Anglian Water Customer Engagement Forum Supplementary Report FINAL

Transcription

1 Supplementary Report by the Chair and members of the Anglian Water Customer Engagement Forum (CEF) Note This is a supplementary report prepared by the CEF for Ofwat and the assurances provided are. The CEF is in the main composed of lay people. They have relied on information they have received from the Company, third party research providers and an independent technical assurance advisors. This report is a summary of the opinions of the CEF given in good faith and to the best of their knowledge and belief. Page 1 of 15

2 1 Table of Contents 2 Foreword from the Chair Background and Context Background the Original CEF Report Ofwat Commentary on the Anglian Water plan submitted in December The Development of the CEF Supplementary Report Customer Research on the revised company proposals Detailed Comments on Revised Proposals Wholesale water costs and Wastewater Wholesale costs Risk and Reward Anglian Water s response to Ofwat Commentary on the December Plan CEF Comment -Overview Detailed Comments ODI Detailed Comments Other Independent Technical Assurance Summary and Conclusions Page 2 of 15

3 2 Foreword from the Chair This report has been prepared by the Anglian Water Customer Engagement Forum (CEF) as a follow up to our original report, which provided an assessment for Ofwat of our views of the company s business plan submitted to Ofwat under Price Review 14 (PR14). It provides the CEF response to matters that Anglian Water have amended in their business plan following Ofwat s commentary on their plan submitted in December. We are a totally independent group which has challenged the company, right up to Board level, to produce a plan which meets the expressed service priorities of household and non-household customers (and key stakeholders) and their willingness to pay for services in these exceptionally tough economic times. The original plan still retains strong support from the Customer Engagement Forum. In my foreword to the original CEF report I said that What the company is proposing in its plan is in our view, based on the evidence and information we have seen and challenged, a balanced and reasonable compromise with much greater sharing of pain and gain between investors and customers than in previous price reviews. We were encouraged by the strong commendation that Ofwat gave to the December business plan in relation to many areas on which the CEF had challenged the company, on behalf of customers, such as the level and quality of customer engagement and the extent to which plan outcomes were driven by customer priorities. The CEF supports the revised submission. We feel positive that most of the strong features of the plan have been preserved in the revised submission and are pleased that average bills are estimated to be 1.5% per annum below RPI on average over the AMP. The 19/20 bill is estimated to be 377 vs 406 in (in prices). However we would like to raise the following points which are covered in more detail in the further sections of the report: We recognise that the wholesale WACC of 3.7% announced by Ofwat was potentially good news for customer bills. However, the company has informed us that consequence of making this change is to make the plan unfinanceable and it therefore has made PAYG choices to ensure that its plan remains financeable. These have had the effect of reversing some of the decreases in customer bills that arise from the lower returns allowed to shareholders. We regret the withdrawal of the automatic sharing mechanism if the RPI is between 3 and 4.5%, which was a highly attractive feature of the original proposal. The group broadly supported the proposed change in the metering programme The Environment and Climate Change Panel representatives have argued strongly against any of the spending commitment being taken out for resilience, ecological improvement and water resource management. The group would have wanted the company to have been even more ambitious than its original expenditure proposals. Given the very direct and clear message from customers that the company should be investing in more than the economic level of leakage the CEF would have preferred to Page 3 of 15

