PERFORMANCE REPORT

Transcription

1 PERFORMANCE REPORT This report examines Scottish Water s progress in improving customer service, controlling costs, delivering investment outputs and tackling leakage over the period

2 INTRODUCTION INTRODUCTION We promote water and sewerage customers interests by making sure that they receive both high-quality service and value for money. Every five or six years we set prices that allow Scottish Water the resources it needs to deliver ministerial objectives for the water industry at the lowest reasonable overall cost. At the same time we set challenging targets for improvement and monitor Scottish Water s performance in meeting these. At the start of each price setting period Scottish Water signs up to a regulatory contract. The contract is transparent, achievable and subject to rigorous monitoring, with managerial incentives closely tied to performance against the contract. As part of our monitoring we publish annual information on performance. The reporting year marks the final year of the regulatory control period , so we are now able to report on performance over the whole five-year period. 1 We published our final determination for the next regulatory control period, , in November Associated documents The Strategic Review of Charges : The final determination, November The Strategic Review of Charges : The final determination, November Scottish Water s Performance , December Scottish Water s Performance , December Scottish Water s Performance , November Scottish Water s Performance , October Scottish Water s Performance , October Please note that all costs in this report are expressed in prices and that cost comparisons are expressed in real terms. 2 PERFORMANCE REPORT

3 KEY MESSAGES OVERVIEW As the economic regulator of this vital public sector industry it is our job to make sure that customers receive the levels of service they expect for the lowest reasonable overall cost. Over the past fifteen years we have developed a regulatory framework to ensure that this happens. In particular, we have adapted price cap regulation (or RPI-X regulation 2 ) an approach used by all of the UK economic regulators to the situation of Scottish Water, a public sector water company. The framework comprises a number of different elements that combine to create the same or greater impetus to excel than is experienced by companies subject to capital market pressures. Key to this has been our setting of challenging performance targets and cash limits, aligned with appropriate managerial incentives to outperform. KEY MESSAGES The performance targets are not aspirational, but are the minimum levels of acceptable performance. The cash limits are binding. Only if managers are able to outperform these requirements will they benefit from the bonus incentives that are in place. It is this incentive-based framework that has produced the remarkable transformation of the water industry since Scottish Water was created in Customers have benefitted from: substantial improvements in the level of customer service 3 ; considerable reductions in Scottish Water s operating costs; higher quality drinking water and a better water environment; and much lower levels of leakage. 2. RPI-X regulation is a form of regulation that involves setting price caps that are measured relative to the retail price index (RPI). Setting maximum prices that Scottish Water can charge for its services for a period of years provides an incentive to improve its efficiency, as it must drive down costs in order to remain within cash limits. 3. As measured by the Overall Performance Assessment score. PERFORMANCE REPORT

4 KEY MESSAGES ENSURING VALUE FOR MONEY FOR CUSTOMERS One way that customers are seeing the benefits of the regulatory framework is in the form of lower bills. For the average household bill in Scotland is 346, which is 40 lower than the average for the water and sewerage companies in England and Wales. As Figure 1 shows, today household bills in Scotland are amongst the lowest in Great Britain. Figure 1: Average household bills in ( ) SEVERN TRENT SCOTTISH WATER YORKSHIRE THAMES NORTHUMBRIAN ANGLIAN SOUTHERN UNITED UTILITIES DWR CYMRU WESSEX SOUTH WEST INVESTING IN SCOTLAND S WATER INDUSTRY During the regulatory control period Scottish Water was once again tasked with delivering a large investment programme. Since 2010 around 2.5 billion has been invested in Scotland in maintaining and improving the industry s assets, with 1 billion of this committed to improving drinking water quality, environmental and customer service performance. Despite this, output delivery performance, as measured by the Overall Measure of Delivery (OMD), has remained within the target range for each year of the period. Output delivery performance is also measured across each of 23 individual programme areas, such as the drinking water quality improvement, flood management and wastewater discharge improvement programmes. While we are pleased to note that there has been outperformance in some programme areas, we have also noted ongoing slippage throughout the period in other programme elements, including in the important areas of improvements to water treatment works and wastewater discharges. While the number of projects involved is relatively small, this has resulted in delays to the delivery of customer and environmental benefits. Scottish Water has acknowledged the concerns raised by the Commission and the environmental and drinking water quality regulators about these delays, and has provided assurance that the remaining projects will be delivered as soon as possible. Scottish Water has also put in place measures to improve asset management procedures to take account of the lessons learned in the delivery of the programme. Performance in this area will continue to be monitored closely. The Commission is also working with Scottish Water and the Outputs Monitoring Group to further enhance the output monitoring mechanisms for the period, as well as ensure that output delivery progress remains transparent to stakeholders and is based on a realistic assessment of delivery capability. LOOKING FORWARD Looking ahead, we consider that there are opportunities to develop our regulatory approach further, so that customers and the environment continue to receive the benefits of improved performance. We are therefore proposing to review our approach to the price setting methodology for the next regulatory period. This work will build on the approach adopted for the Strategic Review of Charges, and will explore changes that would reduce complexity while promoting customer and community engagement, efficiency and innovation within a broader framework of financial sustainability and affordability. 4 PERFORMANCE REPORT

