Assessment of Severn Trent Water’s engagement and the ... · the level of engagement undertaken by the company and its response, as well as how the balance of the plan serves customers’

Report of the Water Forum November 2013

Assessment of Severn Trent Water’s engagement and the outcomes for customers in the company’s business plan 2015-20


About this document

This document is the Water Forum’s formal submission to Ofwat as part of the periodic review process for 2015-20.

As requested by Ofwat, this report sets out our views on:

• how well Severn Trent Water’s business plan reflects customers’ views;

• how well evidenced the company’s understanding of customers’ views is;

• how effectively the company has balanced and reflected those views in its plan1; and

• whether the company’s proposals are sufficient to enable it to meet its statutory obligations.2

The document also sets out the Forum’s view of the overall acceptability to customers of the business plan and its impact on their bills for 2015-20. We also highlight the extent to which, in our view, the company has been innovative and ambitious in its plan.

The views given by the Forum in this report are based on the outcome of almost two years of discussion with Severn Trent Water and on the information the company has provided. The Forum notes that its comments should be taken in this context; while it has taken steps to ensure that the company has provided objective and accurate information, the Forum’s views are dependent on the extent to which this has been the case. The Forum also recognises that Ofwat will have sources of information not available to the Forum. What it has sought to do is inform itself sufficiently well to judge the level of engagement undertaken by the company and its response, as well as how the balance of the plan serves customers’ interests in the round.

1‘Involving customers in price setting – Ofwat’s customer engagement policy statement’, page 16, August 2011.

2‘Setting price controls for 2015-20 – final methodology and expectations for companies’ business plans’, page 11, July 2013.

3

The conclusions in this report are based on the Forum’s extensive scrutiny and robust challenge of Severn Trent Water over the past 22 months. It is presented by Dame Yve Buckland, Chair of the Forum, but represents the Forum’s views as a whole.


Contents

Executive summary 5 Foreword by Dame Yve Buckland 9 Acknowledgements from the Chair 11 1. How the Forum has fulfilled its role 12 2. Severn Trent Water’s customer and stakeholder engagement 22 3. Severn Trent Water’s understanding of its customers’

expectations and priorities 32 4. The Forum’s views on measures of success and incentives 38 5. Challenges to the development of Severn Trent Water’s

proposals for each outcome 48 6. Severn Trent Water’s statutory obligations 68 7. Has Severn Trent Water’s plan responded to customers’ priorities? 72 Afterword 74 Appendices (published separately)1. The Water Forum’s terms of reference2. About the member organisations3. PR14 Customer Engagement Working Group (CEWG) Terms of Reference4. PR14 Assurance Working Group (AWG) Terms of Reference5. The three phases of engagement6. Summary of agreed customer insight7. Theframeworkforeffectiveengagement8. Decision letters of support and Statement from the DWI9. Natural England’s assurance summary for Severn Trent Water’s PR14 submission10. Letter and supporting annex from the Environment Agency11. Index of information against Ofwat’s risk-based review tests

Report of the Water Forum November 2013 5

Executive summary

This report outlines the views of the Forum following its interactions with Severn Trent Water as the company carried out its engagement programme and developed its business plan for the period 2015-20.

In particular, it provides the Forum’s views on the quality of the company’s engagement and the extent to which the priorities of customers and stakeholders have been taken into account within the company’s business plan.


Executive summary

In reaching its final conclusions, the Forum has considered the following questions.

Has the Forum been able to fulfil its role objectively and independently?The Forum is satisfied that it has had the information, resources and access to senior staff within the company and Board members it required in order to fully scrutinise the company’s engagement and business plan proposals. It has developed a clear understanding of the company’s customer base and of the key issues for the company’s plan and strategy.

The Forum established a framework for independent challenge that has served to enhance its scrutiny role. This included two sub-groups – the Customer Engagement Working Group (CEWG) and Assurance Working Group, as well as a series of ‘task and finish groups’. It has also benefited from additional assurance provided by the company’s own assurance providers, Atkins, and by peer review of key areas of the business plan that was undertaken by the Forum’s regulatory adviser, Dr Harry Bush.

Has the company carried out engagement of sufficient quality to understand its customers’ expectations and priorities?Severn Trent Water has undertaken a substantial and wide-ranging programme of customer research, supported by extensive stakeholder engagement, over a two-year period. The Forum played an important part in shaping the company’s objectives, strategy and approach in undertaking the engagement. It was supported in this by the CEWG, which scrutinised and challenged in detail how the company implemented its engagement and interpreted the outcomes.

The Forum is satisfied that the company has carried out engagement of sufficient scope and quality to allow it to understand the expectations and priorities of its customers and other stakeholders.


Executive summary

How well evidenced is the company’s assessment of customers’ expectations and the outcomes it has developed in response?The Forum is satisfied that the company’s engagement programme provides a sufficient range and depth of evidence to enable it to form a well-grounded assessment of customer views. There is a clear line of sight between customer priorities and the final agreed set of outcomes.

Are the measures of success and outcome delivery incentives appropriate and are the targets sufficiently challenging?The company worked with the Forum to develop a robust set of measures of success against which to assess its performance in delivering outcomes. The Forum has ensured that these measures can be used to hold the company to account in delivering customers’ priorities, are accessible to customers, and demonstrate innovation.

The Forum pressed the company, in developing its incentives framework, to make sure that its incentives are aligned with the interests of customers, encourage the right behaviours, provide proportionate rewards and penalties, work within the parameters set by willingness to pay research, and reflect an appropriate degree of simplicity, clarity and transparency. There has been extensive challenge of the company’s proposals and some amendment, both in terms of content and quantum, as a result. The Forum is therefore satisfied that the company’s proposed use of incentives is aligned with customer priorities and represents a reasonable balance between risk and reward.


Executive summary

Is the company’s proposed level of performance and approach to delivery against its outcomes aligned with customers’ priorities?Throughout the development of Severn Trent Water’s business plan and its approach to delivering its outcomes, the Forum has challenged the company to ensure that the priorities of its customers are taken into account and performance issues are addressed.

The company has responded, and the Forum welcomes the changes it has made in its plan to:• increaseitsambitiontoreduceleakageandsignificantlyimproveitsresponse

time to leaks;• demonstrate a pro-active approach to managing drinking water quality risks;• increase its ambition in relation to river water quality;• re-phaseitsproposalsforstrategicresilienceandsignificantlyrefineitscosts;• commit to working in partnership with local authorities to deliver more for customersinrelationtosewerflooding;

• improve its customer service through a stretching transformation plan underpinned by key milestones;

• offerasubstantialandholisticprogrammeofsupporttohelpcustomers who struggle;

• setitselfmorechallengingefficiencytargets;• reviseitsfinancingapproachandreduceitsproposedrateofreturn;and• demonstratehowitisusinginnovationtodeliverbenefitsforcustomers

and the environment (for example, its development of an urban catchment approachtomanagewaterresourcesandfloodingissues).

Are the company’s proposals sufficient to enable it to meet its statutory obligations?The environmental regulators, the Environment Agency and Natural England, have confirmed in writing to the company and to the Forum that the business plan proposals have made sufficient allowance for the company to meet its statutory obligations.

The Drinking Water Inspectorate (DWI) has formally supported nine of the company’s proposed water quality schemes and has commended the remainder for support by Ofwat. The Forum notes the observation by the DWI that these improvement schemes will make only a small contribution to enabling the company to meet its legal obligations in respect of drinking water quality. It is for the company to deliver the remainder of its obligations by making appropriate operational and maintenance provisions in its plan.

Has the company’s plan responded to customers’ expectations and priorities?Overall the Forum considers that this is a balanced plan that responds well to customers’ expectations and priorities.


Foreword by Dame Yve Buckland

“The Forum has pushed the company hard. Our discussions, though sometimes difficult, have resulted in a better deal for customers and the environment.”



This report sets out the evidenced-based views of the Severn Trent Water Forum in providing assurance to Ofwat about the company’s proposed business plan for the period 2015-20.

The report is the culmination of an intense period of involvement by the ten members of the Forum dating back to 2011. It also reflects the views of around 17,000 members of the public and stakeholders who engaged with and were consulted by the company – views we have reflected and pressed right to the heart of the company and to its Board.

We wanted to see a plan with proposals firmly based on customer priorities and their willingness and ability to pay for them; that not only meets statutory obligations but also has a level of ambition for the natural environment; that doesn’t stack up problems for the next price review period or for future generations; and which challenges the company to be efficient, innovative and most of all transparent. We felt that this would enable Severn Trent Water to be seen as a legitimate provider of very important services to customers.

We have challenged the company hard in all of these areas and we have challenged each other too. We believe that this has led to a better deal for customers and the environment.

Right since we started our work in 2011 we have been conscious of the tough economic context for all of Severn Trent Water’s customers – household and business – and of the high levels of social and economic disadvantage affecting many parts of the company’s operating area. At the time we are submitting this report many families and small businesses are struggling and few have seen their incomes even keep up with inflation. For those on benefits we know that things are likely to get even tougher. We therefore welcome in particular the company’s recognition of these issues and its far-reaching proposals to support customers who are struggling to pay.

We challenged the company hard that, despite high levels of customer acceptability for flat real bills (ie increasing with inflation at RPI), it should strive to get its bills as low as possible. So we are pleased that the company is proposing to keep its bills for households and business customers flat (in nominal terms) in 2015-16, followed by below inflation increases for the four years 2016-20. The company’s proposed price profile mirrors what the company considers is likely to happen to real household incomes.

We have also worked intensively with Severn Trent Water on incentives and penalties. This includes challenging discussions about the treatment of windfall gains. While the company did not commit to a specific mechanism, it has said that it will maintain its track record of open discussion about sharing the benefits of unforeseen windfall gains. The Forum would still like to understand the process and timetable for these important discussions.



Many customers also told the company that they wanted the necessary investment for a safe and secure supply of water, a drive down on the ‘iconic’ issue of leakage, and for the natural environment, particularly the region’s rivers, to be protected for future generations. So we are pleased that this plan also proposes investment in those areas, including proposals to improve strategic resilience. Large investments have been scrutinised carefully and the proposals have been amended as a result.

Environmental champions on the Forum challenged us all that there should be more investment in the environment given stated customer priorities and given the likelihood of future investment need. But the Forum supports the company’s plans as an acceptable balance given the context outlined above.

Where possible we have taken appropriate steps to cross-check some of the more technical aspects of the business plan to reassure ourselves that the company’s proposals have challenging efficiency targets and are financeable, and that their assumptions are reasonable from a customer as well as investor perspective.

Severn Trent Water has responded well to our challenges. We have taken our role seriously and since our inception the main Forum of ten members has spent more than 100 person days in formal Forum meetings. Some members have been involved extensively in other work including working groups, public consultation meetings, task and finish groups and site visits. We estimate that this equates to around another 150 person days (and that does not include any preparation time required).

We have worked actively to overcome any asymmetry in our knowledge or information and we have maintained our independence and objectivity throughout. We have seen the company really open itself up to this process and we believe it also feels that the Forum has added real value to the development of its proposals. We have had access to confidential and sensitive information and unprecedented access to the company Board to make direct and continued challenges. This is even more commendable considering Severn Trent Water is a publicly listed company.

As a result there is a clear line of sight between what customers wanted to see and what is being proposed in the plan. It is because, and only because, the company has significantly shifted to meet our demands for the lowest possible bills, together with the necessary investment, that we can commend the plan to you as a fair and balanced plan.

Dame Yve BucklandChair

November 2013

Acknowledgements from the Chair

I would like to place on record my thanks to all of the thousands of customers and stakeholders who have taken part in this exercise of engagement. I would like to thank the Chairman and Chief Executive of Severn Trent Water for their openness. Thanks also to all of the company’s seniorstaffwhohaverespondedto our demands and particularly to Tony Ballance and Harriet Towler who have borne the brunt of them.

Thanks to our independent regulatory adviser Dr Harry Bush and to Claire Nichols our independent report writer; eachhashelpedindifferentwaystocrystallise our conclusions.

Many, many thanks to all members of the Forum for their very hard work and for their strong views and passion to see a good outcome from this process. In particular a big thanks to Councillor Tom McDonald for his wisdom and insight into the realities of life for his manyconstituentsandhisunflaggingchallenges to Severn Trent Water, right up to the point when he was admitted to hospital just before this report was completed.


How the Forum has fulfilled its role1This chapter explains the Forum’s role and the governance and assurance arrangements that were put in place to ensure that it was able to undertake this role effectively. The chapter also assesses the quality of Severn Trent Water’s engagement with the Forum and its responsiveness to debate and challenge.

The Forum’s role The Forum was formally established in March 2012 as the independent Customer Challenge Group for Severn Trent Water, although discussions about its establishment began in 2011.

Customer Challenge Groups are a key element of Ofwat’s arrangements for setting price controls for 2015-20. They are not intended to act as a substitute for customer engagement. The focus is on challenging the company on the effectiveness of its engagement and the interpretation of that engagement in defining the outcome commitments in the company’s business plan .