4 maintain investment in enhanced leakage prevention but we have accepted the new proposals based on an ODI mechanism. In the light of the additional customer research the CEF is supportive of the proposals on Outcome Delivery Incentives put forward by the company. However, we remain concerned that there is a significant risk that customers may react negatively when it comes to actually paying for future company out performance. The CEF is pleased to note that Anglian Water, unlike some other companies, is managing its own bad debt issues without expecting additional funding. The CEF supports the proposals for differential social tariffs between Anglian and Hartlepool customers which have been developed through consultation with customers. The CEF does not wish to see constraints on growth and believes that mechanisms to influence company behaviour such as logging up and logging down should be symmetrical as growth forecasts can be over and underestimated and thus customers should be protected for either outcome. While the above bullet points are important for Ofwat s consideration they do not undermine our support for the plan: In summary the CEF is able to continue to give overall support for the Anglian Water Business Plan. The company has agreed the appropriate future structure and working methods with the CEF, so that it will continue beyond this report in helping to hold the company to account on behalf of customers as the plan is implemented, as well as in taking a longer term view, including preparing for the next price review. This structure will include greater direct involvement for customer representative groups with the expectation that the CBI and CAB will provide CEF members. As in the original CEF, the Consumer Council for Water, Environment Agency, Natural England and the Drinking Water Inspectorate will be represented. We intend that the Environment panel will continue as a specific panel and that the members of the other panels will be involved through regular newsletter updates, the annual AGM and a mixture of workshops and 1-1 interviews convened as required depending on the agenda set by the CEF or AGM. This should mitigate the difficulties that some groups had in continuity of attendance and will create a more flexible way of engaging stakeholders from different perspectives to discuss specific issues. I would like to thank all CEF members and in particular the Panel Chairs and our three Champions who gave freely of their time, energy and expertise to serve the needs of customers as well as the Chief Executive and senior staff of Anglian Water who continued to respond to CEF challenges appropriately and dedicated a level of commitment in ensuring that CEF concerns were promptly followed up. Page 4 of 15

5 3 Background and Context 3.1 Background the Original CEF Report The original CEF report submitted to Ofwat in December 2013 strongly supported the Anglian Water Business plan that it accompanied as a balanced set of proposals at a price that customers were willing to pay. It considered it an appropriate response to the trade-offs implied by customer preferences based on robust willingness to pay and other research. These trade-offs included balancing the need to maintain downward pressure on bills while supporting a level of ambition in investment in relation to environmental, economic and resilience priorities. This was borne out by the results of acceptability testing which showed that over 90% of customers surveyed thought that the company had got the balance right in a draft plan that proposed keeping bills flat before inflation, while investing to maintain and improve services, meeting legal obligations and tackling future challenges. In addition, other customer engagement activities showed that in some areas, such as leakage, customers valued an improvement in service. The CEF original report represented the culmination of an extensive period of challenge and detailed scrutiny by CEF members supported by four specialist panels which provided an in depth focus on the environment, economic growth and communities. The CEF also drew on specialist technical assurance from Halcrow Management Sciences Ltd. and the views of a senior independent expert, Dr Harry Bush. Taken together this represented a sophisticated and sustained testing of the plan on behalf of customers and CEF members continue to stand by their original conclusions that the current plan represents the priorities of customers and stakeholders and customers willingness to pay. At the point we submitted our original report the CEF had pushed for low prices on behalf of customers and we were pleased that Anglian Water held the increase in average bills to 1.8% p.a. below inflation (the largest reduction in bills over the AMP6 period of any company), while doing more to address future challenges. We recognise that setting the WACC is Ofwat s responsibility not the CEF s but feel that it can only be good news for customers for Ofwat to set a wholesale WACC of 3.7%. However, we note that the anticipated reduction in bills which might follow this reduction in the WACC has been offset by the decision taken by the company to increase its PAYG ratio by 4% in order to maintain the financeability of their plan. The CEF recognises that, despite this change, the company is proposing one of the largest reductions in bills of any company, with average bills set to rise by 1.5% less than the estimated rate of RPI for the period. This figure now takes account of the decision taken by the company to abate K in setting its 2014/15 bills. We also believe that the proposed PAYG ratio, based on the Ofwat notional capital structure, is not an outlier when compared to other companies. The company has targeted a lower credit rating by one notch in assessing the financeability of its plan. This has reduced the need to bring forward revenues and results in a lower PAYG ratio being required. Against this, the company had assumed that a high proportion of its outstanding and new debt is index-linked but this was precluded in Ofwat guidance. The revised lower assumption increases the need to bring forward revenues via a higher PAYG ratio to meet key financial ratios. The company has also reduced the level of its dividends. Whilst the impact of these changes has been to lower headroom on key credit metrics, the company remains confident that it will be able to maintain its actual credit rating and meet its covenanted ratios. The company has argued in Page 5 of 15

