Customer Challenge Group North West - United Utilities · Customer promises 19 Willingness to pay 25 Water resource management plan 34 CCWater threshold of acceptability research

Customer Challenge Group North West

Report on United Utilities Engagement for the Business Plan 2015-2020

Making a Difference

CCG challenges and United Utilities responses are highlighted throughout this report.

Key challenges

ContentsForeword 3Executive summary 4

Part 1 Background 7 North West England: geography - economy - people - environment 7 Price review methodology 9 Customer challenge group - North West 9United Utilities overview 10United Utilities engagement strategy 12

Part 2 Research and Engagement 14

Business as usual research 14 Ofwat SIM surveys 14 UU customer satisfaction surveys 15 UU business customer research 15 UU Customer Opinion Focus Groups 16 UU brand tracking 16 UU social tariff research 17 UU drought plan research 18 UU environment and climate change research 18

PR14 Research 19 Customer promises 19 Willingness to pay 25 Water resource management plan 34 CCWater threshold of acceptability research 36 Stakeholder engagement 37

Strategic direction statement 39

Part 3 Business Plan 41

Environment 41Finance 44Integrated asset planning 49Business plan outcomes 52Measures and incentives 54

Appendices 57

1: CCG Member profiles 57 2: CCG terms of reference 61 3: Willingness to Pay subgroup terms of reference 64 4: Environmental subgroup terms of reference 65 5: CCG Challenge log 66 6: DWI statement and decision letters 81 7: EA evaluation report 112

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Foreword

We believe, as the title of our report suggests, that we have ‘made a difference’ to the research strategy, customer engagement and outcomes of United Utilities’ Business Plan for 2015-2020. We consider that our input, robust challenge and support has been a helpful and focused contribution to the price review process. The company has worked with us in a transparent manner and responded constructively to the challenges we have made. We have ensured that the customers of United Utilities have been at the centre of our work and have noted that the company takes very seriously the views expressed by them. We consider the company’s work with its stakeholders to be extensive and impressive.‘Making a Difference’ also refers to the work United Utilities is doing to improve the efficiency and effectiveness of its services, its responsiveness to customers, and its commitment to the environment. We have looked at the company’s plans for improvement and discussed its aspirations and believe that the company’s ambitions will be realised.

CCG members have given an immense amount of time and energy to provide the required challenge to the company and to statutory regulators. We have attended main and subgroup meetings and customer engagement workshops, undertaken site visits, piloted questionnaires and worked at length on this final report. We would like to thank everyone, including report writer John Lafon, for their commitment, hard work, tenacity and good humour, which has enabled the Group to fulfil its role so comprehensively.

As this process draws to a conclusion we welcome the way in which United Utilities has responded to challenges from the CCG about issues of affordability and understand that it will submit a Business Plan which will deliver bills below RPI for domestic customers, while maintaining or improving service levels. There may be some disappointment that there will be a lower level of investment in the environment, but at a time of economic austerity customers have made clear this is something which they cannot afford. We recommend our report to OFWAT and believe that we have made a difference to the price review process for customers in the North West of England.

Andrea Cook OBE, Chair and Bernice Law, Deputy Chair

Foreword

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Executive summary

IntroductionIn order to set price limits for 2015-2020 United Utilities (UU) has engaged with its customers to understand their priorities and to deliver the services they want at a price they support. The results of this engagement are set out in its Business Plan submission to Ofwat. The company established a Customer Challenge Group (CCG) with an independent chair and deputy chair and a cross-section of representatives from the North West to scrutinise, and where appropriate challenge, the development of the Business Plan by:

•commentingonthedevelopmentofUU’scustomer research, evaluating the results and challenging the conclusions reached;

•challengingthequalityandreachofthecustomer engagement process;

•robustlychallengingregulatorsandthestatutory requirments;

•testinghowwellthecompany’sproposedoutcomes and outcome delivery incentives reflect customers’ views and priorities, and:

•providinganindependentreporttoOfwat.

It is the view of the CCG that the company’s Business Plan has been strengthened by our input and we support a plan that we believe represents good value for money for customers, maintains services and will achieve the company’s commitment to meeting its environmental and statutory obligations.

The CCG for the North West was established in February 2012 when the chair, Andrea Cook and the Deputy Chair, Bernice Law were appointed. The CCG has representation from members of the key regulatory bodies which support the water industry, from the business and development sectors and from community groups.

The review process involved formal CCG meetings where senior UU representatives and their staff and consultants were invited to deliver presentations on different elements of the Business Plan as it developed. During

the meetings members were able to question the company on specific areas of research, findings and Business Plan proposals to improve their understanding of the issues. CCG members also met in private session at the start of each meeting to review progress and identify the key areas to focus on. We challenged the company on areas where more detailed information was required or the proposals did not adequately reflect customer priorities or their ability to pay for them. Throughout this review process UU responded openly and constructively to these challenges. Where a particular area required a greater level of detail or the issues were complex the CCG formed subgroups to support the work of the main group.

Four subgroups where formed to look at:

1. Willingness to Pay and Acceptability Testing 2. The Environment3. Engineering Options4. Incentives

The research undertaken by the company had two strands: firstly, its ‘business as usual’ engagement, which seeks to compare company performance against the rest of the water industry and other North West service providers; and secondly, the research developed specifically for PR14. Over the period of this review UU has engaged with approximately 27,000 customers through a wide range of research programmes.

The Willingness to Pay (WtP) subgroup was established to support and monitor the development and delivery of the most demanding of the PR14 research programmes, Willingness to Pay, which also included Acceptability Testing (AT) of the company’s proposals. The group focused on the research linked to PR14 and subgroup members helped to ensure that the materials used for customer engagement were easily understood. They attended development and pilot sessions, engagement groups and reviewed and challenged the findings. All of the subgroup’s work was reported to and discussed at the full CCG meetings.

The environmental needs of the region are demanding in fulfilling existing and new regulatory demands, however it is important

Executive summary

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that customers are willing to pay for these, particularly in a time of austerity. As there were a wide range of environmental issues to be considered the CCG established an Environmental subgroup (ESG) to focus on this area. Three of the key issues facing UU which were reviewed in detail were: sewer flooding, bathing waters and West Cumbria supplies.

Although the CCG expects Ofwat to assess the value for money of UU’s Business Plan and to make a technical assessment of some project proposals, the CCG wished to understand the processes, controls and modelling tools used by the company in developing its asset investment plans. In a review by an Engineering Options subgroup of CCG of ‘end to end’ asset management planning, UU demonstrated how it develops projects and schemes aligned to UK best practice to deliver whole life cost solutions.

The company developed a system of incentives based on the Ofwat methodology which, because of its complexity, was reviewed by a joint CCG and UU working group. Following challenges by the CCG and internal reflection, the outcome of this work has been for UU to propose only penalties and not rewards.

Findings and Conclusions•Therehasbeeneffectiveandtransparent

communication with CCG members at all levels, including with the Executive Management Team and the Board of United Utilities. All requests for information have been met and the robust challenges from the CCG have largely been accepted and acted upon. The CCG has particularly welcomed the attendance at meetings by the CEO, meeting the senior Non-Executive Director and the engagement which has taken place between the Chair, Deputy Chair and the Board.

•TheBusinessPlanhasthesupportoftheCCG and members consider that they have had a significant influence on the already concerted efforts of the company to produce a plan where there has been challenge around efficiencies and costs to result in bills which are affordable to the majority. The CCG also believes the company’s commitment to continuous improvement, reflected in particular in improvements in customer service and environmental perfomance in the past two years, is embedded in its Business Plan.

•TheCCGwelcomestheproposalstoprovide bills between 2015-2020 which will be below RPI for domestic customers. It notes that the increase proposed for business customers is largely linked to sewerage costs and trade effluent and understands the reasons for this. It has some concerns about the impact on small businesses, which are often on the margins of profitability, and has asked the company to produce a strategy and communications plan to assist such customers to make use of water efficiency programmes and other ways of managing their costs.

•Itisclearthattheaffordabilityofbillsand customer debt will continue to be a major issue for the company against a background of exceptionally high levels of deprivation in the region. There is evidence however that UU is applying best practice to debt management and developing new ways of supporting those who find it difficult to pay. The issue of poverty and deprivation is likely to remain a significant challenge to the company for years to come. The CCG believes strongly that the company’s portfolio of options to sensitively manage affordability and payment problems, including its Trust Fund, remains crucial to helping vulnerable customers.

•Thecompany’scustomerengagementprogramme has been extensive and demonstrates how seriously the company takes the views of its customers within all communities in the North West, including those in rural areas. During the engagement process the company took steps to communicate with all sectors of the community, including the hard to reach, and adopted the use of social networks and intermediary agencies to extend its engagement. It’s Customer Promises have been developed as a result of this engagement.

•ForthePR14customerconsultationthequality of the materials has been of a high standard. The CCG provided input to these to ensure customers clearly understood the messages and questions being raised. CCG members also attended many of the events to listen to customer views. The CCG is satisfied that UU has successfully completed an extensive programme of customer research and engagement which has resulted in a clear understanding of customers’ needs and preferences which are reflected in the Business Plan.

Executive summary

6 Executive summary

•Themostdemandingpartoftheengagement programme for UU and the CCG was the Willingness to Pay and Acceptability Testing research. There was extensive but constructive challenge with the company from the WtP subgroup and the CCG on this. AT included a first stage which tested three levels of bill impact and a final stage of testing of a single bill impact of +£9.87 (+RPI). The subgroup recommended that no further testing was needed. Although some CCG members were of the view that it would have been beneficial for the company to have tested its proposed plan, which has a reduced bill impact, it is reasonable to assume that this would have resulted in a higher level of acceptability than 76%.

•Reducingsewerfloodingbroughtstrongsupport from customers and considerable challenge from the CCG on the cost of achieving this objective. Through this challenge and learning process UU acknowledged that its initial cost assumptions had not reflected all of the properties that would benefit from the investment and a lower average cost per property was determined and a positive outcome was achieved which the CCG has endorsed. It was recognised however by the CCG that as UU continues to reduce the number of customers at risk of sewer flooding, the cost of removing each property at risk inevitably increases.

•Improvedbathingwaterstandardswillrequire significant investment by the company simply to maintain beaches to a similar standard. Research undertaken by the company showed that customers were not willing to pay for enhancements beyond the minimum standard. The outcome did however provide the CCG with evidence that UU is committed to partnership working to address environmental needs in this and other areas.

•WestCumbriawatersupplieswillbeimpacted by the need to protect fresh water mussels in the River Ehen. This has been a specific focus of UU’s customer engagement and will have a significant bill impact. The CCG was presented with the options considered by UU and support its proposal to pump supplies from Thirlmere reservoir to West Cumbria.

•TheCCGissatisfiedthatUUhasmadesignificant progress in the area of asset management and planning over the last five years which should improve its delivery programme and benefit customers and stakeholders.

•TheextensiveanddetailedreviewofUU’sproposed incentive scheme found that whilst WtP findings do provide an indication of customer priorities it does not provide evidence of customer consent for increased charges as a reward for outperformance. The scheme also highlighted that proposed rewards in respect of pollution and sewer flooding performance could be perceived as rewards for service ‘failures’. The company shared the view of the CCG that it should remove the positive financial rewards which had been proposed and the final outcome for incentives is supported by the CCG.

•TheCCGwelcomesandsupportsthedecision by the company to submit a business plan based on a lower level of WACC of 4.1%. The company responded positively to challenge internally and from the CCG to provide the lowest possible rate of return it feels able to whilst still producing a balanced plan. We are satisfied that the company has been pressed hard on the content of the business plan, on its efficiency targets and its’ financing.

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North West England: geography - economy - people - environment

GEOGRAPHYThe North West of England covers 14,165 sq km, with almost 30% of its area designated as a National Park or Area of Outstanding Natural Beauty (AONB). The region includes the Lake District, England’s largest National Park, three AONBs and one Heritage Coast within the 1,400km of coastline along the Irish Sea. It also has thirty two nature reserves and two UNESCO World Heritage Sites which are Hadrian’s Wall and Liverpool’s Waterfront.

Background

Compared to the rest of England the North West has 29% of its landscape designated as protected, compared to only 23% for England overall. This comprises 11% of Areas of Outstanding Natural Beauty and 18% of National Parks. There are also 187 Sites of Special Scientific Interest (SSSIs) designated for their geological diversity which reflect the variety and complexity of the physical landscape.

In delivering water and sewerage services within the North West UU is expected to demonstrate that it is a responsible company which understands its duties as a custodian of the regional environment.

This section of the report provides an overview of the socio economic and environmental features of the North West of England and how these influence UU business planning for the future. It also describes the changes Ofwat implemented to ensure water companies deliver business plans which reflect the needs of customers and stakeholders in the region. The section concludes with an overview of UU in respect to performance and approach to customer engagement.

Background

Part 1

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ECONOMYThe North West is the UK’s largest manufacturing region and home to some of the world’s leading companies. It has exceptional strengths in the nuclear industry employing half the UK’s civil nuclear workforce. There are also strengths in its bio-medical, digital and creative industries. These include the recent development of MediaCityUK. As a result of all this activity and infrastructure the North West of England is Europe’s 12th largest economy.

Over 200,000 businesses (registered for VAT and/or PAYE) operate in the region with a quarter of businesses in the ‘retail’ and ‘professional, scientific and technical’ industries. The North West makes a larger contribution to the UK’s manufacturing industry than any other region and has the third largest expenditure on research and development by businesses in the UK. Almost 78% of the region’s total research and development expenditure is in business. The majority of jobs in the North West are provided by the service industries while just over 10% of jobs are in manufacturing compared to 8% for the rest of the UK. This is the result of the shifting patterns of employment from traditional industries to the service sector.

Development within the North West includes one of the largest projects in the history of the UK. Atlantic Gateway, backed by Peel Atlantic Gateway, aims to develop the corridor between the Port of Liverpool and Manchester along the Manchester Ship Canal. This development will be backed by £50 billion of investment over 50 years and by 2030 will create 250,000 new jobs.

PEOPLEThe population of the North West in 2011 was 7.1 million which was a 4% growth since 2001 and represents 13% of the population of England and Wales. This is the largest regional population in the UK, outside of London and the South East, and larger than the total population in Scotland and Wales. The North West also has the second highest population density in the UK. The region’s population is projected to increase at the lowest rate of all the English regions at only 9% cent between 2008 and 2033 and is one of two regions where the working-age population is projected to decrease.

The employment rate in the North West (Q2 2013) was 69% compared with the UK rate of 70.5% and weekly earnings for full time employees stood at £508 compared to the UK median of £568.

It has been found that 52% of England’s 1% most deprived Lower Super Output Areas (LSOAs) are located in the North West and 22% of England’s 20% most deprived LSOAs are also located in the North West. This provides evidence that the North West has the highest proportion of deprivation of any English region. Nearly three-quarters of the region’s population living in the most deprived quintile live in Greater Manchester and Merseyside. The most deprived districts within the North West were Liverpool, Manchester and Knowsley which had approximately two-thirds of LSOAs in the most deprived quintile. The North West has among the highest proportions of one person households, 30% in 2010 and 7.8% of households are lone parents with dependent children.

ENVIRONMENTThe Environment Agency describes climate change as the greatest threat to life on earth. It believes that reducing greenhouse gases and the risks associated with climate change are likely to become more significant than current predictions show. The North West already has over 170,000 properties at risk of flooding from rivers and the sea. Surface water flooding will increase the number at risk. The Agency regulates 40% of greenhouse gases emitted in the North West and future regulatory changes will see this increase to more than 50% of the region’s carbon emissions covered by the EU Emissions Trading Scheme.

The North West has 29 designated bathing waters including the three major resorts of Blackpool, Southport and Morecambe and the inland bathing waters at Windermere. UU – through customer bills - will have invested around £1bn over the last 25 years and compliance with the current Directive has increased from 20% in 1988 to 82% in 2012. From 2015 the revised Bathing Water Directive brings in tighter standards for bathing water quality and will classify beaches as excellent, good, sufficient or poor. Based on the previous 4 years of data, up to half of the bathing waters in the North West are at risk of failing to achieve these tighter standards. Bacterial failures in bathing waters come from numerous sources including sewer overflows, farm animal faeces from runoff during heavy rain and toilets misconnected to the drain. The Environment Agency currently estimates that UU’s’ contribution to those failures is between 10% and 60% at individual bathing waters. The public perception is often that the problem is entirely caused by sewage and therefore ‘owned’ by UU.

Background

9Background

Price Review MethodologyINTRODUCTIONFollowing the PR09 price review in 2009 Ofwat reviewed the process by which it sets price limits for the water companies. The drivers for this review were the government review of Ofwat’s regulation of the industry, government policy on its vision for the future of the industry and proposed legislative changes. These included; increasing customer choice; enabling new businesses to enter the water market; supporting a national water supply network; and giving Ofwat a duty to take greater account of long term resilience. The changes in methodology made by Ofwat for the PR14 price review centre around three key strands; wholesale, retail and customer engagement.

WHOLESALE PR14 will be the first time Ofwat will set wholesale revenue controls, separate from retail. This change is to accommodate the planned legislative developments as competition is introduced to the non-household retail sector from 2017. Ofwat also wishes to apply targeted incentives to different sectors.

Ofwat has moved away from separate treatment of operating expenditure (OPEX) and capital expenditure (CAPEX). In future Ofwat will assess the amount of expenditure companies need through TOTEX models and assessment. Companies will be allowed to determine how much revenue is needed to finance this expenditure through a combination of ‘fast money’ (revenue) and ‘slow money’ (funded through regulatory capital value (RCV)). Companies are required to decide the composition of total expenditure (TOTEX), having regard to issues of affordability and the financing of the company.

RETAIL In the light of legislative changes in the industry Ofwat will set retail controls separately for non-household and household customers in the form of a revenue control rather than a price control. The revenue controls for retail will determine the level of retail revenue that companies will be able to add to wholesale revenue, as determined by the wholesale revenue controls.

Ofwat will set the household retail revenue controls based on the lower of the industry average cost to serve or the company’s own cost to serve. The non-household retail revenue controls will be based on the average revenue per customer type.

The most material departure from Ofwat’s previous approach is that it will no longer link the retail revenue controls to RPI inflation. Instead, the company will be able to pass on only the indexation element from the wholesale revenue through to customers. Over time therefore the retail element of total revenue will reduce in real terms.

