Inputs, outputs and outcomes –
What should price limits deliver?
An Ofwat discussion paper
Consumer Council for Water response
May 2011
1.
Introduction
1.1
The Consumer Council for Water (CCWater) is the statutory consumer
organisation representing water and sewerage customers in England
and Wales. CCWater has four regional committees in England and a
committee for Wales.
1.2
CCWater welcomes the opportunity to respond to Ofwat’s latest in a
series of discussion papers that encourage debate on refining specific
aspects of price setting.
This discussion paper focuses on
incentivising outcomes, rather than outputs or inputs, and explores
how this approach may be more beneficial to customers. The paper
also suggests a possible framework within which a methodology can
be drawn up to deliver this approach.
2.
Executive Summary
2.1
CCWater supports Ofwat’s work in engaging interested parties on
moving the emphasis of the price setting process towards identifying
and then delivering outcomes, or high level objectives water
companies are incentivised to achieve.
2.2
CCWater agrees with this approach and has been advocating for some
time a greater focus on targeted deliverable outcomes to include:
 a high level of customer satisfaction with the quality of water
and sewerage services received; and
 a high level of customer satisfaction with value for money.
2.3
We agree with Ofwat's view that, “outcomes must reflect what
customers need, want and are willing to pay for”. That is why both
customer satisfaction measures are so important and need to be
applied across the value chain. This would press companies to focus
on their customers and identify the outcomes different segments of
the customer base expect from their water and sewerage service
provider.
2.4
Beyond that, we would like to see customer engagement and
research used as an evidence base to help identify and set as
objectives, further outcomes that need to be achieved from the price
setting process.
2.5
Water companies need to be incentivised to build their business
strategies on the delivery of outcomes. This can achieved through
ensuring that the achievement of outcomes is measured as part of
the companies’ Key Performance Indicators (KPIs), where penalties
and rewards are set for companies that either fail to achieve the
outcomes, or significantly exceed them.
2.6
Independent, objective and consistent customer research should be
used to measure the level of customer satisfaction with the quality of
service and value for money, two outcomes which should be key
priorities. The research results should be used as two of the KPIs.
2.7
The inputs and outputs from price setting will determine how the
outcomes will be achieved. Some of the more significant inputs and
outputs that drive the outcomes would still require monitoring (on a
proportionate basis, depending on company performance) and, if
necessary, action from regulators and CCWater as the statutory
consumer representative to provide assurance that the appropriate
'elements' are in place to deliver the outcomes.
2.8
It is important that the industry's quality regulators, the Environment
Agency and the Drinking Water Inspectorate, are supportive and
engaged in this change of approach to price setting, to ensure they
agree with the set outcomes and have a part in monitoring whether
these outcomes are being delivered. If other regulators cut across
the outcome based approach, the benefits of this approach may not
be realised.
2.9
The definitions Ofwat provide of ‘outcomes’ and ‘outputs’ have a risk
of being confused (for example, is an output based on ‘serviceability’
the same as an outcome on ‘reliable service’?). Further attention
should be given to these definitions to avoid a ‘blurring’ between
outcomes and outputs. Clarity is needed if companies are to focus on
the outcomes customers want to see.
2.10
More detailed views are proposed below in response to the questions
raised in the discussion paper on:
 how to build a framework for a price setting process that
focuses on delivering outcomes; and
 how the delivery of these outcomes can be measured.
3.
Responses to discussion paper questions
Question 1: Do you agree that an outcome focussed approach is the best
way forward for water regulation? What are the main pros and cons of
holding a company to account in this way?
3.1
CCWater agrees that an outcome based approach is the preferred way
forward for water regulation. We agree with Ofwat’s statement in
the discussion paper that, ‘adopting an outcome focussed approach
to regulation means that we focus on incentivising the companies
efficiently to deliver what customers and society, need, want and
are willing to pay for.’ Our response to the Ofwat consultation on
involving customers in decisions about water and sewerage services
also supports this view1. Some clarity on what ‘society’ means in this
context would be helpful as this could be open to different
interpretations.
3.2
Our ‘Lessons from PR09’ report highlighted that the price setting
process in water can be improved by increasing customers’ trust
through delivering outcomes that represent an improvement in the
reliability, safety and environmental impact of the services they
receive, at a fair price2.
3.3
An outcomes based approach to price setting has already been
proposed for Scotland. The Water Industry Commission’s approach to
price setting involves identifying outcomes that customers wish to
see, and focussing regulation on their delivery.3
3.4
Similarly, regulation in the energy sector also focuses on setting a
range of output measures and incentives specifically intended to
deliver outcomes that are in the interests of consumers. This is a
central feature of the RIIO (Revenue = Incentives + Innovation +
Outputs) methodology used by Ofgem4.