6 discussions with the CEF that an alteration in the PAYG ratio of the order proposed is essential to avoid a situation in which bills have to rise because of the higher cost of raising debt. The CEF has scrutinised these proposals. It supports the proposals but would register that the impact of a lower WACC has had the impact of making the plan unfinanceable. The company has made PAYG choices to ensure that its plan remains financeable and these have had the effect of reversing some of the decreases in customer bills that arise from the lower returns allowed to shareholders and we would expect Ofwat to reflect on this issue. 3.2 Ofwat Commentary on the Anglian Water plan submitted in December CEF members were pleased that Ofwat recognised the quality of engagement and willingness to pay information as exceptional and at the top end for the industry together with a very strong alignment of outcome commitments with customer priorities. We are also pleased that Ofwat recognised the exceptional performance in statutory and licence obligations; we are aware that Anglian Water was one of the few companies who were not challenged on the technical justification and financial provision made for meeting Water Framework Directive commitments in NEP5. These are areas where CEF and panel members have had extensive involvement and influence. The CEF were pleased by Ofwat s assessment that the company has strongly demonstrated that its proposals are affordable over the period (Rating: A Exceptional), that its proposed commitments reflect value for money and that the costs associated with those commitments are reasonable (Rating: B Acceptable) and that the Consumer engagement and willingness to pay (WTP) information test was assessed as Exceptional (A). CEF members were therefore somewhat surprised by the concerns raised by Ofwat in relating to wholesale water and wholesale waste water costs but wanted to emphasise that the CEF, its panels, subgroups and its external assurance support had extensively scrutinised the components of these costs. The company had been asked by the Environment Panel and the Economic Development Panel to assure them of their ambition for the environment and their ability to fund the necessary infrastructure as a result of planned development in the Anglian Region. CEF members were surprised by the relatively limited emphasis that appeared to be given to the large reduction in the bill and the range of additional improvements, which together implied a substantial efficiency gain. They noted Ofwat s view that gaps between the Risk Based Review cost thresholds and company cost projections highlight areas where there are opportunities for the companies to provide further information and evidence which has been further scrutinised in our recent meetings prior to the submission of this supplementary report. In summary, CEF members have continued to challenge Anglian Water to push the boundaries and to continue to meet the particular challenges of the region and customers priorities. The majority of the group would have preferred it if Ofwat had accepted the original plan; however in analysing the proposed revisions now being made by Anglian Water we have ensured that the company has maintained a clear link between the views of its customers and the outcomes and investment that it is proposing. We feel that it is imperative for the success of this price review, and for the credibility of using CEF-type structures to inform future price reviews, that customers' views were not ignored but can clearly be seen to have been central to Ofwat's assessment. Page 6 of 15

7 3.3 The Development of the CEF Supplementary Report The CEF continued to meet after its original report was submitted to Ofwat and continued to maintain a close but challenging relationship with the company. In order to develop this report the CEF: Has identified those areas of the revised proposals where it feels it is competent to make comment and challenge, and these are covered by further comments in this report. Delegated to the Assurance Sub Group the responsibility for detailed scrutiny of the company s response to Ofwat s commentary on its business plan in relation to ODIs. Oversaw the work of Halcrow Management Sciences Limited Ltd. (HMS), independent technical assurance providers, to confirm the company s view that there had been little or no changes to capital or Opex schemes compared with the plan submitted in December. The whole group engaged in a discussion about what the additional customer research should cover and the Customer Engagement Champion carried out a forensic examination of the detail of the research on behalf of the CEF. Convened a full CEF meeting on April 17th 2014 to scrutinise the company s revised proposals in detail and to confirm the above arrangements and followed this by a full CEF meeting on June 19 th 2014 which considered the results of the customer research and the company s final revisions to its business plan. 3.4 Customer Research on the revised company proposals In looking at the revised company proposals, the group has been informed by the results of the McCallum Layton research of April Customers views were tested on the impact of the revisions to the company s proposals required to meet the feedback from Ofwat. Customers were helped to understand that Anglian Water will still deliver the same outcomes and improvements in service but: Expected average bills will be less than originally forecast. Anglian Water will need to be more efficient to earn profits. There will be greater penalties if it fails to deliver its plan and greater rewards if it delivers its plan well. A small part of every customer s bill will vary depending on how well Anglian Water delivers its plan against its key targets. The targets that Anglian Water must meet have been developed using customer feedback and agreed with an independent customer forum. They include the following measures: Improving customer satisfaction. Reducing interruptions to water supply. Reducing the number of customers with low water pressure. Reducing leakage and helping customers save water. Reducing the number of properties affected by sewer flooding. Maintaining its assets e.g. water treatment works, sewers, pumps. Improving the quality of bathing waters. An independent group will audit Anglian Water to make sure its performance on these measures is accurately reported and the results of this will be made publicly available. The vast majority of customers (85%) were satisfied with the service they currently receive from Anglian Water; only 2% were dissatisfied. Moreover, around three-fifths (58%) felt the water and Page 7 of 15

