Supporting the water sector during rapid change

As we all navigate the new normal and adjust our business and ways of working, The Water Services Regulation Authority (Ofwat) has been quick to signal support and guidance to water companies.

Rachel Fletcher, Chief Executive at Ofwat said:

We will consider the need for any ex post adjustments to our regulatory system… This will require that companies can demonstrate how their operations have been impacted by COVID-19 and how they made their decisions.

In response to this and the new ways of working, water companies are increasingly exploring two core questions:

1. How do I make decisions regarding assets and management which are not necessarily aligned to the existing regulatory framework?
2. How can I meet regulatory performance levels when operations have been severely impacted by COVID-19?

With these questions in mind, companies are rapidly focusing on evidence gathering activities which will inform future discussions with regulators. Key focus areas are:

• What evidence do I need to document investment levels that are temporarily affected?
• What evidence do I need where service/performance levels are affected?

Adapting and preparing for a new normal

Processes and data capture

In answer to these challenges and the need to take proactive steps, we have seen a rapid adjusting of processes and requirements to better facilitate capture of data on a continual basis and to record/test assumptions by measuring them against outcomes.

This immediate change is perhaps unsurprising and water companies are using renewed data and processes to facilitate discussions with Ofwat to help them understand challenges and impacts being felt by water companies.

Key actions being undertaken to adjust processes and capture data include evaluating revenue streams and the current and potential longer term impact.

It's also important to identify how different functions and operations can gather and access data on an ongoing basis. Has this as a result of revised working patterns, data handling, reporting processes etc?

Companies are reviewing data sources to make sure they are still feasible and that the right data and information is able to be captured on a regular basis. This data compilation and additional information support re-baselining so that regulators can consider the need for any ex post adjustments following an ‘in-the-round’ assessment.

Decision-making framework

To bring the necessary rigour and record keeping to capital delivery, water companies are exploring decision-making frameworks that review each of the programme development stages to identify changes to the business plans that have recently been accepted by the regulator. Ultimately they need to ensure that any re-prioritisation decisions are cognisant of the full range of consequences.

Consistent use of a decision making framework provides an audit trail for companies, demonstrating to regulators that:

1. The principles of the change control process are intended to support business resilience while focusing on customers and communities, as required by performance commitments.
2. The relationship between marginal cost and performance levels is being considered.

The day-to-day management of the changes arising (cost, level of service, business resilience) will be similar to existing change management processes. However, decision-making frameworks should have a modified set of decision criteria for each change:

• Need: Revisit the original needs assessment to demonstrate that work is essential and/or high priority under these exceptional circumstances. Reprioritisation may enable companies to take advantage of easier access for asset maintenance works as a result of reduced network load or traffic levels.
• Optioneering: Companies must be able to demonstrate how they and the supply chain have collaborated and innovated so that the scope and scale of the change is modified to mitigate impacts. Collectively they also need to focus on opportunities which deliver long term benefits. Doing this collaboratively with supply chains is vital to ensure customer outcomes are realised. For example, operating expense (OPEX) based solutions could be switched to capital expenditure (CAPEX) solutions, taking advantage of lower demand and reduced traffic impacts but may have cost implications. Agreeing with suppliers and customers on the priorities and testing the impact on bills and service levels is vital.
• Cost: Companies must show that they have challenged themselves to minimise cost impacts and also considered viability of activity taking account of change in benefit/cost ratios. For mitigated activity, plan to demonstrate reasonableness of change on cost/quality/time. Given the adverse impact of COVID-19 on society, companies should consider:
  • Ethical profit – additional costs directly linked to COVID-19 should not generate profit either for the company or the supply chain.
  • Pain sharing – where there is financial pain due to either cost over-runs or penalties (to compensate customers for service level shortcomings) companies should consider how the pain is shared equitably between the supply chain, the company and customers.
• Customer: Ensure the selected approaches are in the best interest of customers given that changes in drivers and costs have to be weighed against customer priorities including willingness to pay and security of supply.

Getting fit for future discussions with the regulator

Using decision-making frameworks with modified data capture, companies can:

• Have greater confidence in current business plan milestones and progress against them that were set prior to COVID-19. Companies can then assess the full impact of recent weeks against this baseline. Cost and performance information, in particular, are being compared to business-as-usual baselines.
• Consider supply chains and engage with Tier 1, 2 and 3 suppliers to get confidence in ongoing support and health of suppliers. Key is the need to demonstrate that activities will continue to have a customer focus, collaboration and innovation across suppliers. Maintain engagement with suppliers and if reprioritising projects or activities, engage with customers first on the impacts on outcomes and bills.
• Refine processes and decision making frameworks now and on an ongoing basis. For example look at incident response changes given social distancing restrictions, stakeholder and customer communications protocols, how can vulnerable customers be supported. Of particular importance will be controls and governance of any COVID-19 related action plans.

By opening an early dialogue on impacts and choices, there is greater opportunity for consensus within the decision-making window and mutually agreeable outcomes.

Contact us

We have been active in supporting our infrastructure sector clients in reviewing processes and adapting to new ways of working. We are also partnering with clients to prepare for future challenges from regulators.

For more information about how to embrace decision-making frameworks specific to your challenges and operations, please contact our specialist water sector team at [email protected].

Further resources

Please visit our COVID-19 response page for all of our resources relating to the impact of COVID-19 on the construction sector.