The Forum’s principal role has therefore been to: • enhance the quality of Severn Trent Water’s engagement with its customers

and stakeholders;• encourage the company to be ambitious in the way it responds; and • come to a view on the extent to which the results of the company’s engagement isreflectedinitsbusinessplan.

The aims, roles and responsibilities of the Forum and its Chair were defined and set out in agreed Terms of Reference, which also covered other aspects of governance including accountability, communication and disclosure of information. The Terms of Reference are set out in Appendix 1.

Membership The Forum kept its membership under review to ensure that, collectively, it had the skills and expertise required to undertake its role effectively.

The group originally comprised representatives from CCWater, the Drinking Water Inspectorate (DWI), the Environment Agency and Natural England4. During the course of the process, and to reflect the composition of Severn Trent Water’s customer and stakeholder base, the Forum agreed an expanded membership to include representatives from the CBI, West and East Midlands Councils, NFU and CAB. An additional member with expertise in commercial business planning and customer service, from Scottish and Southern Energy (SSE), joined in February 2013.

3See, for example, ‘Setting price limits for 2015-20 – final methodology and expectations for companies’ business plans.’CCGsandCCWaterbriefingsession: questions and answers, Ofwat, August 2013.

4These members made up the ‘quadripartite group’ of regulators and stakeholders that were involved in the development of Severn Trent Water’s business plan at the previous price review, when charges were set for the period 2010-15.

The Forum’s remit was clearly defined and proper governance procedures were put in place. As a result the group was able to fulfill its role effectively in challenging Severn Trent Water’s engagement and business plan proposals.


Chapter 1: How the Forum has fulfilled its role

The new members brought a useful perspective from outside the water industry, which served to strengthen the challenge the Forum could make to the company. Several Forum members were also part of other Customer Challenge Groups, and so were able to contribute this wider experience to discussions.

In addition to the ten member organisations that have been directly involved, the Forum was able to take into account the wider perspectives of around 160 additional individual stakeholder organisations that acted as formal consultees and as a sounding board for the company and the Forum.

Appendix 2 provides further information about the member organisations. It should be noted that no member received any remuneration, in payment or in kind, in relation to their work on the Forum and no member claimed expenses.5

Forum membership Dame Yve Buckland (Chair) IndependentRichard Butler (Deputy Chair) Confederation of British Industry (CBI)Ian Butterfield Natural EnglandElinor Cordiner DWIProfessor Bernard Crump CCWaterGemma Domican CCWaterSarah Faulkner National Farmers Union Charley Gibbons Citizens’ Advice Bureau (CAB), CoventryCllr Bruce Laughton East Midlands CouncilsAdam Lines Environment AgencyGreg Marshall Environment AgencyCllr Tom McDonald West Midlands Councils6 Gareth Wood SSEDr David Wurr CCWater

Understanding the company and its customersThe Forum recognised that to work effectively it would need to develop a full and detailed understanding of the wide-ranging elements of the company’s engagement process, business plan and customer base. It therefore requested detailed briefing sessions on the industry as a whole, the price review process, Severn Trent Water’s track record, and its performance relative to that of other companies.

At the Forum’s request Severn Trent Water provided further workshops on:• the company’s performance in delivering the 2010-15 investment programme; • thewayinwhichthecompanyisfinanced,andshareholderreturns

(and how this impacts on customer bills); and• a number of other key strategic areas by request.

The company also provided regular updates to the Forum on its performance in delivering against its current key performance indicators (KPIs), and in comparison with the industry as a whole.

At the outset, the Forum requested information on the demographics7 of the company’s customer base, including regional socio-economic factors that impact on customers. This included information on the company’s understanding of its customers from the research it had already carried out.

5As some Forum members had existing connections with Severn Trent Water interests were declared at the start of each meeting so that the Forum could consider whether or not there was a conflictofinterest.Nosuchconflictswereidentified.

6Now known as The Centre for Local Government – West Midlands.

7This encompassed both household and non-household customers, and the c.30,000 customers who live and work in Wales.

“The company has found value in getting people who are not in the industry to look at the risks – it has helped them moderate their own views.”Richard Butler, CBI



Socio-demographic split of customers (ACORN categories)

Wealthy achievers Urban prosperity Comfortably off Moderate means Hard pressed

Business customers by known sector (% of water use)

Industrial (manufacturing, mining, construction & utilities) Commercial (financial,businessservices,transport, communications and distribution) Public sector (education, health, public administration and defence) Agriculture Hotels & catering

29%

26%

21%

12%

12%

21%25%

12%

28%

14%

Customers in arrears

>12 months >24 months >36 months >48 months On instalment plans On support scheme

0

50,000

100,000

150,000

200,000

250,000

300,000

Understanding the company and its customers Customer demographicsAs at March 2012, the company provides water for 7.4 million people and sewerage services to 8.5 million people in a region spanning the Midlands and Mid-Wales.

Socio-economic factors impacting Severn Trent Water’s region• The Midlands region has above

average poverty levels.• Almost one in ten of the households

the company serves spend more than 5% of their disposable income on water.

• Since 2008 real incomes have declined. The company expects real incomes to stabilise in line with inflationduring2015-20,butnotesthat the incomes of some of its poorest customers may continue to decline in the light of welfare reform.

Performance issues for the company• The company has been one of the poorer performers

on Ofwat’s Service Incentive Mechanism (SIM). • The company has experienced recent issues with

its performance on drinking water quality events. • More than a quarter of the cases where rivers in

the Midlands region fail to achieve the statutory standards are directly attributable to the company.

• The company has made recent improvements in its leakage performance but overall leakage levels appear high compared with other companies in the industry (although the company has reported that its customers arethemostwaterefficientinthecountry).

• Thecompany’sperformanceonsewerflooding during 2012-13 deteriorated, which it in part attributes to poor weather conditions in that year.



The company was also asked to set out its aspirations and vision for the future (this was undertaken by the company’s Chief Executive).

To ensure that it was not only the company that was presenting information, individual Forum members were also asked to provide briefings on key issues on which they had particular expertise. For example, the Environment Agency presented papers on Water Resources Management Plans (WRMPs) and River Basin Management Plans (RBMPs), and on the National Environment Programme (NEP). Coventry CAB presented a paper on welfare reform and CCWater provided a presentation on key issues for customers.

To enhance their understanding of significant issues Forum members undertook a number of visits to sites requiring potential capital investment. In particular members of the Forum took part in an extensive site visit to Wales to consider at first hand the options and issues associated with improving the company’s strategic resilience. Forum members also investigated local rivers on a visit hosted by the Environment Agency to explore the factors that affect the condition of rivers, and what impact action by water companies can have.

Forum members have been able to develop a clear understanding of the customer base and of the key issues for the company’s plan and strategy.

“The group’s membership is very effective in terms of the spread of skills and knowledge and also in terms of the ability and willingness to discuss quite complex issues. This has been further enhanced by the clarity and timeliness of information provided by the company.”Elinor Cordiner, DWI



The Forum has been able to maintain an independent perspective in all of its interactions with the company. As a result the Forum has confidence that it has not been captured or misled.

Framework for independent challengeThe Forum’s work was supported by detailed scrutiny undertaken by its two standing sub-groups (the Customer Engagement Working Group and Assurance Working Group), and by effective third party assurance.



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Customer Engagement Working GroupScrutinised the company’s engagement programme in detail – from its initial design through to the company’s interpretation of the outcomes and eventual response in the business plan. This group also cross-checked detailed elements of the plan to ensure a clear line of sight back tothecustomerresearchfindings.

Assurance Working GroupExamined components of the business plan that were material to achieving customer priorities and statutory obligations. The group’s role was to provide assurance that the company hadbeensufficientlychallengingofitselfinidentifyingcost-effectiveandinnovative solutions.

Task and finish groupsThese groups consisted of individual members of the Forum who volunteered to spend additional time in scrutinising material areas of Severn Trent Water’s plan in more detail (such as water resources and the proposals to improve strategic resilience).

Peer reviewIn response to challenge from the Forum the company sought to strengthen its own assurance further by introducing additional experts to peer review key areas of the business plan and customer research, including the willingness to pay research.

Technical assurance Jonathan Archer, Regulation Director at Atkins provided technical assurance from the ‘bottom up’ in relation to the company’s investment programme. In particular he helped the Forum understand whether or not the company’s identificationofneed,proposalsforphasing, costing and benchmarking of investment appeared appropriate.

Regulatory assuranceIndependent assurance was provided to the Forum directly by Dr Harry Bush, a former regulation director at the Civil Aviation Authority with extensive experience of regulation and customer engagement.DrBushexaminedspecificareas of the process and business plan proposals, and conducted a number of detailed challenge sessions with the company.



The company’s assurance frameworkThe company has explained to the Forum that is has carried out extensive assurance in order to give the company’s Board the oversight, engagement and scrutiny necessary to satisfy itself as to the quality of the plan.

The Forum, and its independent adviser, were given full access to this assurance and to the opinion reports of its assurance providers, including for example, Mott McDonald.

The company has used a comprehensive assurance framework that comprised the following:• a detailed bottom-up review of the investment programme, modelling and

data tables;• reviews, opinions and comparative analysis of key parts of the programme (including,forexample,ratesofreturn,efficiencyandoutcomes);and

• top-down reviews of the plan as a whole and whether it is robust and welljustified.

Severn Trent Water PR14 assurance process

The company responded well to early challenge from the Assurance Working Group that there should be greater allowance for peer review and challenge in its framework. The Forum’s independent adviser, Dr Bush, has also reviewed the framework and found no omissions or issues that should be of material concern to the Forum in carrying out its role.

In addition, Dr Bush has tracked on the Forum’s behalf, how the company’s assurance has impacted its plan in key areas such as strategic resilience and private drains and sewers. He reported that, in the areas he examined, the company was able to demonstrate that it had responded to the challenges of its assurance providers.

ServiceabilityRate of returnEfficiencyWholesale/retail

Review keyaspects of

the plan

Ofwatguidance

Businessplan data

tablesOutcomes Costs Risks and

rewards

Affordabilityand

financeabilityPerformance

Assuranceof the plan

STW LtdBoard

assurancestatement

Investmentprocess

Potentialsolutions

Identificationof need

Reviewof costsOptions

Atkins

Seven expert reviewers

Data flows Models Assumptions Regulatory submissions

Measures ofsuccess and

incentives

eg:



The company’s engagement with the ForumAn important aspect of the ability of the Forum to undertake its challenge role has been the company’s overall approach to engaging with the Forum.

Having established the Forum as its Customer Challenge Group the company has engaged well with the group, taking the steps necessary to allow the Forum to carry out its functions effectively. This has manifested itself in a number of ways.

Provision of informationThe company has provided the Forum with the information it required in order to discuss issues fully with the company and provide robust challenge. All requests to the company for information were responded to in full. Some of this information has been price and commercially sensitive. The amount and quality of the information available to the Forum compares well with that which was available at the quadripartite meetings at the last price review.

Similarly, meeting papers were well written, objective and accessible and the detailed minutes represented a full and accurate record of proceedings.

AccesstoseniorstaffandBoardmembersAt its own request the Forum has been given regular access to senior representatives from Severn Trent Water and members of the Severn Trent Water Ltd Board.

The company’s Chief Executive attended the Forum meeting in December 2012, and its Director of Strategy and Regulation attended every Forum meeting. In addition, senior managers with direct responsibility for developing and delivering the company’s business plan attended each meeting.

The Forum has also had direct access to non-executive members of Severn Trent Water’s Board. Non-executive Board members also attended Forum meetings. These included Andrew Duff (Chairman), Gordon Fryett (non-executive director) and Richard Davey (Senior non-executive director and Audit Committee member).

The Forum’s Chair met with the Board’s Chairman and twice attended company Board meetings to update them on the Forum’s views. She also met the company’s Chief Executive at regular intervals.

Responsiveness to challengeThe Forum has been able to subject Severn Trent Water to a substantial degree of scrutiny, pressing the company hard on the most important areas of the plan for customers and the environment.

Dialogue throughout the process has been open and transparent and the Forum’s concerns, requests for clarification or challenges were resolved either within the meeting or through follow up actions. To assist this transparency, Forum members signed up to protocols on confidentiality. As a result of the company’s positive and pro-active attitude, the Forum considers that the process has worked well. This assessment was supported by the Forum’s independent adviser Dr Harry Bush.

“Meetings have been conducted openly and member participation is encouraged. My views have been recorded accurately and the level of participation from the Severn Trent Water management team demonstrates commitment to the Forum.”Gareth Wood, SSE



The Forum discussed some issues several times with Severn Trent Water, with the company regularly returning with more developed proposals or having undertaken further research. In a number of instances the company was required to reflect carefully on its approach and come back to the Forum with more detailed explanations. For example, in response to the Forum’s challenge on its pursuit of innovative solutions, the company drew in people from across its business to provide concrete examples of innovation and how these were delivering benefits.

Some of the Forum’s discussions with the company led to full and frank conversations about issues that at other price reviews have been avoided or hidden, such as the sessions on the company’s track record, financial performance (and growth aspirations) and strengths and weaknesses.