3.5
There are pros and cons in using an outcomes based approach:
Pros:
 an emphasis on outcomes focuses and incentivises companies
to achieve results that consumers want to see.
 if customer satisfaction with both the quality of service and
value for money are two central outcomes, this will increase
legitimacy of the companies in customers’ eyes, should the
companies achieve them.
 less prescriptive attention on outputs may incentivise greater
efficiency and innovation. Ofwat's paper recognises this as,
‘an outcome based approach…allowing companies the scope to
fund alternative approaches’ (paragraph 26).
Cons:
 outcomes can be affected by third party actions/inactions, or
external factors such as extreme weather events.
 some outcomes may be in conflict with each other.
1
CCWater’s response to Ofwat's consultation on involving customers in decisions about
water and sewerage services, paragraph 2.2.
2
CCWater – Lessons from PR09, page 7
http://www.ccwater.org.uk/upload/pdf/Review_of_the_Review.pdf
3
WICS: Putting Customers at the Centre of the Price Review process
http://www.watercommission.co.uk/UserFiles/Documents/CustomerEngagement%20%20final.pdf
4
Ofgem RIIO Overview Paper, March 2011 , Paragraph 1.12
http://www.ofgem.gov.uk/Networks/Trans/PriceControls/RIIO-T1/ConRes/Documents1/T1decision.pdf

if an outcome is not delivered, there is a risk of criticism that
there has been insufficient scrutiny of inputs and outputs.
Our view is that the advantages of an approach that focuses on
delivering outcomes outweighs the ‘cons’. In this case, the ‘cons’ are
risks that can be mitigated, as we explain later in this response.
Question 2: What would the key success factors be were Ofwat to
adopt such an approach?
3.6
A key success factor is the delivery of the outcomes. Outcomes must
be measurable with clear evidence to show that an outcome has been
achieved (or progress is being made in achieving it).
3.7
Customer satisfaction with the quality of service and value for money
are two key outcomes for companies to achieve. This would need to
be measured by companies using an objective and consistent method
of customer research to match or exceed an agreed benchmark.
A suitable benchmark can be identified through comparison with
customer satisfaction with other sectors (for example, energy or
telecoms) to help identify what should be a suitably challenging
target that water companies can aim for. This is explored further in
our response to Question 3 below.
Question 3: How should outcomes be determined? How would we
know that outcomes had been delivered? What should be the
relationship between inputs, outputs and outcomes?
3.8
Ofwat’s definition of the relationship between inputs, outputs and
outcomes is illustrated in the pyramid diagrams on pages 7 and 19 of
the discussion paper  Inputs are the resources the company uses to carry out its
activities and to deliver outputs (e.g. finance).
 Outputs are the observable and measurable actions or
achievements a company needs to make in order to deliver the
outcomes (e.g. leakage reduction).
 Outcomes are the things that customers and stakeholders
value and are the objectives companies should achieve through
the delivery of the outputs across the value chain.
3.9
We would like to see a clearer definition as there is a risk of
confusion between ‘outputs’ and ‘outcomes’. For example, an
outcome based on ‘environmental quality’ may be confused with a
required output on ‘achieving environmental standards’. Outcomes
must be higher level strategic objectives while outputs are the
actions needed to deliver them.
3.10
While outcomes based on customer satisfaction with the quality of
service and value for money would be fundamental to achieving what
customers expect from a water company, other outcomes can be a
combination of strategic objectives driven by customers’ priorities
identified through research and outcomes driven by other parties
such as quality regulators (for example, outcomes based on
environmental quality or sustainability).
3.11
We would like to see customer satisfaction with the quality of service
and value for money as priority outcomes that companies should
focus on. These outcomes would be delivered through the following
outputs:
 Affordable prices customers are willing to pay;
 Customer service outputs such as accurate and clear bills, good
call centre performance, and effective communication with
customers; and
 Performance of company assets to a level that maintains or
improves the reliability and quality of water and sewerage
services received by customers.
3.12
In our response to Question 2 we describe how customer satisfaction
with the quality of service and value for money can be measured
against a suitable benchmark through customer research. A body
independent from the regulator and the companies could provide this
role. CCWater’s tracking surveys provide an analysis of customer
satisfaction with service quality and value for money across industry
and can be developed further to provide this measure for individual
companies.
3.13
In the wider context, KPIs in risk based regulation should be used to
measure the delivery of all outcomes. We welcome Ofwat’s on-going
development of new KPIs and look forward to further consultation on
this.
3.14
Outcomes focussed regulation must take place within the context of
companies’ 25 year Strategic Direction Statements, so annual
performance against KPIs is part of a greater objective of delivering
sustainable services in the long term.
