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instituteofwater.org.uk
Thanks to our sponsors
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Inspiring members to reach their potential.PR19 in 2019
instituteofwater.org.uk
Welcome to PA Consulting offices
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Agenda13:50 Welcome address
Jason Ryall, Chair of the South East Area Institute of Water
14:00 Introduction and consultancy perspective of PR19
Richard Khaldi, Director of PR19 at PA Consulting
14:20 Ofwat perspective of PR19
Prof. Trevor Bishop, Former Director of Strategy and Policy at Ofwat
14:40 Customer perspective of PR19
Steve Hobbs, Senior Policy Manager at Consumer Council for Water
15:00 Networking & refreshments
15:25 Water Company perspective of PR19
Craig Lonie, Director of Strategy & Regulation at Southern Water
15:45 Q&A panel discussion – Chaired by Paul Holton, Investment Strategy Manger at Southern Water
16:15 Close & Networking Drinks
Health, safety and wellbeing
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What we do
Professional RegistrationWe offer all professional registrations at all levels in Engineering, Environment and Science.
Continuing Professional Development (CPD)Career development is at the heart of everything we offer. Easily record your CPD by using our exclusive online CPD platform. The best submissions are recognised by an Annual CPD award.
MentoringOur Online Mentoring Programme unlocks potential, supports career goals and develops talent in the water sector.
EventsWe run national and regional events and many of these are cross-sector collaboration. Our specialist conferences for Engineering, Environment and Science are free for members.
NetworkingThe opportunity to network with peers from across the water sector is always rated high amongst our members as one of the key reasons they join the Institute of Water.
InformationAs an Institute of Water member, you will receive our quarterly Magazine, covering the latest developments and learning from across the water sector. You will also receive a biannual technical Journal.
Bringing Ingenuity to Lifepaconsulting.com
Richard Khaldi
Director, PA Consulting
Consultancy perspective on PR19
9© PA Knowledge Limited
WHERE HAVE WE COME FROM AND WHERE ARE WE NOW?
“Although PR14 was a
more forward-looking
regime, and has
stimulated some
efficiency gains, the
scale of change
required to position
the companies for the
demands of PR19 is
that much greater…”
10© PA Knowledge Limited
• Lower WACC – less money
• Operational focus – more scrutiny
• Agile transformation – quickest wins
WHAT IS PR19 REALLY ABOUT?
11© PA Knowledge Limited
• Lower WACC – less money
What can we do to increase efficiency?
What technology can we embrace?
• Operational focus – more scrutiny
Operations no longer the ‘poor cousins’ of head office?
How will you respond to the challenge?
• Agile transformation – quickest wins
How quickly can companies embrace real
change?
Does your culture block change?
HOW WILL PR19 IMPACT COMPANIES DAY TO DAY?
12© PA Knowledge Limited
AN EXAMPLE OF DIFFERENT: EFFICIENCY FRONTIERS FOR PERFORMANCE COMMITMENTS
Delivery efficiency
ratio greater than 1:1
Delivery efficiency
ratio less than 1:1
Internal Sewer Flooding
Blockages
External Sewer Flooding
LeakageEnvironmental
CollapsesSupply Interruptions
PCC PollutionsSiz
e o
f penalty a
void
ed b
ased o
n h
itting A
MP
7 p
lans
Investment amount in AMP7 plans
Y-axis: AMP7 penalties avoided
by achieving stated levels of performance compared to doing nothing and allowing the assets
to further deteriorate
X-axis: Level of investment in AMP7 by performance
commitment
Colour – Where effort should be
focused in AMP6 vs AMP7 based on the ratio of the annual level of performance
improvement required
• Red – Rate of performance
improvement is set to increase in AMP7 indicating
more ambition than AMP6• Amber – AMP7 performance
improvement broadly similar to that delivered in AMP6
• Green – Rate of performance
improvement is higher in AMP6 indicating less
ambition in AMP7
Bringing Ingenuity to Lifepaconsulting.com
Richard Khaldi
Director, PA Consulting
THANK YOU FOR LISTENING!
Trevor Bishop
Director, Water Resources South East
21st January 2019
Institute of Water
PR19 in 2019
Perspective
What might PR19 look like
Addressing the challenges:
• Resilience of systems and services
• Affordability
• Customer service
With ambitious, innovative and high quality plans
PR19 will not be business as usual:
Customer
driven
businesses -
This is not just
about writing
a business
plan
Stretching
outcomes -
Going further
and faster for
customers
Frontier shift
in cost
efficiency
If you’re not
ahead, you’re
behind
“Lower for
longer” -
impact on
WACC
cus
Key themes of PR19
Customer
service
Long-term
resilience
InnovationAffordable
bills
PR19
Context is everything?