At these sessions the Forum was able to challenge the company about aspects of its plan that have a strong influence on customer perception, such as the company’s debt structure and financing, dividends, executive pay and tax payments. Another key area of debate was whether or not the company’s plans for the environment were sufficiently ambitious.

Although these discussions were at times difficult, even combative, the Forum considered that the company was trying to achieve the right balance of priorities in the interests of customers and the environment. At the same time, the company was always clear that the Board would ultimately make key decisions about its plan, guided by what it has heard from customers, other stakeholders, investors and shareholders.

The detailed ‘challenge log’, which was maintained as an on-going action log and record, also provided assurance to the Forum that the company was taking its views seriously and attempting to respond in a complete and impartial way. All of the substantive challenges, and the company’s response, are detailed in this report; however, the full challenge log can also be accessed at www.severntrent.com/waterforum.

At the end of the process the Forum identified some aspects of the process that it felt could be improved upon were a similar process to be put in place in the future. Learning points are discussed further in the ‘Afterword’ on page 74.

“There have been some really awkward questions, some almost distrusting questions… the company has been very good with that.”Richard Butler, CBI



21

Overall:The Forum’s constitution has allowed the group to fulfill its role effectively in challenging Severn Trent Water’s engagement and business plan proposals. It was supported in its work by the detailed scrutiny undertaken by its two standing sub-groups and by effective third party assurance.

The company has provided information in an efficient and timely way so as to enable the Forum to fulfill its role. The Forum has also had full access to the individuals within the company and on the Board with direct responsibility for developing and approving the plan.

Finally, the company has been open and transparent and has responded well to challenge from the Forum.


Severn Trent Water’s customer and stakeholder engagement

This chapter provides the Forum’s overall assessment of the adequacy of the company’s engagement programme as a means to understand the views and priorities of customers and other stakeholders.

Overview of the engagement programme Severn Trent Water has undertaken an extensive programme of engagement over a two-year period. This comprised substantial amounts of customer research supported by a large programme of direct and indirect communication with customers and other stakeholders. During the process the company has had meaningful contact with around 17,000 customers and stakeholders, which represents engagement on an unprecedented scale for the company.

The company’s approach was guided by a clear set of expectations for ‘good engagement’. Both the Forum and the company agreed, at an early stage in the process, that it would be important to develop a common understanding of what good engagement looks like as a baseline against which the company’s approach could be assessed. The Forum worked with the company to reach agreement on a defined set of criteria, the ‘framework for good engagement’.

The Forum undertook an interim assessment of the company against this framework in February 2013 and a final assessment in November 2013. Further information about the framework and the Forum’s assessment is set out on page 29, and in Appendix 7.

The company adopted a strategic approach to its engagement programme, tailoring its methods of communication according to the knowledge and interest levels of the customer base and stakeholders. This approach, and its rationale, was clearly articulated to the Forum.

The company has made a distinction between customers and other stakeholders. The company’s plan has been principally driven by the expectations and priorities of its customers (gathered through research). It has used stakeholder engagement to draw on stakeholders’ expertise and to ascertain their views on how it might best achieve customer priorities, as well as to discuss more technical aspects of its plan.

Although the company had agreed a clear strategy for its engagement programme at the start of the process, it has sought challenge from, and the endorsement of, the Forum and the CEWG at important junctures in its programme. As a result the approach to engagement has evolved and improved during the course of the programme’s implementation.

2


Chapter 2: Severn Trent Water’s customer and stakeholder engagement

The company’s tiered approach to engagement

Expert

Around14,000

Around3,000

Around160Interested

Representative

Open

“[The company] have attempted to engage with a range of social groups and have also taken the Forum’s feedback into account and taken different approaches.”Charley Gibbons, CAB

A representative sample of the customer base

Customers with an interest in having a say

Stakeholders with an interest in the company’s services and approach to delivering them

Stakeholders with an in-depth knowledge of the industry and/or customer interests



The three phases of the engagementThe engagement was undertaken in three main phases. The Forum’s first meeting took place as Phase 1 was coming to an end (in March 2012).

Appendix 5 contains detailed information about the activity the company undertook during each phase and this is also summarised opposite. It included several written consultations, briefing sessions, customer research, focus groups, customer perception tracker surveys, regional roadshows and a PR and digital-led customer campaign. The company also carried out a number of broader promotional and awareness raising customer and stakeholder activities.

Phase 1: December 2011 to March 2012 ‘ Shaping the consultation’, which aimed to understand how stakeholders would like to be involved.

Phase 2: April 2012 to March 2013‘ Shaping the plan’, which aimed to understand customer and stakeholder priorities and sought views on the overall strategic direction the company should take.

Phase 3: April 2013 to November 2013 ‘ Balancing the plan’, which used further customer research and stakeholder engagement to help find an appropriate balance of outcomes for the final business plan.



It is the Forum’s view that the company’s overall strategy for engagement, involving a phased and tailored approach, was appropriate.

Phase 1 consultation

• Stakeholder consultation on approach to engagement

• Early discussions with quadripartite group on establishment of Forum, approach to engagement and willingness to pay research

Phase 2 consultation and research• Willingness to pay research• Review of historic research• Bespoke research on customer

service• Quarterly customer satisfaction

surveys• Revealed preference research

on drinking water quality• Stakeholder consultation

‘Making the right choices’• x 5 stakeholder workshops

Phase 3 consultation and research• Secondary research on river

water quality, resilience, supply/demandbalanceandsocialtariffs

• Acceptability research in two parts

• Stakeholder consultation ‘Your water. Your choices’

• x 3 stakeholder roundtables• x 7 ‘Let’s talk water’ regional

roadshows

Forum challenges company as its revised proposals are developed• Revised plan developed

and challenged by Forum with reference to agreed insight from Phase 3 in relation to: balance; extent of improvements; measures of success and incentives

Establishment of Forum

• Challenge and agreement of Phase 2 consultation

• Development of framework for good engagement

Phase 2 analysis and the development of outcomes• Insight analysed by company • Scrutinised by CEWG• Approved by the Forum• Published in ‘Your views’ on website• Customer outcomes challenged

and agreed by Forum and CEWG• Basis for Phase 3 consultation

agreed by Forum and CEWG• Quality of engagement interim

assessment

Phase 3 analysis and the significance for the business plan•Insightandsignificancefornext

iteration assessed by company• Scrutinised by CEWG• Challenged and agreed by

the Forum

Final business plan

Process for engagement and challenge



The Forum’s scrutiny and challenge of engagementAs outlined above, during the course of the process the Forum played an important part in shaping the company’s objectives, strategy and approach in undertaking customer engagement. The Forum was supported by the CEWG, which scrutinised and challenged how the company implemented its engagement programme and interpreted the outcomes.

The Forum assessed the quality of the company’s engagement with reference to the pre-agreed framework for good engagement.

This framework is based on the four principles of good engagement: Inclusivity, Materiality, Responsiveness and Accountability that underpin Accountability’s AA1000 stakeholder engagement framework8. It has been augmented with the principles for good engagement set out by Ofwat9 and CCWater10 and other examples of best practice in this area.11

The Forum’s subsequent challenge of the company has been guided by this framework. It has challenged the company to ensure that its engagement has been:• inclusive (for example, including hard to reach groups and using appropriate

methods); • material (for example, considering issues where there was meaningful scope toinfluence);

• responsive(bothtochallengeandtothefindingsofengagement);and• accountable (by undertaking to act on the outcome of engagement).

A number of examples of the Forum and CEWG’s inputs and challenges to the company, along with its responses, are provided below.

Phase 1: Shaping the consultationThis phase took place before the Forum was established, although a forerunner of the CEWG comprising the quadripartite group was involved in the process from July 2011. The group’s involvement included selecting a supplier for the company’s willingness to pay research.

8AA1000 Stakeholder engagement standard, AccountAbility (2011).

9‘Involving customers in price setting – Ofwat’s customer engagement policy statement’, page 16, August 2011.

10‘Customer engagement principles’, CCWater, July 2012.

11Including: ‘The Consultation Charter’, the Consultation Institute (2010); ‘Stakeholder Engagement: A Roadmap to Meaningful Engagement’,CranfieldSchool of Management (2009).



Phase 2: Shaping the plan (April 2012 to March 2013)

A series of material challenges were made to the company during Phase 2 on its approach to engagement. These included the following:

Issue Challenge Company response

Willingness to pay research

The scope of service attributes to be included in the research should be broadened.

The company agreed to include low water pressure in the research and to undertake a further programme of secondary research to consider issues such as social tariffs.

Willingness to pay research

Insufficient qualitative testing had been included in the research proposals.

The company expanded its approach to include online forums, focus groups and cognitive tests.

Willingness to pay

Customers would not understand the proposed presentation of inflation in the survey.

The company agreed a revised form of wording.

Willingness to pay

The company needed to explain how it would take account of the significant difference between the online and ‘in person’ survey results.

The company stated that the in person sample was sufficient and representative and should be used in its final analysis. This was validated by the research company.

Scope of research

The willingness to pay research should not be taken in isolation as being representative of the views of customers.

The company agreed that willingness to pay should be one part of a broader programme of research to understand customers’ views. The company agreed the areas of focus for this secondary research with the Forum.

Stakeholder engagement

The company should make further efforts to engage with some significant interest groups from which it had yet to seek views, notably organisations representing older customers.

The company acknowledged this. These stakeholders were more successfully involved in Phase 3.


The drafting of ‘Making the right choices’ should be revised in parts to ensure that it remained objective.

The company revised the drafting of the document to substantially take into account the comments of Forum members.

Analysis of research findings

It was not clear how the company would synthesize the outcome of its research and engagement into meaningful implications for its business plan.

The company designed a framework to assimilate views from a range of sources. Its assessment of this, and the weighting it gave to different sources, was reviewed in detail by the CEWG on behalf of the Forum.

Analysis of research findings

There was a division of views within the CEWG as to whether the company should include research from other parties in its analysis.

The company reached agreement with the CEWG that this insight should be included in a proportionate way.



Phase 3: Balancing the plan (April 2013 to November 2013)A series of material challenges were made to the company during Phase 3 on its approach to engagement. These included the following:

Issue Challenge Company response


The company’s proposal to put forward four packages of outcomes for consultation in ‘Your water. Your choices’ would constrain the trade-offs respondents could make between outcomes.

The company revised its approach and explained the scope for choice against the main outcomes that impacted on bill levels. This allowed participants a greater range of choice.


The company’s proposal to use flat bills in real terms as the basis for its consultation in ‘Your water. Your choices’, with the option for participants to increase/decrease performance and bills around key outcomes within a given range, implied that the company had created its plan based on a predetermined view of how prices should change.

The company provided assurance that its basis for consultation of bills flat in real terms was the outcome of building an investment programme (based on its then knowledge of customer priorities) and initial financing and efficiency assumptions.


The impact of inflation on average bills during 2015-20 should be made explicit in ‘Your water. Your choices’.

The company revised its draft of ‘Your water. Your choices’ to include an illustration of what could happen to bills in real and nominal terms.

Acceptability research

Insufficient provision had been made to understand the views of future customers.

The company included a customer sample in its acceptability research to explore ‘inter-generational’ views.


A significant proportion of customers (18%) found the business plan to be ‘neither acceptable nor unacceptable’. The company needed to explore and explain the reasons for this.

The company agreed to undertake additional research to understand why.

Working with neighbouring companies

It was not clear if the c.0.5 million customers of the company who were billed by South Staffs Water for sewerage services would be included in the company’s research.

The company agreed to work with South Staffs Water by providing sewerage willingness to pay questions for its research and by the companies sharing the outcomes of their respective research.

Social tariffs Insufficient research had been undertaken to understand customer views on helping others who struggle to pay and the acceptability of cross-subsidies.

The company agreed to undertake additional research in this area.



Third party assessmentIn discussion with the Forum, Severn Trent Water commissioned two separate peer reviews of its willingness to pay research. These were carried out by Professor Ian Bateman and Professor Ken Willis, two recognised experts in this area. The results of these reviews were shared with the CEWG.

Professor Willis reviewed the initial questionnaire and findings from cognitive interviews and his comments, with CEWG support, were largely incorporated into the design of the pilot survey. Professor Bateman later reviewed the final willingness to pay report and reported that it was “a high quality study with some impressive attributes” confirming the views of CEWG members who stated their satisfaction with the willingness to pay research.

The Forum’s assessment of the quality of Severn Trent Water’s engagement The Forum undertook an interim assessment of the company against the framework for good engagement in February 2013. The Forum found that the company’s engagement was not yet of an appropriate standard against a number of the 25 criteria.

The company subsequently demonstrated to the Forum that it had responded to these shortcomings.

Appendix 7 sets out the Forum’s interim and final assessment of Severn Trent Water’s engagement, and the company’s evidence against each criteria.

In its final assessment, undertaken in November 2013, the Forum scored the company as green (based on a red, amber, green assessment) against all 25 of the criteria.



