PRICE REVIEW BLOG: Setting incentives that don’t short-change customers

Earlier this week, water industry regulator Ofwat published its draft methodology for the 2019 Price Review as preparations for the next price-setting process moved up a gear. Our Senior Policy Manager Steve Hobbs highlights some of the key issues for water customers.

Every five years, water companies set out their plans for the services that they want to deliver and the investments that they want to make and the impact on customer bills. Ofwat then decides the limits on customer prices the companies can charge for the next five years. The next price review – known as PR19 – is in 2019 and Ofwat is now consulting on its proposed methodology, which explains how companies should develop their business plans and how it will assess them.

We have always said that companies should find out what their customers want from their water and sewerage services. These preferences should then be reflected in their business plans.

What approach is Ofwat taking to measuring and incentivising the performance of water companies – and what do we think about this?

Ofwat says: It will look at company performance in 14 different areas of service and apply consistent ways of measuring them.

We say: Each of these measures will need to reflect customer priorities and companies will have to make sure that they have enough data to set appropriate performance targets.

Ofwat says: It will introduce a ‘customer experience’ measure, to reflect how well companies handle customer contacts and track overall customer satisfaction. Companies will receive financial rewards if they exceed a performance target, or penalties if they fail.

We say: This is a welcome addition, which could improve service and communication. However, we have some questions about how the customer experience measure will work so that companies have the right incentive to both increase overall customer satisfaction and improve customer service and reduce complaints.

Ofwat says: It is changing the system of financial rewards and penalties, known as Outcome Delivery Incentives (ODIs). Currently, most ODIs reward out-performing companies by allowing more money at the next price review, or penalise under-performing companies by allowing less. Ofwat is proposing to adjust company income each year, rather than at the end of the five year price review period.

We say: In general, we want it to be harder for companies to be rewarded through ODIs. If a company ‘outperforms’ customers pay more and this could lead to unpredictable bill increases each year. Customers don’t like bill volatility and are not supportive of paying more for their water company to do the day job. We’ll be pressing water companies to develop incentives that customers think are fair and reasonable and avoid any risk of volatile bills.

CCWater will be studying Ofwat’s draft methodology closely before submitting a detailed response to its consultation in August.