Customer Challenge Group - North WestIn August 2011 Ofwat published ‘Involving customers in price setting – Ofwat’s customer engagement policy statement’ which set out their approach to customer engagement during the price-setting process. This was a significant change from the PR09 process and was intended to increase the level of customer engagement in business planning. Ofwat required companies to take responsibility for enabling customers and stakeholders to engage with and influence all parts of their company’s business plans. This was through:

•Directengagementwiththeirwatercompanyon issues including local services and bill impacts

•Challengingtheshapeoftheoverallplanand the way the companies met their legal obligations (for example, on drinking water quality and the environment).

•InfluencingandinformingOfwat’sdecisions.

The membership of the Customer Challenge Group has moved beyond the statutory bodies which were part of previous price reviews – Consumer Council for Water, Drinking Water Inspectorate, Environment Agency and Natural England - to include a wide range of social, environmental, business and other organisations who are representative of customer issues in the region.

Members of the CCG are:

Andrea Cook - Chair

Bernice Law - Deputy Chair, Liverpool Vision

Jacky Atkinson - Drinking Water Inspectorate

Neil Clark - Natural England

Bill Darbyshire - Environment Agency

Andrew White - Consumer Council for Water

Carol Graham - Citizens Advice

Damian Waters - CBI

Richard Jarvis - Health Protection Agency North West

Alistair Maltby - The Rivers Trust

Jenny Stuart - Liverpool Chamber of Commerce

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Joel Tagg - Department for Business, Innovation and Skills

Tayo Adebowale - North West Regional Flood and Coastal Committee(For members profiles see Appendix 1)

The key representatives from UU attending the CCG have been:

Gaynor Kenyon - Corporate Affairs Director

James Bullock - Director of Economic Regulation

Gary Dixon - Customer Services Director

Chris Jacques - Price Review Programme Director

Jo Harrison - Head of Wastewater Strategic Asset Planning

Dave Champness - Head of Water Strategic Asset Planning

Jill Pilling - Secretariat

The first meeting of the North West Customer Challenge Group took place in February 2012. The chair said that ‘the aspiration was to create a CCG where members would feel able to address issues, and challenge where necessary, so that at the end of the process the CCG would have a high level of confidence that the company’s Business Plan had the support of its customers and they could endorse it to Ofwat’. It was nevertheless acknowledged that support should not be based on the ‘lowest common denominator’, that it was unlikely that all members would agree on every issue and that it was appropriate to expose challenges both within the CCG and between the CCG and UU. The terms of reference for the group were then discussed and later agreed and are set out in Appendix 2.

Between February 2012 and November 2013 there have been 12 formal CCG meetings for all members.

In addition to the main CCG group two subgroups were established with terms of reference agreed with the group. These were a ‘Willingness to Pay’ subgroup and an ‘Environment’ subgroup. The ‘Willingness to Pay’ subgroup was chaired by Bernice Law (deputy chair) and the ‘Environment’ subgroup by Bill Darbyshire (EA). The terms of reference are set out in Appendix 3 and 4. Two other subgroups were established during the review process. First was the ‘Engineering Options subgroup’ whose focus was to understand and see evidence of UU’s solutions evaluation processes, whole life cost modelling and the management and delivery of capital programmes. The second subgroup was the ‘Incentives subgroup’ who worked with

UU to consider UU’s incentives and rewards proposals.

United Utilities OverviewBUSINESS OVERVIEWUU holds a licence from Ofwat to provide water and sewage services to around three million households and 200,000 businesses in North West England. Households pay just over £1 per day on average for the combined water and wastewater services provided and over the 2010-2015 period the customer’s average annual bill will increase by £25 when the impact of inflation is taken into consideration.

Between 2010-2015 £3.5 billion will have been invested in the company’s capital investment programme to improve the water and wastewater infrastructure and the environment across the North West. The programme covers:

•Over42,000kilometresofwaterpipes,fromCumbria to Cheshire

•Over77,000kilometresofsewers

•570wastewatertreatmentworks

•94watertreatmentworks

•189reservoirs

•Over56,000hectaresofcatchmentland

Since 1990 UU has made major improvements right across its business. With revenue from customers it has invested more than £4,000 for every household in the North West. As a result it has:

•Halvedtheamountofleakagefromnetworks, supported by the ongoing investment in pressure management and innovations in leakage detection and repair.

•Helpedimprovecompliancewithbathingwater standards across the North West which has risen from just over 21% to more than 82%.

•Improveddrinkingwaterquality,asmeasured at customer’s taps, from 99.6% to over 99.95% compliance with drinking water regulations, supported by investment in water mains replacement and improvements at water treatment works.

CUSTOMERS AND STAKEHOLDERSUU’s objectives are to continue to provide customers with high quality drinking water to meet all their daily needs and to have environmentally responsible wastewater collection and treatment at a price that customers regard as good value for money.

Background

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•Investingineducationprogrammesbothinschools and the wider community.

•Recognisingtheeffectthatitsoperationshave upon the community and environment and investing in programmes that support those affected by them.

Where the business causes disruption as part of its major capital works it invites local community groups to apply for small scale grants to support their work. Last year the business contributed to 116 groups in 10 locations across the North West. It also contributed approximately £2 million supporting local communities by providing debt advisory services and undertaking over 26,000 hours of employee volunteering. However it is clear that customers see such work as part of the role of any large employer which recognises corporate social responsibility and did not see that this was something which customers should be expected to fund.

OPERATIONAL PERFORMANCE UU’s operational performance and customer service has improved over the last few years. This improvement is evidenced through Ofwat’s customer service Measures, the service incentive mechanism (SIM). In 2010/11, the company’s performance was rated 21st out of the 21 water companies on SIM. The company worked closely with CCWater on identifying key areas where improvement was needed and developed a range of initiatives to achieve this, for example by moving all complaint handling in-house and ending subcontracting arrangements whereby telephone calls from customers in debt were transferred to Manila. By 2012/2013 it was joint 14th. Customer complaints to CCWater have continued to fall, with zero complaints warranting investigation by the CCWater in 2012/2013.

Ofwat rates the serviceability provided by a company’s assets to its customers, and the company’s operational performance across four categories covering water and wastewater infrastructure and non-infrastructure. In 2010/11, UU had one asset class, ‘wastewater infrastructure’, classified as ‘marginal’, with the remainder all being assessed as ‘stable’. However, in 2012/2013 wastewater infrastructure had been upgraded to ‘stable’ and all four asset classes are now assessed as at least ‘stable’ in line with the company’s target.

UU has met or outperformed its regulatory leakage target for the seventh consecutive

Background

Customer and wider stakeholders’ views from across the North West are being used to shape the company’s plans for the future. The views of almost 27,000 customers have been sought over the last 2 years to understand their needs and priorities. This has generated, together with UU’s ‘business as usual research and engagement’ a set of Customer Promises which will drive the benefits the business can deliver for them, for the environment and for the regional economy over the next 25 years.

These views and opinions are also influencing and shaping what the business needs to do specifically over the next five-year business plan period, from 2015-2020. The company plans to focus what is invested for customers and to make sure that it is balanced with the cost of that service, so that customers are satisfied that their bills are reasonable.

The CCG has scrutinised and challenged the company’s proposals to ensure that the views are representative of all parts of the region, for example rural, urban, coastal, that the Customer Promises have been adequately tested and adapted in light of customer views and that the contents of the Business Plan reflect the priorities of domestic and business customers.

Capital investment in the 2015-2020 period will focus on delivering UU’s five Customer Promises which have been tested with customers:

•Provideyouwithgreatwater

•Disposeofyourwastewater

•Giveyouvalueformoney

•Delivercustomerserviceyoucanrelyon

•Protectandenhancetheenvironment

Following discussions with the CCG the company concluded that it would not include its work with communities as one of its Customer Promises as it was not central to the delivery of services and part of its core business. Nevertheless the communities in which UU operate are where its customers and employees live and work, and they are vital to its business. UU believes it is important to play an active part in these communities and to do this it is committed to:

•Investingincommunitypartnershipsformutual benefit with particular focus on tackling current social issues.

•Encouragingitsemployeestogetinvolvedand make a positive contribution to local communities.

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year and has met the regulatory target every year so far in the 2010-2015 period. The company has improved its performance under the Environment Agency’s performance assessment, moving from 7th of the 10 water and sewerage companies in 2010/2011 to be ranked as an above average performer under the latest assessment.

It was important for the CCG to look at UU’s current level of performance to determine whether its proposals for 2015-2020 are realistic and sufficiently aspirational and to be satisfied that investment is being directed towards the key areas. UU measures its performance against a wide range of Key Performance Indicators (KPIs). All key business areas are assessed, from customer service to water quality, leakage performance to financial performance. Results are monitored by Ofwat, and shared with their customers, stakeholders and other regulators.

United Utilities Engagement StrategyINTRODUCTION UU customer and stakeholder engagement strategy is intended to address the expectations of Ofwat’s report ‘Involving customers in price setting – Ofwat’s customer engagement policy statement’. The CCG was provided with an overview of the proposed engagement strategy by UU at its meeting in December 2012. Since then detailed engagement has been evidenced through various research and engagement programmes which are covered in later chapters of this report. The CCG had the opportunity to comment on and shape these, making challenges where appropriate, and to attend various external events to meet with stakeholders and exchange views.

ENGAGEMENT STRATEGYThe key objectives of UU’s engagement strategy were to:

•Understandcustomersandotherstakeholders’ views and priorities in relation to the services provided by the company and its future direction and plans.

•EnsureeffectiveengagementwiththeCCG, responding to challenges where appropriate.

•EnabletheBusinessPlantobeinformedand shaped by customer and stakeholder views and priorities.

•Throughtheabove,enablethedevelopmentof a balanced plan that delivers the best achievable outcome for its customers whilst meeting statutory obligations.

•Keepcustomersandotherstakeholdersinformed on its future direction and plans.

GUIDING PRINCIPLESThe company took account of good practice guidance, including:

•“Involvingcustomersinpricesetting–Ofwat’s customer engagement policy statement” (October 2011).

•Ofwat’s“ExpectationofcompaniesandCustomer Challenge groups – Excerpts from Setting Price Controls for 2015-2020 – framework and approach – A Consultation”.

•ConsumerCouncilforWater’sexpectationson water companies’ customer research, consultation and engagement at the 2014 Price Review.

•ConsumerCouncilforWater’sresearchreport“ValueforMoney:areportonthedrivers of satisfaction in the Water and Sewerage industry”.

•UKWaterIndustryResearch(UKWIR)methodology guidance on Outcomes and Measures consultation.

•Ofwatpaperon“Lessonsfromourapproach to setting price limits (PR09)”.

•“ConsumerEngagementinDecision-Making – Best practice from Scottish Public Services”.

•CCGcontributionsonbestpractice.

In addition, the surveys were stratified in such a way that customers could be segmented and comparisons made in order to establish the priorities of different groups, including for example, domestic, business and so-called ‘seldom-heard and hard to reach’ customers. Standard segmentation included for example criteria such as age, gender, income, social-economic grouping, size of water bill, geographical location and whether water supply is metered or unmetered. This approach to segmentation was supported by the CCG. Whilst UU’s existing customer, stakeholder and community engagement is comprehensive and has clearly been part of its culture and operations for a number of years, the company also incorporated suggestions and proposals from the CCG and developed its engagement to address Ofwat’s PR14 requirements through robust analysis.

Background

13Background

ENGAGEMENT SCOPEUU’s main audiences for engagement in the Price Review have been:

•Domesticcustomers

•Businesscustomers

•Regulatorybodies(Ofwat,CCWater,EA,DWI, Natural England)

•Politicalengagement(Defra,MPs,localauthorities)

•NGOsandcommunitygroups

•Media

•Otherstakeholders:regionalfocusandengagement on key issues as appropriate

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This section of the report considers the effectiveness and extent of customer and stakeholder research and engagement undertaken by UU including both ‘business as usual’ and PR14 specific research. In total approximately 27,000 customers have been engaged by UU during the whole research programme. The CCG has played a very active and challenging role throughout the PR14 research programme and this is described within this section.

Research and Engagement

Part 2

Business as Usual ResearchUU has a number of ongoing programmes of research in addition to the specific research programmes it undertakes to address particular policy and business changes. The main focus of the business as usual research is to understand the needs and vies of its customers. As part of the price setting review the company determined that a number of these programmes were very relevant to and supported the wider engagement process for the PR14 review. Each of these research programmes is described below.

OFWAT SERVICE INCENTIVE MEASURE (SIM) SURVEYSThe Service Incentive Mechanism (SIM) is an incentive mechanism to encourage water companies to provide better service

to customers. It also allows customers to compare the performance of their service providers with others in the industry. The key objectives of SIM are to:

•reducethecustomerimpactofservicefailures by reacting quickly and being proactive

•getthingsrightfirsttime

•resolvecomplaintsfirsttime

Companies are rewarded for improving performance and penalised for poor relative performance and the service is scored based upon customer experience. The scoring mechanism is made up of a qualitative component which looks at how satisfied customers are with the way in which the company handled their query and a quantitative component which looks at the volume of customer service failures in the period.


15Research and Engagement

The key question that generates the overall SIMscoreis“Takingeverythingintoaccount,how satisfied were you with the way UU handled this enquiry/contact?” This is ranked on a scale of 1 = very dissatisfied to 5 = very satisfied.

The comparative industry positioning at April 2013 for UU was 5th out of all WASC businesses and 10th out of all water services companies. A ranking of 10th was a significant improvement on the previous year’s ranking of 21st and this has been welcomed by CCWater. However the company is not complacent and there is still much to be done if the company is to achieve its ambition of being the leading water company in the UK.

UNITED UTILITIES BUSINESS CUSTOMER RESEARCHIn November 2012 UU commissioned River Research to undertake a comprehensive research programme to understand the business customer base in more detail and allow UU to create customer segments and added value offers. This need was also, in part, a response to the potential for increased competition within the water utility sector in England in the immediate future, and partly so that the company could better organise itself to provide an improved service to its business customer base in general. The research was ultimately intended to form the basis of an actionable customer segmentation model with which to improve customer targeting, acquisition, retention and sales growth.

The approach adopted involved 663 telephone interviews with UU commercial customers. These were profiled broadly in the following way:

•80multi-sitebusinesses

•72Large,Majorbusinesses

•122Small,Majorbusinesses

•389SmallMediumSizeEnterprises(SMSEs)

The respondents were those individuals who had influence over the decisions about which water and wastewater service provider their company use, whether in single or multi-site businesses. The key actions resulting from this survey were:

•Developmentofacommercialcustomersegmentation hypothesis.

•Validationbyanexercisewhichallocated‘look-alike’ accounts from the commercial customer database into the proposed segments.

•Theresultingsegmentationmodelisbeingused to drive Customer Relationship Management (CRM) strategies by the Business Customer Management team.

This will provide the basis for the Business Plan and activities to deliver profitable growth from the company’s activities with commercial customers over the coming years.

“The only communication I get is the bill and a leaflet. Customers need more frequent and better communication.”

“How much is returned to the investors? Be transparent about the balance between customers and investors.”

UNITED UTILITIES CUSTOMER SATISFACTION SURVEYS (CSAT)UU carries out a monthly customer satisfaction survey that tracks customer responses to questions about their experience in having queries and issues resolved. The survey is based upon the same set of questions as are included in the Quarterly Ofwat survey, and the activity is managed by the same research company as Ofwat commissioned for the Quarterly survey. The monthly CSAT survey provides UU with a continuous ongoing indication of customer satisfaction and an opportunity to address any issues in advance of the Ofwat Quarterly study.

The key messages for UU from recent surveys are that although steady progress is being made in all areas, there is still room for continuous improvement, especially in consistency of the Wastewater operations scores. Commercial customers are tending to score more severely with wastewater again being the area of most opportunity for improvement.

The actions taken by UU are for survey results to be reviewed by their internal Customer and Network Operations boards, with specific actions being driven out as a result.

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CUSTOMER OPINIONS FOCUS GROUPSFollowing a period of substantial organisational change, including the sale by UU of its electricity business in 2010, the company commissioned DJS Research Ltd to undertake research to help understand customer opinion regarding its continuing operations. The research took place in March 2011. Questions focused on customer perceptions, what they wanted or expected from UU as their water company, were they advocates of the business and what they think of the company branding and name.

The programme involved establishing five focus groups across the region with between 8 and 9 attendees at each group; a £30 incentive fee was paid for attendance. The process of selecting participants ensured a mix of young to old people and from both urban and rural environments.

The key findings and conclusions from the exercise were:

•UUisseenaslargelyafaceless,unknownbusiness entity encouraging little in the way of loyalty from customers.

•Thosewhodohavesomerecallknowthebusiness chiefly from its water process heritage, although a minority thought that it had business interests nationally.

•Averysmallnumberofrespondentshadcontact with the company, although a proportion of these felt the experience to have been poor.

•Themajorityofrespondentshadambivalentfeelings towards UU.

In terms of significant areas of interest customers;

•wantedtoknowhowtheirmoneywasbeinginvested

•wereinterestedtolearnwhatUUcoulddoin the community and for the environment

The key messages for UU were:

•Thecompanyneededtoworkhardtoincrease its brand image and the level of positive awareness from its customers and the public.

•Thebusinesscoulddobetterincommunicating its plans, opportunities, and successes to help customers understand the contribution the business makes to individuals, businesses and the community.

•Thereisaneedtounderstandhowthebusiness invests in its processes and in the environment.

•Customersarereceptivetoinformationabout water efficiency.

“It’s nice to be asked my option.”

The action taken by UU following this research was twofold. First a Brand Tracking survey was put in place to monitor Brand Personality, Brand Health and Advertising Stand-out to provide a view of Customer Opinion over time. Secondly campaigns have been generated to concentrate key messages such as Reservoir Safety and Leakline through the sponsorship of Granada Weather.

UNITED UTILITIES BRAND TRACKINGThis research programme based on customer surveys commenced in October 2011 with ‘Wave 1’ and continues to date with ‘Wave 5’ being completed in May 2013. The programme is designed to monitor the health of the UU’s brand and to provide insight into the effectiveness of marketing programmes implemented by the company in the form of a brand tracking study.

Wave 5 involved 1100 online interviews, split between 2 surveys, 900 consumers and 200 SME and medium size businesses. Geographically the interviews were targeted to provide a representative spread across Greater Manchester, Merseyside, Cumbria, Lancashire and Cheshire. In addition the sample ensured an urban and rural mix together with a balance between metered and non-metered customers.

