Ofwat – Protecting consumers, promoting value and safeguarding the future Water and Regulation Improving the value from statistics Gordon Allan Engineering Adviser – Ofwat September 2009

Contents Ofwat – Protecting consumers, promoting value and safeguarding the future Welcome to WSUG Regulatory issues PR09 observations and frustrations

Our strategy Ofwat – Protecting consumers, promoting value and safeguarding the future Keeping consumers at the heart of what we do Enforcing compliance Keeping companies accountable Introducing competition where it benefits consumers Regulating effectively Shaping the regulatory agenda at national and EU level Taking a long- term view of sustainability

Ofwat – Protecting consumers, promoting value and safeguarding the future Ofwat strategy / plan “ What we want to achieve to protect consumers: Simple, effective and efficient regulation that achieves best value outcomes over the long term for consumers. Regulation that exemplifies best practice and is underpinned by the better regulation principles of transparency, accountability, proportionality, consistency and targeting. “ How we will regulate: We will take enforcement action, where appropriate, if a company’s data is inadequate or its performance is poor. We will develop approaches that rely on less regular data from companies but we will conduct detailed checks of the underlying source data for completeness and accuracy as and when we consider appropriate. We will minimise the regulatory burden wherever possible.

Ofwat – Protecting consumers, promoting value and safeguarding the future Ofwat plan In the next three years we will: develop and consult on a strategic framework for keeping companies accountable. We want a strategic framework that minimises the regulatory burden in line with the better regulation principles – transparency, accountability, proportionality, consistency and targeting – and that recognises the development of competition in the water and sewerage sectors. We will target our work to ensure we promote the right behaviours by companies ( , and ); publish industry performance reports that focus on the key information coming out of our analysis of each company’s annual regulatory return (the ‘June return’), supported by detailed information, so that we can continue to provide our stakeholders with relevant and timely commentary on companies’ performance ( , and ); include impact assessments when we consult on major policy proposals, taking account of recommendations from the National Audit Office report on impact assessments ( , and ); and increase the onus on each company to provide reliable, accurate and complete data by publishing each company’s annual returns soon after submission to us ( , and ).

WSUG Ofwat – Protecting consumers, promoting value and safeguarding the future Ofwat believes that our requirement for “…reliable, accurate and complete data…” and the WSUG aim of “..improving the …understanding of the use and value of statistics within the Water Industry”. are aligned....So we welcome WSUG and support your objectives

Ofwat – Protecting consumers, promoting value and safeguarding the future Regulatory Issues Passive (June returns etc) Serviceability / performance measures - performance ‘events’ (failures) - asset ‘events’ (failures) Inventory of assets - numbers, class, condition Regulatory returns - confidence, quality Active (business planning) Performance modelling - and performance prediction - sensitivity and uncertainty Cost – benefit - cost estimates - benefits estimates / WTP - confidence, uncertainty

Ofwat – Protecting consumers, promoting value and safeguarding the future PR09 observations 1 – asset planning leadership; policy and strategy; management; planning processes; planning systems; (data collection, processing, business as usual) data; (asset, service, performance and intervention) analysis; (performance modelling, prediction and future intervention) reporting; and overall approach to risk and balance. (optimising risk, co and customer) To assess PR09 plans for capital maintenance expenditure (circa £12bn over 5 years) Ofwat used its ‘AMA assessment’. This assesses company plans over 31 assessed components divided between the following headline areas. Statistical issues are very pertinent to some of these as indicated above.

Ofwat – Protecting consumers, promoting value and safeguarding the future Industry PR09 draft determination AMA scores - example This is the best scoring sub-service (out of the four) – so room for improvement!

Ofwat – Protecting consumers, promoting value and safeguarding the future PR09 observations 2 – Capex estimates – understanding estimating confidence?

Ofwat – Protecting consumers, promoting value and safeguarding the future PR09 observations 2 – Capex estimates – understanding estimating confidence? How is the uncertainty priced?

Ofwat – Protecting consumers, promoting value and safeguarding the future PR09 observations 4 – serviceability Conundrum – forecast confidence insufficient despite historic performance Modelling gives limited forecasting capability: 50 % confidence of achieving range B 95% confidence of achieving range C Need 100 % confidence of achieving range A, AND oscillate around a target figure (reference level), as historically observed ABC

Ofwat – Protecting consumers, promoting value and safeguarding the future PR09 observations 5 – climate change UKCIP02 provided one future climate change outcome – best evidence Size of change UKCP09 will relative measures of the considered evidence that supports plausible future climate change outcome Time Size of change Time Consistency in the argument and accounting for uncertainty

Ofwat – Protecting consumers, promoting value and safeguarding the future PR09 observations 3 – CBA benefits, WTP Significant uncertainty across many attributes - WTP, impacts of schemes, costs Many different techniques - Monte-Carlo, Scenario analysis, switching Which are the best methods? Can results be pooled to reduce the uncertainty? - What variance is there across companies/regions? Is there a minimum survey size? An optimum?

Ofwat – Protecting consumers, promoting value and safeguarding the future A water regulation perspective Questions?