Insights

How to impress in your RIIO-ED2 business plan submissions: learning from the PR19 experience

DNOs are preparing for the commencement of the RIIO-ED2 period (beginning in April 2023), two years after the other sectors (gas distribution, gas transmission and electricity transmission). Ofgem has already expressed that the RIIO-2 period will be tougher for all their regulated companies with the regulator setting its lowest cost of capital at 4.3%. Similar pressure has been applied in the water sector with Ofwat setting its lowest weighted cost of capital at 3.19% (in CPIH terms) in its draft determinations which is even lower than the 3.40% proposed in the PR19 methodology in 20171. In addition to this financial challenge, Ofwat threw down the gauntlet for companies to deliver significant improvements for customers and it appears that Ofgem will do the same. It creates the question of whether RIIO-ED2 will be a series of déjà vu moments mirroring the level of challenge that Ofwat have given to many companies in the PR19 period.

 

Sia Partners RIIO-ED2 Learning from PR 19

 

Ofwat are preparing to publish their final determinations for all water companies by December 2019, with the fast-track companies (Severn Trent, South-West Water and United Utilities) already receiving their draft determinations and the remaining companies receiving their announcements today.

This provides an opportune moment for DNO’s to take stock and learn what the water companies did well, particularly those who were awarded fast-track status, and how they could incorporate these lessons into their RIIO-ED2 business plan preparations.

This article, using the lens of Ofwat’s four PR19 themes (Great Customer Service, Affordable Bills, Resilience in the round and Innovation), provides recommendations that DNO’s can incorporate to help create a compelling RIIO-2 submission.

Ofwat Theme 1: Great Customer Service

DNOs should: Build RIIO-2 business plan ‘block by block’ with customers

Two of Ofwat’s initial assessment of plan (IAP) test areas required companies to have a clear link between customer input and company action, flowing seamlessly throughout their business plan. These areas were ‘Engaging Customers’ and ‘Delivering Outcomes for Customers’, respectively. Only one company, Anglian Water, out of the 17 regulated organisations, achieved an ‘A grade’ rating (defined as a ‘high quality, ambitious and innovative plan with evidence that overall is sufficient and convincing’) for their engagement with customers. They achieved this through their use of a multitude of engagement methods to listen to their customers, which allowed them to maximise their effective outreach to a variety of different customer and stakeholder segments. Crucially, they started their engagement early on and sustained it as their plan evolved, demonstrating how engagement built towards a final proposal, step-by-step. In the eyes of the regulator, this helped Ofwat as Anglian Water produced a clear ‘line of sight from the results of [their] customer engagement to the outcomes in [their] business plans’2.

To impress, DNO’s will need to follow suit and demonstrate a clear and well-evidenced ‘golden thread’ from their customer engagement programmes, ideally highlighting multiple stages in the journey with logical sequencing from the ‘why’ to the ‘what’. The regulator will want to understand how the outcomes, priorities and specific services were chosen including the methods that were used to get final acceptance from customers on the service levels proposed. The insight derived from the customer engagement should be (demonstrably) interwoven in a DNO’s decision making, continually, throughout the evolution of their plan.

Ofwat Theme 2: Affordable Bills

DNOs should: Form partnerships to maintain quality services whilst driving down costs

For the IAP test area ‘Addressing Affordability and Vulnerability’ only one company, United Utilities, achieved an A grade rating. United Utilities were praised for their bill reduction of 11% whilst simultaneously allocating a 34% increase for the financial support that they would provide to customers in vulnerable situations by 2025. These initiatives show the level of stretch in their plan to deliver for customers in vulnerable circumstances. In addition to this, they have created an Independent Affordability and Vulnerability panel, made up of independent NGO’s and other organisations that work with vulnerable groups including representatives from Warrington Disability Partnership, Salford City Council and Macmillan amongst others. The panel will hold the company to account on their initiatives to heighten the services provided to vulnerable customers. In their submission, United Utilities demonstrated (in detail) a range of tools to help them target interventions that can contribute to a lower cost-to-serve. One initiative included a detailed segmentation of customers at the household level rather than at the post-code level. Results were then incorporated into their systems and processes which helped United Utilities focus their interventions where they are most needed.