The key messages from the research to date are:

•OverallsatisfactionwithUUhasrisenandisup year on year.

•Recentcampaignshavemadesomeinroads in changing customer attitudes to the brand, but overall customers are still ambivalent towards UU.

•Awarenessofcoreservicesisreasonablyhigh, although there continues to be some confusion as to the range of services the company provides.

•UUcompareswellwhenrankedagainstapeer group of top FTSE 100 service focused companies, but its brand personality traits are somewhat functional rather than having an emotive or advocacy related dimension.

•Appreciationofthecoreservicesofferedbythe brand appears to have risen, potentially as a result of the sponsorship around Granada Weather programming.

•Thesponsorshipcampaignshavemadeapositive impact on perceptions; seeming to be beneficially influencing the perception of ‘value for money’ and helping consumers appreciate the brand.



UNITED UTILITIES SOCIAL TARIFF RESEARCHThe independent review of charging carried out for government by Anna Walker in 2008/9 acknowledged the growing problem of water affordability. The Government subsequently introduced legislation under the Floods and Water Management Act (2010) which enabled companies to operate local social tariff schemes funded by other customer bills. Companies in England are expected to consult with CCWater as they develop social tariff proposals and test the acceptability of proposals with their customers.

In order to better support customers who struggle to pay their water bill, UU has investigated the creation of a social tariff that takes into account customer perceptions, principles and preferences for cross subsidisation. Given the potentially sensitive nature of such a proposition and the many criteria that could be flexed to optimise the way it could operate, it was considered vital that a considered research programme should be undertaken that captures and explores the nuances in detail. The research and development of a social tariff has been supported by CCWater and is ongoing at the time of publication of this report.

In April 2013 UU commissioned ‘Box Clever Research’ to conduct a research programme with the aim of providing recommendations as to how to proceed, as well as measuring the likely customer acceptability ratings for various scenarios of social tariffs and the likely cross subsidy that would be borne by the customer base at large. The research programme reflects the views of over 2000 domestic customers.

Qualitative customer research objectives included:•Exploringconsumerunderstandingofthe

different facets of a social tariff scheme.

•Providinginsightintothecorrectlanguage to use with consumers to clearly communicate how the social tariff will work.

•Exploringwhatcustomersperceivetobeideal / acceptable formulations.

•Providingaclearpictureofhowperceptions

“This I think shows that finally a big company is focusing on its vulnerable customers which is admirable.”

towards a social tariff proposition differ across different customer groups (by eligibility, affluence, rural vs. urban etc.)

•Quantifyingthelikelyacceptanceratethatconsumers display towards a social tariff solution.

Qualitative customer research findings:•Themajorityofcustomershavemixedviews

about the concept of social tariffs

•Mostdonot‘begrudge’helpingthosein genuine need, but feel that it is the government’s role to provide this type of support and not other customers.

•Intermsofthelevelofsupportthatshouldbe provided, the feedback was that it should be substantial enough to make a real difference, but should be supported by advice on water efficiency to change wasteful behaviours

•Crosssubsidyvaluesseemedtohaveaceiling of about £1 per month before they appeared significant to customers.

Quantitative customer research objectives:•Quantifytheproportionofcustomerswho

find the potential social tariff options to be acceptable.

•Explorehowthislevelofacceptabilityvariesacross different groups of consumers.

•Assessconsumersbroaderattitudestotheconcept of a social tariff and who they think would be most / least deserving.

•Evaluatearangeofpotentialcommunications messages that could accompany the introduction of a social tariff.

Quantitative customer research findings:•Howdoconsumersperceivetheirfinancial

situations and what is the significance of the water bill?

- 15% feel that money is extremely tight and they struggle to pay bills. This is higher for council tenants, disabled people who use more water and those in receipt of benefits.

- 1 in 4 agrees that they worry about not being able to afford their water bill with just over 1 in 10 agreeing strongly that they already can’t afford it.

•Whatproportionfindsasocialtariffacceptable?

- Rural customers are more likely to find all of the scenarios acceptable; those in private rented accommodation and customer with meters are least likely to find scenarios acceptable.

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“It shouldn’t just depend on just one network to supply the shortfall (at Ennerdale). If there’s a shortfall in different areas they should be looking at the whole of the UK, every corner of the UK where it could pump in emergency supplies.”

- Level of acceptability is heavily driven by the contribution required.

- Only 7% were aware of the possibility of a social tariff being introduced prior to taking part in the research

•Whoshouldqualifyforasocialtariff?

- The majority of consumers believe that water meter installation should be required.

- Those on pension credit and incapacity benefit are the groups who consumers believe most strongly should qualify for a social tariff.

•Whichmessagesresonatemostwithconsumers?

- Messages related to helping pensioners and those with medical conditions is most motivating.

In light of the results of the research UU, in consultation with CCWater, decided to revise its proposals and undertake further customer research in November 2013.

UNITED UTILITIES DROUGHT PLAN RESEARCHIn March 2011 UU commissioned ‘DJS Research Ltd’ to canvas customer views to aid future water resources management planning. Questions related to the timing of restrictions, priority of restrictions, relative value of hosepipe bans, exemptions and communication preferences.

The methodology involved 400 structured interviews with domestic customers, 50 structured interviews with business customers and 12 semi-structured interviews with key stakeholders.

The key messages were:

•NoneoftheusesofwaterlistedundertheFlood and Water Management Act are of great importance to domestic or business customers.

•Customersseethelinkbetweenconservingthe region’s water and the restrictions, but they question the impact that not watering their gardens or cleaning their car would actually have

- It is therefore more of a necessity for UU to inform and educate its customers as to the importance of such restrictions in good water conservation practices.

- Customers are receptive to increased efforts to generally help and inform them on effective water saving strategies.

- It is unlikely that many domestic customers, business or stakeholders

would object to any restrictions should they become necessary, although the longer they go on the more likely that customers will be concerned that they are receiving a reduced or deteriorating service for their money.

The findings from this research have helped to inform the draft Water Resources Management Plan.

UNITED UTILITIES ENVIRONMENT AND CLIMATE CHANGE RESEARCHUU conducted an analysis of the customer research held against the emerging themes of the strategic direction and the evolving Business Plan for the Price Review process. As a result it was decided that further research to directly canvass customer opinion of environmental and climatic aspects of its activities would be helpful to inform future planning. 1,010 online interviews took place with domestic customers and 250 telephone interviews with business customers.

Research findings:

Water services•Themajorityofdomesticcustomersfeel

that their water supply is safe and secure over the long-term.

•Iftapwatersmeltstrange,orwasdiscoloured, the majority of domestic customers would think it unsafe to both drink and to wash with.

•Forbusinesscustomers,strangesmellingwater is a larger cause for concern than discoloured water.

The environment•Two-fifthsofdomesticcustomersthinkUU

is responsible for ensuring that beaches in the North West are clean.

•Residentialcustomersthinkitisimportantfor UU to concentrate on improving the environment.


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Customer’s priorities•Mostresidentialcustomerswouldwelcome

information from UU on saving energy, fixing leaks, and saving water.

•Businesscustomersaremostinterestedinreceiving energy saving advice.

•Energybillsandefficiencyareabiggerconcern to businesses than water bills or efficiency.

•Ofthetenareastestedforimportance,helping businesses manage risks caused by climate change is seen as least important for UU.

Funding•Customersaremorewillingtoprioritisefixing

leaks than they are reducing waste.

•AclearmajorityofallcustomerssayUU should meet, not exceed, regulatory requirements to minimise bills.

•99%ofcustomerssayitisveryorquiteimportant to try and keep bills at their current levels. Offering improved services is less important.

The insight will be used to help develop UU plans and approach to aspects of their activities that are concerned with, or have an impact on, the environment or climate change.

CCG observations on the BAU researchThe CCG specifically asked the company to bring the full range of its research activities to the group so that it could look at customer perceptions of UU and where it is starting from in developing its Business Plan and examine particular research projects in detail. It is clear that the company has and continues to conduct a wide range of research programmes. This includes addressing specific issues such as ‘drought plan research’ in addition to monitoring performance and customer views on an ongoing basis. The response to the research on social tariffs was of particular interest given that Defra


“I don’t think it should be the sole responsibility of UU but it would be nice to go to a nice beach and go for a nice walk and not be afraid of going in the sea because you’re going to get something.”

has asked all companies to look at the parameters for developing a social tariff.

The CCG noted that there are generally good levels of satisfaction with the reliability of services provided by UU and that customer service performance is improving well. There is however a need for the company to improve customer perceptions of the value for money of the services it provides. This should be a key consideration in the Business Plan developed by the company. The company is also operating in a challenging economic environment and will need to continue to provide a range of innovative and sensitive solutions to support people who have difficulty in paying their bills.

PR14 ResearchCUSTOMER PROMISESAs part of the PR14 review process UU is expected to demonstrate that it has researched and understands customers’ priorities and that it has developed a Business Plan which reflects these, including being able to deliver planned investment in a cost efficient manner to meet customer expectations around tariffs and bills.

A key research study was commissioned with River Research - an independent market research agency - to listen to customers and understand their needs and what they would be looking for in ‘Customer Promises’. The study involved showing customers some initial ideas of potential Customer Promises, to understand which parts of these were relevant, and how potential Customer Promises could best be communicated back to customers in a meaningful way.

At the September 2012 CCG meeting UU provided a high level outline of their approach to customer engagement developing the Customer Promises. CCG challenged the extent and degree of customer engagement and wanted to ensure the company’s submission reflected the priorities of all customers. UU agreed to identify any gaps in the engagement process. There was also a challenge that as only 2 people had turned up for the ‘Young Singles’ focus group this was not a representative sample. UU agreed and conducted telephone surveys with Young Singles to provide a suitable sample size.

“Everybody is entitled to good clean drinking water.”

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UNITED UTILITIES INITIAL CUSTOMER PROMISES

The following UU draft Customer Promises were presented to CCG in September 2012 as a starting point for the customer research and engagement process on Customer Promises.

Draft domestic Customer Promises

Giving you value for money

Delivering service you can rely on

Providing great water

and wastewater services

every day

Protecting and enhancing the environment

Supporting our local

communities

Draft business Customer Promises

• Prices are fair and affordable

• Clear about our charges

• Offer support with payment options

• Using water wisely

• Prices that are competitive

• Clear about our tariffs and charges

• Automated billing services

• Contact straight through to a person

• Take ownership of an issue

• Resolve it there and then

• Keeping you informed of progress

• Communicate clearly and simply

• Manage your account online

• Reliable service

• Take ownership of an issue

• Resolve it there and then

• Keeping you informed of progress

• Value added services

• Manage your account online

• A reliable supply of great water

• Remove wastewater efficiently

• Inform you of supply interruptions

• Respond quickly in a crisis

• Ensure long term water supplies

• A reliable supply of great water

• Remove wastewater efficiently

• Help you to reduce consumption

• Inform you of supply interruptions

• Do it out of hours

• Respond quickly in a crisis

• Protect the environment

• Improve the natural environment

• Reduce our carbon footprint

• Protect the environment

• Provide innovative solutions to using

• water and wastewater wisely

• Help to reduce your carbon footprint

• Play a key part in the communities

• Encourage employee involvement

• Support the North West economy

• Play a key part in the communities

• Support the North West economy

• Working in partnership



CUSTOMER RESEARCH

The research involved qualitative and quantitative stages with the aim of establishing the degree to which the Customer Promises that emerged from the qualitative research stage could be supported and validated by a larger, more inclusive quantitative stage.

QUALITATIVE RESEARCH (OCTOBER 2012)

The study involved showing customers some initial ideas of potential Customer Promises in order to understand which parts of these were relevant, and how potential Customer Promises could best be communicated back to customers in a meaningful way. A wide range of domestic and business customers in both urban and rural areas were consulted. This resulted in an understanding of their needs and views on potential promises, and confirmed the most appropriate wording and the sense of what they were intended to convey.

To ensure that a broad spectrum of customer opinions was canvassed, the sample was carefully chosen as follows:

•Abroadmixofdomesticlifestages

•Amixofurban/ruraldomesticcustomers

•Amixofbusinesscustomersize(Small/Medium / Key Accounts)

A combination of 8 focus groups and 10 telephone interviews were undertaken: 6 groups with domestic customers, 2 groups with business customers and 10 telephone interviews with business customers.

QUANTITATIVE RESEARCH (NOVEMBER 2012 - JANUARY 2013)

A large number of domestic and business customers were engaged to validate the proposed Customer Promises, and understand how important each promise is. The research included non-customers to understand if the North West has particular needs different from the rest of the UK. Interviews were 20 minutes in length and conducted mainly on-line. For domestic customers the interviewee was the bill payer. For business customers the interviewee was the person who influences the decision about which water and wastewater service provider their company uses. In total there were 1437 interviews. These comprised:

873 – Domestic UU customers218 – Domestic non-UU customers214 – Business UU customers132 – Business non-UU customers

STAKEHOLDER ENGAGEMENT EVENTS (MARCH - APRIL 2013)

Following the further development of Customer Promises from the qualitative and quantitative research the findings were tested at five county level stakeholder events. These were held at Warrington, Manchester, Leyland, Penrith and Liverpool and attended by 150 stakeholders from both the public and private sectors. Each event also included representatives from the CCG. The Outcomes from these events are described in the Stakeholder Engagement chapter.

The CCG provided feedback to UU on some of the engagement events, most of the comments being very positive. The challenges to the company included:

•Theneedtoincludethosedifficulttoreach communities who may not have ready access to the internet.

•Theneedtoensurethatabalanceofviews had been sought from different communities to ensure that the promises represented a broad range of customers.

•Thatthepromisesreflectedcustomerexpectations of the company

•ForonesessionatKendalonly2peopleturned up against the 5 who said they would. River Research undertook 5 telephone interviews to address this shortfall.

QUALITATIVERESEARCHFINDINGS

Customer perceptions: •Itwasconfirmedthatdomesticcustomers

were generally positive about UU.

•Forbusinesscustomers,UUwasseenasan important, but sometimes silent, partner.

•UUappearstogettheimportantthingsrightand does so consistently.

What UU does well:•Greatqualitywater.

•Consistentsupplyofwater.

•Basicwastewaterservicesworkwellconsistently.

•Friendlystaff.

•Caresaboutitsimpactsontheenvironment

•Costsaregenerallyseenasreasonablebydomestic and small business customers.

•LargebusinesscustomersthinkUUhasrealexperts that can talk their language.

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What UU can improve:•Demonstratingthatitschargesarefair.

•Makingbillinglesscomplex.

•Helpingallcustomerstoconservewaterand reduce bills.

•Ensuringthatcustomerservicerepresentatives always listen.

•Providinga’joined-up’responsetoproblems.

•Treatingbusinessesasindividuals.

•Providingsimpleandgoodvalueeffluentcharges.

•Offergreaterprotectionfortheenvironment.

•Providingflexibilityinpricestructures/tariffs.

Customer generated promises:•Domesticandbusinesscustomers

spontaneously suggested similar Customer Promises to the initial hypothesised 5 promises. In particular, customers wanted ‘value for money’, ‘good customer service’ and a ‘reliable supply and removal of wastewater’.

•Domesticandbusinesscustomerswerethen shown UU’s 5 hypothesised Customer Promises. Customers thought these relevant and appropriate strategic goals.

•Customersmaderecommendationsaboutthe language of the promises, and also supplemented and refined them.

QUANTITATIVERESEARCHFINDINGS

There was customer support for all 5 promises

•Thetop2CustomerPromisesforbothdomestic and business customers were ‘Giving you value for money’ and ‘Providing great water and disposing of wastewater every day’. For UU domestic customers both of these promises were seen as equally important.

•ForUUbusinesscustomer’svalueformoney is the more important promise.

•‘Supportinglocalcommunities’wasdefined as ‘important’ by over 4 out of 10 customers. This promise had lower importance for customers who are dissatisfied.

The overall importance of the promises was broadly the same across customer life stages and urban / rural areas.

•Althoughthequalitativeresearchstageshowed that customers in different life stages and in different urban / rural areas have slightly different opinions and needs, they broadly agreed when coming to rating each promise. The one exception to this was young singles and middle-aged singles who both rated ‘Protecting and enhancing the environment’ and ‘Supporting local communities’ lower than other customer life stages.

•Thereweresomesmalldifferencesinterms of what customers wanted within each promise. For example, people in an urban area were more likely to want online account management.

Overall, customers felt that the UU promises and their constituent elements were comprehensive. In most cases, customers could not think of any missing promises, or missing elements from the refined Customer Promises. The two most frequently mentioned missing elements (mentioned by a very small number of customers) were:

•Apledgetofixleaksforthepromisesof‘Providing great water and disposing of wastewater every day’ and ‘Protecting and enhancing the environment’.

•HavingaUK-based/localcallcentrefor‘Delivering customer service you can rely on’.

The lowest scoring customer promise – ‘Supporting local communities’ – needs to be better understood and separated from the delivery of water and wastewater services.

•Supportinglocalcommunitieswasendorsed by over 4 out of 10 customers. However, qualitative and quantitative insights suggest that this promise needs to be carefully handled with customers. There is a concern amongst customers that this promise might cost customers money in a difficult financial climate.

•Customersaremostreceptivetothispromise when it focuses on UU’s area of expertise – helping people affected by flooding, educating people on responsible water usage and providing apprenticeships for school leavers and graduates.