8 wastewater service they received from Anglian Water represented good value for money, however 14% believed they received poor value for money. Two-thirds of respondents (65%) agreed that Anglian Water s new approach, which will see future bill changes linked to a greater extent to the company s performance, is acceptable. Only 7% disagreed, predominantly because they would just like lower bills or that they believed billing should be independent of performance. Most respondents (88%) wished to be kept informed on an annual basis of Anglian Water s progress against the targets set out in the business plan, preferably provided as an inclusion with their bill. The overwhelming majority of customers (93%) were either not averse to or actively backed the proposed new approach. The CEF asked its customer champion to represent it in considering the results of the McCallum Layton online panel. She supported the research and its findings with two caveats: Firstly, the company s customer research on its ODI package does not address the customers view of the principle of rewards/penalties, but presents them as something that will happen, and asks customers about the mechanics and targets. Secondly, the research identifies two segments of customers who are less in favour of the new approach than others: of the customers surveyed, those who felt their water and wastewater service was poor value for money were less like to favour the new (incentives rewards) approach than customers who considered the service good value for money; and customers who had affordability problems were less positive about the proposed plans than those who rarely or never had difficulty paying their bill. This could be a warning sign to the company about the sensitivity with which the rewards payments need to be communicated, if increased dissatisfaction with bill levels is to be avoided. The CEF has taken these views into account when considering the more detailed proposals particularly on rewards. Page 8 of 15

9 4 Detailed Comments on Revised Proposals 4.1 Wholesale water costs and Wastewater Wholesale costs Anglian Water response to Ofwat Commentary on the plan submitted in December Anglian Water provided a detailed gap analysis between the Ofwat costs from the modelling exercise and their plan linking the difference in expenditure to the case for their resilience proposals, ecological improvements, investment in enhanced leakage prevention, investment in smart metering and their meter replacement programme, and increased services to meet planned housing and business growth in the area. They stated that there were two material changes in costs between the plan submitted in December and the revised plan: Reduction in meter replacement and smart metering programmes (Impact c 46m). Meter replacement expenditure will fall from 40m to 20m and smart metering expenditure by c 26m to 6-7m. Reduction in leakage expenditure (Impact c 32m) and replacement of the funding mechanism for leakage investment via an additional ODI The Ofwat models do not support leakage reduction beyond the economic level. The company is still committed to the original proposals around leakage reduction but proposes to handle the funding requirement via an incentive of up to 32m. CEF Comment The CEF strongly supported the company s original programmes. We do understand that the impact of taking all of the schemes challenged by Ofwat (over and above those changes relating to leakage and metering already proposed by the company) out of the plan could potentially reduce bills by up to 8-12 per annum per customer by 2020, and that the changes relating to metering and leakage currently proposed by the company will result in savings of around c 4 per customer for an average annual bill The overall CEF view was that the additional expenditure compared with the Ofwat model had been scrutinised in detail and it was appropriate based on customers preferences for improvements as evidenced by the willingness to pay analysis, and the need to insulate customers from future cost pressures in relation to rare but very high impact events. The CEF has been through the detailed gap analysis provided by Anglian Water and it is comfortable with the approach taken by the company. The potential to reduce bills further had been discussed at the CEF assurance group during the scrutiny of the plan submitted in December and the view then was that customers preferences justified the company s proposed expenditure. Specifically: Resilience proposals the CEF felt that failure to invest in the past has had an adverse impact on bills in this AMP and it considered the plan as having an appropriate commitment to sustainability over the longer term. Ecological improvements The Environment and Climate Change Independent Advisory Panel Chair strongly argued to retain the spending commitments in this area the Panel had urged the company to be even more ambitious and this expenditure had been thoroughly discussed at the Panel and at the CEF itself (as it happens the Blueprint for Water has published their evaluation of various companies plans on the environment and has criticised Anglian Water for not having done enough). In the Panel s view these improvements protect customers from higher bills in the longer term. Page 9 of 15