3.15
Properly conducted and moderated research and engagement with
customers by companies can identify further required outcomes. In
CCWater’s ’Lessons from PR09’ report, we stated that, ‘consumer
research should be fundamental to future price setting and price
reviews5.’ Our response to Ofwat’s consultation on involving
customers in decisions about water and sewerage services explains
how companies can be incentivised to produce investment and price
proposals that are grounded on evidence of what customers find
5
CCWater – Lessons from PR09, page 5
http://www.ccwater.org.uk/upload/pdf/Review_of_the_Review.pdf
acceptable and affordable.6 This research and engagement will also
allow companies to determine the outcomes their customers want
them to achieve.
3.16
An example of how this can work can be seen in customer research
undertaken during the 2009 price review. In 2008, Corr Wilbourn
conducted deliberative research to identify customers’ priorities for
investment at the 2009 price review. 7 This revealed that, across the
industry, customer investment priorities were (in order):
 reducing leakage;
 preserving drinking water safety;
 maintaining sewers; and
 improving the environment.
3.17
To reflect this, further required outcomes could be:
 reliable, safe and available water supply;
 reliable sewerage service; and
 environmental sustainability.
3.18
In order to achieve these outcomes, the following outputs would need
to be delivered:
 maintenance of assets to reduce risk of service failure;
 compliance with environmental and drinking water quality
standards; and
 reduction of carbon emissions.
3.19
Evidence that the outcomes are being achieved could be gathered
through:
 Quality regulators’ monitoring (checking for the delivery of
statutory obligations needed for compliance with environmental
and drinking water quality standards); and.
 KPIs that measure the performance of company assets.
3.20
Consideration must also be given to whether different outcomes
should apply for different companies. Customer engagement and
research may reveal that the customers of one company want
different outcomes to the customers of another company. This could
potentially make the monitoring of the delivery of outcomes more
complex, and would not allow easy comparison between companies.
A compromise may be needed to set outcomes that apply across the
industry and provide comparators.
3.21
Some outcomes may also conflict with each other. For example, a
required outcome on customer satisfaction with value for money may
6
CCWater response to Ofwat consultation on involving customers in decisions about water
and sewerage services, paragraphs 3.2.4 to 3.2.7.
7
Deliberative research concerning consumers’ priorities for PR09 for the Water Industry
Stakeholder Steering Group, June 2008 (Corr Wilbourn), pages 19 to 22
http://www.ccwater.org.uk/upload/pdf/CW_PR09_Delib_Res_No_Appx_10_06_08.pdf
not be deliverable if the achievement of another output on
environmental quality or sustainability involves investment that has a
significant bill impact. In such a situation, a trade off will be
required to achieve a suitable compromise so that both outcomes can
be achieved within a reasonable timescale.
3.22
Some of the outputs required from companies have a significant
influence on how outcomes are delivered. There will need to be
monitoring of companies’ delivery of some outputs, but in proportion
to a company’s proven record of performance. Similarly there will
need to be some monitoring of significant inputs. This is explored in
more detail in our response to Question 4 below.
3.23
Some inputs and outputs are more significant than others in how they
drive the outcomes. The discussion paper acknowledges that some
inputs and outputs would still need to be focussed on, but only those
that pose the greatest risk to successful delivery of the outcomes.
Such inputs include;
 Cost of capital;
 Capital maintenance expenditure;
 Operating costs (and some major drivers of these costs); and
 Number and scale of capital investment programmes.
Such outputs include:
 Compliance with statutory drinking water quality and
environmental standards; and
 Removal of properties from the sewer flooding registers.
3.24
In an outcome focused environment, some inputs and outputs would
not need to be monitored as closely. Our ’Lessons from PR09’ report
identified that the data-intensive nature of the last price review
undermined transparency and accountability8. A more proportionate
level of scrutiny based on the achievement of agreed outcomes would
help avoid this.
Question 4: How could a risk based approach work alongside a
greater focus on outcomes? How can Ofwat decide whether, when
and in relation to what it needs to look at in terms of outputs or
inputs?
3.25
8
A key recommendation in our ‘Lessons from PR09’ report was that
Ofwat should adopt a more risk based approach, so that where a
company can clearly demonstrate that it is meeting its statutory
duties, is efficient, and has the support of its customers and statutory
CCWater – Lessons from PR09, page12
http://www.ccwater.org.uk/upload/pdf/Review_of_the_Review.pdf
partners, a lighter touch can be applied by Ofwat.9 This approach
moves away from the ‘one size fits all’ approach to regulation, but
does not mean that regulation should not focus at all on key outputs
that have a direct influence on required outcomes.
3.26
Once required outcomes have been identified and set as targets for
companies to achieve, if the measuring of the outcomes reveals that
a company has achieved (or is making good progress in achieving) the
outcomes, a ‘lighter touch’ approach would mean less reporting, a
lower data burden and less scrutiny by the regulator.