Customer reaction to each promise

Customer Promise

Elements of the customer promise which were seen as important (75%+ stated were important)

Domestic Customer Business Customers

Providing great water and disposing of wastewater every day

•Deliveringareliablesupplyofwater•Respondingquicklyinacrisis• Deliveringhighqualitywaterthattastesgreat• Removingwastewaterefficiently,safelyandresponsibly•Ensuringthereisasustainablesupplyofwaterforthefuture•Tellingyouinadvanceofanyinterruptionstoservice,and

keeping you informed of progress

•Deliveringareliablesupplyofwater• Deliveringhighqualitywaterthat

tastes great•Respondingquicklyinacrisis• Tellingyouinadvanceofany

interruptions to service, undertaking necessary work out of hours, and keeping you informed of progress

•Removingwastewaterefficiently,safely and responsibly


•Ensuringourpricesarefairandaffordable•Ensuringweareclearaboutourcharges• Makingsureyoupaytherightamountbyhavingaccuratebills

and regular meter readings• Givingyoueasytounderstandguidesonhowmuchwater

costs• Reinvestingyourmoneytoensureagreatwaterprovisionand

wastewater services in the future• Offeringpaymentoptionstosuityourcircumstances

• Givingyouexperthelptokeepbillslowbybeingwaterefficient

•Makingsureyoupaytherightamount by having accurate bills and regular meter readings

•Ensuringweareclearaboutourtariffs and charges for water and wastewater services

Delivering customer service you can rely on

•Acknowledgingyourproblemsandtakingthemseriously•Tryingtodoeverythingwecantoresolveaproblemthereand

then•Communicatingwithyouclearlyandsimply•Makingiteasyforyoutodealwithusi.e.email,phoneetc.• Keepingyouinformedofprogresswhentryingtoresolve

problems•Ensuringyougetstraightthroughtosomeonewhenyoucall

us•Ensuringwetakeownershipofproblems•Proactivelycontactingyouwhenwespotaproblem•Dealingwithyouasanindividual

•Deliveringyoureliablecustomerservice

•Makingiteasyforyoutocontactusi.e. phone, email etc.

•Keepingyouinformedofprogresswhen trying to resolve problems

•Doingeverythingwecantoresolvea problem there and then

•Ensuringwetakeownershipofanyproblems

•Proactivelycontactingyouwhenwe spot a problem


•Doingallwecantoprotectandimprovethenaturalenvironment under our control none

Supporting local communities

•Helpingpeopleaffectedbyflooding

•Helpinglocalcommunityareasaffectedbyflooding

•Helpingpeopleaffectedbyflooding•Helpinglocalcommunityareas

affected by flooding•Educatingchildrenonresponsible

water usage

STAKEHOLDEREVENTSFINDINGS

Five county level events were held and at four events participants were randomly divided into two groups. (Liverpool attendees were fewer

than other events and the format of the day was modified to reflect the lower numbers.) Both groups were asked to score their least important and most important Customer Promises. The results are shown below:

Least important customer promise

Delivering customer service you can rely on7 groups

1 group

6 groups

1 group

1 group





Most important customer promise

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CCG members questioned if customers may have had a different view regarding ‘communities’ if the UU funding had been seen as coming from the company out performance rather than possibly being regarded as a supplement on bills. They welcomed the company’s commitment to the local community and suggested they consider how this important aspect of their role within the region is communicated. UU’s response was that although ‘supporting local communities’ was not to be a customer promise it had not changed their commitment to current and future involvement in this area. Within the Strategic Direction Statement these commitments are evidenced by:

•Supportingapprenticeshipsandgraduate programmes.

•Helpingbusinesscustomerstoputsustainability plans in place to improve their efficiency and resilience.

•Promotingwaterefficiencythrougheducation and engagement programmes.

CUSTOMER PROMISES AND THE STRATEGIC DIRECTION STATEMENT

UU’s revised Customer Promises were used as the foundation for their Strategic Direction Statement: Playing our part to support the North West1. This document sets out the five promises and Outcomes to be achieved over the next 25 years. A summary of these are shown below.

1 United Utilities draft SDS consultation document

The area events also invited participants to state what they believed were the most important aspects of each customer promise. The key feedback was:

Disposing of wastewater

Delivering customer service you can rely on




Bills for you and future customers are fair

You have support if you struggle to pay

The North West’s economy is supported by our activities and investment

You’re highly satisfied with our service and find it easy to do business with us

Your drinking water is safe and clean

You have a reliable supply of water now and in the future

Your wastewater is removed and treated without you ever noticing

The risk of sewer flooding of homes and businesses is reduced

The natural environment is protected and improved in the way we deliver our services

The North West’s bathing and shellfish waters are cleaner through our work and that of others

Our services and assets are fit for a changing climate and our carbon footprint is reduced


Delivering service you can rely on


Disposing of wastewater


Stakeholders saw this as less important but felt striking the right balance was important.

Stakeholders highlighted the need to improve communication and work more closely with organisations.

Stakeholders felt very strongly that we should be maintaining current drinking water quality and not improving it.

Stakeholders felt very strongly that we should improve our wastewater services, in particular sewer flooding.

Stakeholders felt that this was the most important role that the company have to play in the North West.

DEVELOPMENTOFTHEFINALCUSTOMER PROMISES

UU presented a final set of Customer Promises to CCG in April 2013 for discussion and approval. The most significant changes were to remove ‘supporting our local communities’ as a customer promise and split ‘providing great water and wastewater services every day’ into two promises ‘providing great water’ and ‘disposing of wastewater’. UU said that these changes reflected the views of customers from their extensive research and engagement process.



CCG observations of Customer Promises

UU appear to have taken a comprehensive and logical approach to identifying the needs and aspirations of a statistically representative sample of domestic and business customers. The findings are close to those assumed by UU at the start of the process which suggests a good existing understanding of its customer base, however it has also listened to customers and to the CCG and made adaptations where necessary. Examples of this include:

•Changingthepromise‘DeliveringServiceyou can rely on’ to ‘Delivering customer service you can rely on’. Customers wanted the word Customer adding to make it absolutely clear that Customer Service is a priority for the company.

•‘Supportinglocalcommunities’wasremoved as a promise as customers felt that this was not a priority for them and that if the company deemed it to be important then they should fund it.

•Customersdididentifysomegapsintheattributes to Customer Promises, these have been included in the Strategic Direction Statement;

- Providing a UK/Local call centre.

-Fixingleakstoconservewater.

•Someadjustmentstowordingandlanguage in the on-line surveys was made following customer feedback;

- Customers were keen to see the company offering apprenticeships and graduate schemes.

- Business customers wanted to see how UU could help them reduce their bills through more sustainable use of water and disposal of wastewater.

- Business customers wanted the company to demonstrate that UU will share their knowledge, expertise and best practice by working in partnership with local businesses and suppliers.

WILLINGNESS TO PAYINTRODUCTION

Willingness to Pay and Acceptability Testing were the most demanding and critical parts of the CCG engagement process. This chapter describes the key stages of the research and engagement programme and the contributions and challenges made by the CCG. During the early stages of this programme the CCG believed there was a need for increased engagement with the CCG members. In order to address this and oversee the willingness to pay programme the CCG, with UU’s support established the WtP subgroup in June 2012. The sub-group met 17 times during the development and delivery of UU’s research programme. The group actively discussed, reviewed and challenged the whole process and contributed to the design and approach of the research, reporting back to the main group on a regular basis. WtP group members and other CCG members observed focus group sessions during the design and implementation phases to understand how customers were responding and to ensure that they were satisfied that the development of the research programme was grounded in customer views.

Ofwat’s customer engagement policy sets out the key requirement of ‘customers being at the heart of the price-setting process’ to ensure that the Business Plan proposals are ‘acceptable to customers’. UU approach to addressing this requirement was presented to the CCG in May 2012. This outlined three main phases of work covering the Customer Priorities, WtP and AT. Research on Customer Priorities was undertaken and followed by 2 phases of the WtP programme, consisting of a pilot stage followed by the main research. The WtP work was followed by 2 phases of AT which were intended to establish the extent of customer support for the company plan. Economics for the Environment Consultancy (eftec) and ICS consulting carried out the research programme on behalf of UU.

“The costs required for improving water quality for use other than drinking aren’t necessary; water is being over-treated. Internal sewage flooding, with sewage in your house, Would be a major issue for me. Dealing with that should be a top priority.”

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CUSTOMER PRIORITIES RESEARCH (DECEMBER 2011 – JULY 2012)

Prior to WtP and AT research UU undertook domestic customer research with two objectives. The first was to explore Customer Priorities in terms of their water and wastewater services, and thus determine how the company might respond to future challenges. The second was that it wanted to trial a number of different methods of conducting research in order to understand which worked best at eliciting customer’s views on complex subjects. Two pilot focus groups were run, followed by 12 focus groups involving 85 customers. Four research methods were tested.

In June 2012 there was a challenge from the WtP subgroup regarding the need for greater involvement in the focus groups since these would identify the attributes which would inform the pilot stage of WtP research. Members had not been given the opportunity to attend. UU agreed to run two further focus groups in July enabling subgroup members to attend and so ensure there was a robust approach to customer research that the CCG was content with right from the outset.

The main themes tested in the focus groups were:

•WhatelementsoftheserviceUUprovidesare most important to customers?

•Whatareacceptablelevelsofserviceexperienced by customers?

•WhatdocustomerswantfromUUoverthelong term?

•Puttingcustomersasdecisionmakers-what would they do?

Feedback and lessons learnt from the research groups included:

•CustomerswereencouragedthatUUwereseeking their views.

•Themajorityfeltthesessionswouldhaveanimpact on UU’s decision making.

•CCGobserverswereconcernedthatthemethod would not be as successful with lower socio-economic groups.

•Participantsfounditdifficulttoproject25years ahead.

•Prioritieswerelooselydefinedanditwasdifficult to understand the implications of decisions.

The outputs from the research programme were a list of the most important attributes customers expected of their water company. These were used to in the WtP and AT research programmes.

WILLINGNESS TO PAY RESEARCH PILOT STUDY (SEPTEMBER 2012 - OCTOBER 2012)

The pilot was the last stage of the design and testing phase of the WtP study and involved field testing the full stated preference survey with a small sample of domestic and business customers. The WtP subgroup members were present at these focus groups.

ForthepilotstagetheCCGobservationsand challenges included:

•Stressingtheneedtoavoidjargonandoverly technical language to ensure customers understood the questions being asked, including the definitions of attributes.

•Ensuringthatimagesandwordsusedinthe questions did not contain any bias.

•Askinghowpeoplewithnosewerflooding experience could judge their response to this type of service failure.

•Thetreatmentofleakageasanattribute.A key challenge from the CCG was made at the results stage when the differences between online and face to face CAPI (computer-assisted personal interviewing) were found to be significant. UU and the subgroup explored the methodology and evidence from the market research. It was jointly agreed that there was no right or wrong answer and that both streams of results should be maintained and the findings reviewed separately at the end of the research stage. The research consultants also confirmed that the results reflected known behavioural patterns.

MethodologyThe research covered three separate groups of customers. These were:

•DomestichouseholdsusingfacetofaceCAPI - 55 respondents.

•Domestichouseholdsviaonlinesurvey-211 respondents.

•Businesscustomers-22respondents.

In order to reduce the risk of survey fatigue the attributes being tested were divided into three blocks and customers were asked to review and respond only to two blocks. The three packages were ‘water services’, ‘wastewater services’ and ‘environmental services’.



Research resultsCustomer perceptions:

•Bothdomesticandbusinesscustomersreported high levels of satisfaction with current service levels for water services (80.6%).

•Onlinerespondentswereonaveragelesssatisfied with current service levels for wastewater and environmental services.

•Ahighproportionofbusinesscustomersfeltthat wastewater services needed improving.

•Thedomesticonlinesamplehadanoticeably lower level of satisfaction compared to the CAPI survey.

•Forcombinedsamplesthequalityoftheriver environment, number of pollution incidents and UU’s response to problems had lower levels of customer satisfaction.

Customer experience:

•Reportedexperienceofservicefailuresislow.

•Concernabouttheaestheticqualityoftapwater is the most common issue.

•Limitedexperienceoflowpressure,interruptions to supply and odour from sewage treatment works.

Key messages:

•Wastewaterservicesappearedtobethearea where there is most concern.

•Giventhelowlevelofcustomerexperienceof service failures it was considered important to set the scene sufficiently in subsequent surveys so customers can make more informed choices.

CCG members did observe from the results a high level of concern about the aesthetic quality of tap water. The DWI noted this and said they expected UU to treat this as a high priority.

WILLINGNESS TO PAY RESEARCH - STAGE 1 (DECEMBER 2012 - JANUARY 2013)

The key objective of this phase of the research was to provide customer valuations of potential changes to service levels across the ten different water and wastewater attributes. This was achieved through measuring the value of a theoretical change in the level of service.

An eftec presentation to the WtP subgroup hadpreviouslyexplainedthat“WtPwasameasure of customer benefit or dis-benefit experienced from service improvements or deteriorations. The way in which customers value services was not an explicit indicator of acceptability or affordability of changes

in customer bills. It did however provide a broad indication as to the scale of customer values of particular attributes and potential changes in service provision”. The WtP subgroup challenged UU and their consultants to ensure the questionnaire was developed without using the words ‘willingness to pay’ to reinforce the message that the research was about how customers value their service and not about how much they were prepared to pay for any improvements. UU used the results to determine the cost and benefits of investments and to identify the optimal investment programme.

The attributes used for the main survey were:

•Unexpectedinterruptionstosupply

•Hosepipebans

•Discolouredtapwater

•Tasteandodouroftapwater

•Internalsewerflooding

•Externalsewerflooding

•Nuisancefromsewagetreatment

•Riverwaterquality

•Bathingwaterquality

•Pollutionincidentsfromsewers

The subgroup was fully involved in the development of the stage 1 research. One of the key questions asked was how the process addressed the issue of where the company is driven by statutory drivers and there is no choice about meeting future compliance targets. UU agreed to address this by making the distinctions clear, ensuring there were no leading questions and changing some of the pictures used to support the questionnaire.

Another key input from the WtP subgroup was the review of scripts and pictures to be used by researchers in asking customer questions and illustrating examples such as sewer flooding. Some changes to these were requested by the subgroup and UU responded positively.

AttheCCGmeetinginFebruary2013members raised their concerns with UU on the use of the title ’Willingness to Pay’, believing this could be misleading. It was recognised that the terminology was widely accepted by UKWIR but the CCG thought there was a need to consider alternative titles. At a subsequent CCG meeting it was agreed by the CCG and UU that the title would need to be retained for the current price review but should be re-visited in the future by Ofwat and the industry.

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Methodology1600 surveys were conducted incorporating both business and domestic customers. 50% of these were domestic using CAPI; just over 25% were domestic on-line and just under 25% business on-line. Domestic customers were segmented based on age and socio economic groups. Business customers were segmented by size of bill and SIC code. The geographical spread of survey respondents was throughout the whole of the North West region and was representative of the spread of the customer base. The ten attributes were tested together with options for associated service levels.

Research resultsStage 1 results were presented to the CCG in March 2013 and included the following key messages:

•Resultsshowhouseholdsvalueimprovements in most tested attributes.

•Critically,allcustomershighlyvalueavoidance of deterioration in service levels.

•Businesscustomersonlyvalueafewservice improvements (taste and odour of tap water, internal flooding, and pollution incidents) but do place a value on avoiding deterioration in all aspects.

•Domesticcustomersdidnotvaluefewerwater interruptions or less hosepipe bans but did value the other improvements and placed a higher value on avoiding deterioration.

•TheresultsfoundsomechangesfromPR09but without a consistent pattern.

•Intermsofmethodologythereweresomevariations apparent between CAPI and on-line results.

•ServicevaluesfromCAPIsuggestedthatrespondents were not supportive of price increases.

The results of the stage 1 research were presented to both the WtP subgroup and the CCG. Both groups raised questions following the results presentation which included requests for more detailed breakdowns of the research data. The key challenge however was that the information presented provided only the combined survey results rather than the split of CAPI and online results as had been agreed. The CCG was insistent that this had to be rectified as clear direction had been given. As a result of this challenge separate results were subsequently provided to the subgroup which was fully engaged in the company’s proposals for the interpretation of the

data. At the next CCG meeting a detailed explanation of the CAPI and on-line results was presented by UU to members and their decision to use the CAPI results was supported by CCG members.

WILLINGNESS TO PAY RESEARCH - STAGE 2 (JUNE 2013 - JULY 2013)

The need for further research and engagement on WtP was presented by UU to the CCG meeting held in December 2012. Stage 2 research was intended to help prioritise the projects for the Business Plan. The company had started planning in depth surveys for water resources and sewer flooding and said the design and testing would be discussed at the WtP subgroup in January 2013. At this meeting UU provided further evidence of the need for stage 2. An example presented described stage 1 as customers putting a value on having fewer water supply interruptions and stage 2 would explore how these values change with interruptions of different durations. UU explained that the planned approach to be adopted for this research would be similar to stage 1 with focus groups and pilot testing. The presentation to the subgroup also outlined how AT of the Business Plan would be undertaken. Preparation would include design, focus groups and a pilot study. A stage 1 phase would test high level proposals in different service areas. Stage 2 would use feedback from stage 1 to refine Business Plan proposals and test these with customers.

The survey design material for both water resources and sewer flooding was reviewed in depth by subgroup members and many changes to the structure and wording were recommended to make it easier for the customers to understand. A typical example was the term ‘surface water’ which was changed to ‘rain water’. Almost all of the changes were incorporated into the final survey material.

At the March 2013 CCG meeting UU provided an update on WtP which confirmed that there would be two stage 2 research programmes:

•Sewer flooding - This would gather evidence on customers’ preferences for investment in specific aspects of situations with a higher than acceptable risk of flooding. The specific objectives were:

- To estimate relative values for avoiding sewer flooding incidents for different types of property.

- To understand opinions as to various levels of severity and frequency of sewer flooding events.



- To probe whether there is a different perception to severity if the sewer flooding is inside a property or external to it.

- To assess the relative preferences for a range of potential solutions.

•Water resources - This would gather more evidence on customers’ preferences for investment. The specific objectives were:

- To estimate relative values for different water use restrictions.

- To estimate the value of improved service levels for drought permits and drought orders.

- To establish relative values for different water resource planning options.

SEWERFLOODING(APRIL 2013 - MAY 2013)

ResearchProposals for the sewer flooding research was presented by UU and discussed at the subgroup in March 2013. The proposals were endorsed by members.

A series of one-to-one interviews were held to develop questionnaire and study material during April 2013, with respondents completing draft questionnaires and providing feedback. A further set of 10 cognitive interviews were conducted to help shape the design of the survey.

The survey was successfully piloted in May 2013 with 47 domestic customers through face to face interviews and with 26 business customers online. The feedback from the pilot findings was incorporated into the main survey feedback. On advice from the WtP subgroup additional changes were made post-pilot to the survey material, with the aim of improving the clarity of the information.

The main survey involved 352 domestic customers and 306 business customers. Customers were asked to choose between different types of sewer flooding situations, shown on prepared visual aid charts as a form of choice experiment. Factors under consideration included the type of property, level of severity of the flooding and impact, number of properties affected and the location and frequency of flooding. The second choice experiment focused on potential solutions to sewer flooding problems, and customers were asked to rank their preferences for these as described on a series of 6 prepared visual aid charts.