In summary, the company has:• adopted a strategic approach, engaging with customers and stakeholders on

all major areas of concern to them, and providing a wide range of ways in which to respond;

• followed best practice where relevant and used both tried and tested and more innovative approaches, as well as both formal and informal methods of engagement;

• undertaken substantial and widespread research, using a number of reputable research partners that were well briefed;

• engaged with groups of customers across the full demographic range, using a statistically robust sample group;

• offeredcustomersrealandcostedinvestmentpackagesinkeyareas,affordingclear choices to be made below and above a ‘company baseline’ and showing the bill impacts of these choices;

• collated and assessed in an objective way the information and viewpoints gathered through engagement;

• provided this information and viewpoints from the interpretation of its engagement activities to the CEWG and Forum to scrutinise.



31

Overall:The customer engagement that Severn Trent Water has carried out has been carefully planned, well resourced and well executed.

The Forum’s overall assessment is that Severn Trent Water has carried out engagement of sufficient scope and quality to allow it to understand the views and priorities of its customers and stakeholders.


This chapter outlines the Forum’s assessment of the extent to which Severn Trent Water has understood its customers’ priorities, and gives the Forum’s views on the suite of outcomes that Severn Trent Water has developed in response.

Overview of Severn Trent Water’s approach to understanding its customersSevern Trent Water has developed an understanding of its customers’ and stakeholders’ expectations and priorities using an iterative process over almost two years. At regular intervals it has assessed the results of its engagement and its significance for its business plan. As part of this, the Forum and CEWG have challenged the company to ensure that its analysis is fair and balanced, and that the implications for its plan are properly understood.

The initial understanding of customer expectations and priorities and the development of outcomes (October 2012-March 2013) At the end of Phase 2 of its engagement the company agreed with the Forum its understanding at that time of:• customer expectations;• customer outcomes;• detailed customer views within each outcome; and• the basis for consultation in Phase 3.

Each of these areas is discussed below.

Customer expectationsThe company summarised its understanding of customer expectations into five broad themes which are set out opposite. The Forum is satisfied, based on the findings of the research and engagement that it has seen, that this is a fair and balanced representation of customer expectations.

Customer outcomesThe company used its insight from Phase 2 to develop a suite of ten outcomes (these are now called ‘objectives’ in the company’s business plan). The outcomes were developed through a process of challenge, consultation and refinement that spanned more than a year (from August 2012 to October 2013).

The Forum challenged the company extensively during this process. In particular, the Forum considered that the company’s initial suite of outcomes did not reflect the importance customers attach to issues including the environment and the community, or had not taken into account the full scope of its statutory responsibilities, such as in relation to effective management of biodiversity in its estates. The company made subsequent revisions to its outcomes in response.

Severn Trent Water’s understanding of its customers’ expectations and priorities

3


Chapter 3: Severn Trent Water’s understanding of its customers’ expectations and priorities

In the Forum’s view, the final suite of outcomes that was agreed represented a good response to the challenges it posed and achieved a reasonable balance between being comprehensive but not overly complex. The Forum is satisfied that the company’s final list of outcomes properly reflects the priorities of its customers as identified through the engagement process.

Customer expectation Severn Trent Water outcomeQuality water We will provide water that is good to drinkA service you can rely on We will ensure water is always there when you need it We will safely take your waste water away We will provide you with excellent customer serviceAffordable bills We will have the lowest possible charges We will help you if you struggleResponsible business We will protect our local environment We will protect our wider environment WewillmakeapositivedifferenceinthecommunitySustainable finance Wewillfinanceourbusinesssustainably

The company consulted on its proposed outcomes in its ‘Your water. Your choices’ consultation. No material changes were proposed by stakeholders.

The company has also demonstrated that its outcomes are consistent with guidance from both Ofwat12 and from UKWIR13. In particular, that they:• reflectwhatcustomersandsocietyvalue;• are easily understood by stakeholders and customers; • are linked to the company’s responsibilities; and• reflectgovernmentpriorities.

Detailed customer views within each outcome At the end of Phase 2, the company also carried out analysis of what it understood customer and stakeholder views to be within each outcome (as opposed to the actual outcomes themselves). For example, under ‘We will ensure water is always there when you need it’, the company analysed whether customers and stakeholders had a preference for demand or supply side interventions.

This analysis was scrutinised in detail by the CEWG and then by the Forum itself to ensure that it was a fair and balanced assessment. Its conclusions were summarised in the company’s consultation ‘Your water. Your choices’ and explained in its supporting ‘Your views’ document which is available on the company’s websites.

The key emerging themes noted by the Forum were:• customers expect safe, high-quality drinking water as a given;• customers expect reliable services as a given;• leakage and metering are front of mind issues for customers and stakeholders;• customers regard excellent customer service as a responsive, straightforward

service;• customerssupportactionbeingtakentotacklesewerflooding,butnotat

any cost;• customers support action being taken to improve the environment;• customers support the principle of helping those who struggle to pay, but

there was no clear view at this stage about who should bear the cost;• customersareconcernedaboutprofits,andhowtheyimpactontheirbills;• stakeholders (including local authorities) want water companies to work in

partnership with them to help deliver more for less; and• buildingcustomers’understanding(education)ofwaterefficiency,responsible

sewer use and what their bills are paying for is supported by both customers and stakeholders.

12Setting price controls for 2015-20 – final methodology and expectations for companies’ business plansAppendix 1: Integrating the calibration of outcome delivery and cost performance incentives, Ofwat.

13‘Defining and Incentivising Outcomes and Measures of Success’, UKWIR, 12/RG/07/26.



The basis for consultation in Phase 3The Forum discussed in detail the conclusions from the company’s willingness to pay research. It noted that while customers’ views of future bills showed that more than 70% wanted current levels of service to be maintained, with no increase in bills, the average figure for a package of maximum improvements by 2020 was £10.

The interpretation of the willingness to pay research has been a strong area of debate between the Forum and the company, and between Forum members themselves. While some members have cited that, on average, customers would support an increase in bills for further improvements, others have countered that this is not a majority view.

The Forum therefore challenged the company to take into account customers’ willingness to see and pay for improvements in their service, and the relative values they attach to different improvements, but also to keep bills as low as possible.

In response the company put forward as the basis for consultation in Phase 3 a package of improvements in line with its understanding of customers’ priorities and with the effect of keeping bills flat in real terms (the Forum noted that in reality bills would be going up as they included inflation). The Environment Agency in particular had been concerned to ensure that environmental improvements were not unduly constrained by a desire to keep bills low. The company therefore provided costed options that allowed participants to increase or decrease the improvements delivered, and the consequential bill impacts.

A summary of the understanding of customer insight agreed between the Forum and the company is set out in Appendix 6.

Understanding customer views at the end of Phase 3 and implications for the business plan (June 2013 – November 2013)In its Phase 3 engagement, Severn Trent Water sought evidence on whether it had found the right balance between outcomes, and the right balance between making improvements and keeping bills low. The company used acceptability research, its ‘Your water. Your choices’ consultation and stakeholder roundtables to do this. It also carried out secondary research into river water quality, the supply/demand balance, resilience, and social tariffs.

The key emerging themes noted by the Forum were:• 88% of customers found the proposals for improvements in ‘Your water. Your

choices’, including stable bills in real terms, acceptable;• customers and stakeholders both agreed that the company had not proposed

to do enough to tackle leakage;• customers and stakeholders would support further environmental

improvements beyond those proposed; and• customers and stakeholders both regarded the safety of drinking water quality

as a priority but thought the company was already performing well in this area.

As the figure on page 36 illustrates, customers also wished to see less expenditure on ensuring ‘water is always there when you need it’. However, the company has been able to demonstrate through its secondary research that, when the specific issue of resilience is discussed in detail with them, 66% of customers would choose either the level of action (and stated bill impacts) proposed in ‘Your water. Your choices’, or more.

The Forum was satisfied that the company’s assessment of customer expectations at the end of Phase 2 was a fair reflection of customer priorities and a reasonable basis on which to stage the next phase of engagement.





Notwithstanding that the company’s research indicated that some customers would be prepared to pay more for further improvements, the Forum has strongly emphasised, particularly in the light of current economic conditions, that the company must keep affordability at the heart of its plans. At this point the Forum challenged the company to come forward with proposals that would meet customers’ priorities and deliver environmental improvements, but avoid an inflationary uplift in bills. The Forum wanted the company to consider this option given that very many of its customers were not getting RPI inflation increases in their income.

The Forum therefore set out its expectation that in developing its revised plan, the company should consider how to:• deliver more improvements for the environment;• do more to tackle leakage;• ensure that risks to future services, including strategic resilience and

drinking water quality, are properly managed; and• keepbillsaslowaspossible,withthechallengetokeepthemflatin

nominal terms.

The Forum also agreed in more detail with the company further changes it expected it to consider for its plan. These are set out in the summary of agreed customer insight (Appendix 6).

The Forum gives its view on whether or not the company has responded to these challenges in Chapters 5 and 7.

300 5 10 15 20 25

Summary of changes in the balance of improvements proposed by customers and stakeholders (bill impact per outcome)

Stakeholder roundtables


Your water. Your choices

Good to drink Water always there

Take your waste water away Protect the local environment

£2.74 £9.64 £5.82 £7.78

£2.87 £8.60 £5.58 £7.29

£3.00 £9.50 £5.50 £6.00

“As an elected councillor, working with and interfacing with residents daily I am very aware of people whose wages do not keep up with inflation, more and more of them enter into fuel poverty and water poverty. Water Forum members, working with professionals from the company, recognise that affordability is essential for customers – both for them and for managing bad debt. We have arrived at a range of challenging options, some of which are aspirational and ambitious.”Cllr Tom McDonald, West Midlands Councils



37

Overall:By November 2013 the Forum was satisfied that the company had engaged and listened to its customers, in a phased and iterative way, dating back to December 2011.

The Forum is satisfied that the company has a clear understanding of customer priorities, that this was well evidenced and that outcomes had been developed to align with customer priorities and expectations.


The Forum’s views on measures of success and incentives

This chapter outlines the Forum’s assessment of the measures of success that Severn Trent Water has developed to assess its performance in delivering outcomes. It goes on to discuss the extent to which the company has developed outcome delivery incentives that are aligned with, and will encourage the delivery of, customers’ priorities.

Overview of the approach to developing measures of success Severn Trent Water has developed a suite of measures, against which its performance in delivering its proposed outcomes can be assessed. The company used an iterative process to develop these measures involving challenge from the Forum, challenges from its own assurance providers and the views of its customers and stakeholders. This process is explained in the simplified schematic below.

Process to develop measures of success (aligned to the UKWIR recommended process)

4

STW develops a potential long list of measures and demonstrates compliance with six UKWIR criteria:• Closely related to outcomes•Measurableandverifiable• Covering a large proportion of

the outcome• Easy to understand by

stakeholders• Extent to which in water

company control• Future proof

Revised suite of measures agreed:• Revised list of 27 measures

agreed including new measures for asset stewardship, coliform detections, biodiversity, customer education and partnership working

STW consults on measures of success:• ‘Your water. Your choices’ consults

on 20 proposed measures and seeks proposals for new biodiversity and community measures

Long list is challenged by CEWG, Water Forum and company assurance, and revised:• Proposed list is too narrow

in its scope ie community, biodiversity omitted

• Not enough innovation in approach (measures closely resemble existing KPIs)

• Not all measures understandable or relevant to customers•Nomeasurestoreflect

serviceability of assets

Final business plan


Chapter 4: The Forum’s views on measures of success and incentives

In its challenge, the Forum sought to ensure that the measures of success:• would hold the company to account for delivering customers’ expectations

and priorities; • are accessible to, and have resonance with, customers and stakeholders; and• demonstrate innovation by not simply relying on existing KPIs.

The Forum also considered whether the company had proposed an appropriate number of measures, and whether their scope and coverage overall was sufficient.

Holding the company to account to deliver customers’ expectations and prioritiesThe Forum challenged Severn Trent Water as to whether its proposed shortlist of measures, as set out in ‘Your water. Your choices’ would sufficiently hold the company to account for delivering customers’ priorities in three key areas.

First, the company’s two proposed measures for drinking water quality (compliance and complaints) did not appear to capture current performance issues. The company subsequently added a measure relating to coliform detections.

Secondly, the company’s assurance providers had challenged the company that, despite including a large maintenance programme, it had not initially included any measures relating to the management of its assets. The Forum noted that throughout the company’s qualitative research, customers repeatedly expressed concern that the company should adequately maintain its infrastructure for current and future generations. Customers expect Severn Trent Water to do this as a given. In the light of this, the Forum welcomed the company’s decision to include four asset stewardship measures of success.

Finally, the company has proposed a large investment scheme to improve its strategic resilience whereby the full customer benefit will only be realised in 2025. Its initial measure of success focused on the customer outcome (ie number of customers who benefit from a second source of supply), which would not be significantly impacted by the scheme until 2025. Given the size of the project, the Forum welcomed the company’s subsequent decision to introduce a measure of success based on milestones to map delivery in the interim.

Resonance with customersThe Forum challenged the company that many of the measures it initially included appeared detached from customers and would not resonate with them.

In response, and in addition to the SIM, the company has included two measures of success that are directly dependent on customers’ views of the company: the UK Customer Satisfaction Index (to measure customer satisfaction); and customers’ perceptions of value for money.