BurstsFreeze thaw
Bursts
Off shore accounts
Leakage performance
Politics
Delivering Water 2020: Our final methodology for the 2019 price review
Some key points:
• Building on PR14
• Addressing future challenges
• Our strategy and the legal
framework for PR19
• PR19 and the environment
• Separate price controls
Retail controlsWholesale controls
Water
resources
Water network
plus
Wastewater
network plus
Bioresources Residential Business
(Wales*)
Direct procurement for customers
Customer engagement
Performance commitments and outcome delivery incentives
Resilience
Affordability and vulnerability
Return on
capitalRetail margins
Average revenue
control
Initial assessment of business plans
Average revenue
control
Average revenue
control
Total revenue
control
Total revenue
control
Total revenue
control
Wholesale form of control Retail form of control
* We will set an average revenue control for all business retail customers in Wales and business retail customers of non-exited retailers
in England.
** Cost-to-serve
Financeability
Efficient totex
allowance
Efficient totex
allowance
Efficient totex
allowance
Efficient totex
allowance
Efficient totex
allowance
Efficient CTS** per
customer group
Retail marginsReturn on
capital
Return on
capital
Return on
capital
Confidence and assurance
Accounting for past delivery
What will PR19 look like
PR19 - 2019 Timetable
2019
Late January Ofwat publishes
• Initial assessment of business plans; and
• 2018 company monitoring framework
March/April Ofwat publishes early draft determination (exceptional and fast track plans)
April Companies submit revisions to business plans (significant scrutiny and slow track)
July Ofwat publishes draft determinations (slow track and significant scrutiny)
December Ofwat publishes final determinations
Time table
Initial Assessment of Business Plans
Reputational Procedural incentives Financial Incentives
Exceptional
Fast track
Slow Track
Significant Scrutiny
IAP
Resilience: A journey from policy to deliveryResilience
Future Water Networks 2017 - Resilience
1. Systems thinking
2. The environmental foundation of a resilient sector
3. Customers at the heart of resilience
4. Resilience Planning
5. Smart Resilience
6. Monitoring and Measuring Resilience
7. Company Boards and resilience
Resilience Principles
Resilience: A journey from policy to deliveryChallenges
Drainage and Wastewater Management Plans
Drainage Strategy Framework (2013)
• Joint EA/Ofwat guidance ahead of PR14
• Water and sewerage companies to prepare Drainage Strategies
• Partnership
• Uncertainty
• Risk based
• Whole life cost and benefit
• Live process
• Innovation and sustainable
Drainage and Wastewater Management Plans
Drainage and Wastewater Management Plans – Vision
The vision of the 21st Century Drainage Programme is to enable the UK water industry, working in partnership
with others, to make plans for the future that will ensure the sustainability of our drainage infrastructure, and the
services it provides to customers and the environment.
• New challenges
• WaterUK 21st Century Drainage Programme (more than 40 organisations from across the UK – governments,
regulators, local authorities, environmental charities, academics and community groups).
• Consistency, sharing best practice and better cross sector coordination for the long-term
• Capacity Assessment Framework – a standard capacity approach for the foul and combined sewer networks, now
and into the future (possible extension to include surface water sewers)
.
• Storm Overflow Assessment Framework – valuing the benefits of improvements to storm overflows.
• Wastewater resilience metrics – standardised approach for the resilience of wastewater services
Summary
Tough
Shared ambition
Balancing ambition and risk
Keep a perspective
INSTITUTE OF WATER: PR19 in 2019
Consumer Perspective
Steve Hobbs
Senior Policy Manager
Consumer Council for Water
2020-25 BUSINESS PLANS
Evidence of customers views
& challenges raised with companies
Four companies propose static or
lower bills – when inflation is added
Significant increase in affordability assistance
Improvements in service areas
customers value
Increased spending to £50bn over
2020-25
Some commitments to share financial outperformance
ROOM FOR IMPROVEMENT?
More cost efficiencies?
Further ambition in Performance Commitments? What about
maintenance?
Customer reaction to Outcome Delivery Incentives?
More to do to help vulnerable consumers and those struggling to
pay?
More to do on making services resilient….and preparing for the
future?