Quality assurance of the research project was also carried out for UU by a leading academic who concluded that the methodology was of the required standard.

FINDINGS

Experience of Sewer FloodingOverall the experience of sewer flooding was low amongst the household sample respondents, with approximately 7% stating that they had experienced some type of flooding in their current home. Just 2% had experienced sewer flooding and this was related to external sewer flooding. None of the sample had experienced internal sewer flooding. A higher proportion of business respondents, 21%, had experienced general flooding at their business address and around 9% had experienced sewer flooding.

Impact of Sewer flooding•Fordomesticcustomers,sewerflooding

of private dwellings (households) and care homes (vulnerable customers) were the worst situations in terms of types of property affected.

•Businesscustomersalsorankedthesetwocategories the highest, but gave highest weight to care homes.

•Domesticcustomersplacedarelativehigh priority on avoiding inconvenience associated with flooding of these types of properties.

•Asexpected,internalsewerfloodingrankedas a worse situation than external sewer flooding for all customer types.

•Increasesinthenumberofpropertiesaffected and in the frequency of flooding incidents elicited a negative response from all customers.

•Increaseinfrequencyseemedtobecreatingthe highest impact on customer perception than the severity of the event.

Preferences for Sewer flooding solutions•Therewasastrongpreferencefora

managed solution versus a ‘do nothing’ base case.

•Householdcustomersdidnothaveastrongpreference for any given solution; their main concern was that the problem should be dealt with rather than left.

•Businesscustomersshowedsomepreference for sustainable urban drainage scheme-based solutions.

•Customerpreferenceforanyoftheoptionsdecreases in line with the financial impact on customer bills.

•Generallytherewasnosignificantvaluationpremium observed for one particular option over another.

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WATER RESOURCES (JULY 2013 - AUGUST 2013)

ResearchThe CCG members expressed concern about the complexity and potential difficulty for customers completing the survey material for water resources. UU presented options to mitigate this issue at the April subgroup meeting which addressed a number of concerns but it was still felt that some customers may not really appreciate the purpose or the reasons for the questions.

UU held 5 pre-pilot focus groups, which were attended by WtP subgroup members, to explore customers’ views and understanding of factors related to water use restrictions and water resource options. Feedback from these was then used to create a questionnaire which was ‘cognitively tested’ on 10 respondents in interview situations. WtP subgroup members were involved in testing the prototype which they found helpful in understanding the process although questions around issues like drought order frequency were still considered to be overly complex. On advice from the subgroup, the resultant survey was separated into two studies; one to cover water use restrictions and the other to cover water resources. UU had also provided feedback on all the comments raised by the subgroup and explained how they had been taken on board.

The two surveys were tested with 105 domestic customers through face to face interviews. This included 62 business customers online as well as members of the subgroup. The feedback from the pilot findings was incorporated into the main survey feedback.

Quality assurance of the research project was also carried out for UU by a leading academic who concluded that the methodology was appropriate.

FINDINGS

Water use restrictions•Householdcustomerspreferred

improvements in the frequency of Hosepipe Bans and Drought Permits.

•Businesscustomerswerealsosensitivetochanges in the frequency of Drought Permits but did not value changes in service levels for Hosepipe Bans.

•Neithercategoryofcustomerwassensitiveto changes in the frequency of Non-Essential Use Bans.

•Econometricestimatesofthevaluationthat customers place on these types of restriction were formulated. WtP for a 1% change in frequency of Hosepipe Ban was estimated at £0.34 per household per year. The Drought Permit was £1.03 per household per year. The Non-essential Use Ban valuation was, for practical purposes, zero.

Water resourcesCustomers prioritised four water resource options compared to the base case (a change in frequency of Hosepipe Bans). The top four preferences were slightly different between domestic and business customers:

•Domesticranking(1)LeakageReduction,(2) Reservoir Storage (3) Metering (4) Water Efficiency.

•Businesscustomerranking(1)LeakageReduction, (2) Water Efficiency, (3) Reservoir Storage (4) Transfer of water from within the North West.

ACCEPTABILITY TESTING

AT for PR09 had been carried out by Ofwat after draft business plans had been submitted by water companies. For PR14 water companies have not been asked to submit a draft business plan and have been required to undertake their own AT.

The purpose of the testing was to provide information to shape the Business Plan and to seek to establish the extent of customer support for it. Following the initial design and pilot testing the main testing programme would be in two stages. Stage 1 would provide research on the number of possible options and stage 2 would test customer support for one or two options.

Testing would involve three different scenarios with different bill impacts. The scenarios would be based on what the company knows now about service levels and legal obligations as well as being informed by the WtP research. The testing would also be a mixture of quantitative and qualitative research.

Stage 1 research and findingsThe first stage of acceptability testing was concerned with gaining early views from customers about how acceptable alternative planning options would be to them, to allow their views and ratings to be used to shape the final plan proposals. Three planning scenarios were tested, each with a differing scope and bill impact, to gauge customer acceptance levels.



At the January 2013 subgroup meeting a number of challenges were made to the company by the CCG members. These included:

•AskingwhyUUwasdevelopingStage2 in advance of reviewing the results from Stage 1. There was concern that without the evidence to support further research, investment priorities might be not fully aligned to customer needs. UU assured the group that Stage 2 was to help the company understand the customer priorities in greater detail to enable better targeting of investment; and to explore specific sensitivities and refine UU understanding of the service or service levels that customers may value the most.

•Seekinganassuranceabouttheaccuracy of the costs being used in the acceptability testing. UU advised that there was some uncertainty around costings but this would be refined as the Business Plan was developed and further data understood. UU explained that the first phase of AT was about piloting the approach and ensuring that the language was understood by customer groups.

•ChallengingthesuggestionthatWtPfor improvements in service can only be demonstrated once true values (£) are attached to the improvement. This then tests the acceptability for customers across all income groups to pay more, less or the same. UU agreed but stressed that the AT should in fact test WtP in absolute terms and saw value in the process for this Price Review in that the company was responsible for conducting WtP and AT alongside each other. CCG was content with this approach providing WtP results were not used as an indicator of customers acceptance of bill increases to fund particular improvements.

Quantitative researchDevelopment of the survey was supported by a pilot test that took place during April 2013. This included running the survey via CAPI to 16 household customers, followed by a debriefing interview which was then used to help the final design of the questionnaire.

The main survey was implemented with a combination of CAPI in-home and group tests across the North West region. Quotas were set based on age, gender and socio economic group in order to ensure a representative sample. 613 household customers were interviewed in May 2013 with

each customer being surveyed on only one of the alternative Business Plans:

•PlanA:legalminimumplusstableservice(low) – 197 respondents (bill impact £0.00 before the effect of inflation).

•PlanB:legalminimumplusimprovedservice (medium) – 215 respondents (bill impact £14.77 p.a. before the effect of inflation).

•PlanC:legalminimumplusenhancedservice (high) – 201 respondents (bill impact £20.75 p.a. before the effect of inflation).

Qualitative key findings•Overallacceptabilityratings:scopeandbill

impact: Plan A – 86%, Plan B; 70%, Plan C; 66%.

•Overallacceptability–theacceptabilityof Plan A is consistently higher than Plan B and Plan C across all customer group breakdowns.

•Householdincome–acrossallthreeplanversions, acceptability is higher for high income households than for low income households.

•Socio-economicgroup(SEG)–thereisno clear trend in overall plan acceptability across different SEGs.

•Satisfactionwithservicelevels–thehighlevel of satisfaction with current service levels makes it difficult to discern if respondents who were not satisfied have lower overall acceptability of a plan.

•Currentbillamount–overallacceptabilityappears to fall as current bill amount increases.

•ForPlanAthereductioninacceptabilitywith higher current bill amounts is negligible (Plan A bill impact = £0.00). There are also differences in the pattern of results between Plan B and Plan C, with lower levels of acceptability evident from lower bill amounts.

Quantitative researchTen group discussions were held across the North West region and each group was targeted at a specific socio-economic group. There was a mix of male and female respondents, metered and unmetered customers, individuals who were responsible for the water bills and customers who had contacted UU in the last 12 months.

Discussions took place over a period of 2 hours as there was more material to read and understand than is usual in focus group research. A small incentive of £40 was given for the respondent’s time. The focus groups were facilitated by staff from DJS and a

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representative from UU who attended each group to provide assistance with technical questions. A member from the CCG was also in attendance at two of the sessions.

Qualitative key findingsThere are common themes across the service areas influencing acceptability of proposal investment:

•Personalexperience/relevance.

•Sizeofthetotalincreaseinthebill.

•Servicelevelinsufficiency–respondentsassess the relative improvement and ideally want to fix the problem completely for the level of investment.

•NIMBY-ism.Agenerallackofaltruismacross the groups, a reflection of the difficult economic conditions.

There are also five additional recurring themes that are affecting opinions:

•Lackofunderstandingoftheinvestmentimpact and increases in investment.

•AperceptionthatUU’s’profitsarenotbeingre-invested.

•Adesiretoseeallproposedincreasesbefore commenting on increments.

•Needinganunderstandingoftheimpactofinflation on bills.

•Overallthedifficultyoftheconceptsforrespondents to grasp quickly.

AT stage 1 results were presented to the CCG at their meeting in June 2013. The CCG members challenged the company on the level of efficiencies included in each of the tested plans and whether there was scope for further efficiencies. UU later increased the level of efficiency in the plan tested in stage 2. Members also challenged the company on how they had drawn conclusions from the results, particularly as Plan A did not meet the legal minimum requirements. UU said that although there was a higher overall acceptability for Plan A, there was still a good level of acceptability for Plan B, but when bill impacts were introduced customers clearly preferred Plan A. They also said that they were working towards trying to deliver Plan B scope for Plan A costs. Some CCG members were not entirely convinced by these arguments. There was discussion about what legal requirements had been left out of Plan A which caused CCG members some concern and they therefore challenged UU on the appropriateness of its approach for AT Stage 2.

Stage 2 research and findingsThis stage was intended to gauge customer assessments of proposals that have incorporated changes as a result of the feedback from AT Stage 1. The testing would also involve a larger sample of customers, including business customers. The findings from Stage 2 were then used to provide UU with an overall rating for the level of customer acceptability of the PR14 Plan proposals and associated service levels. At the June 2013 CCG meeting UU said their intention was to use a single plan for this phase. This was challenged by CCG members as the plan which the company intended to test reflected a relatively large increase in customer bills. UU said they were committed to the size of survey in order to get statistically robust results and could therefore only test one scenario. They believed the scenario reflected the best balance of service improvements and customer acceptability. The scope of the research evolved through discussions with the subgroup and questions were added to align the survey with CCWater guidelines. A revised scope and bill impact was presented to the subgroup in July 2013, however there were some members who continued to be disappointed that the company was not going to test more than one plan.

ResearchThe research involved a combination of 616 domestic customer interviews (CAPI in-home and in-hall) across the North West region and 300 business customer interviews (via on-line forum). Hard-to-reach customers were accounted for within the research respondent recruitment approach, for example monitoring for physical disabilities and ethnicity.

Customers were shown the same overall Business Plan, but it had been updated with results from stage 1 testing, and probed on each individual element separately and on the plan as a whole. UU explained that they had asked a number of supplementary questions as part of this research to better understand the levels of acceptability; these covered affordability, household incomes and service satisfaction levels.

The indicative effect of inflation on customers’ bills in monetary terms was made available for the reference of respondents, but only as a ‘per annum’ figure rather than as a cumulative or year by year breakdown. The overall bill impact being tested was £9.87 above inflation



for a service level scope which was enhanced above the minimum required for both regulatory and operational serviceability.

Key findingsAT stage 2 results were initially presented to the WtP subgroup in August 2013 when a number of points of clarification were raised. These were addressed by UU and presented to a second subgroup meeting in September 2013. The full results were then presented to CCG members in September 2013.

Overall, 75% of domestic household customers and 76% of business customers stated that the proposed plan was acceptable. There was no statistical difference between the domestic and business customers segments in overall terms. Confidence levels are +/- 4% for domestic customers and +/- 6% for business customers. Both show high degrees of statistical confidence in the results.

The level of acceptability scores for the scope proposals alone ranged from 88% (Taste and smell of tap water) to 74% (Wastewater standards & growth) across domestic household and business customers segments.

The level of acceptability for both scope and bill impact proposals ranged from 79% (Taste and smell of tap water) to 34% (Wastewater standards and growth) across both customers segments.

For domestic customers the three most acceptable scope and bill impact’s were; Taste and smell of tap water (79%), Leakage from water supply pipes (79%) and Maintaining the water system – efficiency savings (78%). The three least acceptable were; Improving rivers (59%), Ensuring bathing waters reach acceptable standards (55%) and Wastewater standards and growth (46%).

For business customers the three most acceptable scope and bill impacts attributes were; Leakage from water supply pipes (76%), equal second Maintaining the wastewater system – efficiency savings (73%) and Taste and smell of tap water (73%), closely followed by Maintaining the water system – efficiency savings (72%). The three least acceptable were; Improving rivers (44%), Ensuring bathing waters reach acceptable standards (40%) and Wastewater standards & growth (34%).

There appears to be discernible patterns in acceptability based upon several factors

(although owing to the small sample sizes these may not be statistically significant);

•Householdincome–acceptabilitytendstorise where income levels are higher.

•Satisfactionwithcurrentservicelevels–higher levels of current satisfaction correlate with higher acceptability of proposals for both domestic and business customers.

•Currentbillamounts–thereisaslightdecrease in levels of acceptability as current bill size increases.

•Thereisnoapparentdifferenceinacceptability by age, general socio-demographic grouping or household composition.

•Industrysector–publicservicesweremorelikely to find the plan acceptable (89%) and primary services, e.g. agriculture, forestry, fishing and extractive were least likely to find the plans acceptable (50%).

•Waterconsumption–acceptabilitywashigher for self-assessed ‘high-volume’ water users in the business sector and lowest for medium consumption users.

At the September 2013 CCG meeting the WtP subgroup chair explained to members that the subgroup had been fully engaged with the company on the WtP and AT research programme and had challenged the company on all aspects of the research programme and had reviewed the methodology the company had followed. It had also reviewed all research scripts, materials and showcards that had been used.

The CCG asked UU how it would deal with some of the ranges of acceptability in the sub elements of the plan where the range was quite considerable. UU advised that the main purpose was to test the overall acceptability of the plan. The company had however responded to feedback from customers where lower levels of acceptability had been shown and challenged itself to look hard at the investment planned and it had specifically challenged the EA on certain elements of the National Environment Programme (NEP).

Members also questioned the areas of low levels of acceptability, for example investment in bathing waters by business customers. The meeting was advised that the subgroup had discussed this issue and asked the company’s consultants, eftec to prepare a note outlining the value for money aspects that can be observed from the results.

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Members observed that UU may have a communications challenge in respect of getting public support for investment in bathing water quality but could do this by identifying the legal obligations and linking this with the potential benefits of increased tourism to the region.

The chair of the subgroup presented to the meeting a report covering their findings which included the issue of the Retail Price Index (RPI). The subgroup was satisfied that the wording used by UU had appropriately addressed this issue. The wider CCG was made aware, however, that UU had not explicitly set out the full five year impact of RPI on customer bills in monetary terms and this differed from the approach which had been adopted by some other companies and which could be regarded as more transparent. UU agreed to review Ofwat’s guidance on the use of RPI.Followingthesediscussionsthechairof the WtP subgroup stated that their review had been thorough and robust and recommended that the CCG accept the results of the WtP and AT research. They had concluded that it was not necessary to press UU to undertake any further testing.

CCG observations

The CCG believes that this major piece of research undertaken by UU has resulted in an objective and balanced reflection of customer’s views and willingness to pay. The success of this programme and the CCG’s findings is largely due to the early establishment of the WtP subgroup, the scrutiny provided to consumer research by the full CCG and the active and constructive engagement of CCG members and UU.

There were a number of difficult areas to address throughout the research programme which included:

•Theneedforclearandunambiguouslanguage.

•TheuseofCAPIandon-lineresults.•Theuseoftheterm‘willingnesstopay’.•TheneedforUUtoimprovetheir

efficiency savings.•Thelimitationsofonlytestingoneplan.•Thetestingofaplansignificantlyabove

RPI.•ThetreatmentofRPIcostsinthefinal

plan.

All of these issues were addressed in a constructive manner between the CCG and

UU and resultant levels of acceptability based on a price increase of almost £10 were encouraging. In such circumstances it would seem safe to assume that a lower bill would result in a higher level of acceptability although this was not tested. UU were fully aware that this did not mean that there was a mandate from the CCG for an increase in bills; however the CCG was reassured by the company’s commitment to keep pressure on reducing costs.

WATER RESOURCE MANAGEMENT PLANUU has a statutory duty to produce a Water Resource Management Plan (WRMP) which sets out the investment needed to ensure that it has sufficient water to continue supplying its customers. In developing its WRMP, the company carried out research and consultation with customers and stakeholders as follows:

•December2012:researchtounderstandcustomers’ opinions on a series of options for managing water resources in the future.

•MaytoAugust2013:consultationwithcustomers and stakeholders, seeking feedback on and providing evidence of attitudes towards the contents of the draft WRMP.

•January2013andAugust2013:WtPresearch, to gauge the extent to which customers would be willing (or otherwise) to see water bills increase to obtain increases in levels of service.

•JunetoAugust2013:ATresearch,todetermine the acceptability of plans to customers.

•September2013:researchtogatherviewsfrom customers in West Cumbria on the alternatives for their future water supply.

WRMP RESEARCH AND RESULTS (DECEMBER 2012)

The specific objectives of this research, undertaken by DJS Research Ltd, included measuring attitudes to water saving, environmental concerns, preference for five

“To me I just want the water to turn up every day and be good quality, and that they get rid of the waste water.”



specific water management methods and preferences for a range of service levels. The research involved 631 face to face interviews with customers across the region. All of the respondents had a responsibility for paying the water bill.

The key messages from customers and stakeholders were:

•Thecompanyshouldfocusonfixingleaks,reducing prices and taking less profit over the next five years.

•Customersprofesstobewaterandenvironmentally conscious. However, compared to a survey carried out by the company in 2011, customers were less concerned about water shortages.

•Ofthepotentialoptionsthecompanycould adopt for saving water in the future, reducing leakage and encouraging water efficiency in the home were customers’ first and second choices both without and then with costs attached.

