Minutes of the fourteenth meeting of the Water Forum
Severn Trent Centre, Coventry
10 June 2014
Present:
Chair
Dame Yve Buckland
Consumer Council for Water (CCWater)
Bernard Crump, David Wurr, Gemma
Domican
Environment Agency
Greg Marshall
Natural England
Ian Butterfield
East Midlands Councils
Bruce Laughton (in part)
Observers
Claire Nichols, Report writer
Peter Fordham, Atkins
In attendance:
Severn Trent Water
Tony Ballance, Min Bansel, Frank Grimshaw,
Neil Corrigall, Harriet Towler,
Apologies for absence:
Sarah Faulkner (NFU), Richard Butler (CBI) Gareth Wood (SSE), Charley Gibbons (CAB),
DWI representative.
1.
Governance
The Chair welcomed attendees to the fourteenth meeting of the Water Forum. The Chair
also welcomed Peter Fordham from Atkins (STW’s lead assurers) to the meeting and
explained he would be there to provide a view on any assurance related questions the
Forum had.
There were no declarations of interest.
The Forum reviewed the minutes and action points from its meeting on 21 May 2014. The
Forum approved these minutes.
The Forum noted that the DWI had been contacted regarding future attendance and whether
the DWI had any issues or concerns that it wished to raise in the Water Forum’s
supplementary report. STW reported that its Director of Water Services would meet with the
DWI that week and would also raise with the DWI whether it had any issues. There were no
other outstanding actions from the last meeting.
2.
Developments since the last Forum
STW provided an update on key developments since the last Water Forum. It reported that
both Dwr Cymru and Northumbrian Water had now received draft determinations. It reported
that in a number of areas Ofwat had made the performance commitments proposed by the
companies more challenging.
STW reported that it continued to have constructive dialogue with Ofwat, including meeting
to review STW’s draft gap analysis. This meeting had been informative – it confirmed STW’s
view that it should expect a high degree of scrutiny from Ofwat in a number of specific areas.
STW had highlighted these areas in today’s meeting papers for the Water Forum to
comment on in its report.
The Forum discussed that it had been surprised by the level of scrutiny that Ofwat had
applied to plans – more so than at PR09 and noted that it had moved away from the original
intention of being a risk based review.
The Forum noted this update.
3.
Affordability and financing
STW reported that following its 2 December submission, it had made changes to its plan to
take into account:
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Ofwat’s risk and reward guidance (in particular, a lower weighted average cost of
capital (WACC));
a revised Birmingham resilience scheme;
increased legacy adjustments (to reflect AMP5 performance and the re-introduction
of the revenue correction mechanism (RCM)); and
an adjusted PAYG (‘pay as you go’) ratio.
It reported that as a consequence, the average household combined bills are £4 lower on
average across AMP6 than the original plan.
STW reported that the PAYG ratio had been adjusted to bring forward more cash to support
credit ratios and avoid a substantial reduction in future dividends. The Forum agreed that it
understood the importance of credit ratios and the company’s position. It also concluded that
an increased use of PAYG would not place undue pressure on future bills. It agreed,
however, that more detailed assessment of such an approach would be a matter for Ofwat
as economic regulator to decide.
The Forum further noted that STW had decided to re-introduce the RCM mechanism as part
of a revised package of incentives. It understood the rationale for this given the changes to
the overall balance of risk and reward in the revised plan.
The Forum also noted the company’s update on the impact of theses changes on both water
and sewerage bills now and in the future.
4.
Household retail
STW explained that in its risk based review, Ofwat had challenged STW’s cost allocation.
The Forum noted that this had been revised and externally assured.
The Forum further noted that STW had commissioned Frontier Economics to carry out
econometric modelling to determine whether STW levels of bad debt were efficient. STW
would provide this report to the Forum once complete. The Forum reiterated that it expected
STW to continue to press for performance improvements in this area, but it expressed
concern that this should not come at the expense of customers who were genuinely
struggling.
The Forum agreed that it supported the new costs that STW proposed to deliver customer
service improvements (and in particular, a customer relationship management system and
administrative costs for the introduction of a new social tariff).
5.
Birmingham resilience
STW provided on update on: a revised solution for Birmingham resilience; the high level
findings from recent research; an accelerated delivery profile; and its proposed approach to
consumer protection. It reported that it had had constructive dialogue with Ofwat over recent
weeks and had sought to revise its proposals in response.
STW explained that it had developed a revised solution that would make greater use of its
existing network. This carried a greater, but albeit more optimal, level of risk for customers.
The revised scheme would be lower cost overall than the original scheme and it would be
delivered in just one AMP. This meant that whilst bills would be lower overall as a
consequence, they would be slightly higher than with the original scheme initially.
STW reported that it had carried out further customer research. This continued to show
majority support for STW’s original proposal.
STW also reported that its revised scheme would include enhanced customer protection for
non delivery – including a shortfalling mechanism based on the proportion of the resilience,
maintenance and community risk benefit not delivered.
The Forum reiterated its disappointed that this scheme had not been considered initially and
in response to its own challenge in this area. It considered however, that there was still
clearly a need to take action to address the risk. It further noted that customers would be
prepared to pay the additional £1 in support of the lower risk scheme originally proposed.
Therefore the Forum agreed that it continued to support the original scheme.
The Forum noted and supported the proposed form of consumer protection.
6. Performance commitments.
STW explained that Ofwat had requested further evidence to justify the balance of
improvements in its plan and the cost benefit analysis to support the chosen level of
performance improvement – particularly in relation to wholesale outcomes. In response,
STW had documented the range of evidence used.
The Forum agreed that this was an area that it had already considered in some detail. It
agreed that it supports the revised proposals and considers them to be sufficiently stretching
and to represent value for money for customers, based on the company’s cost-benefit
analysis, and its evidence on the plan’s affordability and acceptability based on research and
engagement.
7. Outcome delivery incentives (ODIs)
STW set out the outcome of its customer research into the use of ODIs, its revised package
of ODIs and the total bill impact. It reported that a meeting of the incentives sub-group had
also been held on 5 June 2014 and challenge from that group had helped to shape STW’s
revised proposals.
STW presented evidence from its customer research that most customers found the
proposed concept of ODIs acceptable. It also reported that it proposed to change some of its
original proposals so that some ODIs would be paid in period. In its view, this would help to
heighten the strength of the incentive.
The Forum welcomed STW’s plan to consult with customers in response to its challenge. It
agreed that it supports STW’s proposed response to the challenges made to its original ODI
proposals. The Forum welcomes in particular the introduction of incentives that will help
drive the company forward, such as the ODIs on biodiversity, partnership working and the
speed of response to leaks.
The Forum agreed that it had some reservations about the about proposals to apply ODIs in
period because of the confusion this may cause to customers. The Forum also considered
these should be confined to those where annual performance can be accurately assessed.
The Forum also agreed that it did not support STW’s proposals in relation to:
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an ODI for the avoidance of serious pollution incidents, which the Forum believes is a
regulatory matter that is very much the ‘day job’.
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a reward if no hosepipe ban occurs during the AMP period, which the Forum has
challenged based on the likely incidence of such a ban.
8. Measuring, reporting and recording
STW set out its draft proposals for how it will record, report and assure its performance
against the commitments made in its plan and implement outcome delivery incentives. It
explained it was proposing a four component approach relating to: ownership and internal
reporting; robust assurance; effective governance; transparency and public accountability.
The Forum agreed that Severn Trent Water is developing a robust model that would enable
an appropriate degree of independent public scrutiny. This will be particularly important in
light of the weighting to revenue and bills that is now afforded through the ODIs.
The Forum noted that STW had yet to finalise arrangements for the future constitution of the
Forum and the appointment of the Chair. It understood CCWater was developing industrywide proposals in the latter point. The Forum looked forward to working with the company as
it develops its proposals further, particularly in relation to the appointment of members and
an appropriate Chair.