A report prepared for Ofwat and Water UK has flagged up some concerns in the run-up to the 2019 Price Review about how the water companies report on the common Performance Commitments (PCs) established by the regulator.

Ofwat and Water UK, the body which represents all the UK water companies, jointly appointed KPMG and Jacobs to carry out a targeted review of seven of the 14 common PCS metrics in order to understand how the water companies currently approach and calculate the metrics they relate to.

The introduction to the outcome of the review - a 281 page report Targeted review of common performance commitments - said the project had been undertaken against a challenging timetable which had “necessarily impacted” on the level of detail the researchers had been able to go into.

A total of seven of the 14 common PCs set out by Ofwat for PR19 were the focus of the targeted review:

• Leakage: the amount of water lost from water company supply systems;
• Per capita consumption: the average amount of water consumed per person per day in a water company area;
• Supply interruptions: the combined length of each interruption to supply affecting each property each year as a proportion of total properties;
• Sewer flooding: the number of instances where there is flooding from sewers at customers’ properties, particularly both internal and external sewer flooding being reported.
• Sewer Collapses - the number of sewer collapses in the report year (seen as a measure of the health of the assets);
• Mains repairs: the number of burst water mains that a company experiences in a given period (seen as a measure of the health of the assets); and
• Unplanned outages: the extent which unplanned events lead to a reduction in the maximum sustainable production capacity of a company and the length of time and impact of those events (also seen as a measure of asset health).

Companies “will have a lot to do” ahead of AMP 7 to comply with new guidance on leakage and per capita consumption

Key findings in the report include:

• Across four of the PCs reviewed (supply interruptions, sewer flooding, sewer collapses and mains repairs) there is a reasonable level of consistency in the approaches companies are adopting to allow them to capture and report their performance. This can be further improved through the additional changes to the guidance recommended in the report allowing reasonable comparison in PR19.
• For two of the PCs (leakage and PCC) the changes recommended should drive a material improvement in comparability but companies will have a lot to do ahead of AMP 7 to comply with the new guidance. There also remain some significant opportunities for further work that will now need to be undertaken during AMP 7 ahead of the next price review.
• In the case of unplanned outages, material changes to the guidance and approach have been made via the review. The changes build on existing elements of the Water Resources Management Plan process to maximise consistency.
• However, the measure is still at a very early stage of development and the report says that meaningful comparative assessment is not currently possible. The report recommends that a period of shadow reporting is undertaken to bed in the new guidance and that there is a further review of the PC guidance and definition during AMP 7.

Next steps – “great deal more” could be done to improve quality of metrics and comparability

Ofwat and the industry will now need to consider the proposed changes to the guidance set out as part of the review, as well proposals in the report for assurance and further work.

The report’s authors say they consider that the direct guidance changes proposed, once implemented, will improve comparability of the metrics considered during AMP7, but there is "a great deal more that could be done over time to improve both the quality of the metrics and their comparability."

Beyond the immediate revised guidance, the report makes a number of other recommendations for future work which would further improve consistency and comparability of the PCs for the next Price Review in 2024.

Several companies told the researchers that changes to the PC reporting and definitions would change the overall reported levels of the metrics across the industry and that “the messaging around this change would need very careful handling.”

For example, companies considered that under the new definition of leakage there is “a high risk that values across the industry” were likely to increase, purely as a result of methodological reporting improvements.

The report says:

“This review has been focussed on driving consistency in the reporting of these measures and not whether the changes would increase or decrease PC reporting. However, these are often sensitive topics and the transition to this new reporting in AMP 7 is therefore likely to require very careful handling and communication across the sector."

Concerns over whether incentives of some PCs promote behaviours that would always be in the customer interest

The report has also flagged up other issues which it says “are tangential but important to this exercise.”

Some companies raised concerns around the incentive properties of some of the PCs, for example whether they promoted behaviours that would always be in the customer interest. While they generally “did not argue” with the rationale for the metrics established by Ofwat, some did raise the concern about the broader incentive properties, particularly for the newer metrics.

The report says:

“The concerns raised do seem to us to have merit ….we would suggest that ….it would be sensible to consider the incentive properties of these metrics and whether the reporting of them could address any perverse incentives that may be created by the current or revised definitions and reporting. The overarching purpose must surely be to improve outcomes for customers.”

Finally, some companies also raised concerns over the extent to which they could achieve similar levels of performance to their peers.

Different approaches to data collection for PCs affected “the ability to sensibly compare service levels”

KPMG and Jacobs said that in seeking to develop the common performance commitments, it had become clear that, whilst most companies in the sector already collect and report information on many of the PCs, different approaches are taken across companies in the collection, calculation,reporting and assurance of these PCs and this affected “the ability to sensibly compare service levels.”

"We have found the timeline to be extremely challenging”

The report is warning that time is now very short to finalise any new definitions for the common PCs ahead of companies’ business plan submissions for PR19 in September 2018. “This means that companies will be submitting their plans only a few months after these new consistent definitions are agreed and without a clear view of their comparative performance,” the report points out.

The tight timeline since the review was commissioned by Ofwat and Water UK has also constrained the depth of the work - all of the work has been completed during a seven week period

The timeline has involved issuing seven questionnaires in December 2017 to companies, reviewing the responses, completing and writing up a series of 17 company visits as well as moderating the feedback from the visits to identify key issues and finally considering how those issues could be addressed in a report with updated guidance.

KPMG and Jacobs commented:

“We have found the timeline to be extremely challenging and this has inevitably created a trade off with the depth of this review.…..Full convergence is not possible through a one off exercise like this”

Click here to dowload Targeted review of common performance commitments final report