•Whenfinancialandenvironmentalcostsareconsidered, increasing the hosepipe ban frequency moves up to 3rd place – not far behind increasing water efficiency.

•Whenactualbillamountsareshowncustomers opt for the cheapest scenarios – a mixed approach (including boreholes, leakage reduction, water efficiency) and new supplies.

•Thefocusonkeepingbillsdownalsoextended to level of service, as the vast majority of respondents wanted to keep hosepipe ban frequency/drought permits the same to ensure stable bills, or reduce bills slightly by accepting more frequent hosepipe bans and drought permits.

This research was used to inform the development of the draft water resource management plan.

DRAFTWRMPCONSULTATION (MAY 2013 - AUGUST 2013)

UU published the draft Water Resources Management Plan consultation in May 2013. The key messages in the draft plan were:

•Therewasacontinuingreductionindemand owing to improved leakage control, replacement of old water mains, impact of water metering and promoting water efficiency.

•Threeofthewaterresourcezonescoveringthe large majority of the region have adequate resources until 2040. The West Cumbria resource zone however is likely to

have a significant deficit of water by 2020, unless action is taken. This is because of the need to reduce the amount of water taken from the environment in order to protect this ecologically sensitive area. The draft business plan described three options for addressing this issue which were:

- Buy water from Northumbria Water

- Find new water sources in West Cumbria

- Build a new pipeline from Thirlmere reservoir to West Cumbria

In order to secure the views and opinions of customers and stakeholders, UU emailed the draft plan to 520 stakeholders; conducted five workshops across the region; published the document on the website and conducted an on-line consultation process.

The company web site asked ‘Let us know what you think of our Draft Water Resources Management Plan’ and prompted customers to consider the following:

•Doyouthinkthattheplanhassufficientresilience to meet future customer demand for all of our customers?

•Doyouconsiderthecurrent1in20yearlevel of service for statutory water use restrictions to be appropriate?

•Doyouconsiderthecurrent1in20yearlevel of service for implementation of drought permits to be appropriate?

•OutofthethreealternativesforWestCumbria, which do you consider to be the most appropriate long term solution for our customers and for the environment?

•Arethereanyothercommentsyouwishtomake as we develop our thinking on the Water Resources Management Plan?

•Arethereanyothercommentsyouwishto make on the associated Strategic Environmental Assessment Environmental Report?

Customers and stakeholders were advised that their feedback on the draft plan would go directly to the Department for Environment, Food and Rural Affairs (Defra) and then be shared with UU. They were also advised that feedback received would be taken on board and that UU would publish a response to all comments and provide an updated Water Resources Management Plan on their website. The final plan will be published in spring 2014.

At June CCG, UU explained that the draft Water Resources Management Plan2 , had been approved for consultation by DEFRA, had been shared with key stakeholders

2 Draft Water Resources Management Plan 2013

36

was available on the company’s website. A customer version3 had also been produced for those customers without access to the web.

There was a discussion within the CCG meeting on the timing of changes of abstraction licences in the West Cumbria area and whether this could continue into the next AMP and therefore delay the impact of the proposed investment. Members asked to see the evidence and rationale for this investment starting in AMP6. The company explained that it had looked at low cost options to mitigate the need for investment but did not believe that it could deliver a long term solution. UU said that consideration had been given to demand side interventions such as water efficiency campaigns and further promotionoftheFreeMeterOptionScheme. The latter was described as particularly difficult in the West Cumbria area with homes that were on low rateable values.

The company received 55 consultation responses with over 200 detailed points being raised. On 11 November the company published, and submitted to Defra, its Statement of Response describing the responses received during the consultation period and explaining how it had taken these into account in revising its draft plan.

WEST CUMBRIA RESEARCH (AUGUST 2013)

The company conducted focus group research in West Cumbria to gain views on and further inform the selection of the preferred plan for West Cumbria.

Throughout the research and consultation period the company has also continued to engage with stakeholders, including the Lake District National Park Partnership and EA on the options for West Cumbria.

CCG observations

The CCG believed that the approach adopted by UU for engaging customers in developing its Water Resource Management Plan has been comprehensive. It included a two stage approach of seeking customer views before developing a draft plan and then a consultation process to test this plan. The key issue of the West Cumbria supplies is discussed later in this report. The full CCG and the WtP and Environment subgroups have been fully engaged throughout this

3 From source to tap: our water resources management plan to keep the North West flowing

process. The company’s revised draft WRMP was published, and sent to Defra, on 11 November 2013.

CCWATER THRESHOLD OF ACCEPTABILITY RESEARCH INTRODUCTION

CCWater conducted research into what customers consider to be an appropriate threshold for acceptability of company business plans under the price review in order to understand customers’ views and to inform companies and the CCGs. It commissioned SPA Future Thinking to undertake a qualitative programme of research on the ‘Threshold of Acceptability’ across England and Wales. The research took place in July 2013.

CCWater had considered a possible aspirational target of 90% acceptability but recognised that it needed to base this on evidence from customers. During the 2009 price review 82% of customers considered Ofwat’s draft determinations for UU price limits to be acceptable.

The key objectives set for SPA were:

•Toidentifyandexplorethepercentagethreshold for customer acceptability.

•Tounderstandwhethercustomersbelievedifferent average bill levels and different proposed plans should affect the threshold for acceptability.

•Toexamineviewsonanaspirationalthreshold of 90%.

•Toexploretheconceptofabufferzoneifa company has Measures in place to help address non-acceptability.

•Tounderstandcustomerviewsonwaysofimproving acceptability such as providing help for customers who struggle to pay.

METHODOLOGY

SPA held five focus groups across the country for domestic customers and five interviews with business customers of Thames Water. This qualitative approach was adopted due to the complexity of the subject matter, which would require customers to understand the price review process, and time constraints whereby companies needed to have this information at the optimum time to test the acceptability of their plans.

The format of the research comprised:

•IntroducingCCWater,Ofwatandthepricereview process.

•Explaininghowwatercompanieswereexpected to engage with customers for the PR14 price review process.

•Establishingcustomers’spontaneous



expectation of the CCWater threshold of acceptability.

•Illustratingsimplifiedbusinessplansandwhether different bill impacts should affect the threshold of acceptability.

•Consideringwhetherdifferentcompanybill levels should affect the threshold of acceptability.

•Examiningreactionstotheproposed90%target and potential 80% - 89% buffer zone for those companies with mitigating actions.

MAINFINDINGS

•Domesticandbusinesscustomersareconscious of their water bills but generally deem them more affordable than other utility bills.

•Participantswerereassuredbytheexistence of Ofwat and the price review process.

•Majorityofcustomersspontaneouslyfavoured a threshold of 70% - 75%.

- Domestic customers – 80% of customers supported a 75% threshold, the remainder supported a 50% threshold

- Business customers – 62% supported a 75% threshold

•Exceptionsandallowances

- It was generally felt that a universal threshold would be better, ensuring that water companies are consistent in their approach to business plans.

- Customers felt that bill level starting points should not affect the threshold which water companies are set.

•AsaresultofthisresearchCCWaterisrecommending that all companies adopt a threshold of 70-75% for the acceptability of their business plan. Where this is not achieved companies should provide an explanation of the reasons why and consider whether further research is needed or the business plan requires amendment.

STAKEHOLDER ENGAGEMENTINTRODUCTION

In December 2012 UU presented to the CCG an overview of recent and planned customer and stakeholder engagement activity. A more detailed presentation was later made to the CCG in February 2013 which explained how the engagement findings would also feed into the Strategic Direction Statement (SDS). At the March 2013 CCG meeting it was reported that members had provided feedback on the materials and format for the regional events. As a result the

event duration was shortened, and the interactive workshops amended to include the communities’ aspect.

The key objective of UU’s stakeholder engagement strategy was to understand stakeholders’ views and priorities in relation to the services it provides and to enable the business plan to be informed and shaped by these.

There were four key strands to stakeholder engagement, three of which were specific to the price setting review and one being on-going ‘business as usual engagement’. The three PR14 specific strands were:

“Partnerships are important, we all need to work together for the future.”

•Fivearea-basedengagementeventscalled ‘Planning for the Future’, asking the stakeholders how UU should shape their focus for the future.

•Consultationwithstakeholdersonthe‘Strategic Direction Statement’ which was headed ‘Playing our part to support the North West’.

•ConsultationwithstakeholdersonthedraftWater Resource Management Plan which was headed ‘From Source to Tap’.

Business as usual engagement includes the regular direct business communications with stakeholders by telephone, email and face to face meetings. In addition managers participate in or present at conferences and attend and contribute to industry meetings. Stakeholder engagement is also fundamental to the delivery of capital schemes and is integral to the project delivery processes. The process is described by UU as encapsulating “themeansbywhichtherightbalanceis struck between the needs, wants and opinions of all those who have an interest in, or are impacted by the capital programme”.

The CCG was mindful that it would be neither possible nor appropriate for it to assure the project design and approval processes which the company uses. It asked UU to present its engineering design and delivery processes to a small group of members to have confidence that these appeared ‘fit for purpose’. This included the Keswick pumping station relocation and build.

38

AREA STAKEHOLDER EVENTS - PLANNINGFORTHEFUTURE

UU held five area engagement events across the region in March and April 2013; these were attended by 150 stakeholders. The CCG members were invited to these events and there were representatives present at all but one. At each workshop attendees were issued with an information pack and a presentation was given by members of UU’s Executive Management Team, highlighting the key issues facing the company. These were identified as:

•Planningandadaptingforclimatechange.

•Meetingregulatoryrequirementstoimprovethe quality of the environment.

•Providingvalueformoneyandaffordableservices.

This was followed by four interactive events which enabled stakeholders to either vote or provide verbal feedback on their preferences. Two of the interactive sessions focused on the five draft Customer Promises.

In May 2013 a consolidated view of feedback from the events was presented to the CCG and detailed feedback was presented to the CCG in June 2013. A summary of the key findings were:

•Partnershipworkingcameoutasaverystrong theme from the stakeholders, along with enhanced dialogue and communication.

•Theneedtostrikeabalancebetweenwaterbills for today’s customers with those of tomorrow was a clear message, as well as ensuring a fair balance between customer bills and shareholder returns.

•Maintainingcurrentservicestandardsforthe water service was viewed as acceptable by the majority of stakeholders but there was strong support for further improving the wastewater service.

•UU’sroleinprotectingandenhancingtheenvironment was considered very important, but it was also acknowledged that achieving further improvements needs to be delivered in partnership with others.

The CCG members made a number of observations on the feedback. These were:

•Therewasasubstantialwillingnessfromstakeholders to work in partnership and that UU needed to capitalise on this and identify situations, or projects, were it was appropriate to be a partner rather than a leader. UU responded by saying that partnership working is featured in the company’s SDS, under the ‘dispose

of your wastewater’, ‘give you value for money’ and ‘protect and enhance the environment’ promises. Working in partnership with regulators, local authorities and other stakeholders to deliver proposed solutions and resolve issues also features extensively in the company’s Business Plans.

•UUneededtobemoreinnovativeabout the way it communicates with customers. UU responded by describing their continual review of new ways on communicating with customers including face-to-face road shows with specific themes; introducing interactive communications through its website and using other social media such as Twitter.

At the June CCG meeting UU presented the key Outcomes resulting from the engagement process. These were:

•Stakeholdersfeltverystronglythatthecompany should only be maintaining current drinking water quality and:

- The majority felt that the current level of service for supply reliability is sufficient.

- Business customers wanted more reliability and an extension of services such as an ‘on-call’ capability.

- UU should ensure they provide sufficient water and wastewater capacity so as not to hinder development.

•Stakeholdersfeltverystronglythatthecompany should improve wastewater services, in particular the sewer flooding performance and:

- There is a need to work in partnership to adopt a multi-agency approach to improving sewer flooding performance.

- Greater clarity is required on ownership of the sewer network.

- There is a need to plan ahead for sewer capacity.

- Greater innovation is required by UU to keep costs and bills down.

•Stakeholdershadlesstosayaboutvalueformoney but felt that striking the right balance was important and that:

- The customer bills of today should be balanced with those of tomorrow.

- Community involvement should be linked to UU activity and funded by outperformance.

•Stakeholdershighlightedtheneedtoimprove communication and:

- There was a need for UU to be more proactive and innovative in communication with customers.



- The company should work more closely with organisations to get key messages across to customers.

- There was a high level of support for North West based call centres.

- There should be better contact links with agencies, LA’s and NGO’s.

•Stakeholdersfeltthatprotectingandenhancing the environment was the most important role the company has to play in the North West. They look to UU to:

- Actively seek more opportunities for partnership working.

- Educate consumers on sustainability issues such as water efficiency.

- Protect the intrinsic link between clean beaches and rivers to tourism and economic prosperity.

CCG observations of Stakeholder Engagement

The CCG concluded that the regional stakeholder events were highly informative and provided a different perspective, supplementing the wider research and customer engagement. Those present were individual customers but were not present in this capacity. They were there as informed consumers, fulfilling a representative capacity for a wider group, for example those with social and economic problems, small businesses, local authorities, the farming community and tourism. They were keen to develop or strengthen links between their sectors and the people they represented and UU, so that the Business Plan reflects their priorities and different methods of working where appropriate.

Strategic Direction StatementINTRODUCTIONAll companies are required to set their five year business plans within a longer term context by producing a 25 year plan which is called a Strategic Direction Statement (SDS). In December 2012 UU presented to the CCG their programme for developing their longer term plan. Two key drivers for the SDS were ‘Customer Promises’, which encapsulate the customer’s needs and aspirations, and ‘Outcomes’, which include the higher level objectives and Measures of success. The needs and objectives of customers are intended not only to identify business plan

inputs for PR14 but also provide a foundation for the aims and objectives of the company to be delivered over the next 25 years.

STRATEGIC DIRECTION STATEMENTIn April 2013 UU circulated a draft SDS titled ‘Playing our part to support the North West’4 to CCG members inviting them to comment on the consultation document. CCG members responded and the majority of these comments, were incorporated into a revised draft SDS which was presented to CCG in May 2013.

The key comments from CCG members were:

•Thewordingwasgenerallyplainandeasy to understand although some changes were recommended.

•Therewasarecommendationthatreference to reducing carbon could be made more visible alongside the outcome for climate change.

•TheOutcomesreflectedagoodsummaryof what customers had said they valued.

•Someissues,forexample‘cleanbeaches’, were not totally within the company’s gift to resolve.

•ItwasimportanttoseetheMeasuresthat relate to each outcome and the resulting customer benefits.

At this meeting UU explained the work of developing Measures and targets to support each Customer Promise and Outcome and how this would be communicated. Some CCG members said that their organisations could support UU in e-communicating with specific groups. Members asked how the company intended to consult with housing associations and local authorities given the specific issues regarding the tenanted population and changes in housing benefits. UU said they were planning a meeting with the Northern Housing Consortium to discuss this issue.

4 UU Water Resource Management Plan document

“The commitment to go beyond protection to enhancement is particularly welcomed.”

40

SDS CONSULTATIONThe revised draft SDS formed the key consultation document for customers, stakeholders, regulators and shareholders.

UU approach to customer consultation included:

•Targetingcustomerswhowerereceptivetoe-shot communication.

•Promotingconsultationinspecificareassuch as West Cumbria via adverts and social media.

•Distributinghardcopiesofthecustomerversion via Citizens Advice Bureau, libraries and schools.

•Targetingthosewhowouldn’tgetanemail through card distributions and press releases in local papers.

•Issuingbespokeinvitationstoattendeesofengagement events to provide feedback.

•Makingmaximumuseoftheirnetworksandattending meetings with key stakeholders to present draft SDS

•Issuingtailoredinvitationstoprovidefeedback on particular areas of interest.

•LinkingintoquadripartitemeetingsofUU,CCWater, EA and DWI.

•1:1meetingsbetweentheChiefExecutive,MPs and City representatives.

•Developingamediapacksootherscouldpromote the draft SDS

The consultation document and the web site were structured around the five Customer Promises developed through earlier customer engagement and the planned Outcomes for each Promise. In June 2013 UU sent an information note by email to 1300 stakeholders entitled ‘Playing our part to support the North West’. In addition personal emails were sent to the 145 stakeholders who attended the area events. Both of these communications invited stakeholders to examine the company’s 25 year plan and provide feedback.

In addition these documents included, for each Promise:

•Amoredetailedoverview.

•Whatcustomersandstakeholdershadtoldthe company so far.

•Acasestudyofhowapromiseandoutcome can be realised.

•Detailsoftheproposalsoverthenext25years.

Some of the ‘key issues’ highlighted within the plan were:

•Protectingtheenvironment:thereisaneedto meet new environmental legislation by working with partners to find innovative and sustainable ways of working.

•Preparingforagrowingpopulation:thenumber of households the company supplies is expected to grow from 3 million now to 3.6 million by 2040.

•Sourcingproactive,innovativeandsustainable solutions: there is a need to evolve the company approach to preventing problems and finding solutions.

•Respondingtoachangingclimate:thecompany must ensure there are resilient water resources and supply infrastructure in place and the capacity to tackle flooding incidents caused by intensive bursts of rainfall.

•Embracingregulatoryreformofthewaterindustry: legislative changes will encourage greater competition between providers and open up opportunities to trade water between regions.

•Keepingbillsaffordable:thecompanymustachieve the right balance between keeping bills affordable whilst ensuring water and wastewater infrastructure receives the investment it requires.

UU reported to the July 2013 CCG meeting that feedback from the consultation process was, although limited, broadly supportive of the direction being taken. Some respondents, particularly in Cumbria, wanted more focus on encouraging the wiser use of water. UU described the references to water efficiency in the SDS and have also included a measure in the Business Plan on household consumption.

CCG observations of the Strategic Direction Statement

The CCG was kept fully involved and influenced the development of UU’s Strategic Direction Statement. This started with the extensive involvement of members and their challenges associated with the Customer Promises. Before the final draft SDS was issued for consultation CCG members provided feedback on the initial draft and UU responded positively to all of the key issues.


41Business plan

Part 3

This section of the reports includes a review of some of the major issues facing UU which are reflected in its Business Plan. The plan and challenges for UU and customers has been reviewed extensively by the CCG, in particular with regards to the environmental and deprivation issues within the North West.

Business plan

EnvironmentAs a result of the range of environmental issues facing UU the CCG established an Environment subgroup (ESG) to work with UU and to support the CCG in identifying the main environmental priorities for the company. The first meeting of the group was held in July 2012 and since then the group has:

•Offeredchallengestothecompanyandtothe regulators about the needs and drivers for the Business Plan.