5 CUSTOMER SERVICE HOW CUSTOMER SERVICE IS ASSESSED We measure customer service using a points-based system called the Overall Performance Assessment (OPA). The OPA milestones which we set at the Strategic Review of Charges form an important part of the regulatory contract that Scottish Water must deliver during the period. The OPA is calculated by weighting 17 individual performance measures that fall into four categories: water supply levels of service; sewerage levels of service; customer service; and environmental performance. We calculate Scottish Water s OPA based on the customer service information that it submits each year, which is subject to review by an independent technical Reporter. The maximum achievable OPA score is 418 points and the best comparable score ever achieved by a company is 409, which was reported by Wessex Water in CUSTOMER SERVICE HOW SCOTTISH WATER PERFORMED Over the period Scottish Water has responded well to the customer service targets we set. As Figure 2 shows, Scottish Water s OPA has improved year-on-year throughout the period. Figure 2: Scottish Water s OPA targets and actual performance to date Annual Performance Annual Target Scottish Water has consistently met and outperformed its targets; the score of 400 in was 20 points higher than the target for that year. Only one company in England and Wales has ever exceeded 400 points year-on-year. PERFORMANCE REPORT

6 CUSTOMER SERVICE HOW SCOTTISH WATER PERFORMED ON INDIVIDUAL MEASURES Figure 3 shows the overall improvements achieved by Scottish Water on individual OPA measures over the regulatory control period Figure 3: OPA improvements between and for individual areas of customer service OPA Water Samples Water And Sewerage EPIs SOSI Unplanned Interruptions Non-Compliant STWS Sewer Flooding Customer Service Inadequate Pressure Leakage OPA We particularly welcome the significant improvement in drinking water quality standards, where Scottish Water s performance in the six OPA parameters 4 has improved from 98.43% in to 99.74% in This has been driven by a substantial improvement in trihalomethane (THM) compliance following a concerted effort by Scottish Water to understand and reduce the formation of THMs in its water supplies. We also welcome the substantial improvement in wastewater pollution incidents, where Scottish Water has reduced the total number of pollution incidents from 804 in to 249 in Key to this improvement has been the establishment of better operational data and intelligence which has allowed Scottish Water to allocate resources more effectively and prevent pollution incidents from occurring. 4. Aluminium, faecal coliforms (E. coli), iron, manganese, trihalomethanes and turbidity. 6 PERFORMANCE REPORT

7 LOOKING FORWARD We welcome Scottish Water s commitment to, and outperformance of, the OPA targets. This has resulted in material improvements for customers in Scotland, many of which have been delivered without being specifically required by the regulator and without any additional cost to customers. Looking forward, as outlined in our final determination in November 2014, Scottish Water is expected to maintain its service performance over the regulatory period so that its OPA score remains within a target range of 380 to 400 points throughout the period. In addition, three new measures have also been introduced for the period following agreement between the Customer Forum and Scottish Water. These measures are: the household Customer Experience Measure; the non-household Customer Experience Measure; and the High Esteem Test. Similar to the Service Incentive Mechanism developed by Ofwat, the household Customer Experience Measure is built from a quantitative and a qualitative component, although the measures within each component have been adapted to meet the unique needs of Scottish Water and its customers. This new measure is the first performance measure to include the views of customers who have experienced an issue with their service but did not make direct contact with Scottish Water. As part of the annual return Scottish Water submitted a baseline household customer experience score of 82.6 (out of a total of 100). CUSTOMER SERVICE A similar measure is also being developed for non-household customers, however a baseline score will not be available until These will help customers and other stakeholders to compare the service that is provided by Scottish Water year-on-year and, potentially, with services provided by other water and sewerage companies. The High Esteem Test will be used to compare Scottish Water s reputation among the public with those of other UK utilities, and also with the country s most trusted companies and brands across all sectors. Over the regulatory period Scottish Water is expected to improve its service performance period so that it: ranks among the leading UK water companies on the new Customer Experience Measure; and is among the leading UK utilities for customer satisfaction. In addition, Scottish Water will implement service improvement measures to address priorities identified by customers in relation to external sewer flooding, visible leakage, reducing carbon emissions, managing responses to extreme weather events, and minimising the number of complaints that are escalated up to or upheld by the Scottish Public Services Ombudsman. PERFORMANCE REPORT

