Ofwat Chief Executive Cathryn Ross has confirmed that customers will be at the heart of the next price review and that Ofwat will strive to deliver lower bills and better service.

Speaking at the Consumer Council for Water’s ‘Customer Matters’ event yesterday, Cathryn Ross confirmed Ofwat’s ambitions for the 2019 price review to deliver better customer service, greater resilience and lower bills.

Delivering this would mean bills on average across the sector could continue to fall in real terms until 2025 at least.

Although she declined to comment on the choice of what model underpins the ownership, funding and financing of the sector on the grounds that this was a political issue, she added:

“But it seems to me that a lot of the noise we are hearing right now isn't about ‘big P’ political issues. It is about whether the system we have is actually delivering for customers in the way it was intended to.”

The Ofwat chief lauded the achievements the sector has delivered since privatization, pointing out that customer bills are a third lower than they would have been without Ofwat’s efficiency challenge. However, she went on to warn that customers think of water as a human right in contrast to other things like consumer goods or even energy, describing legitimacy as “the very fundamental challenge” facing the sector today.

Ofwat keen to see more money at risk for companies through ODIs

Cathryn Ross said that what used to be aspirational levels of performance for the water companies are now the baseline – meaning that economic incentives are needed to keep stretching and encouraging companies to go further.

“This is why we are keen both to see more money at risk for companies through ODIs and a stronger challenge to set performance benchmarks at the upper quartile level. “ she added.

Ofwat is also expecting to take a more forward looking approach in its efficiency challenge. The benchmark will no longer just be based on the best available historical data at the time of the review – which is is two years’ out of date by the beginning of the control period – but on the regulator’s  view of what is achievable in future.

Cathryn Ross continued:

“This, coupled with the lower financing costs we expect to see in PR19, give considerable ‘headroom’. On average – and I know individual companies’ circumstances differ – we think significant improvements in customer service, and in resilience are possible together with lower bills.”

Sector’s approach to customers in vulnerable circumstances is “acid test of its legitimacy”

Describing the sector’s approach to customers in vulnerable circumstances as “an acid test of its legitimacy”. Ross reaffirmed Ofwat’s expectation that the water companies will set out strategies for identifying and providing both non-financial and financial support to customers in vulnerable circumstances in their AMP7 business plans.

Ofwat is also calling on the private companies which provide essential public services to be exemplary corporate citizens, with the highest standards of board leadership, governance and transparency.

Cathryn Ross said:

“We put in place some principles a few years ago that have driven significant improvements in this area, especially for the non-listed companies. ….we are pursuing these further with companies at the moment, especially to push forward greater transparency on financial flows.

"And we are giving all of this work some real teeth through PR19, with a requirement (as at PR14) for board assurance of plans."

However, she cautioned that while customers want to be confident that they will get the services they expect when they want them, “it simply isn’t possible to provide a cast iron guarantee of that while maintaining costs at a level that everyone can afford to pay.”

Nevertheless, the sector needed to recognize that expectations of the resilience of services are rising, while people’s tolerance of failure is getting lower and that a regulatory approach based on outcomes and totex (rather than outputs and capex) helps deliver resilience more efficiently.

Cathryn Ross said legitimacy was not only about what each individual company does but also about how the sector as a whole is perceived.  The impact of individual incidents on the sector’s legitimacy over the long term is “far greater than the immediate impact on any individual company’s reputation in the short term”, she added.

In her view Ofwat’s regulation helps because the sector wide information it provides, especially in conjunction with the sector-wide view from others like CCWater and the other water regulators, provides a challenge across the sector that improves performance, efficiency and accountability across the board.

“One of the things we have consciously done at Ofwat over the last few years has been to improve the quality and transparency of information that is available both on what companies across the sector are delivering for customers and society, and on how they are delivering it.” she concluded.

The water sector regulator is currently consulting on the methodology for its 2019 price review and will publish the final methodology, setting out its approach, in December of this year.