•ReportedtotheCCGonprogressanddevelopments.

•SupportedUUindevelopingarangeofbriefing notes and information notes to provide information and background on the major environmental challenges faced by the company.

The membership of the ESG was open to all CCG members, but with a core group from the EA, Natural England, the Rivers Trust and CCW. Having identified areas to challenge, these were then brought to the main CCG for discussion and for the views of the CCG to be formally recorded.

ENVIRONMENTAL CHALLENGES FACED BY UNITED UTILITIESThe company has a significant impact on the environment in the North West. The water taken from the surface and groundwater impacts on environmental quality, the treated sewage impacts on ecological and chemical quality and overload and blocked sewers can lead to flooding or increased risk of pollution in rivers and lakes. UU is equally affected by climate change and the implications this has for water resources, flooding risks and the wider environment. The ESG has been satisfied that UU is using recognised Government data on climate change for its Business Plan development.

The company knows that it must continue to improve performance and explore new, collaborative ways of working to respond to these challenges. In the wastewater business the Urban Wastewater Treatment Directive designates sensitive areas which require improvement in water quality at these locations. The Water Framework Directive is also driving tighter treatment standards at wastewater treatment works and requiring the removal of chemicals that impact on

42

the environment. The company also needs to ensure it plays its part in improving the beaches in the North West so that the new standards required by the revised Bathing Water Directive are met. This means it will have to provide further capacity and treatment at wastewater sites along the coast.

Abstractions from rivers and lakes can impact on the habitats that internationally protected or endangered species depend on. New and emerging evidence means there is also further work needed to meet future obligations, particularly in the West Cumbria area. UU also needs to ensure wastewater activities do not endanger areas of special ecological interest, such as Windermere and Rostherne Mere.

At the April 2013 ESG meeting UU made presentations on climate change and supply demand. At the May 2013 CCG meeting it was emphasised that the company needs to ensure that there is a high degree of confidence in its planning assumptions for growth and development so ensuring the infrastructure can cope with the new demand. There is currently a significant dependency on local authorities’ planning assumptions. UU responded by saying that the company meets with local authorities to understand future development plans and modelling work has identified where there are risks to meeting demand.

At the June 2013 ESG meeting UU presented the cost build-up of the investment programme. For the legal minimum costs UU indicated that through efficiency and improved maintenance that the starting point for the build-up of the costs was minus £45.42. To this was added the costs associated with private sewers +£11.96; the costs associated with Water +£4.54; the costs associated with Wastewater +£25.25. This resulted in a bill reduction of £3.97. These headline costs were challenged and the company was asked to provide more information on:

•Thecostspresentedaslegalminimum.•Greaterclarityoncostsassociatedwith

hydraulic flooding and why the cost per property seemed high.

•Greaterclarityonthecostdivisionbetween legal minimum and improved service.

UU agreed to provide a breakdown of the legal minimum costs.

UU also discussed the Water Framework Directive (WFD) projects and costs covered by Defra’s Statement of Obligations (SoO) which the company needed to take into account in developing the Business Plan. The CCG subsequently agreed that essential schemes are required under the WFD to prevent any deterioration of water quality and those schemes related to bathing and shellfish waters.

Efficiency schemes were also discussed where UU intends to undertake essential maintenance at a number of works incorporating the National Environment Programme (NEP) phase 5 works which will save money for customers. The CCG subsequently suggested that costs should be broken down to ensure clarity between the legal minimum and NEP work. On schemes like Ennerdale for example questions were raised about whether this cost should be in the legal minimum or not.

The company provided a breakdown of costs between legal minimum and improvedservice,includingforWFDprojects, On Ennerdale, the company explained that it had examined a range of options to resolve the issues in West Cumbria. These included demand side measures, but these were neither sufficient to meet the scale of the supply demand deficit, nor cost beneficial. Detailed timelines and scenarios have been shared with the CCG through the process, and the West Cumbria scheme has been subject to on-going dialogue with EA and other stakeholders under the WRMP review process.

UU and the CCG discussed the right proportion of investment that should be included in AMP6. To ensure intergenerational equity, the CCG agreed that the proposal of 16% of the investment was appropriate.

On the topic of Flood Risk UU has built this requirement into its Business Plan based on its obligations outlined by Defra in the SoO. Whilst there was some support for UU’s ambition to move from a lower quartile performer in terms of hydraulic flooding and

“It’s just important to keep the wildlife safe. If the bees and the butterflies go then we’re pretty screwed really.”

Business plan

43

‘flooding other causes’ a detailed discussion focussed on the hydraulic schemes (207 properties protected at a cost of £325k per property). The CCG questioned whether these schemes could be regarded as cost effective. Strong concerns and challenges raised by CCG members in regard to sewer flooding costs resulted in a meeting with UU in August 2013 to establish a better understanding of how these costs had been developed. The key Outcomes from the meeting were:

•Costsandprojectobjectiveswererefinedfurther and the overall bill impact was expected to be only slightly less than that tested in Acceptability stage 2 research.

•UUhadalwayspreviouslycitedthatthehydraulic programme would address just 207 properties – with an associated unit cost of £325k. At the meeting it was established that around 410 properties (i.e. an additional 203 properties) will also have their risk reduced, at a cost of £86m for the hydraulic programme. These properties are not currently on the register but have been proactively identified as at risk of flooding by UU.

•Inlightoftheaboveandchangesto assumptions about the cost of schemes the unit cost for the hydraulic programme was clarified as £260k for 110 properties and £190k for 300 properties.

•UUacknowledgedthat,inhindsight,it would have been better to present unit costs as an average rather than a maximum and to have presented the full picture in terms of the overall number of properties which will benefit from its proposals.

•Inworkingthroughtherevisedcostingsfor the overall flooding programme (hydraulic and ‘flooding other causes’), which total £210m, it was pointed out to UU that there was possible double counting of a figure of £15m for climate change. This was subsequently acknowledged by the company and costs revised accordingly.

Assuming the information UU provided was correct regarding the £86m hydraulic programme addressing issues at 410 properties, rather than 207, then CCG members were more comfortable with the company’s unit cost assumptions.

At the June 2013 ESG meeting UU presented more detailed information on the cost elements regarded as legally required and those elements regarded as optional. UU’s

Chief Executive explained the challenge he had given his management team to ensure that the company improved its efficiency and managed its Opex costs in building the plan. He also explained that the £9.87 bill impact was the maximum anticipated and that, although this would go into the Acceptability Phase 2 testing, the company’s intention was to ‘drive this down’.

UU also explained the different costs of capital (infrastructure enhancement, capital replacement and non-infrastructure) which the ESG felt helped them to understand the development of the plan and gave a good understanding of the different elements.

The ESG did however make a number of challenges, these were:

•ThecostsoftheEnnerdaleschemehadbeen placed into the legal minimum element of the plan. There was concern that the in-zone solution had not been sufficiently worked up and that one sixth of the overall cost of the Thirlmere scheme may not cover the work needed to be done in AMP6. UU agreed to arrange for some independent scrutiny of the Ennerdale solution and programme, which was undertaken by the EA. Based on its experience of delivering similar large scale pipeline schemes, UU assumed that even starting the scheme in AMP5 using transition funding, it will not receive National Park planning and environmental permissions before 2018. Therefore, the majority of the construction spend is currently expected to occur in AMP7. However, should the approvals process conclude faster than anticipated, it does not want to constrain the amount of construction in AMP6 (and unnecessarily delay the scheme’s implementation) due to a lack of funding. It is therefore proposing that this scheme is assessed by Ofwat in the same way that “overlap projects” were handled in PR09 i.e. funding levels will be corrected at PR19, reflecting the actual proportion of the scheme that is delivered in AMP6.

The EA was also challenged around the costs of the proposed Bathing Waters Schemes (+£10.87) The EA subsequently carried out further work on the bathing waters, examining in more detail the costs and benefits of measures that are needed to bring these bathing waters up to the minimum standard as required by the new Directive. This work has included specific WtP surveys that sought the views of customers who would be faced with signage warning against bathing due

Business plan

44

to poor bathing water quality and detailed examination of bathing water usage.

The national EA WtP surveys identified that customers were prepared on average to pay £1.52/yr for a 1% increase in bathing waters (compared to the UU WtP value of £752,780/yr based on all its customers) but that customers who actually visited bathing waters were prepared to pay a much higher amount, £24.65/yr to improve bathing waters from poor to sufficient.

The total cost of the PR14 bathing water improvements is around £300M. The national EA work has estimated present value benefits over 25 years for the bathing waters that are impacted by UU’s discharges to be around £125M at Southport, £160M at Lytham St Annes, £765M at Blackpool, £170M at Bispham, Cleveleys and Fleetwood, £128M at Morecambe, £23M at Allonby and Silloth.

The ESG asked UU to explain the background, current position and costs associated with the transfer of private sewers. UU responded with a briefing report which included the following:

•Approximately32,000kmofprivatesewersand around 2,100 private pumping stations will transfer into UU ownership between 2011 and 2016.

•Assetsurveysofpumpingstationsareongoing.

•BudgetsforAMP6arebasedonAMP5experience with identified efficiency savings.

CCG observations of the Environment

The ESG made a significant contribution to the PR14 review process through supporting the wider CCG in its understanding of the environmental challenges the company is facing. The key environmental challenges for the company included West Cumbria water supplies, the new bathing waters directive, sewer flooding and the uncertainty of climate change. The plan delivers the legal undertakings required by the DWI via a small number of schemes to address taste, appearance, a revised Vyrnwy trunk main undertaking and the company’s lead strategy. UU has worked openly with the ESG and the full CCG although at times robust debate and demands were made to ensure clear evidence was produced by the company to support its proposals. Examples of this included scrutiny of the cost assumptions and outcomes associated with the proposed sewer

flooding programme and of the viability of different options to address the water resource deficit in West Cumbria. The CCG and UU also recognised customers’ willingness to pay for environmental enhancements above legal minimum requirements is limited.

FinanceAt the request of the CCG and throughout the review process UU has provided both an introduction to the financing of a water company and a number of presentations on particular aspects of financial controls which have an impact on customers. These have provided CCG members with a better understanding of these controls and enabled them to make more informed decisions and challenges. This chapter covers the key areas of price controls, financial controls, debt management and the impact of deprivation in the region.

PRICE CONTROLSIn May 2012 UU presented an update on the Ofwat statement of principles for future price limits. This included an explanation of the separation of wholesale and retail price controls in addition to the current controls separating regulated and unregulated activities of water companies. The contestable business equates to business customers, and the non-contestable to household customers. CCG members questioned the water industry and UU’s view on this separation, and what measures UU would put in place to protect domestic customers if they had to pay more as a result. The company explained that the debate on price separation was regarded by Ofwat as having been concluded, and the questions now are about the definition of retail and wholesale services. They also said that steps would need to be taken to ensure that domestic customers were not cross-subsidising commercial customers. Competition arrangements are currently set out by the Costs Principle in legislation, but it has made competition more difficult and so there are proposals that it should be repealed.

The wholesale business is the biggest driver of costs and accounts for over 90% of customers’ bills. The price control for contestable customers may be less of an issue, however many commercial customers won’t be eligible for competition in 2015 when this price control takes effect. Ultimately the contestable market may not need a price control, but there is an issue of timing and

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so Ofwat will set default tariffs to protect commercial customers.

UU has stated that competition will not reduce its aspirations for AMP6. It wants to offer all customers the best possible service and competition should provide scope to offer business customers a more personalised service and for the company to operate out of area. The price control for domestic customers will not be based on UU’s costs, but on an average across England and Wales. Historically UU’s retail cost to serve customers has been high, for reasons including historic inefficiency and the high level of deprivation. Ofwat are looking at what is a fair way to take account of issues such as this in a price control. The CCG emphasised the need for UU to protect vulnerable customers where possible; members hoped that the CCG would be able to challenge and work with the company to achieve bills in 2015-2020 that are affordable for a majority of customers.

Despite the significant cost challenges it faces, the company’s Business Plan delivers a reduction in bills for household customers by 2019/20, excluding the impact of inflation.

The plan also outlines the range of schemes it offers to help those struggling to pay or in debt, and how it will build on these going forward. This includes additional funding for the UU Trust Fund and the possible introduction of a Social Tariff.

DEPRIVATION AND THE AFFORDABILITY OF WATERAt the December 2012 CCG meeting UU presented an overview of ‘affordability’ which was described as a growing issue for the country, the industry and the company. UU stated that collecting revenue was a challenging issue due to the above average levels of income deprivation within the region. The company highlighted that the business impact of the debt owed to UU by customers was:

•OutstandingrevenueatMarch2012wascirca £275m, with 475,000 customers owing debts greater than 3 months old.

•ThetotaldebtrecoveryOpexwascirca£12m and write-off circa £18.5m.

Scheme Debt or Affordability Overview Customer helped

Arrears Allowance Scheme

Debt

Customer pays 13 weekly payments and UU writes off a matched amount from arrears provided the customer maintains payment.

7,000 customers currently on scheme

UU Trust Fund

DebtCustomers apply to independent charity who can make grants to pay off outstanding arrears.

Approximately. 5,000 customers helped per annum

DWP Debt

Customers or UU apply to DWP to have on going charges and arrears paid directly from means tested benefits.

33,000 customers paying by this method

Watersure Scheme

(Vulnerable group)

Affordability

Tariff with capped bills for customers with medical conditions or large families that require them to use large amounts of water.

33,000 customers paying by this method

Support tariff Affordability

Pilot tariff based on customer’s income level. Available in 5 postcode sectors. Applications individually assessed.

Approximately 3,000customers on tariff

Promotion of metering and other associated tariffs

AffordabilityDay to day promotion via front line staff and communications channels.

Circa 40,000 customers apply each year for a water meter

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46

•OfwatcurrentlyallowsUUaspecialfactorfor income deprivation of circa £8m per annum.

The implications to UU of these issues are:

•Affordabilitymateriallyimpactscosttoserveperformance.

•Therearelimitedsuccessfulmechanismstorecover outstanding charges.

Moving forward the company explained plans to address affordability further, with the following initiatives:

•Socialtariff

•Greaterpromotionandtargetingofmetering

•Extensionofsupporttariff

UU provided further information to the CCG on customer affordability at the June 2013 meeting. Some key statistics presented by UU were:

•UnemploymentintheNorthWestissignificantly higher than the UK average, with an almost 1% difference.

•Regionalunemploymentratesvarywithinthe North West, with Knowsley at 14.5%, and the percentage change from April 2009 to April 2012 showing a worsening position.

•TheNorthWestisa‘hotspot’areafortherate of possessions claims issued when compared to the National position.

The demographics showing deprivation in the North West demonstrates a clear correlation between deprived customers (customers on low incomes) and the number of household bills in arrears.

The company reported that it was constantly looking at refining its schemes in response to the growing number of customers facing affordability issues. Initiatives included:

•IncreasingleveloffundingfortheUUTrustfund.

•AnimprovedArrearsAllowanceScheme.

•AnextensiontotheareascoveredbytheSupport Tariff.

•Amorefocuseduseofdebtcollectionagencies to promote assistance schemes to customers.

As a result of this the company had seen a more sustained level of charges paid by customers linked to the UU Trust fund and a year on year improvement in the number of customers helped. On Welfare Reforms the company expressed concern about the impact that the reforms may have on people in the North West. The North West has the highest number of benefit claimants

with nearly 800,000 people affected when compared to national statistics;

•7ofthetopworsthitLocalAuthoritiesand16 of the top 50 Local Authorities are in UU’s region.

•Blackpoolhasthehighestfinanciallossperworking age adult of any Local Authority (£914).

The company explained how the Universal Credit system would be rolled out and the impact that it may have on claimants;

•Claimswouldbemadetoonesinglepersonin the household.

•Benefitswouldbemadeonceamonth,ina single payment, into the claimants’ bank account.

The company’s view was that receiving a single payment or managing a bank account may prove extremely difficult for people who may not have been used to budgeting or managing their finances in this way

The company went on to explain how it is moving towards a ‘bundling approach’ for managing customers in arrears. It is proposing that the existing schemes will be enhanced by the development of a new Social Tariff and the promotion of a free meter scheme to those customers who would benefit. The latter could be offered as part of a ‘bundled’ approach helping customers in arrears and reducing future on-going charges. The Social Tariff would be a new tariff which requires customer support and the consultation exercise is nearing a conclusion.

Members asked how they could gain more evidence in this area to understand the impact on the company. However they also pointed out that the higher bills that the company was testing at that time could potentially undermine the case for a’ special factor’ if it was felt that the company had not taken social and economic deprivation into consideration in setting its price limits.

At the October 2013 CCG meeting UU presented the further evidence requested by members. First it presented the Ofwat criteria for consideration of adjustments to the ‘average cost to serve’, these were where there was evidence of factors which:

•haveamaterialimpactonitscosts;

•arebeyondmanagementcontrol;

•haveanimpactonthecompanyinamaterially different way to other companies.

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UU explained that they remained convinced that the key drivers for its high cost to serve, bad debt and increased collection costs are due to extreme levels of socio-economic deprivation. The company presented the table above showing deprivation levels for each of the English regions which show significant regional variations.

The company also presented its costs per £ collected for each of its bad debt strategies which include £0.78 per £ collected for the UU Trust Fund to £0.17 per £ collected for the DWP means tested benefit scheme.

In 2012/2013 UU said that it had engaged Indepen to review its collections strategy. Indepen reported that by making progress against its plan, and in view of the external interviews it had undertaken, this suggested that UU was at the frontier of revenue collection and debt recovery practice in the utility sector.

It is clear that the affordability of bills and customer debt will continue to be a major issue for the company against a background of exceptionally high levels of deprivation in the region. There is evidence however that UU are applying best practice to debt management and developing new ways of supporting those who find it difficult to

pay. The issue of poverty and deprivation is likely to remain a significant challenge to the company for years to come. The CCG believes strongly that the company’s portfolio of options to sensitively manage affordability and payment problems, including its Trust Fund, remains crucial to helping vulnerable customers.

FINANCINGAt the February 2013 CCG meeting UU presented an overview of financing investment and benefit sharing. Based on Ofwat’s PR09 determination UU had a total annual cost of £6,015m and required an income of £7,102m. The PR09 outperformance mechanism was explained showing companies retaining Opex benefits for the remainder of the AMP period and then reflected in lower bills for customers. Capex outperformance resulted in a 70% share of the gain for customers in the next price review.