The RIIO-1 period has seen several noteworthy developments to protect customers in vulnerable circumstances, including the creation of two-way texting in emergency situations and vulnerability mapping tools. However, the future of the energy system is changing to respond to a more digitised, decentralised and decarbonised landscape and as Ofgem’s recently published ‘Consumer Vulnerability Strategy for 2025’ highlights there is still a way to go for the industry. The consistent ask of both water and energy companies is to do more with less. Collaboration is the way forward and DNOs should be building networks with charities and other organisations to share data and build partnerships that benefit customers, whilst lowering Opex costs wherever possible. The regional initiative by Wales and West Utilities, Western Power Distribution and Welsh Water to allow a cross-sector data share option for priority services customers has been well received and DNO’s should continue to look beyond to partner where feasible.

Ofwat Theme 3: Resilience in the round

DNOs should: Consider ‘whole-systems thinking’ to deliver a resilient service for all customers

There were no specific tests that measured resilience in PR19; understandably, as it is a concept that cuts across an organisation. Ofwat highlighted their expectations for companies to demonstrate corporate, financial and operational resilience. Broadly, this refers to an organisations ability to avoid, cope with and recover from disruption at all times across these areas3. Few companies were praised explicitly by the regulator for the resilience of their organisations, however, United Utilities received recognition for their systems thinking approach and South West Water were recognised for their approaches to long-term resilience. As part of securing resilience for the environment South West Water developed an award-winning upstream catchment management scheme designed around partnerships with local farmers and conservation groups. This partnership approach aligns with United Utilities strategic approach to systems-thinking including the entire ecosystem of organisations impacted along the value chain, from abstraction to bioresources.  Overall, this approach forms more effective partnerships earlier in the value chain reducing the need for more capital-intensive investments which would likely be more costly to customers.

Ofgem has already decided to consider networks’ whole system planning in their assessment of Business Plans (for most of the controls). They have also highlighted that greater co-ordinated action between energy actors could reduce costs to consumers. In the same way that a consumer vulnerability strategy can benefit from collaboration, resilience planning can benefit from partnerships with regional utilities as well as organisations operating in connected spaces. Both strategies, praised in PR19, allow companies to leverage the resource and capability of multiple organisations delivering within the interconnected ecosystem and again drives towards ‘doing more, with less’ as well as fulfilling Ofgem’s aspirations for the sector to move towards a whole-systems approach. Collaborative work is happening with recent examples of the establishment of the Energy & Utilities Skills Partnership group on a long-term commitment to attract the right skills to the sectors but there is room for DNOs to build on this and truly utilise the skills of the wider community.

  Ofwat Theme 4: Innovation

DNOs should: Build meaningful innovation into plan at both macro and micro levels

PR19 saw Ofwat formalise their expectations around innovation with the inclusion of a test area. Both United Utilities and South East Water were praised for their innovation submissions with United Utilities demonstrating that innovation formed the future shape of their organisation including redesigning their performance assessment frameworks with an innovation component for all employees. Whilst South East Water developed an innovation assessment tool to help target the areas across their organisation that were most viable to realise benefits through. For South East Water, this tool revealed that areas such as Leakage and Catchment Management were simultaneously priority areas for customers and had the greatest ability to innovate compared against other areas which were either a lower priority for customers or had a lesser capacity for further innovation or both4.

Demonstrating a holistic approach to innovation is powerful and companies need to approach it at both the macro and micro level considering how it is valued culturally as well as how it is measured and incentivised. The fluid nature of innovation means it can be challenging to monitor success and outcomes but if companies incorporate more strategic approaches that prioritise innovation against business challenges and customer feedback they, as well as their customers, will reap the rewards.

Summary

The specific dates for RIIO-ED2 submissions are yet to be confirmed but it will likely be summer 2021. The strategic thinking required to design impactful initiatives takes time, as does building the foundations of the collaborative partnerships required to deliver resilient plans. The regulator will want to see ambition coupled with sufficient levels of affordability for customers. It is not an easy ask but, as we’ve seen from PR19, it is possible to demonstrate both with enough forward planning and strategic thinking.

Sources:

1https://www.ofwat.gov.uk/wp-content/uploads/2019/07/PR19-draft-determinations-Overview-of-companies-draft-determinations-1.pdf

2https://www.ofwat.gov.uk/wp-content/uploads/2019/01/PR19-initial-assessment-of-plans-Anglian-Water-company-categorisation.pdf

3https://www.ofwat.gov.uk/wp-content/uploads/2017/09/Resilience-in-the-Round-report.pdf

4https://corporate.southeastwater.co.uk/media/2827/appendix-16-innovation-final-180830.pdf