The company has also included an additional measure of success for its speed of response to leakage. This is particularly welcome given the weight of customer dissatisfaction in this area.



Use of innovationThe Forum challenged the company that in its initial iteration, it had relied too heavily on its existing KPIs.

In response the company has developed new and innovative measures that include measuring its contribution to achieving the Water Framework Directive, partnership working and water resource efficiency. The Environment Agency in particular has welcomed the company’s progressive approach in this area.

Number and scope of measures The Forum strongly challenged the company that the initial suite of 20 measures of success was not sufficient in its scope. It wished to see an expanded suite included.

While the Forum recognises the company’s view that too large a suite of measures risks diluting their effectiveness and impact, it welcomes the fact that the company has increased the final suite to 27 measures – which represents a proportionate response to the Forum’s concerns.

Severn Trent Water’s 27 measures of success1. Number of complaints about drinking water quality2. Compliance with drinking water quality standards3. Asset stewardship – number of sites with coliform failure4. Resource efficiency (amount of water taken out of the environment)5. Leakage levels6. Speed of response in repairing leaks (percentage fixed within 24 hours)7. Number of minutes customers go without supply each year8. Percentage of customers with resilient supplies (those that benefit from

a second source of supply)9. Asset stewardship – mains bursts10. Progress on strategic resilience (meeting milestones)11. Number of internal sewer flooding incidents12. Number of external sewer flooding incidents13. Partnership working (measure of joint initiatives on flooding)14. Asset stewardship – sewer blockages15. Customers’ satisfaction with their service (based on a customer survey)16. Customers’ experience of dealing with the company (based on Ofwat’s SIM)17. Delivery against efficiency plans18. Customers rating the company’s services as good value for money19. Number of struggling customers helped with their bills20. Percentage of customers who do not pay21. Improvements in river water quality against Water Framework Directive criteria22. Number of pollution incidents23. Asset stewardship – environmental compliance24. Biodiversity improvements25. Size of our carbon footprint26. Improved understanding of the company’s services through education27. Investment grade credit rating



41

Overall:The agreed suite of measures of success is aligned with the delivery of outcomes that are important to customers.

The Forum believes that the measures will be an appropriate and robust way to measure Severn Trent Water’s performance in delivering those priorities and expectations.



Overview of approach to developing outcome delivery incentives In challenging the development of the company’s incentives, the Forum has considered whether the incentives:• provide robust protection for the interests of consumers;• take account of the penalties and incentives created by other regulatory

regimes;• encourage and provide proportionate rewards for innovation; • are based on customer willingness to pay; and• reflectanappropriatedegreeofsimplicity,clarityandtransparency.

The Forum’s initial discussions concerned the principle of introducing incentives. It also agreed its understanding of how measures of success and financial incentives might be applied.

Process to develop outcome delivery incentives

The Forum asked a sub-group of its members (CCWater, SSE, Environment Agency and Natural England) to consider the company’s proposals in more detail. This is also an area where the Forum’s independent adviser has challenged on its behalf.

Areas for reputational and financial incentives to be applied agreedTaking into account:1. Would reputational incentives alonebesufficient?

2.Isthereanexistingfinancialincentiveinplace?

3.Shouldfinancialincentivesbe penalty only or reward and penalty?

Revised package of incentives agreed•Packageof13financialincentives

agreed• Aligned with customer priorities• Overall impact within willingness

to pay parameters• Reasonable balance between

risk and reward achieved

Forum and ‘task and finish’ group challenge applicationChallenge considers:1. Alignment with customer priorities2. Timing of application and beneficiariesoffinancialpenalties

3. Right behaviours (eg innovation) encouraged

4. Financial impact for customers is within willingness to pay

5. Balance of risk and rewards between customers and the company appropriate

Company proposes extent of incentive to be appliedTaking into account:1. Importance attached to

issue by customers2. Size of performance

improvement proposed3.Allowforefficiencyandinnovation

Final business plan



The Forum challenged the company in the development of incentives in the following areas.

The principle of using incentivesThere has been robust discussion within the Forum itself regarding the principle of using financial incentives that reward outperformance. The Forum has challenged the company to ensure that its use of financial incentives is proportionate and does not go beyond what its willingness to pay research suggests customers would be prepared to pay for. As explained below, the company has worked within these parameters.

As the financial impact of incentives and penalties will arise after 2020, under the company’s proposals, the Forum has asked that further research to engage customers in the detail of these proposals takes place at the end of the period, when the scale of underperformance or outperformance can be fully assessed.

MeasuresofsuccessagainstwhichfinancialincentivesshouldbeappliedThe company has discussed with the Forum and CEWG the measures of success against which financial incentives should be applied. In doing so it has considered where:• reputational incentives could be applied instead to have most impact;• existingfinancialincentiveswerealreadyinplace(forexample,theSIM);• penaltyonlyfinancialincentivesshouldbeapplied(forexample,inrelation

to asset stewardship which customers regard as a basic task); and where• financialincentiveswithbothpenaltiesandrewardsshouldbeapplied(for

example, in relation to the Water Framework Directive to encourage the earlier achievement of outputs where prudent to do so).

The company has proposed the application of financial incentives in the areas set out below.

Measure Type of incentive

Number of complaints about drinking water quality Reward/penalty

Asset stewardship – number of sites with coliform failure Penalty only

Leakage levels Reward/penalty

Number of minutes customers go without supply each year Reward/penalty

Asset stewardship – mains bursts Penalty only

Progress on strategic resilience (meeting milestones) Reward/penalty

No. of internal sewer flooding incidents Reward/penalty

No. of external sewer flooding incidents Reward/penalty

Asset stewardship – sewer blockages Penalty only

Customers’ experience of dealing with the company (based on Ofwat’s SIM)

Reward/penalty

Improvements in river water quality against WFD criteria Reward/penalty

Number of pollution incidents Reward/penalty

Asset stewardship – environmental compliance Penalty only

The Forum agrees that the company’s proposed use of outcome delivery incentives is aligned with customers’ priorities.



Encouraging the right behavioursThe Forum has considered whether the company’s proposed application of financial penalties and rewards would encourage behaviours from the company that would be in the interests of customers and the environment. It has also considered whether they properly reflect the extent of customer detriment and desire for improvement.

The Forum has challenged the company that the scale of penalties should be increased in the event of deterioration from current service levels or in the event of continued failure. In response the company has agreed to tiered incentives to add a higher rate of penalty in these circumstances for water supply interruptions, leakage and internal sewer flooding.

ThepotentialoverallfinancialimpactforcustomersIn the light of the challenges noted above as to the overall financial impact of incentives, the company has put forward a package that it expects will have a similar financial impact as – and be in addition to – the current SIM incentive. The Forum accepts that the maximum financial impact of c.£6 on bills from 2020 onwards is within the average willingness to pay as indicated by the company’s research.

The Forum has also challenged the company as to whether all customers, or specifically those affected, should benefit from penalties. The company has responded that it expects the biggest benefit (through economies of scale) to be delivered overall if financial penalties are returned to, or reinvested in the services for, all of its customers.

The Forum notes this, but expects the company to give careful consideration to its framework for redress for customers who suffer from a single or multiple service failure during the 2015-20 period. The company has agreed to review its approach.

Potential impact of financial penalties and rewards

£ change in household bill

Drinking water complaints

Pollution incidents

Leakage

Supply interruptions

WFD improvements

Internal sewer flooding

External sewer flooding

Outcomes incentives – maximum range

Outcomes incentives – likely range

SIM-10 -6-8 6 8420-2-4



The timing of the application of incentivesThe Forum has questioned the company as to whether or not incentives would be applied either annually or at the end of the 2015-20 period. The Forum agrees with the company that incentives should be applied at the end of the period when the scale of underperformance or outperformance can be fully assessed.

Monitoring progress against performance commitments The company has proposed that the Forum’s or a similar challenge body’s role should be continued and that it should monitor progress against performance commitments.

The company has explained that it will apply its current process for assuring its performance against KPIs to the measures of success before publishing them and submitting them to Ofwat. The assurance process would be extended to include the level of reward or penalty due for each measure, and it will publish the current position each year in terms of rewards and penalties.

The level of performance proposed against each measure of successThe Forum considered the company’s use of incentives in the context of how ambitious the company’s proposed performance is, and therefore the degree of risk associated with whether the company will achieve, underperform or outperform its target.

To help understand this risk, the Forum challenged the company to set out its targets in the context of its own historic performance and that of the industry in general. The company responded by providing an indexed view of its performance in the last period, compared with its future proposals, and current industry leaders.

The Environment Agency, while broadly supportive, notes that it has been difficult to say with confidence that the balance between risk and reward is set correctly when it comes to Water Framework Directive ambition. Although the principle of incentives in this area is welcomed by the Environment Agency as being more innovative than it has seen elsewhere, it has less confidence about whether or not the central targets for all components identified for incentivisation are sufficiently testing or whether, through efficiency and innovation, they might have been increased.

100 = 2014-15 expected performance Scale of improvement over AMP5 (2010-15) Scale of improvement over AMP6 (2015-20) Current industry upper quartile Current industry best in class

60 80 100 120 140 160 180 200

Example: External sewer flooding performance



The Forum is satisfied overall, however, that the size of rewards and penalties appears proportionate to the extent of the risk/challenge that the company has taken on. The company’s own assurance provider in this area has stated that its approach has been “robust, credible and well-justified”.

The treatment of windfall gainsThe Forum has challenged the company as to how it would treat windfall gains created as a result of factors beyond its control, such as higher than assumed inflation.

The Forum recognises that the company has a track record of sharing these gains with customers and shareholders. While Severn Trent Water has not committed to a specific mechanism or process in 2015-20, it has said it will continue to make decisions about benefit sharing in an open and transparent manner and in consultation with consumer representatives. The Forum has requested that the company develop and share a clear and transparent process for these discussions.



47

Overall:It is the view of the Forum that the incentives that the company has developed, following challenge from the Forum, are clearly linked to customer preferences and strike an appropriate balance between risks and rewards.

The Forum will continue to press the company to put in place a clear process to trigger discussions about the sharing of windfall gains.


Challenges to the development of Severn Trent Water’s proposals for each outcome

This chapter outlines the principal areas of Severn Trent Water’s plan that have been challenged by the Forum. It summarises the issues discussed by outcome, highlights the main areas of challenge, and sets out the Forum’s concluding remarks on the adequacy of the company’s response in its plan.

Overview of the approach to developing proposals for each outcome Throughout the development of Severn Trent Water’s business plan, the Forum has challenged the company to ensure that within the outcomes the company proposes to deliver: • the priorities and expectations of its customers have been taken into account; • it has been innovative in its approach; and • sufficientallowancehasbeenmadeforitsstatutoryobligationstobemet.

As with other areas of the company’s plan, this has been an iterative process. The following sections provide a summary by outcome of the main challenges across the different iterations of the plan. The simple schematic opposite sets out these iterations.

Where members have provided comments that may diverge from the consensus view, these are recorded.

The Forum understands that it is not its role to form a view on, or scrutinise in detail, the cost of investment solutions, efficiency or approach to financing, proposed by Severn Trent Water to achieve its outcomes. However, given the importance to customers’ bills it has sought assurance from the company’s assurance providers and its own independent adviser that the company’s proposals appear to be within the bounds of reasonableness. These challenges are documented below for information.

5

“Discussion has been frank and at times abrasive and has certainly drawn out those issues which members felt strongly about, and which Severn Trent Water needed to consider.”David Wurr, CCWater


Chapter 5: Challenges to the development of Severn Trent Water’s proposals for each outcome

Company consults on strategic issues (Phase 2)• Willingness to pay research• Review of historic research• Bespoke research on customer

service• Quarterly customer satisfaction

surveys• Revealed preference research

on drinking water quality• Stakeholder consultation

‘Making the right choices’• x 5 stakeholder workshops

Forum challenges company as its revised proposals are developed• Final measures of success agreed• Level of ambition against each

outcome agreed• Approach to delivering outcome,

for example partnership working, innovation and capital vs operating expenditure approaches agreed

Company consults on proposals (Phase 3)• Secondary research on river water

quality, resilience, supply/demand balanceandsocialtariffs

• Acceptability research in two parts

• Stakeholder consultation ‘Your water. Your choices’

• x 3 stakeholder roundtables• x 7 ‘Let’s talk water’ regional

roadshows

Forum challenges company as it develops proposals by outcome for further consultation• Initial measures of success agreed• Level of ambition against

each outcome challenged• Approach to delivering outcome

for example, partnership working, innovation and capital vs operating expenditure solutions discussed

Final business plan

Process to develop proposals for each outcome



Outcome: We will provide water that is good to drink

Overview of the issue The company’s research consistently shows that a safe, high-quality water supply is customers’ top priority. However, because existing quality performance is high, they have no great appetite for additional investment.

The Forum has expressed concern that DWI reports for the past two years have shown that the company has experienced a number of drinking water quality events and that it needed to do more to understand and manage risks. For 2015-20, the company has proposed a more risk-based approach to targeting future investment which it considers will ensure that areas with greatest risk of non-compliance are given greatest priority. It has also sought to increase its use of less capital-intensive solutions, particularly catchment management14.