Good outcome we want to see
Evidence
shows 80%+ of customers
approve the Draft
Determinations
PERFORMANCE COMMITMENTS
Plans show a ‘Mixed Bag’ across the common and bespoke PCs
Generally highertargets that reflect customer priorities.Stretching performance across many PCs.
Medium level targets and stretch.
Lower comparabletargets and stretch.Unclear connection to customer priorities.
Draft Determinations should set the bar for Upper Quartile Performance
OUTCOME DELIVERY INCENTIVES
• No universal customer support for incentives.
• Bill impact uncertainty for customers & varied incentive rates.
• Enhanced rewards for leading performance?
• Outperformance payments – will
customers accept and value what they get in return?
C-MEX
Positives Issues
Incentivises customer service performance.
Complaints measure weaker?
Measuring customer satisfaction of contacts and non-contacts
Access to rewards if complaint performance not improving?
Considers other sector comparisons.
Wide complaint sources
Should the incentive be stronger?
CONSUMER
AFFORDABILITY/VULNERABILITY
AFFORDABILITY• Improving range of options to assist customers with
affordability issues.
• More focused measure of performance based on number of customers in water poverty.
• Opportunities for companies to contribute to funding of social tariffs.
VULNERABILITY
• Bespoke Performance Commitments to raise awareness of assistance and satisfaction of those who receive it.
• Addressing transient/temporary vulnerability.
DRAFT DETERMINATIONS
Why?• Customers should accept the price, investment and service
package. • Consistently applied measure across all Draft Determinations
When?• First stage – ‘Exceptional’ and ‘Fast Track’ in April.
• Second stage – ‘Slow Track’ and ‘Significant Scrutiny’ in July.
How?• Informed and uninformed customer views.
• Sample of 200 customers per company.
CCWater to test Draft Determinations for customer acceptability
IDEAL OUTCOME
Greater customer trust and satisfaction
• Bills acceptable and affordable – high level of customer acceptability of the package.
• Efficient delivery of ambitious performance improvements and investment in customer priorities.
• Effective assistance for those who need it.
• Milestone in long term strategy – current and future customer needs addressed.
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Networking and Refreshments
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Thanks to our sponsors
January 2019
Price review process…
� This process takes place every five years for water companies in England and
Wales
� Ofwat sets out a methodology for how it will determine new revenue and price
controls, based on:
� Defined and agreed outcomes
� Estimated costs
� An agreed “risk balance contract”
� Key financial metrics (WACC, gearing)
38
The brief from Ofwat had notable changes from PR14…
39
Great customer service
Affordable bills for all
Long term resilience in the
round
Innovation and new ways of
working
High Quality InnovativeAmbitious
Our plan must address Ofwat’s four themes for PR19
Ofwat will assess plans in nine key test areas against three plan characteristics
Increased reliance on comparators, and change to customer performance metrics (CMEX, DMEX)
Direct Procurement
Requirement for specific improvements in key outcomes e.g. leakage.
…and was subject to some in flight adjustments
40
• Gearing• Dividend policy• Executive pay
• Independence and culture
Board leadership transparency &
governance
Putting the sector back in balance
The regulatory & political landscape is evolving…
41
� Resilience an increasing focus – Out in the Cold consultation, prolonged 2018 dry spell
� Push for greater collaboration
� Continued focus on financials
� WACC
� Outperformance
� Increasing profile of sector
� Efra Select Committee report on water regulation
� New environment bill
� Brexit implications uncertain
� Nationalisation and ownership question prominent in media
� Social contract in the water sector
� National infrastructure commission
� National infrastructure identified significant needs
� Review of sectoral regulation
…Our response
42
43
What's next…
2019
J F M A M J J A S O N D
31 Jan –confirmed IAP
results
Draft Determination for Slow Track &
Significant Scrutiny
Final Determination
Draft Determination for Exceptional & Fast
Track
Plans will be categorised as:• Exceptional• Fast Track • Slow Track, or• Significant Scrutiny
Each category has reputational, financial and certainty impacts.
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Q&A panel discussion
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South East Area
We are one of eight regional Areas of the Institute of Water.
We organise a series of unique industry learning, development and networking opportunities.
Becoming a member of our Area Committee is a great way to develop new skills.
We also know how to have fun and organise enjoyable social events.
Some Dates For Your Diary
14 March 2019 – Innovation Awards, East London
6 April 2019 – Presidents Day (family event), Hop Farm, Paddock Wood, Kent
10 to 12 October 2019 - "Confident communication for future leaders” Weekend School, Cookham, Maidenhead
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Inspiring members to reach their potential.
Post event networking drinks
Thank you for coming – safe journey home
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