8 CONTROLLING COSTS CONTROLLING COSTS A key part of our role is to make sure that customers receive value for money. We do this by challenging Scottish Water to drive down its day-to-day running costs and deliver its capital programme more efficiently. MOVEMENTS IN OPERATING COSTS At both the 2001 and 2005 reviews (covering the regulatory control periods and respectively) we challenged Scottish Water to deliver very large improvements in operating efficiency. In response to this Scottish Water reduced its operating expenditure by almost 40% between and In our final determination in November 2009 we acknowledged that, although customers will expect Scottish Water to continue to make savings in its operating costs, there would be less scope for further significant reductions in operating costs in future. Over the course of the regulatory period Scottish Water s underlying operating expenditure 5 increased from 344 million in to 368 million in The main reason for this increase was the substantial increase in the business rates that Scottish Water must pay to local authorities, which have risen by around 50% in real terms since After adjusting for costs outside of management control 6, the underlying increase on a like for like basis has been around 1.5%. The movements in Scottish Water s operating costs over the regulatory control period is shown in Figure 4. Figure 4: Movements in Scottish Water s operating costs between and ( m) Operating Costs SEPA Charge Local Authority Rates Controllable Operating Costs Controllable Operating Costs 5. Reported operating costs adjusted for any one-off items. These relate to restructuring costs and atypical costs associated with bad weather in and a local authority rates rebate in SEPA charges and local authority rates. 8 PERFORMANCE REPORT

9 Overall Scottish Water is successfully containing increases in controllable costs whilst at the same time improving its levels of service. This is particularly welcome given the upward pressures on costs arising from the increase in energy and carbon prices and the uplift in the household income collection charges from Scottish Councils. We consider that Scottish Water is meeting the challenge to deliver broadly constant real operating expenditure, which we set when setting prices for the period. ENSURING VALUE FOR MONEY IN DELIVERING THE CAPITAL PROGRAMME In 2001 we challenged Scottish Water to improve its efficiency in planning and procuring capital projects, and so reduce the cost of delivering its capital investment programme for by 23%. This allowed savings of over 700 million in today s prices. In 2005 we examined Scottish Water s investment proposals for We identified and removed excess scoping and cost estimation and then challenged Scottish Water to deliver a further 20.5% cost reduction through planning and procurement efficiencies. Overall, these requirements produced savings of over 1.8 billion. In our final determination in November 2009 we challenged Scottish Water to reduce the cost of delivering its capital enhancement programme for by 13%, saving 150m in today s prices. Given the relatively large efficiency challenges already delivered in previous regulatory periods, this represented a significant challenge for the company. CONTROLLING COSTS Over the period around 2.5 billion has been invested in Scotland in maintaining and improving the industry s assets, with 1 billion of this committed to improving drinking water quality, environmental and customer service performance. This is around 300 million less than that allowed in the final determination, however it should be noted that a broadly equivalent portion of investment expenditure has been deferred to the regulatory period to deliver the remaining outputs. Scottish Water are therefore on track to deliver the capital efficiency target that we set. LOOKING FORWARD For the Strategic Review of Charges we regulated operating expenditure and capital expenditure together as total cash expenditure. Regulation based on total cash expenditure means that some of the bias in favour of capital-based solutions that resulted from benchmarking of operating expenditure has been removed. As a result, going forward, Scottish Water should be neutral to the full range of options available. This new approach allows Scottish Water, where agreed with the Customer Forum, to cover the costs associated with the occasional failure of a novel solution, while allowing for innovative solutions to be implemented where appropriate. This may, for example, include solutions which can be delivered with less initial cash outlay than with a more traditional approach. Looking ahead, it is important that Scottish Water exploits these changes to the regulatory framework and continues to seek out and pursue opportunities to generate additional cash from within the business. PERFORMANCE REPORT