Areas of challengeChallenge has been provided by the Forum, Assurance Working Group and CEWG in the following areas:

Area Challenge Response

The measures of success

The company’s initial measures of success focused on compliance and customer complaints. There was nothing to reflect other performance issues.

The company has introduced a new measure of success relating to the number of sites with coliform failures.

Identification of risks and implications for maintenance

The Forum noted that the company had proposed an uplift in maintenance in this area. It sought assurance that the company’s approach to identifying future risks had not over or understated the extent of the issue.

The company’s assurance providers have reviewed the company’s approach and have reported that it is appropriate.

Innovation15 The Forum challenged the company to explain how it was using innovation to deliver this outcome.

The company has reported that it will be extending its use of catchment management; optimising its treatment process to take more account of river flows; and improving monitoring to manage chlorine in its network.

OverallThe DWI has engaged separately with the company concerning its drinking water proposals. The DWI summarised this process in a Statement to the Forum, and this Statement can be found in Appendix 8.

The Forum welcomes the greater use of catchment management which is more environmentally friendly, requires lower capital investment, and which the company has demonstrated has received wide customer support.

The Environment Agency in particular has welcomed the company’s trialling of innovative new approaches to source control as part of the Chemicals Investigation Programme.

14‘Catchment management’ is an approach used by water companies to deal with pollution ‘at source’. For example, by tackling pollution suchaspesticidesthatrun-offfromfarmers’fields,beforetheyenterwatersources, the company can negate the need for expensive enhancements to its treatment processes to remove the pesticides and make the water safe to drink. 15References to innovation in this chapter have been taken from a workshop on innovation the company held on 9 May 2013 in response to challenge from the Forum that it needed to demonstrate its ambition in this area more clearly.



Outcome: We will ensure water is always there when you need it (supply/demand balance)

Overview of the issueAlthough Severn Trent Water has sufficient resources to meet demand in the current investment period, changes to abstraction licensing and climate change impacts mean that, without intervention, it will face significant deficits by 2040.

The company has sought to align its WRMP consultation with the customer and stakeholder engagement programme it has carried out for its business plan.

The company’s proposed strategy to reach a supply/demand balance is to prioritise resource efficiency, rather than seeking to develop significant new supplies. The company has evidenced that customers support demand-side interventions and, in particular, expect to see significant leakage reductions. There is also customer and stakeholder support for greater water efficiency programmes and further metering.

Areas of challengeChallenges have been provided by the Forum, the Assurance Working Group, the CEWG and a specific ‘task and finish group’ in the following areas:


The adequacy of the company’s customer research

The company needed to undertake further research to understand customer preferences for supply/demand interventions.

The company has undertaken further research and can evidence that customer preferences are for additional action against leakage and other demand-side interventions.

The use of hosepipe bans

It was not clear that the company had taken into account the outcome of its stakeholder engagement, which broadly supported more frequent hosepipe bans.

The company’s subsequent customer research showed that customers did not favour an increase in hosepipe ban frequency. Furthermore, it was able to show that this would have limited impact on the supply/demand balance.

The company’s response to leakage

The outcome of the company’s acceptability research and ‘Your water. Your choices’ consultation highlighted that its initial leakage proposals were insufficient to meet customer expectations.

The company originally proposed to reduce its leakage by 3%. It subsequently increased this to a 6% reduction. It also made a commitment to fix all leaks within 24 hours, where safe to do so.




The company’s approach to metering

The company was asked to demonstrate how it had reconciled strong stakeholder support for increased metering with concerns expressed relating to vulnerable customers, and customer barriers to metering uptake identified by its research.

The company has stated that it will increase metering by 2040 to over 70%. Its proposed approach is to increase metering “at a pace led by its customers”, that is, it wishes to increase metering by helping its customers make informed choices about whether or not metering is for them. It has included an additional metering programme to support customers in deprived areas.

The company’s water efficiency programme

The company’s proposal to increase its water efficiency programme did not appear to be reflected in the company’s proposed performance against its measure of success for customer education.

See outcome: We will make a positive difference in the community.

Innovation The Forum challenged the company to explain how it was using innovation to deliver this outcome.

The company has reported that over the long term it will be: using ‘urban catchments’ catching rainwater and re-using it where possible to reduce flood risk; using aquifers to store water in times of abundance for use in times of drought; and developing affordable systems for domestic water re-use.

OverallThe Forum welcomes the company’s commitment to go beyond the economic level of leakage and to improve its response time to leaks significantly. There is a clear audit trail of research to evidence that this is in line with customer priorities.

New efforts to educate customers about metering and efficiency and to identify vulnerable customers who would benefit are to be welcomed. The Forum wants to encourage the company to continue to engage proactively on these issues, with clear programmes and timescales.



Outcome: We will ensure water is always there when you need it (strategic resilience)

Overview of the issueAt an early stage, the company explained that it expected that a material element of its investment programme would be dedicated to improving the resilience of its strategic assets.

The company had already considered this investment at the 2009 price review. Since that time it has undertaken additional analysis to try to gain a better understanding of the extent and timing of potential solutions.

The company has identified a preferred option for its scheme, including capital works that the group has scrutinised in detail.

Given the size of the programme, the company proposes to deliver the scheme over two investment periods 2015-20 and 2020-25. In response to challenges from the Forum to balance investment needs with the impact on bills, there has been a shift in the company’s proposals for the phasing of this scheme.

The company has also subsequently reduced its proposed investment during 2015-20 to £0.25bn from £0.3bn in order to take account of planning uncertainties. It does, however, want to retain the milestones for its original delivery profile and if it is able to meet them, it will defer taking the return on any investment beyond £0.25bn until 2020-25.

The company has been able to demonstrate that while customers do not often consider the possibility of a long duration supply interruption, once discussed with them, they support action being taken.

Areas of challengeChallenges have been provided by the Forum, the Assurance Working Group, the CEWG and a specific ‘task and finish group’ in the following areas:



The company had insufficient research to understand customers’ views on high consequence and long duration supply interruptions.

The company has undertaken further research and can evidence that a majority of customers would support the proposal put forward in the company’s ‘Your water. Your choices’ consultation.

The identification of need

The company had not articulated why this investment was required now.

The company has stated that it now has a much greater understanding of the risks and issues and that justifies making improvements now.

The proposed solution

The Forum sought assurance on how the company had reached its preferred solution.

The company explained that it had undertaken a full range of exploratory analysis. It has considered around 100 different options before reaching its shortlist.

The proposed solution

The Forum sought clarification on the risks associated with the preferred solution.

The company reported that the principal risks to delivery related to securing necessary abstraction licences and planning permissions.




The costing of the scheme

The Forum sought assurance on the proposed costing of the scheme which at c£0.6bn (over two investment periods) is a significant component of its overall investment programme.

The company reported that the initial costing for the preferred solution had been independently assured.

Phasing of the scheme

The Forum sought clarification on the risks associated with delivering the preferred solution within proposed timescales.

The company has re-phased the delivery of the scheme based on a more realistic understanding of the likely planning process and timing.

Phasing of the scheme

The Environment Agency has expressed concern that this investment would be carried out at the expense of environmental improvements and, as such, would not be consistent with customer priorities.

The company has re-phased expenditure to allow focus on both areas in its plan.

Accountability to customers

The Forum expressed concern about how the company could be held to account for delivering a large-scale programme that spanned two investment periods.

The company has developed a measure of success for delivering construction milestones.

OverallThe Forum is supportive of this scheme and recognises its importance. It further recognises that customers support the premise of the scheme and that the company has evidenced this through its research.

The company has been responsive to the views of Forum members during the refinement of the proposals. It has also been open about the potential risks of both the issue and the options to address it.

The Forum welcomes the fact that the company has re-planned and re-phased the programme following challenge, and the proposals in the business plan represent a reasonable balance between the cost of the investment both overall (and in AMP6) and the risks.

“We feel that Severn Trent Water has been responsive to the views we have expressed during the refinement of the [resilience] proposals. The current proposals represent a reasonable balance.”Bernard Crump, CCWater



Outcome: We will safely take your waste water away

Overview of the issueSewer flooding is the worst possible incident to affect customers. Research shows that customers support more being done to reduce the risk of occurrence and to mitigate impacts. The company’s stakeholder engagement has further illustrated: the need for enhanced partnership working with local authorities; the need to use more sustainable drainage systems; and the need for a major effort to educate members of the public about their responsibilities to ensure that drains do not become blocked.

The company has proposed investment in this area over its 2010-15 levels to reduce the number of internal and external sewer flooding incidents. Its acceptability research and stakeholder engagement indicated that the level of improvement it had initially proposed was in line with expectations. It has subsequently been able to commit to making further improvements without increasing costs in this area as the costs of delivering these additional improvements have been more than offset by other cost reductions. These include: refined private drains and sewers costs; reduced proposed maintenance spend; and the removal of the costs in this period (but not the benefits) of a strategic sewer flooding scheme.

The company has proposed a change to a risk-based approach, which will take into account the likelihood and severity of sewer flooding incidents. In response to challenge it has also placed greater emphasis on partnership working and the use of sustainable drainage systems.

The company has discussed its approach with the regional flood and coastal committees in its area. It has also asked lead local flood authorities to provide feedback on its proposed proactive, risk-based approach. The company reports they have proved receptive to, and encouraging of, such an approach.

Areas of challengeThe company has been challenged by the Forum, Assurance Working Group and CEWG in the following areas:


Partnership working

While the company indicated its intention to work more closely in partnership with local authorities (in response to stakeholder feedback) there was insufficient clarity around this commitment.

The company has introduced a partnership working measure of success to quantify its commitment and against which it will be held to account.

The use of sustainable drainage systems

Although the company had indicated its intention to expand its use of sustainable drainage systems, there was insufficient clarity around this commitment.

The company has committed to doubling its use of sustainable drainage systems.

Future capacity

Local authority members have strongly challenged that the company should ensure that it is planning to provide sufficient capacity to meet future demand from new developments.

The company reported that its forecasts for future capacity needs are consistent with its WRMP. It has stated that its approach of further investment, more proactive maintenance, partnership working and changing customer behaviour will ensure that these capacity needs are met.




Treatment of private drains and sewers

The Forum notes that customers expect the company to treat these assets as their own. It has sought assurance that the company is taking a robust approach to understanding the condition of these assets and is taking appropriate action in response.

The company has demonstrated to the Forum’s independent adviser that through operational experience and a refinement of its understanding of these assets and their condition over the course of the last 18 months, it has been able to make significant reductions in its forecast costs.

Maintenance proposals

The Forum notes that the company has proposed an increase in maintenance expenditure. The Forum has sought assurance that this is necessary at this time.

The company has demonstrated to the Forum’s independent adviser that its asset management systems are of a good standard. It has been able to demonstrate that reducing maintenance would mean a change to a reactive approach that could lead to higher costs as damage needs to be rectified.

Changing customers’ behaviours

Although the company had demonstrated that a core element of its overall approach was to ensure that its customers use sewers more responsibly, it had not appeared to quantify this nor had it been reflected in its ‘customer education’ measure of success.

The company has committed to reaching on average 40,000 customers a year regarding responsible sewer use as part of its outcome ‘We will make a positive difference in the community’.


The company has reported that its use of sustainable drainage has to date not only allowed it to reduce costs (by around one-third compared with traditional approaches to flood management) but also by creating natural features such as ponds it can deliver additional benefits such as biodiversity improvements.

OverallThe Forum welcomes Severn Trent Water’s proposals to take further action to address sewer flooding and believes that they are in line with customer expectations (as evidenced by its research).

The Forum welcomes the additional commitment that the company has made to work in partnership with local authorities and other stakeholders. Local authority members on the Forum have noted that they would hope to see these further quantified and prioritised in the future.

The Environment Agency has reported that the company’s proposals are consistent with the guiding principles set out in the Drainage Strategy Framework and it fully supports their inclusion in the company’s plan.



Outcome: We will provide you with excellent customer service

Overview of the issueSevern Trent Water’s customers expect a good level of service and they do not expect to pay more for it. For them, it should be part of the ‘norm’.

The Forum understands that the company’s early performance on the SIM was disappointing. CCWater reports that it has worked closely with the company for nearly two years to identify the causes of this poor performance and the ways in which it can be improved. This is being delivered through the company’s ‘customer experience programme’.

In developing its retail plans, the company has carried out further research that has broadly substantiated its initial view (as used in its customer experience programme) of what ‘excellent customer service’ means to its customers and how this can be achieved. In addition to its future plans for household customers, the company has also shared with the Forum its plans for its business customers’ retail offering in the soon to be competitive market.

Areas of challenge


Ensuring sustained improvements

The company has delivered improvements in its SIM score, but this has fluctuated. It needs to demonstrate how it will sustain improvements in the future.

The company has set out a package of strategic initiatives to build on its past performance improvements.


The company has reported that it is developing new approaches to ensure that it can proactively keep customers informed during major incidents (without their needing to contact the company). This includes interactive incident maps, and the use of Twitter and SMS phone messaging trials.