3.27
In contrast, companies should receive greater monitoring of the
delivery of outputs if monitoring and research shows that outcomes
are not being delivered (or progress of delivery is slow) or key
outputs that affect customers (such as debt recovery or reducing
leakage) are not being delivered sufficiently. The incentives and
penalties regime should then bear down on poor performing
companies.
Question 5: How should Ofwat incentivise the companies to
deliver outcomes? How should Ofwat deal with the reward or
penalty that a company would experience because of factors
outside of its control?
3.28
Companies should have an incentive to achieve the outcomes through
 The ‘carrot’ of lighter touch regulation if they are getting it right
(less reporting, less scrutiny);
 A sufficient financial incentive for companies that perform well in
delivering required customer satisfaction outcomes, which should
run alongside the Service Incentive Mechanism (SIM); and
 If companies are failing to deliver the outcomes, this will be
reflected in ‘poor scores’ in their KPIs, which can eventually lead
to more intensive regulation and appropriate penalties. This
would also have an affect on the company’s reputation as the KPIs
would be reported publicly.10
We look forward to Ofwat's summer 2011 discussion paper on
incentives which we think should explore this issue further.
3.29
9
This approach will also give companies:
 an incentive to take greater ownership and responsibility for their
Business Plans, and thus greater accountability to their customers
through the delivery of the outcomes customers want; and
CCWater – Lessons from PR09, page 22
http://www.ccwater.org.uk/upload/pdf/Review_of_the_Review.pdf
10
These recommended incentives are explored further in CCWater’s response to Ofwat’s
consultation on engaging customers in decision during price setting (paragraphs )

the flexibility to achieve outcomes through innovative and/or
more sustainable options, which could mean greater efficiency
gains.
3.30
Factors outside of a company’s control could have a bearing on
outcomes. For example, a period of drought (or other extreme
weather conditions) may impact on an outcome concerning customer
satisfaction with the quality of service. This could be mitigated by:
 assessing whether an outcome has been delivered over a longer
period of time. For example, evaluating customer satisfaction
over a two to three year period, may give a more accurate
assessment of customer satisfaction, than during a shorter period
which could be influenced by external factors; and
 effective communication with customers by companies to explain
why an outcome is not being achieved in the required timeframe,
and what actions are being taken to address this. While it may
take time for customer perception of a company to change
(possibly longer than it takes to deliver many of the outputs),
effective communication should help to mitigate this.
3.31
In addition, some companies may start from a lower base than other
companies in order to achieve a required outcome. For example, in
CCWater’s Tracking Survey for 2010, only 46% of consumers in the
South West expressed satisfaction with the value for money of water
services, compared to 79% in Yorkshire11. The benchmarking process
used to determine the required outcome should acknowledge the
lower starting point for some companies.
Question 6: How would an outcomes based approach differ
between different stages of the value chain? How could it work
with a retail price control and a wholesale price control?
3.32
If there is separate price control for retail and wholesale, while some
outcomes may be applied to the wholesale business only, more
general outcomes, such as customer satisfaction, would have to apply
to the whole value chain. Setting different outcomes for the
separate parts of the value chain may over-complicate the process
and lead to a lack of focus on the outcomes that matter to customers
and that need to be delivered by both the wholesale and retail
elements. Only a relatively small number of customers will have the
option to change retail supplier, and so companies may only focus on
the wholesale business as a result.
Question 7: How would a more outcome-based approach on
Ofwat's part affect other regulators? How would other regulators
11
CCWater Tracking Survey 2010, page 12
http://www.ccwater.org.uk/upload/pdf/CCWater_Annual_Tracking_Survey_2010_FINAL.pd
f
approaches affect the extent to which we could or should move to
greater focus on outcomes?
3.33
We agree with the view in Ofwat's paper that, ‘moving to an outcome
focussed approach would require a cultural change across the sector’
(Paragraph 38). It is important that the quality regulators also
embrace an outcomes based price setting methodology, recognising
and supporting the desired outcomes. Their monitoring of the
achievement of outcomes and the delivery of key outputs must be
consistent with this approach. If not, there is a danger that the
process loses focus on the outcomes.
3.34
The DWI already operates a risk based approach to drinking water
quality compliance through Water Safety Plans. The EA has begun to
adopt a similar approach, and we encourage Ofwat to work with the
EA to see how this approach could be extended across its business
areas.
Enquiries
Enquiries about this response and requests for further information should be
addressed to:
Steve Hobbs
Policy Manager
Consumer Council for Water
2 The Hide Market
West Street
St. Philips
Bristol
BS2 0BH
Tel: 0117 955 2079
Email: [email protected]