10 Investment in enhanced leakage prevention From its research the CEF considered there has been a clear and very direct message from customers that the company should be doing more than maintaining the economic level of leakage. Customers feel that leakage is an iconic issue and that failure to minimise leaks can undermine the company s ability to make progress with other initiatives such as encouraging customers to reduce water usage. The CEF comment on the new proposals based on the ODI mechanism is described later in this report. Investment in smart metering and their meter replacement programme- The Customer and Communities Independent Advisory Panel had a particular focus on those customers experiencing the greatest need and greatest difficulty in paying bills. The group looked at social tariffs to provide financial support, and also considered ways of helping them to take greater responsibility for their own usage and expenditure on water: the extension of metering encourages this. The Panel also considered meter replacement to enhance fairness because it reduces cross subsidy between customers by reducing the impact of under recording associated with old meters. The Chair of the Customer and Communities Independent Advisory Panel was concerned that the changes directed by Ofwat penalise companies aiming for more sustainable and socially responsible approaches. He was pleased to see that a programme for smart metering remains in the Anglian Water plan albeit reduced. The company s proposals to support an additional logging mechanism for further NEP requirements and wastewater growth Members of the CEF wanted to support the company s proposals to retain a symmetrical logging mechanism for NEP requirements and for waste water. They were particularly concerned that the company might be motivated to over sweat its assets if there was insufficient funding for growth. The Economic Development Independent Advisory Panel Chair presented a strong case that resources did need to be spent to provide the necessary infrastructure for regional growth. The Environment and Climate Change Panel was concerned that if there wasn t sufficient funding for growth and assets were sweated, there would be an increased risk of pollution; they cited examples such as problems relating to the River Wensum and the Norfolk Broads. They felt that investments should have regard to how sustainably and cost effective the response was for the long term. The CEF does not wish to see constraints on growth and believes that mechanisms to influence company behaviour such as logging up and logging down should be symmetrical as growth forecasts can be over or underestimated and thus customers should be protected for either outcome. Social Tariffs The CEF had detailed involvement in the consultation process undertaken by Anglian Water in the development of its plans to introduce social tariffs in April Members of the group had been actively engaged in the Discover, Discuss Decide engagement process which ran from The CEF has noted there was a very strong level of support for the proposed structure of the social tariff being proposed by the company. We also noted the differences expressed by customers in the Hartlepool area about their lower willingness to contribute to a social tariff compared with the broader Anglian Water customer base. Having discussed the findings of the customer consultation on social tariffs and listening to the priorities expressed by customers the CEF supports the plan to proceed with an Anglian Water scheme at 1 cross subsidy but not to proceed in Hartlepool and that the success of the tariff will be reviewed and a further customer consultation undertaken in months time. Page 10 of 15

11 4.2 Risk and Reward Anglian Water s response to Ofwat Commentary on the December Plan Anglian Water has accepted Ofwat s guidance on changing their retail margins (set at 1% for the retail household price control and 2.5% for the non-household price control) and the Wholesale WACC has been reduced to 3.7%. In order to comply with Ofwat s guidance that about 1-2% of RORE should be at risk through both rewards and penalties, Anglian Water has revised its plan risk and rewards as follows: ODI- they have proposed higher incentives and penalties for avoidance of interruptions, reducing the number of households at risk of low pressure, Bathing Waters and Serviceability (the latter penalty only), customer satisfaction and leakage as well as revised proposals for Deadbands, caps and collars and outcome performance reviews. RPI Windfall gains -they have withdrawn their commitment to automatic sharing of RPI between 3.0 and 4.5%. Cost performance -they propose to share the benefits of cost outperformance 50:50 with customers. Financeability To maintain financeability, they have increased the PAYG ratio by an average of 4%, index linked debt from 40% to 33%, and reduced dividends CEF Comment -Overview The CEF had heard originally from Anglian Water customers that they did not have a great appetite for upside rewards. The CEF understands the regulatory rationale for financial incentives, but research by several companies and CCWater shows that there is a significant risk that customers may react negatively to: Paying rewards in the future for company outperformance. Targets that appear to be the day job, especially (if applicable) where the company is not targeted to be industry best. The outcome incentive package the company is proposing, associated with a range of performance targets, runs the risk of a longer term consequence where lower prices in the short term then leads to price rises in the future if the company outperforms its targets, particularly if this is not transparent. The company s estimate of the potential impact on the average household bill depending on whether all measures are achieved or not is illustrated in the chart following: Page 11 of 15

12 The group is basing its assurance on the table above which was provided by the company. It appears to show that the ODI impact falls within Ofwat guidance of between 1-2% of RORE. The CEF challenged the company on this issue as they consider that significant incentive proposals are likely to be highly visible in terms of public and media opinion, in a way which could interact adversely with plan acceptability over time. The group were informed that the Anglian Water Board feel that they cannot forego these potential rewards given the lower WACC proposed by Ofwat and the direction given by Ofwat in their guidance. The Assurance Sub group in this context informed the CEF that the proposals made by the company were the least worst of a range of possibilities in that they reflected customer priorities and also put a very strong weighting on customer satisfaction. The specific proposals are supported by the stated preference (willingness to pay) research which explored the relative priorities which customers afford to different outcomes. The company had responded positively to suggestions to amend some of their initial proposals, for example by complementing the plan to incentivise further the performance on the qualitative SIM measure, with improvements in an overall measure of customer satisfaction with value for money Detailed Comments ODI The new proposals were scrutinised in detail by the Assurance Sub-Group. They considered the following questions on behalf of the CEF: Are they consistent with willingness to pay research? Are they stretching do they represent frontier performance? Are they transparent? In total do they remain within the RORE range? In considering these questions, the Assurance Sub Group was generally positive regarding the proposals the company made, with the following specific observations: Serviceability/ caps and collars/ outcome performance reviews The CEF understands and supports the proposals by the company for escalation to ensure that the right actions are taken by it and the application of any further penalties where performance deteriorates beyond the level covered by automatic penalty mechanisms and supports this approach with regard to the serviceability penalty. It agrees that it, the CEF has a substantial contribution to Page 12 of 15

13 support customers in exercising the necessary judgment on their behalf, based on its longstanding engagement with them and understanding of their needs and also that its involvement is most likely to be beneficial if dovetailed with that of Ofwat, to ensure a coordinated response. Leakage The CEF s view, based on research prior to submission of the original plan, is that customers consistently have wanted the company to take action to reduce leakage even over and above the economic level of leakage. This is why the CEF supported the company s proposals on leakage reduction in the original business plan. Its new understanding is that since there is a significant risk that Ofwat will not adjust their cost models to support this investment through the TOTEX route, the company has decided to introduce an additional ODI if performance improves on this parameter. The CEF recognises that customer bills will reduce to reflect the removal of the spend from TOTEX, but is concerned that customers will experience a greater volatility of their bill with a potential impact, for an average annual bill of between - 2 and + 5. Deadbands The CEF is happy with the deadband proposals for interruptions and low pressure. It strongly supports the company s proposals to include severe weather events in relation to flooding and considers that this provides the best protection for customers. Customer Satisfaction The CEF supports the prominence of this ODI given its direct relevance to customers. However in the original proposal the focus on SIM was too narrow albeit stretching. The Assurance Sub-Group have therefore pushed the company to use the views of a broader base of customers beyond those who have submitted a complaint and therefore appear in the sample frame for the SIM qualitative measure. In response Anglian Water have agreed to use both the CCWater tracker survey (which monitors longitudinally customer satisfaction with the value for money offered by the company), as well as qualitative SIM, with the reward and penalty spread across the two. The CEF understands that Ofwat have raised concerns that that there is insufficient support from WtP research for these measures to be considered as the basis for an ODI. As stated above, in relation to the qualitative SIM the CEF has reservations associated with the small sample size and risk of double counting. In the case of the CCWater tracker the CEF believes that because this measure tracks customer satisfaction with value for money there is no need for it to be supported by WtP research because it is self-referencing. Output Commitments The CEF is happy with the principle that while output commitments may need to be used by it to hold the company to account there will not always need to be penalties for non-achievement if the company can demonstrate that there are alternative ways for it to deliver the desired outcomes. However, the CEF is concerned that if the company is able to reduce expenditure in the absence of logging up/ down, the company may gain a benefit which is not passed on to customers within the AMP period. Bad Debt The CEF is pleased to note that Anglian Water, unlike some other companies, is managing its own bad debt issues without expecting additional funding. Page 13 of 15

14 4.2.4 Detailed Comments Other RPI gain sharing between 3% and 4.5% The CEF is strongly advocating that the RPI gain sharing mechanism remains, as they regard this gain share mechanism as providing legitimacy and credibility to the plan in the event of an RPI windfall. The company have explained that they have to withdraw this as an automatic sharing mechanism because it was part of the overall package prior to changes made as a result of Ofwat s review. The CEF urges the company to keep this position under review. Cost performance The Company have agreed that they would share the benefits of a further improvement in cost performance with customers on a 50: 50 basis. The CEF noted the decision by Ofwat to suspend the practice of logging up and logging down and were concerned regarding the possible impact on the company s ability to respond flexibly to unforeseen cost pressures with a potentially adverse impact (as assets are sweated ) on the environment or sustainability, as noted earlier in the section of this report covering growth. Financeability The Company has proposed to ameliorate some of the impact of the lower WACC proposed by Ofwat, by adjusting the proposed PAYG ratio, in order to bring income forward into the next AMP period. This will mean that customers will not see the full beneficial effect of the reduced WACC in their bills during the period. The company have explained that this is necessary to maintain a positive credit rating, which in turn affects the cost of debt, which feeds through into customer bills. The overall bill will still be well below that which was used in the acceptability research prior to the submission of the original plan, which resulted in 90% acceptability. Retail margins The Company has agreed to revise its proposed retail margins to be in line with those now mandated by Ofwat in more recent guidance. The CEF welcomes this, as the original company proposals, especially for non-domestic customers, were an outlier for the sector. Approach to delivering the incentive or penalty to customers the CEF continues to endorse strongly the company s approach of evaluating and balancing off the overall level of incentives and penalties at the end of the AMP, as in its view this provides greater price stability to customers which research indicates they value. Page 14 of 15

15 5 Independent Technical Assurance Jeremy Hawkins of Halcrow Management Sciences Limited Ltd. (HMS) confirmed that following sample audits of the Company's revised proposals, no material issues had been noted with the associated technical data. 6 Summary and Conclusions In summary the CEF is able to continue to give overall support for the Anglian Water Business Plan in the round as a balanced plan and, specifically, the changes that Anglian Water have made in the version developed by June 2014; although they feel Ofwat has not given recognition to ambition as much as the CEF feel it should. It considered that although the original research indicates that customers do not want to see incentives because of the impact on bill variability, it accepts the ODI mechanism as a means of underpinning some of the company s original proposals. The Environment Agency is supportive of the proposed changes to Anglian Water s plan and have confirmed that the investment areas which have been removed do not have a material impact on Anglian Water s ability to meet its environmental obligations. The EA has reaffirmed that the National Environment Programme must be delivered and is reassured that these elements remain in Anglian Water s plan. Natural England is satisfied that the proposed changes in Anglian Water s plan will not have a material impact on its ability to meet its commitments to the Habitats Regulations and Biodiversity 2020 through both the National Environment Programme and its wider work on catchment management and biodiversity. We support the view of the Environment and Climate Change Independent Advisory Panel that none of the spending commitments on environmental improvements should be taken out of the plan as this would both threaten environmental quality and result in higher bills for customers in the longer term. We have not had notification from the DWI that they wish to raise any concerns with the CEF. While the CEF were highly committed to their role as advocates on behalf of customers they had some concerns about how their inputs were handled within the overall process. Some CEF members found it hard to understand the reasoning which lead to some companies achieving enhanced status when the Anglian Water plan did not achieve this. The only areas of significant concern from Ofwat s perspective appeared to be the level of plan costs and CEF members, through their challenge and scrutiny of the December plan, had satisfied themselves that these were appropriate and consistent with customer priorities as expressed. CEF panel members have been concerned that the views of customers had not been given sufficient weight by Ofwat and that this had also happened in the previous price review. They were not minded to contribute to a future price review without a clear indication that Ofwat will give substantial regard to customers views. The group stressed to the Chair that they would have valued the chance to meet Ofwat representatives directly rather than contact being entirely via the Chair and that in the future it would be good to see Ofwat move towards a more engaged approach with customer challenge groups. End of Supplementary Report Page 15 of 15