Ofwat’s latest reports on water companies’ service, delivery and financial performance over 2017-18 show that customer satisfaction has risen but sector performance deteriorated with a number of failures on performance commitments, including leakage, water quality and water supply interruptions.

The regulator says that while customer satisfaction has risen, it still lags compared to other sectors. Overall performance on service commitments is mixed, reflecting poor responses from some companies to the “Beast from the East” in March 2018.

The report on overall performance against commitments says there was a 1% reduction in the number of performance commitments achieved across the sector in 2017-18, in comparison to 2016-17. “The reduction in performance reflects the issues that some companies experienced managing the effects of the severe, but not unprecedented, freeze-thaw event in late February and early March 2017-18.” the report says.

 It also points out that performance commitment targets were more stretching in 2017-18 than in previous years. Consequently, companies have more to do to ensure they meet their performance commitments.

 Between 2016-17 and 2017-18 the sector improved performance for:

• Pollution incidents – 13% more performance commitments achieved
• Internal sewer flooding – 40% more performance commitments achieved
• Water quality contacts – 15% more performance commitments achieved

Table: Performance commitments: Source Ofwat

However, sector performance deteriorated for:

• Leakage – 17% fewer performance commitments achieved
• Water supply interruptions > 3 hours – 41% fewer performance commitments achieved
• Water quality compliance – 44% fewer performance commitments achieved
• Water consumption – 10% fewer performance commitments achieved

The report says the regulator will use the performance of the best companies in 2015-20 to inform the setting of stretching performance commitment levels for 2020-25.

Greater clarity needed in explanations of payouts to shareholders

On financial performance, Ofwat said that in the round, companies have looked further ahead in assessing their financial viability. This now needs to be matched by greater clarity in their explanations of payouts to shareholders, the regulator said.

For the first time, the report includes information on a new metric – ‘financial flows’ which requires companies to provide greater transparency and clarity about the financial returns to the company’s shareholders. This year was a pilot year and companies were asked to include a narrative to assist in the explanation and understanding of the data - however, only a few companies provided explanation and narrative. Ofwat said:

“There is more companies can and should do to explain how their dividend policies and dividends declared or paid reflect delivery for customers. We continue to encourage companies to be transparent about how dividends paid relate to performance.”

During the period the sector out-performed - although by less than 1% - on the allowances determined at the last Price Review in 2014 - a reduction in outperformance compared to 2015-16 and 2016-17, when the sector outperformed by 6% and 5% on average in each year respectively.

Pension risk a key concern for each of the companies

Ofwat has also published a targeted review of company pension arrangements by Barnett Waddingham LLP, an independent UK consultancy, alongside the financial monitoring report. The review says the average funding level shows the average for the companies to be in line with or marginally better than that of the wider universe of pension schemes.

However, although some companies’ schemes show a surplus, the majority do not and the management of these can impact the financial resilience of water companies. The Pension review says:

“It is clear from the analysis that pension risk is a key concern for each of the companies and in turn Ofwat and the regulated industry. We recommend continued monitoring of the position and review by the respective companies as part of their ongoing approach to funding and risk management.”

Anglian Water top performer on customer satisfaction

Anglian Water was the top performer on customer satisfaction, followed by Portsmouth Water, while Thames Water and SES Water fell to the bottom after marked improvements from both Southern Water and South West Water.

Across the sector, more water companies have improved performance on pollution incidents and internal sewer flooding. Nearly half of water companies however, have failed to meet stretching targets on water supply interruptions, and leakage.

The regulator will take into account companies’ performance across all of these areas when making decisions later in the 2019 Price Review about the bills customers will have to pay between 2020 and 2025.

Ofwat Senior Director David Black commented:

“Delivering a high quality service and good corporate behaviour are pivotal to the ongoing legitimacy of the water sector in the eyes of customers, and society more broadly.

“We are pleased to see that in many areas such as delivering customer satisfaction, assessing financial resilience and reducing pollution and sewer flooding, the dial is moving in the right direction. This now needs to be replicated across the board, so that all customers benefit from the highest levels of service.”

Click here to download the Service and delivery report  

Click here to download the Financial monitoring report

Click here to download the Targeted review of company pension arrangements