10 DELIVERING THE INVESTMENT PROGRAMME DELIVERING THE INVESTMENT PROGRAMME Progress in delivering the investment programme is measured against targets that are agreed by Ministers and set out in Scottish Water s delivery plan. These cover a range of different output categories that deliver improvements in drinking water quality, environmental performance and customer service. Performance against the targets is monitored by the Outputs Monitoring Group (OMG) which comprises the main stakeholders in Scotland s water industry: Scottish Government, Scottish Water, Citizens Advice Scotland, Scottish Public Services Ombudsman and the regulators (the Water Industry Commission, the Scottish Environmental Protection Agency and the Drinking Water Quality Regulator). The OMG produces quarterly reports on output delivery performance against the objectives set by Ministers, and has also produced an end-of-period report that summarised overall performance over the regulatory period. Scottish Water s overall progress with delivering the investment programme is assessed using the Overall Measure of Delivery (OMD), which provides a single measure of delivery performance across the 23 programme areas (such as improvements to protect drinking water quality and to address unsatisfactory wastewater discharges), which in turn comprise several thousand individual projects. We are pleased to report that, on this measure, Scottish Water has remained within the target range throughout the regulatory period. This has ensured delivery of a wide range of benefits for customers and the environment over the last five years. However, while overall performance was on target, the Commission and the quality regulators have highlighted concerns during the period regarding ongoing slippage in some programme elements, as highlighted in Figure 5 below. These include delays in the important areas of improvements to water and wastewater treatment works. Scottish Water has provided the Commission with assurance that the company will maintain a strong focus on delivering the remaining outputs as soon as possible. The OMG has also established mechanisms to monitor closely the delivery of the remaining projects. While some of the delays have been due to Scottish Water taking the opportunity to assess the scope for further efficiencies, others have resulted from issues around design and delivery. Scottish Water has acknowledged these issues and responded by putting in place improvements to their asset management processes to take account of the lessons learned from the delivery of the programme. The Commission will continue to monitor closely performance in this area. It is also worth noting that, as indicated in Figure 5, some programme areas have delivered more outputs than were originally financed, including outperformance in tackling low pressure problems and unsatisfactory wastewater discharges. Customers should be reassured that they will not have to pay any more as a result of any shortfall in Scottish Water s performance. This is because we set Scottish Water a firm budget for delivering its investment programme. If it goes over budget it is not allowed to increase customer charges to pay for this cost overrun. 10 PERFORMANCE REPORT

11 Figure 5: Progress in delivering the programme LOOKING FORWARD CUSTOMER SERVICE & FLOODING Properties removed from low pressure register Sites where malodour is reduced Duties under Flood Risk Management Act DRINKING WATER QUALITY Security of supply improvements Zones with reduced lead levels Sites covered by drinking water safety plans Water metered areas subject to investigation Measures to protect water quality Mains rehabilitation Security and Emergency Measures Direction Raw water sampling and treatment Water treatment works improved ENVIRONMENTAL PROTECTION Environmental studies undertaken Works associated with Commonwealth Games Surface water outfalls improved Non-strategic unsatisfactory discharges addressed Strategic unsatisfactory discharges improved Improvements to the wastewater network Improved wastewater discharges Compliance with wastewater licences Completion of projects from previous periods Proportion of target outputs delivered Proportion of target outputs outstanding 0% 100% Outputs delivered beyond target Scottish Water remains on target to deliver the whole programme, including the remaining projects and the additional outputs, broadly in line with the finance allowed for in our November 2009 final determination. In common with the OMG stakeholders, the Commission places a high importance on maintaining a robust and transparent output monitoring regime to ensure customers receive the benefits for which they have paid. With this in mind, work is underway to implement further enhancements to the output monitoring mechanisms for the regulatory period. This will help ensure that delivery profiles remain both realistic and transparent, and that any slippage can be detected early and addressed. DELIVERING THE INVESTMENT PROGRAMME PERFORMANCE REPORT