OverallThe Forum closely scrutinised the company’s plans for further improvements in customer service. The scrutiny has been in the context of historical performance in this area, which has been improving, but from a low base. The Forum has also looked closely at the company’s initial proposals to plan for and resource the two retail price controls proposed within the business plan.

The Forum discussed with the company its proposals to monitor the outcome of the improvements it has in hand through two measures of success: the SIM; and an independent measure of customer relationship management which allows not only longitudinal comparison but also horizontal comparison with other utility companies.

The Forum agrees that these are useful high-level indicators and that the thresholds for improvement proposed by the company are appropriate. The Forum would like to see these high-level indicators being underpinned by a stretching transformation plan, with key milestones. CCWater will pursue the development of this plan with the company over the next few months on the Forum’s behalf.



Outcome: We will help you if you struggle

Overview of the issueFrom the very first meeting, ‘affordability’ has been emphasised as absolutely crucial for customers, particularly given the current economic climate. The Forum has considered the issue in two ways:• ensuring bills are as low as possible (taking into account the service

improvements that customers wish to see); and• providing support for those who would struggle to pay.

This section covers the latter of these two issues. The discussion the Forum has had about the assistance that should be provided for customers has been informed by an understanding of:• the particular economic circumstances faced by customers in the region;• the assistance that the company is already providing (including by working

with other agencies), and that other companies provide;• the impact of welfare reform on vulnerable customers in the region (provided

by Coventry CAB); and • existing and predicted increases in levels of bad debt, including the company’s effortstomanagethis.

The company has developed a package of actions to support those customers who are in genuine need. This includes enhancing its existing package of support options to include:• theintroductionofasocialtariffforthoseonthelowestincomesandin

genuine need;• ‘water health checks’ whereby the company, and third parties it has trained,

will proactively go out to meet customers to ensure they are on the right payment plan and ascertain whether or not they could save money on a meter, and to educate them about water usage;

• proactive metering, whereby the company will encourage the take-up of metering in deprived areas; and

• an enhanced WaterSure-based scheme with expanded eligibility.

Areas of challengeThe Forum, the CEWG and a specific ‘task and finish group’ have challenged the company in the following areas:


The adequacy of the company’s customer research, and extent of customer support

The company’s initial research in this area was inadequate in its scope and did not show conclusive customer support for: the company’s preferred approach to helping those who struggle; and the extent of cross subsidy that would be required.

The company has undertaken further research and can demonstrate that 74% of customers support the approach set out above, including the proposed £3 cross-subsidy.

Company approach to tackling bad debt

Members have expressed concern about the level of bad debt in the industry and the impact on customers’ bills. It has pressed the company to explain its approach.

The company has explained that its current bad debt charge is one of the lowest in the industry. The company has stated that it will continue with what it regards as effective debt management practices.




Company contribution

Customer research suggests that customers would like the company to make a contribution to the support.

The company has responded that it is not making a specific contribution (beyond its trust fund donations) but will bear the cost during 2015-20 if its approach is not successful and its bad debt increases beyond its current level of 2.7%.

Customers of South Staffs Water

The company was asked to consider and explain whether its sewerage customers who are provided water by South Staffs Water would be eligible for support.

The company is not aware at the time of writing whether South Staffs Water is undertaking a similar scheme but has agreed to discuss implementation of its scheme with them.


The company has reported that its approach to partnership working (currently trialled through its Big Difference Fund) is providing the right help to those customers who most need it.

OverallThe Forum welcomed the extensive research that the company has commissioned in order to understand the reasons for customers getting into water debt and the recognition that different types of debtors need helping in different ways.

Trial use of the Big Difference Fund in Coventry and Leicester has aided the development of the four-pronged, comprehensive approach that the company is proposing to use to deal with affordability issues, including helping customers to manage in the long term by dealing with their underlying problems.

The Forum sees this as being an innovative, and quite possibly market-leading, approach to helping struggling customers and minimising future water debt.



Outcome: We will protect our local environment

Overview of the issueAs one of the largest companies in the Midlands with a direct impact on the environment through its activities, Severn Trent Water has the ability to improve the water environment significantly through its approach and interventions. The company has itself stated that it sees its responsibility for improving the environment as a key tenet of its business plan. The environmental programme currently represents a substantial proportion (some 26%) of the company’s total enhancement programme.

Members of the Forum recognise that there is strong support from customers and stakeholders for improvements to the local environment. This support was reflected in the outcomes of the customer and stakeholder engagement programme. Indeed, the company has acknowledged that the environment has emerged as being even more important to its customers than it initially considered would be the case.

In developing its programme, the company has needed to address the uncertainty created by the differing timescales for the two key processes driving its investment on the environment – the NEP and the RBMP processes. This means that a large component of the Water Framework Directive (which is decided by the RBMP process), will not be determined nor become a statutory requirement until 2016.

Areas of challengeThe Forum, CEWG and Assurance Working Group have challenged the company in the following areas:



Forum members questioned the interpretation of the company’s initial research in this area.

The company undertook additional research to verify that this was a priority area for customers.

Level of ambition The Environment Agency has challenged that as a top customer priority, the company should maximise the benefits for the environment it can deliver.

While other members have agreed with this in principle, they have also contended that outcomes for customers’ bills and reliability of service must be the overriding considerations.

The company recognised both the uncertainty around its eventual obligations and the impact on customers’ bills. It therefore sought to devise a ‘least regret’ programme that delivers maximum ‘bang for its buck’ in terms of improvements, by including only schemes where it is certain the company will have to take action and only where the solution is cost beneficial.

Approach to addressing uncertainty

There was insufficient transparency about how the company had addressed uncertainty about the difference in river basin management planning and price review timescales.

As above.




Cost benefit It was not clear whether all of the schemes included in the programme were cost beneficial.

The company reports that it has undertaken cost benefit analysis and has confirmed that all of the schemes that have been included in its programme are cost beneficial.

Today or tomorrow

The Forum has sought assurance that the company has found an appropriate balance between delivering improvements in 2015-20 and 2020-25.

The company has demonstrated that it is delivering a large programme that will deliver all improvements where there is reasonable certainty that it will need to take action in this period (2015-20). The Environment Agency has nonetheless cautioned about the extent of improvements that may be required in 2020 and beyond.

Changes in response to Phase 3 research

The Forum has sought assurance that the company has increased its ambition in relation to the environment in order to respond to feedback in its acceptability research and ‘Your water. Your choices’ engagement.

The company has included an audit trail of how it has sought to deliver ‘more for less’ by increasing its outcomes in this area for broadly the same level of investment. This includes an allowance for additional investment to meet the requirements of the Chemicals Investigations Programme.

Fair share The Forum has sought assurance that the company is not doing more than its ‘fair share’ of delivering environmental improvements.

The company has reported that its proposed investments are based on ‘fair share’ calculations. The company has made an allowance for match funding schemes which may help partner organisations support the delivery of their obligations and therefore deliver a wider environmental benefit overall.

The Environment Agency has provided assurances that it challenges all sectors to ensure an equitable approach.

Multiple benefits The Forum challenged the company to seek to exploit broader environmental and biodiversity improvements from its programme.

In addition to including a match funding allowance the company has aligned its approach to biodiversity with its Water Framework Directive planning to better exploit multiple benefits.

Measures of success

There was no measure of success to reflect the company’s statutory responsibilities towards biodiversity.

The company has proposed a measure of success for the condition of Sites of Special Scientific Interest which will achieve appropriate condition by 2020.




Measures of success

The company’s initial measure of success for environmental compliance did not take into account abstraction.

The company revised its measure of success to include both water and waste water environmental compliance standards.


The company has reported that it will be reusing existing assets to save costs, using new technologies such as hybacs to reduce construction costs, and trialling innovative approaches to phosphorous removal at its Packington treatment works.

OverallThe Forum considers that the proposed programme overall is sufficient to meet customer expectations while also appropriately recognising bill impacts. The company has properly responded to the challenges and uncertainties noted above.

The Environment Agency reports that the company is committed to meeting all statutory requirements (see also Chapter 6) and has made provision for managing future uncertainties. The underlying strategy that the company has adopted in looking to manage uncertainty is fully supported by the Environment Agency. It has, however, consistently challenged the company to deliver further improvements in this area.

CCWater reports that this has been one of the most difficult issues to consider, not least because of the differences in the price review and river basin management timings that have created uncertainty about what is, what is not, and what may become a statutory duty. It believes that the company has demonstrated sufficient commitment to the environment by being prepared to support local ‘matched funding’ schemes for environmental programmes for which it has no legal or statutory responsibility.



Outcome: We will protect our wider environment

Overview of the issueThe company has expressed its own ambition to continue its strategy of renewable energy generation, greater energy efficiency, and more effective waste management.

The company reports that it is one of the industry’s leaders in renewable energy generation. It also reports that this has been an area of particular innovation by the company.

The company has proposed to continue its innovation in this area and to exploit further the energy it can generate from sludge and deliver an absolute reduction in its carbon footprint.

The Forum notes the views of the company’s stakeholders that they would like to see the company make further advances in this area, but that this should not come at significant additional cost to customers. It also notes that customers have generally welcomed the company’s efforts in this area when discussed with them, but are often unaware of them.

Areas of challengeThe company’s ambitions in this area have not been contentious nor generated specific challenge from the Forum.



Outcome:Wewillmakeapositivedifferenceinthecommunity

Overview of the issueThe company considers that, aligned with its day-to-day operations, it can bring a wider benefit to the communities that it serves.

The company has sought to bring together its response to the need for improved customer education and behaviour changing programmes (in relation to sewer use and water efficiency), under this outcome and under one measure of success.

Areas of challengeThe Forum and CEWG have challenged the company in the following areas:


Accountability to customers

The company had not initially proposed to include a measure of success under this outcome.

The company introduced a new measure of success to reflect the reach of its education programmes.

Proposed performance

As noted above in relation to sewer use and water efficiency, the company’s proposed performance in this area appeared insufficient given the weight of customer and stakeholder support for more activity.

The company has increased its ambition from 80,000 to an average of 140,000 a year, and included engagement regarding responsible sewer use in its measure.

OverallThe company has responded to challenge by the Forum and committed to engage an average of 140,000 customers a year, which the Forum believes is a proportionate response.



Outcome: We will have the lowest possible charges

Overview of the issueOne of the principal and most contentious issues that the Forum has discussed is the prospect for customers’ future bills. The Forum has considered this issue in several ways:• what change in bills customers wished to see (as evidenced by research);• the overall impact of the company’s proposals on bills and the balance it has

struck with customers’ priorities for improvements; • thecompany’sproposalstokeepitsbillsaslowaspossiblethroughefficiency;

and• customers’ perceptions of value for money.

The company is proposing to keep its bills flat (in nominal terms) in 2015-16, followed by below inflation increases for the four years 2016-20. The company’s proposed price profile mirrors what the company considers is likely to happen to real household incomes.

Areas of challenge


Customer ‘willingness to pay’

The Forum has challenged both the company and itself about the interpretation of customer ‘willingness to pay’ research and the implications for the scale of ambition in the company’s plan. Some members have challenged that the company should deliver improvements within the parameters of the average willingness to pay of +£10 by 2020, while others have countered that 70% of customers wished to see no increases in bills.

The company has sought to find a balance between ambition for bills and ambition for improvements. The Forum gives its view on this in Chapter 7.

Overall size of the investment programme

The Forum has sought assurance about the consequences of reducing the size of the programme (and hence bills) at the margins and the consequences for the delivery of customer priorities and future risks.

In the final iteration of its plan, the company has reduced 2015-20 capital expenditure by £160 million by: bringing forward £40 million of investment; reviewing the timing of when customer bills reflect £75 million strategic investment (this more cautious approach reflects the fact that planning uncertainties make it less certain that the benefit can be delivered in this period, but if it can be, the company will delay getting a return on this investment until the next period); and deferring £45 million of investment to 2020-25.

“From the very first meeting, affordability has been emphasised as absolutely crucial for customers, particularly in the current economic environment, and has been the backbone of customer challenge.”David Wurr, CCWater




Efficiency proposals

The Forum has consistently challenged the company to adopt lean processes. It has sought assurance that the scale of the company’s efficiency savings is sufficiently challenging that it has not allowed too great a scope for outperformance, and that consequently proposed bill levels are not unduly high.

The company’s proposals were reviewed by the Forum’s independent adviser. The company subsequently increased its efficiency challenge further and to higher levels than in 2010-15.

Impact of financing

The Forum has sought assurance that the company’s financing proposals are reasonable and are not unduly disadvantaging today’s or tomorrow’s customers.

In this area the Forum sought assurance from Dr Harry Bush on the general reasonableness of the company’s proposals, given the impact on customer bills, while recognising that the issue was one for Ofwat to consider in the light of the broader information it would have available to it.

Customer perceptions of value for money

In the light of the seemingly low percentage of customers who view the company as offering value for money, beyond offering ‘more for less’ the company needs to demonstrate what else it will do to improve customer perceptions.

The company has introduced a measure of success for value for money and committed to improving customers’ perceptions.

Wholesale/ retail split

The Forum has sought assurance that the company has appropriately allocated costs between wholesale and retail activities.

The company has explained to the Forum’s independent adviser that it has followed Ofwat’s guidance regarding the allocation of costs and that this was assured as part of its annual return. The company has allocated efficiencies on a pro-rata basis with costs to ensure no undue bias.

OverallThe Forum considers that the charges for customers outlined in the company’s plan represent a reasonable balance given the need to keep bills as low as possible while financing a substantial investment programme, including the investment required to deliver environmental improvements and improve the company’s strategic resilience.

The pressure the Forum has applied to the company in areas such as the phasing of its investment and its efficiency targets has resulted in bills being lower than they would otherwise have been.



Outcome:Wewillfinanceourbusinesssustainably

Overview of the issueThe Forum has discussed financing in the context that the costs of financing comprise a significant element of customers’ bills.

It has paid careful attention to the views of customers, which is that they are concerned about, and often uncertain of, the level of profits made by the company and how it rewards its shareholders.

The Forum has sought assurance from the company that the approach it has taken has not unduly disadvantaged customers today in favour of shareholders and investors, and that it has found an appropriate balance between customers now and future generations.

Areas of challenge


Overall balance The Environment Agency has challenged as to whether, if a lower rate of return were allowed, the company would seek to keep bills lower or retain its initial price profile and deliver more improvements for the environment.

The company has proposed to use the benefits of a reduced rate of return to keep bills lower.

Overall balance CCWater has challenged that in proposing a rate of return, and in its overall approach to financing, affordability should be a priority.

As stated above, the company has proposed to use the benefits of a reduced rate of return to keep bills lower.

Sustainability The Forum has sought assurance that the company’s approach is sustainable and would not unduly favour today’s customers at the expense of those in 2021 and beyond.

The company has stated that its proposed bill profile is sustainable for the long term.

OverallThroughout this process the Forum has sought to keep the affordability challenge front and centre of the company’s thinking. This has permeated a number of the detailed areas of challenge, including the quantum and timing of capital expenditure, but is particularly germane to the company’s proposals on financing (as well as efficiency). In both areas the Forum has pressed the company and made particular use of its independent adviser in doing so.

On this basis the Forum considers that the company has sought to balance the interests of shareholders and customers, for instance through significant reductions in the cost of capital (and an enhancement to its original efficiency proposals).

However, the Forum recognises that Ofwat will have available to it cross sector information in relation to both financing and efficiency, which the Forum does not have, and can also take account of continuing developments – market and otherwise – on financing particularly.


Severn Trent Water’s statutory obligations

This chapter considers Severn Trent Water’s statutory obligations and sets out contributions from the environmental and quality regulators.

OverviewIn developing its business plan, Severn Trent Water should ensure that it will comply with its statutory obligations. Defra’s Statement of Obligations describes the Government’s understanding of the main environmental statutory obligations that the company is expected to meet during 2015-20.

These obligations relate principally, but not exhaustively, to:• compliance with drinking water quality legislation;• achievementoftheoutputsspecifiedintheNEP;and• compliance with other statutory obligations such as the Countryside

and Rights of Way Act.

The company has provided detailed material from its business plan to demonstrate how it intends to meet its obligations in relation to drinking water quality and the environment. This information has been reviewed by the DWI, the Environment Agency and Natural England. Each organisation gives its views below.

In addressing cross-boundary issues between Severn Trent Water and Dwr Cymru and, respectively, the Environment Agency and Natural Resources Wales, the Environment Agency has exchanged NEP programmes for both water resources and water quality in an attempt to prevent schemes being missed by either party. A high level quality assurance of NEP programmes has been undertaken by the respective PR14 co-ordinators from the Environment Agency and from Natural Resources Wales in order to make sure that scheme coverage is commensurate with company responsibility.

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Chapter 6: Severn Trent Water’s statutory obligations

Drinking water qualityThe DWI has undertaken detailed assessment of the 30 water quality improvement schemes proposed by Severn Trent Water in its business plan. The DWI formally supported nine of the company’s proposals and will put legal instruments in place to make the proposals legally binding programmes of work. All remaining proposals have been commended for support by Ofwat.

The DWI outlined its decisions in nine ‘decision letters of support’, which it sent to the company on 22 October 2013 and in a statement provided to the Forum on 17 November. The letters and statement are reproduced in full in Appendix 8.

The Forum noted the observation by the DWI that these improvement schemes will make only a small contribution to enabling the company to meet its legal obligations in respect of drinking water quality. These obligations are met overwhelmingly by the company making sufficient provision for operational and maintenance requirements in its business plan, and by its use of those resources.

Natural EnglandNatural England has provided an assurance summary in relation to Severn Trent Water’s business plan. This is set out in full in Appendix 9. An overview is provided below.

“ Natural England welcomes the environmental benefits the NEP schemes will deliver both for regulatory compliance and the potential range of wider multiple objectives intrinsic to the natural and urban environment.

“ Natural England feels the company has demonstrated that it is fulfilling its biodiversity duties through:

• parts of the NEP programme which will remove the company’s impact on the Special Areas of Conservation rivers;

• delivery of favourable or unfavourable recovering condition for SSSI land the company manages;

• development of operating rules for SSSI reservoirs to ensure favourable water levels for the interest features of the sites; and

• continued work on catchment schemes looking for opportunities to develop biodiversity gains into these schemes.

“ We are further assured of the company’s commitment to biodiversity by it adopting a biodiversity outcome as one of the measures by which the company will assess its performance.”

NEPThe Environment Agency has reviewed in detail the information that was provided by the company on how it proposes to meet its statutory obligations in relation to the NEP.

The following statement from the Environment Agency was provided in an annex to a letter to Severn Trent Water on 31 October 2013. The letter and supporting annex are reproduced in full in Appendix 10.



The Environment Agency’s views are as follows:From the information that the company has provided we understand that it is planning to meet its statutory environmental requirements set out in Defra’s statement of obligations. We welcome the commitment it has made to meet these. Whilst it is outside our direct regulatory role to endorse wider, non-statutory components of the plan, we do support the process and engagement principles that have been adopted and the associated comments of the Forum.

Our response to Defra and the company is reproduced below.

“ We are pleased with the way Severn Trent Water have embraced the Ofwat changes to the price review process and worked with colleagues in the Midlands region in an open, transparent and collaborative manner at all stages. There has been a robust undertaking of customer and stakeholder engagement supplemented by secondary research in key areas which has resulted in a high standard of engagement information.

“ This in turn has informed Severn Trent Water in the design of their plan and component parts have been constructed using latest information and expert judgement (supported at times by the Environment Agency). Severn Trent Water’s approach has been collaborative and we have been able to help shape the plan.

“ As such there is a very good confidence that the plan reflects preferences and a line of sight can be drawn between willingness to pay, acceptability research and draft plan consultation. Crucially there is clear evidence that challenges through subsequent consultation have been responded to by the company.

“ The methodology and thinking behind outcomes, measures of success and incentives can be clearly linked to our own high level PR14 outcomes and show some real signs of progressive company ambition and direction (for example incentive mechanisms around Water Framework Directive improvements), partnership measures of success and crucially a commitment to address all company reasons for failure by 2027.

“ We welcome that all National Environment Programme requirements are included in the business plan and that in addition the company has made some provision for managing uncertainty and the Water Framework Directive. However, although future need is uncertain, there is an element of predictability and managing uncertainty provision could have been greater in order to better protect customers, the company and the environment from risks associated with future need. We urge Severn Trent Water to look at every opportunity to increase delivery in this area.

“ Nevertheless, we are pleased that the environmental investment elements of the business plan have been fully tested for cost benefit by the company and that their inclusion offers assurance that they will be delivered in AMP6.

“ In terms of flood risk provision, the inclusions within the company’s plan are seen as some of the best practice in the water industry, which we expect to see translated into practical partnerships.

“ In summary, the Environment Agency Midlands Region supports the plan that Severn Trent Water has built for PR14 and indeed welcomes the progressive commitments towards environmental improvements as a true reflection of customer preference.”



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Overall:The environmental regulators have confirmed to the company that it has made sufficient allowance in its plan to achieve its statutory obligations.

The DWI has formally supported nine of the company’s proposed water quality improvement schemes and has commended the remainder for support by Ofwat. The Forum notes that the company’s ability to meet its legal obligations in respect of drinking water quality principally depends on making appropriate provision for maintenance and operational practices, and that this has been beyond the remit of the DWI to review.


Chapter 7: Has Severn Trent Water’s plan responded to customers’ priorities?

Has Severn Trent Water’s plan responded to customers’ priorities?

This chapter sets out the Forum’s views on: the extent to which the company’s plan has responded to customers’ priorities; and the overall balance it has found between different priorities.

OverviewIt is the Forum’s view that the plan demonstrably represents the views of customers more closely than at any previous periodic review.

The principal areas of challenge have been in relation to keeping bills as low as possible while continuing to make improvements to services, and in turn, which areas should be prioritised for improvement.

The following sections provide the Forum’s comments in relation to particular aspects of the plan.

To what extent does the plan deliver the improvements that are important to customers?Through its multi-layered engagement programme the company developed a clear understanding of customer priorities and this has been taken fully into account in formulating the proposals in the business plan. The company has provided a clear line of sight as to how its plan relates back to customers’ priorities.

The environmental regulators have confirmed that the company’s business plan will allow it to meet its statutory obligations and the additional improvements in environmental quality and service delivery that customers are willing to finance. The DWI’s position is as set out on page 69.

The company has responded well to the challenges provided by the Forum, moving its position in a number of key areas including its ambition on leakage, its delivery of the environmental programme, its approach to helping customers who are struggling to pay, and its efficiency targets.

As a result the Forum is confident that the improvements proposed overall reflect the preferences of customers and other stakeholders. In addition, and following challenge from the Forum, the company is now in a position where it is able to demonstrate that its plan is acceptable and affordable to customers.

To what extent has the company demonstrated that it will be innovative, efficient and has considered a wide range of options?The company has considered a wide range of solutions and has been pressed by the Forum to demonstrate whether it was being sufficiently innovative and ambitious. The Forum is also satisfied that the company’s own assurance providers have reviewed these options and challenged the company accordingly.

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Chapter 7: Has Severn Trent Water’s plan responded to customers’ priorities?

In some areas the company is being very progressive and ambitious (for example in its approach to leakage and in helping vulnerable customers). The Forum questioned whether the company’s original efficiency targets were sufficiently challenging and the company responded by moving towards more stretching targets that the Forum considers to be reasonable.

Has the plan achieved a reasonable balance overall?A consistent challenge within the Forum has been the desire to keep bills as low as possible for customers and the desire to respond appropriately to customer preferences.

In particular, the overall plan, and scope for lower bills, has been impacted by the need for major investment in the project to improve the resilience of supplies, combined with the substantial environmental programme. These are, however, issues that customers have shown they are willing to support.

Through a comprehensive process of challenge the company is now proposing a plan that in the Forum’s view will strike the right balance for customers. This encompasses ensuring an appropriate balance between household and business customers, and between current and future customers.

The Forum has focused on the company’s proposed bill changes for typical domestic and non-domestic customers. It recognises that changes in the bills of specific sub-groups of customers may differ from these headline figures, although the bill ‘freeze’ will apply to all for 2015-16. The Forum has scrutinised the principles that will be used to underpin the development of these specific tariffs, and will continue to work with the company as the detailed work of tariff development is concluded.

Overall:The Forum considers that the company has achieved the right overall balance between the many, often competing, priorities that were identified as being important to customers and stakeholders through the company’s engagement programme.

As such the Forum considers that the plan is representative of the best interests, overall, of customers and the environment.


Afterword

A future role for customer challengeThis report comes towards the end of the two-year process of interaction between the company and the Forum in relation to its business plan. However, both parties consider that there could be benefits for customers and the environment from an on-going role for a customer challenge body such as the Forum. At the same time, both parties agree that it would be inappropriate to institutionalise existing arrangements.

The company has made it clear, and evidenced, that the engagement process has had a material influence on the direction and focus of the plan and that it would like this to continue throughout the next control period 2015-20.

The Forum supports the continued involvement of an independent challenge body to monitor and challenge the company’s delivery of the outcomes, performance and the implementation of incentives that it has committed to. In the Forum’s view it should also have a role in ensuring that the proceeds of any windfalls are shared appropriately with customers.

Learning points for the futureOn balance the process has worked well and the Forum agrees that it has been an improvement on previous price review engagement processes. The company committed to ensuring that this was the case and the Forum has been able to benefit from the expertise and commitment of its individual members, further supported by the role undertaken by Dr Harry Bush.

The support provided by the Secretariat has been of a high standard, and the Chair has been able to maintain a strongly independent and objective position throughout.

There have been important learning points from this process which will need to inform any future similar engagement arrangements. The Forum has started a process of reviewing its effectiveness and will provide the learning points to Ofwat in due course.


The Water Forum can be contacted at: Severn Trent CentrePO Box 5309CoventryCV3 9FH

www.severntrent.com/waterforumwww.stwater.co.uk/waterforum

Documents

Assessment of Severn Trent Water’s engagement and the ... · the level of engagement undertaken by the company and its response, as well as how the balance of the plan serves customers’