The value of small local water only companies.
We set out in Bristol Water…Clearly that as a small water only company, we are part of the communities around Bristol and have remained privately owned since being established by an Act of Parliament in 1846. We also set out how we believe this will deliver excellent customer experiences and affordable bills out to 2050.
Together with two other small water only companies, Portsmouth Water and SES Water, we commissioned Ernst & Young (EY) to look at the evidence for why customers should benefit from local suppliers such as Bristol Water, and to obtain case studies to show how we believe this benefit arises in practice. Having set out the factors as to why being served by a small water company benefits customers, EY suggest ways in which this benefit could be calculated. We are using this research to help inform our future plans, including for the plan for 2020-2025 to be submitted to Ofwat in September 2018.
Bristol Water’s view on Cost Efficiency
Assessing how efficient each company is forms a major part of the price determination process where Ofwat sets the amount of revenue we are allowed to collect over the following five-year period. How this assessment is carried out is a matter of expert judgement, with numerous measures and techniques available.
To support our understanding of how efficient we are relative to other water companies we have commissioned economic consultants NERA and Economic Insight to analyse the factors that drive costs in our Wholesale and Retail operations respectively, and how they should be combined into an assessment model.
Ofwat is shortly due to publish a consultation on the approach that it should adopt on efficiency assessment. We have provided this analysis to Ofwat for consideration in the development of its consultation. We are also publishing it today on our website to provide stakeholders and customers with a transparent view of our recommendations.
Out in the cold
Maintaining the trust of our customers is a top priority for Bristol Water. How well water companies plan and respond to operational incidents, in particular during severe weather, plays a significant part in maintaining customer trust. We set out in this document how we responded to the severe weather experienced across the UK in February and March 2018. We also set out what we learnt from recent operational events such as this, specifically from Ofwat’s review into the water supply issues resulting from these weather systems, ‘Out in the Cold’, Ofwat’s company specific letter to Bristol Water and the Drinking Water Inspectorate (DWI)’s letter to all water companies.
Ofwat’s overall assessment of our performance during the freeze thaw was that we responded well and met our customers’ expectations, keeping disruption to a minimum. Although there were no company specific learning points for Bristol Water, we have carefully considered our own experience and those from other water companies. This document sets out the actions already taken and those underway.
Strengthening Wholesaler performance and service in the business retail market
In July 2018 Ofwat published ‘Open for Business’, a report which assessed the state of the business retail market after its first year (it opened on 1st April 2017). The regulator identified a number of market frictions that it said had had a negative impact on retailers and their customers’ experiences during the first year of the market. In the ‘Call for Inputs’ review, Ofwat looked in-depth at the issues the regulator believed were having the biggest impact upon wholesaler performance in the business retail market and the quality of service received by retailers. The review was open from November until 10 December 2018.
For Bristol Water, it is critical for our retailers’ customers and the successful operation of the retail market that we understand and address the root causes of the dissatisfaction discussed in the review paper. We offer our thoughts on the introduction of an ‘R-MeX’ type performance commitment, including on the merits of reputational and financial incentives, as well as our work to date in cooperating with and leading existing working groups and initiatives. We are proud of our performance to date in the market, treating retailers as individuals with needs, and as valued partners working together to provide an excellent experience to customers. Our response letter sets out our ideas in further detail.
Driving transformational innovation in the sector
Ofwat has been exploring options for customer-funded interventions designed to drive innovation to benefit customers in the longer-term. In particular, Ofwat proposed to make up to £200m available for innovation activities for the period 2020-2025, for example through the introduction of an innovation competition or an end-of-period roll-out reward. Ofwat also sought views on a range of additional policy options for encouraging companies to work together to drive innovation in the sector and to ensure that regulation is effectively facilitating innovation.
In our response we highlighted how the consultation jumps straight to one solution, without sufficient evidence and analysis as to what challenge this solves, or whether that challenge requires solving. The water sector fundamentally remains a local public service. It has and continues to operate within national and international frameworks, but most innovations will continue to develop bottom up to address local needs. We stressed how we thought that Ofwat’s approach to the sector’s innovation strategy should reflect this. Likewise, the challenges society faces are complex, and to deliver public value we think cross-sector and cross-utility approaches are likely to be the most efficient and effective. We therefore also encouraged Ofwat to consider how it encourages innovation that has wider impact across different sectors, and to work with stakeholders and other regulators to enable such opportunities.
Measures to reduce personal water use
Climate change, population increases, environmental requirements and a growing demand for water will mean that, in the future, there will be substantial pressure on surface and groundwater supplies, less water available per person and a significant likelihood of more frequent, severe droughts. This consultation was launched by the Department for Food, Environment and Rural Affairs (DEFRA) to help the government understand a wider range of potential measures to reduce personal water consumption, and what reduction in water consumption is technically feasible and/or achievable.
In our response we highlighted how in our research we found that younger generations face more complex and stressful lives than ever before, with potentially less time for and interest in saving water, versus a propensity to use more, for example by taking multiple showers per day. Without intervention this creates a worrying trend for the future. We highlighted the need for ambitious building regulations for water consumption, the importance of partnership working and innovation, the importance of local circumstances and of local customer preferences and for customer supply pipe adoption. We also explored the challenges of customer perception, and in how we work with customers and other stakeholders to educate them on demand management and the benefits of water efficiency. We concluded that we thought a balance of cultural change, ‘hard’ solutions such as water saving devices, and changes in legislation were required to adapt to the challenges ahead.