12 FINANCIAL OUTPERFORMANCE FINANCIAL OUTPERFORMANCE Overall Scottish Water generated financial outperformance against the 2009 final determination of million, of which million was generated in the period from April 2010 to March In undertaking this assessment we have made adjustments to account for: differences in outturn inflation compared to that assumed in the final determination; K factor which Scottish Water was allowed in the final determination but did not use; 7 unforeseen changes in taxation; elements of the defined investment programme which are still outstanding at 31 March 2015; and early delivery of SRC outputs beyond the allowance included in the 2009 final determination. Our calculation of Scottish Water s financial outperformance is summarised in Table 1 below. Table 1: Calculation of financial outperformance Net debt: final determination expectation Implied net debt at 31 March 2015 from 2009 final determination 3,547.4 Adjusted for: Beneficial impact of actual inflation relative to that assumed in the 2009 final determination K factor not taken Adverse taxation change Beneficial taxation impact Implied net debt at 31 March 2015 after adjustments 3,609.0 Net debt: Actual performance Actual net debt at 31 March 2015 adjusted for completion of the outstanding investment programme 3,429.4 Calculation of outperformance Final determination net debt less actual performance Deduction of outperformance generated in the period to 31 March Outperformance from April 2010 to March m Scottish Water has achieved this outperformance by successfully controlling costs and finding alternative ways to deliver the required improvements. In addition, Scottish Water has outperformed through providing higher levels of service than were funded in the final determination. The actual outperformance achieved by Scottish Water to the benefit of its customers is therefore in excess of this financial outperformance. We have not sought to place a monetary value on this level of service outperformance. 7. Over the regulatory period household prices were reduced by 10.2% in real terms compared to the planned reduction in the final determination of 5%. 12 PERFORMANCE REPORT

13 LOOKING FORWARD A key innovation for the Strategic Review of Charges was the addition of the financial tramlines to the regulatory framework. In our final determination in November 2014 the financial tramlines were set around three cash-based financial ratios. These consisted of cash interest cover II, gearing and ratio of funds flow from operations to debt. These ratios are all used by credit rating agencies as indicators of financial health. The financial tramlines enable the monitoring of Scottish Water s financial strength and will ensure that an appropriate level of financial strength is maintained over the long term. The framework balances the need to protect customers from adverse cost shocks against ensuring that customers benefit from any outperformance as quickly as possible when Scottish Water finds alternative ways to deliver the required improvements. Looking ahead, we will soon be setting out in more detail the process for how and when financial outperformance should be used, how financial performance should be reported, and the role of stakeholders, including Scottish Ministers and customers, in this process. FINANCIAL OUTPERFORMANCE PERFORMANCE REPORT

14 TACKLING LEAKAGE TACKLING LEAKAGE Leakage is the water lost in a water network before it reaches customers. It can arise from, for example, bursts in pipes or poor connections. Reducing leakage is not only economically justifiable reducing operating costs and capital expenditure but also helps Scottish Water to deliver its obligations on sustainable development and reduce its carbon emissions. In our final determination in November 2009 we set Scottish Water the challenge of reducing leakage to the point where the cost saving of reducing leakage is equal to the economic cost of the water lost (known as the economic level of leakage) by Scottish Water has succeeded in reducing leakage in every year of the period, exceeding the targets set out in its delivery plan, and meeting our requirement that leakage should be within the range of the assessed economic level by Leakage has reduced by over a quarter in the last five years, as Figure 6 shows. Figure 6: Scottish Water s leakage performance (MI/d) reduction in reduction in reduction in reduction in reduction in LOOKING FORWARD We welcome Scottish Water s commitment to continuing to maintain the level of leakage from its network at an economic level. Looking ahead, we included a new leakage incentive in our final determination for the period that will incentivise Scottish Water to achieve further reductions in the level of leakage. Under this scheme, Scottish Water will be permitted to recover in the next regulatory period the 10 million of one-off transition costs it is estimated are required to reach the lower end of the assessed range of the economic level of leakage 8, provided this is achieved by The incentive scheme allows for an additional 5 million of recoverable costs if the target is achieved a year earlier, or a reduction of 5 million if it is a year later. Lower levels of leakage will bring benefits for the environment and for customers by reducing the volume of water extracted and treated, and by increasing the reliability of supply. 8. For the purposes of the incentive scheme, the lower end of the range is taken to be 500 megalitres per day, subject to adjustments for truly exceptional weather. 14 PERFORMANCE REPORT

15 NEXT STEPS Scottish Water s performance indicates that the clear incentive framework that is in place to regulate the public sector water industry has served the interests of customers well. Our regulatory objectives, combined with a determination on the part of Scottish Water s management to rise to the challenges we set, have delivered significant benefits to customers and the environment. However, there is no room for complacency, and we must ensure that the industry is properly equipped to meet the challenges that lie ahead. NEXT STEPS We have started planning for the next price review process, when we will set charges for the period beyond This work will build on the approach adopted for SRC and will explore changes that could reduce complexity while promoting customer and community engagement, efficiency and innovation within a broader framework of financial sustainability and affordability. PERFORMANCE REPORT

16 October 2015 Water Industry Commission for Scotland Moray House Forthside Way Stirling FK8 1QZ T: E: Design by The Write People for Design Ltd Tel: