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Put customers at the heart of price reviews

14 July 2010

In the lead up to this latest price review, the Consumer Council for Water set out to ensure consumers and their priorities formed the basis of water companies' plans for the future, and remained there all the way through the price-setting process. The result is arguably the most customer-focused price review since privatisation, with average water bills remaining relatively flat and customers getting more for their money.
We have long argued that improving the system for the next price review in 2014 means bringing water customers even further into the heart of the process, and this view was supported by the Cave and Walker reviews.
It isn't difficult to see the advantages of involving customers in negotiating trade-offs between service and price. It would help legitimise decisions and should also help address the worrying fact that customers perceive their water bills to be about the same value for money as their more costly energy bills.
Water companies would be incentivised to focus on customers instead of regulatory standards, and this approach would be a disincentive to "game" when drawing up their plans.
Other regulatory incentives could further focus the industry on consumers outside of the price-setting process. Ofwat's new service incentive mechanism is a good start, but a further incentive, based on customers' perception generally, would help.
With so many major players in the industry recognising the benefits and agreeing on the principles of greater customer involvement, the question is simply, how?
Early engagement with customers is crucial. As a first step, in the latest price review we asked consumers where they wanted to see investment by 2015, and how much they'd be willing to pay for it. We lobbied for recognition of these customer views when we felt they were being ignored; locally with water companies and "quality" regulators, and nationally with all the "quality" regulators, government and Ofwat.
This worked best when water companies took it upon themselves to build plans based on customers' priorities and chose to self-regulate within the envelope of what customers said they would be prepared to pay.
But customers also want reassurance that water companies' plans are cost effective. If Ofwat were to share comparative information on each company's assumptions and key cost drivers, such as cost of capital, efficiency, capital schemes and operating expenditure, customers and their representatives would be able to negotiate their own package of investments and make decisions with a clear understanding of how they would affect prices. Water companies would own, and be accountable for, their plans through the entire price-setting process.
Ofwat would still need to ensure that water companies had a plan that met regulatory and legal requirements and could finance their businesses. The regulator would also have the final decision if a company and its customers were unable to come to an agreement.
Consumers will need strong representation with sufficient knowledge of the industry and of the local geographical drivers of water services. Consumer representatives will need to balance sometimes competing demands from different segments of the population and to be seen as legitimate and accountable to consumers as their representatives in the process. Involving other stakeholders locally, including elected representatives, is important and we recognise that CCWater would need to change to reflect this.
A strong voice will be needed nationally as well as at the local company level to avoid "tame" local panels being coerced into agreeing unnecessary investments.
We're not talking about rewriting the regulation book. The existing framework has delivered for customers for the past 20 years, but it can always be improved.
It's time for a change. The benefits of this approach now are that it can put the customer's voice into some of the big, current issues in water such as social tariffs, and could legitimise proposals by water companies and regulators over which customers currently have no power through switching or voting.
Tony Smith, chief executive, Consumer Council for Water
Source: Disconnector

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