The CCG members wanted the company to be transparent in presenting financial information, for example, to know if it had outperformed against its PR09 submission and the impact of a lower cost of capital and higher level of RPI. There was a discussion about the legacy debt that is carried forward and how long before that is effectively paid off. The

Regional breakdown of Lower Super Output Areas at various levels of overall deprivation

Region1%

most deprived5%

most deprived10%

most deprived20%

most deprived

North East 12% 10% 9% 8%

North West 52% 35% 28% 22%

Yorkshire and The Humber 17% 18% 17% 14%

East Midlands 5% 5% 6% 7%

West Midlands 9% 17% 17% 15%

East of England 2% 2% 3% 4%

London 0% 7% 12% 19%

South East 3% 4% 4% 6%

South West 2% 3% 4% 4%

SOURCE: DCLG ENGLISH INDICES OF MULTIPLE DEPRIVATION 2010

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CCG stated it would like to see how UU plans to spread the cost across future generations in the build-up to developing the Business Plan. Members asked about interest rates and how they are applied; UU gave an explanation on how this is applied to the cost of capital. There was a discussion about outperformance and how that is given back to customers and shareholders in a 70%/30% ratio at the next price review. This led to a discussion about how clear this is to customers. CCG members believed that customers would not feel they were getting benefit from any outperformance particularly if the messaging to them was around bills in the next five year period ‘not going up by as much as they would otherwise have done’. Customers wanted to see price reductions in the current climate.

The company provided an explanation and detail on a range of financing considerations, including how UU is financed, its performance in previous AMPs, and mechanisms for funding and outperformance. The company also provided a detailed overview of funding mechanisms and how the benefits of outperformance are shared. The company’s approach is the current framework for regulatory outperformance.

At the March 2013 CCG meeting UU gave a detailed presentation on financing covering funding mechanisms which included an overview of the price review process; how the benefits of outperformance are shared; and some historical data from previous AMP’s and comparisons with actual delivery. An example of sharing outperformance is covered in the ‘Incentives’ chapter.

The company explained the use of RPI and COPI (Construction Output Prices Index) and that whilst prices had fallen in real terms since 2009/10, RPI had increased greater than that assumed by Ofwat.

UU described the difficult judgement that Ofwat and companies have in setting

the optimum financing charges. There was a challenge that companies may take a conservative view to ensure outperformance. The company explained that it must take a reasonable view of financing arrangements that protects the interests of both its customers and shareholders and that some of the economic issues that are currently being experienced could not have been predicted atthetimeoftheFinalDeterminationforAMP5.

UU shared some comparative data for customer experience, environmental impact and reliability and availability and highlighted some key issues. There was a specific discussion about internal sewer flooding and the impact of heavy rain experienced in 2012. Members asked whether there was any allowance made for heavy rainfall where surface water had impacted on the sewerage system. UU explained the scenarios whereby weather conditions could be taken into account and discounted from the reported performance. Where companies experience continued flooding of particular areas and zones, they are obliged to look at the future design of the sewerage system and network to lessen the impact of flooding. Members asked how climate change is factored into company plans. UU confirmed that all capital solutions are costed based on uplifts for climate changes and assumptions are based on Government statistics and data.

UU also covered the issue of gearing and explained to members that this % represented the amount of debt relative to the RCV. This included the advantages of taking lower/higher ratios and covered the risks associated with each. UU currently has the joint second lowest level of gearing (59%) of the 10 water and wastewater companies. The return on capital for UU was the third lowest level of the 10 companies at 5.0% and had a dividend growth policy of RPI + 2%. Members asked whether the company should consider the concept of a customer dividend that could be positioned alongside investor dividends. This ‘rebate’ could be founded on a number of scenarios ranging from increased investment, a social tariff or something more embracing that would benefit all customers. Members felt that this would be easier to understand than Ofwat’s proposals for Rewards and Penalties.

“How much is returned to the investors? The water industry should transparent about the balance between customers and investors.”

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Members questioned how much information should be communicated to customers about financing and outperformance and the challenge of customers actually understanding the mechanisms that the company uses to share this. They debated the impact of communicating outperformance and how this could be perceived by investors and shareholders. This discussion extended to UU’s corporate responsibility to the North West and how much money is invested to support the community.

The company explained that there are several ways in which UU demonstrates its social responsibilities such as links with capital schemes and support for local communities when the company is conducting major works in an area through to the charitable trust fund it set up to help customers in debt. Members asked about the impact of UU’s work in the North West and the resultant impact on the economic climate in the region and whether there was any documented evidence which could be made available to them. The company advised that there is an external report by Regeneris that was sourced through the North West Development Agency, which evidences UU’s impact on the NW economy. This suggests that the company’s current £3.5bn capital programme converts to a £7bn impact on the wider North West economy and the 5,000 direct employees of UU translates to 9,000 jobs in the North West when the supply chain is taken into account.

CCGobservationsonFinance

•ItisclearfromtheIndepenreportthatUU has or is developing a comprehensive range of initiatives which represent best practice in sensitive debt management given the high level of social and economic deprivation in the region.

•TherewasgeneralconsensusthatUU’soperating environment, including the very high deprivation levels in the region, has an impact on its cost to serve and that Ofwat should consider this and the extent to which it needs to be reflected in price limits. This will be important to ensure sufficient funding is available for the company to continue to operate support and assistance schemes for those who are struggling to pay and to maintain or improve good standards of customer service

•CCGmembersfeltthiswasagoodexample of where extensive and

informed local knowledge around issues of affordability and deprivation could add value over and above an industry wide perspective.

•UUhadrecentlyreturnedmoneytocustomers in the form of additional investment in improvements from the current price review period. The concept of a ‘consumer dividend’ was something which the CCG believed warranted further scrutiny.

Integrated asset planningAlthough Ofwat will assess value for money of the water companies business plans and may undertake a technical assessment of project proposals, the CCG identified that it needed to understand the processes and controls used by UU in developing its asset investment plans. It concluded that it needed to assure the process of project development and be confident that internal governance would achieve a balance between capital costs, operational costs, customer impact and risk. To achieve this, an ‘Engineering Options’ subgroup of the CCG was appointed in March 2013. The group selected recently completed water and wastewater projects and asked the company to take the group through its needs evaluation, design options and delivery process. Within this review CCG also wanted to identify how the company used innovation, provided value for money and managed customer engagement.

Two workshops were arranged for the subgroup where the company illustrated its integrated asset planning (IAP) and delivery processes using the two selected case studies. In addition the company presented its project cost development model.

UU outlined the improvements made to the integrated asset planning process since PR09. The key changes and improvements it described were:

•IAPisnowastructuredinformationhubcontaining live links to systems and data. Quarterly reviews are undertaken, where previously IAP was a one-off exercise driven by the price review.

•Qualityassuranceisnowembeddedwithin the asset management and delivery processes, together with an audit trail for the price review. Previously plans were paper based with less focus on quality assurance.

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•UUclaimthattheintegratednatureoftheprocess enables them to develop more optimised, efficient and effective holistic plans. Previously capital projects were identified independently and not always in a geographical clustered context.

From the presentations made by UU it was illustrated how the IAP process captures data and these inputs enable them to identify the potential need for intervention which are then reviewed by IAP’s Core Team. The Core Team consists of members from across the business and can include stakeholders such as the Environment Agency and Local Authorities who are invited to attend for specific issues. This process enables UU to deliver a live plan containing short, medium and long term actions to address serviceability, compliance, operational efficiency, carbon and sustainability, customer performance, growth and health and safety. It also identifies potential solutions which, together with high level estimates, enable outlying solutions to be eliminated more quickly. Once an intervention is identified, it is incorporated into the local IAP which is for a particular water supply demand zone or wastewater sub-catchment area.

The second phase in the IAP process involves analysis of an intervention using UU’s ‘Optimus’ modelling tool. This provides a cost-benefit analysis to prioritise investment and determine which projects or other expenditure will be included in a given work programme across the region. For this cost-benefit analysis Optimus:

•Helpstoassessvalueformoneyandbusiness benefit.

•Coversallcapitalexpenditure.

•Useswillingnesstopayvalueswhereavailable.

•Actsasacomprehensivestoreofknownissues and future risks.

•IsfullyintegratedwithIAP.

•Trackswhetherbusinessbenefitsarerealised.

Optimus prioritises projects based on the balance between whole-life cost and business benefit. The business benefit is scored on a framework built on Customer Promises and is under-pinned by WtP information where it exists.

The intervention could be one or more of three deliverables. An example could be the need to remove phosphorous at a wastewater treatment works. This could include:

•Acapitalinterventionforphosphorousremoval.

•Anoperationalinterventionforchangingtheoperating procedures.

•Acustomerinterventionpromotingcustomers to switch to phosphate-free detergents.

PROJECT DELIVERYIn 2010 UU introduced a Project Delivery System (PDS) which is part of its Standard Operating Model (SOM). The SOM is based on the principles of the Association for Project Management, an internationally recognised framework for project management which delivers best practice and consistency in delivery. Once a capital intervention need has been agreed within the IAP process it will be incorporated into the PDS.

The diagram below shows the key stages of UU’s project delivery system:

Needs Phase (Capital intervention)

Concept Phase

Definition Phase

Implementation Phase

Handover and Close Down Phase

CAPITAL PROJECT DELIVERYThe Needs Phase determines if the criteria to progress a project has been met. The project then becomes the responsibility of the Core Team. The Concept Phase reconfirms the Needs (in case there have been changes in the interim) and it investigates potential solutions to the Needs and their viability. The Definition Phase reviews and optimises

“They’re very good and proactive with their customers – they keep us informed of major improvements going on which is very helpful.”

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the different options or ways of providing the solution. Once the delivery partner - the contractor - has carried out a sufficient detailed design to develop a confident price, the project returns to UU for full financial approval to enable the commencement of construction. During the implementation phase, any remaining detailed design is completed and construction takes place. After the Handover and Close Down Phase is completed the full cost of the project is known and the actual level of benefit delivered can be confirmed.

UU’s delivery programme has seen improving performance results. During AMP 5 86% of capital investment projects were delivered on or ahead of schedule compared to 63% in AMP4 and 95% of AMP 5 projects were delivered within budget compared to 75% in AMP 4. The AFR (accident frequency rate) in AMP5 is currently 0.10 which according to RoSPA is well below the construction industry average. Customer satisfaction for the delivery of capital projects in 2012/2013 measured 96% by the Ofwat SIM score. For AMP 3 and AMP 4 the Environment Agency considered UU’s performance as poor but they have seen improvements in AMP 5. In the last EA performance report UU was identified as a leading water company and one of only two ‘four star’ companies’.

PROJECT COST DEVELOPMENTUU developed its project costs along a timeline of project development as illustrated in the diagram on the rpevious page. The estimated costs for the first four levels are developed using one or both of two estimating tools supported by bespoke quotations from the supply chain for specialist items. The first estimating tool is a UU database of cost captured from historic and live projects. Low levels of design are required when using this system and costs can be estimated for example from a tank volume. The second is a database of construction and equipment rates captured from historic and live projects. This requires a detailed scope and definition of a project to enable a project estimate to be developed. A level 5 cost is based on a fully detailed design and the costs produced by the delivery contractor. Within this cost there will always be some uncertainty which is usually referred to as the contract risk. These risks are normally shared between UU and their contract partners on a pain/gain basis.

CCG challenges

A number of challenges where raised during the two workshops, these were:

Challenge: UU is often charged with being capital scheme dependent – are the company’s systems developed to ensure that the interests of the customers (least cost) are aligned to the interests of the company (lowest whole life cost)?

UU response: UU’s corporate systems ensure that investment decisions are made on a lowest whole-life cost basis and this does result in the least cost impact on customers. UU’s whole life cost model generates an equivalent revenue number as a net present value (NPV) which is the basis for decision making.

Challenge: How are issues such as climate change and environmental impacts assessed during the project development process?

UU response: UU’s approach to climate change is set out in its corporate strategy and covers both adaptation and mitigation. In terms of adaptation, they follow DEFRA’sbestpracticeandincorporate the findings of CIP09 into design and modelling for future investment. This is reflected in the base assumptions that apply to all projects, such as rainfall impacts. These base assumptions are periodically reviewed and any changes would be built into future designs from the point of change.

Challenge: How does the company engage with communities to ensure that local knowledge is incorporated into scheme development?

UU response: At a project level, UU’s Project Management system includes many prompts about obtaining local

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community knowledge, such as the following assessments:

•InitialCustomerAssessment

•CustomerImpactAssessment

•CommunityImpactAssessment

The knowledge derived from these assessments is built into the project’s Stakeholder Management and Communications Plan which is regularly reviewed and updated as the project continues.

Challenge: Is the company robust enough to bring new ways of working into its project development system?

UU response: UU is committed to investing in research and development (R&D) and implementing new technologies and solutions to its capital programme and offering new services to customers. The company strategy is to have innovation as a core value so that staff “live and breathe” innovation and are constantly finding new ways to provide better value for money. R&D is a key enabler to deliver incremental, breakthrough and fundamental innovations which meet both the short and long term promises of the business and our customers.

CCG observations on Integrated Asset Planning

UU demonstrated to the subgroup how its comprehensive set of business processes and modelling tools now enables it to develop projects and schemes aligned to UK best practice and deliver whole life cost solutions. Examples of innovation were provided, for example delivering added value to major capital projects such as Keswick wastewater treatment works where the upsizing of a sewer linked to customer flooding risk was undertaken whilst laying a major new sewer. The case studies reviewed also demonstrated comprehensive customer

and stakeholder engagement both before works commenced and during construction. The CCG was satisfied that UU has made significant progress over the last five years through improved business processes, management controls and IT systems which should improve its delivery programme and benefit customers and stakeholders.

Business Plan outcomesThe development of Customer Promises and Outcomes has been described in the Research and Engagement section of this report. The first part of this section looks at how the Outcomes have been evidenced in UU’s Business Plan and the Measures to be used against each of the Outcomes. The second part of this section goes on to describe the development, discussions and challenges around incentives, rewards and penalties.

BUSINESS PLAN OUTCOMESThe Outcomes in UU’s Business Plan has already been tested with customers through consultation on the draft Strategic Direction Statement document ‘Playing our part to support the North West’. In this document each outcome was described as ‘what Plan has then taken these Outcomes a step further by first defining the outcome and the Measures to be adopted followed by ‘what we will do’ in order to achieve each outcome. A brief overview of all the Outcomes and Measures included in the Business Plan is set out in the table on the next page.

The Business Plan has been reviewed by CCG members to understand what the delivery of Outcomes means in real terms and whether there is customer support for the planned actions. The CCG observations are:

•Whereprojectsarerequiredtoachievethe Outcomes these are defined in the Business Plan together with completion dates. An example is the six water quality enhancement schemes and the changes to the Vyrnwy Aqueduct programme agreed with the DWI.

•TheBusinessPlanisclearonareaswherepossible improvements in standards have been tested with customers but where there is insufficient support from customers. An example is bathing waters where the willingness to pay research makes it clear that customers did not want to fund increased investment in order to achieve a ‘good’ standard of bathing waters.

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The outcome is therefore that UU will deliver only the legally required standard of ‘sufficient’ rather than being driven by customer expectations.

•Onsewerfloodingtherewasstrongcustomer support for a reduction in the risk of flooding. The level of ‘acceptability’ testing with customers supported a reduction by 40%.

Customer Promise: Outcomes: Measures:

Provide you with great water

Your drinking water is safe and clean

Drinking water safety plan scoreWater quality events DWI category 3 or aboveWater quality service index

You have a reliable supply of water now and in the future

Total leakage at or below targetAverage minutes supply lost per property (per annum)Security of supply indexResilience of impounding reservoirsReliable water service index

Dispose of your wastewater

Your wastewater is removed and treated without you ever noticing

Wastewater network performance indexPrivate sewers service index

The risk of sewer flooding for homes and businesses is reduced

Future flood riskSewer flooding index

Give you value for money

Bills for you and future customers are fair

Number of free water meters installedPer household consumptionCustomers saying we offer value for money

You have support if you struggle to pay

Customers helped and supported into making regular payments

The North West’s economy is supported by our activities and investment

Partnership leverage

Deliver customer service you can rely on

You’re highly satisfied with our service and find it easy to do business with us

Service Incentive Mechanism (SIM)Delivering our commitments to developers, local authorities and highway authorities

Protect and enhance the environment

The natural environment is protected and improved in the way we deliver our services

Protecting rivers from deterioration due to population growthWastewater pollution indexSatisfactory sludge disposalContribution to rivers improvement (Wastewater programme)Maintaining our wastewater treatment worksContribution to rivers improved (Water programme)

The North West’s bathing and shellfish waters are cleaner through our work and that of others

Contribution to bathing waters improved

Our services and assets are fit for a changing climate and our carbon footprint is reduced

Operational carbon footprintQuantity of renewable energy generated

“They need to tell us what value-for-money we are getting and be more transparent with the costs and charges.”

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•Forcustomerswhostruggletopaytheirbills UU’s Business Plan confirms the continuation and development of new initiatives to help customers. At the time of writing customers had not given the company a mandate for the development of a social tariff. Further research over the next few months may establish a way forward on this.

UU’s Business Plan clearly sets out the relevant Customer Promises and Outcomes derived from customer research. The Measures have then been developed by the company to both set out how its performance will be quantified and enable Targets to be set where appropriate. The following table provides a summary of all the Outcomes and Measures included in the Business Plan.

All customer challenge groups were asked by Ofwat to incorporate the views of the regulators in their reports. The CCG has not found this an easy task and has concerns that this undermines the status and significance of the regulators. The views of the regulators are detailed, and specific to their respective roles, and are not necessarily consistent with an agenda for affordable bills. The CCG has concluded on balance that the letters which set out the views of regulators are more appropriately placed in the appendices rather than in the body of the report and hopes that there will be direct contact by Ofwat with them to discuss relevant issues.

We are aware that the Environment Agency will continue to question and challenge the company on the proposed levels of investment for the environment. The EA is not fully convinced that the environment will be adequately protected by the proposal, for example investment in reducing pollution; however the CCG remains mindful that customers did not indicate support for increased investment in the environment and that the company has sought to deliver a balanced plan.

CCG observations on Business Plan Outcomes

The content of the Business Plan reflects the discussions with the CCG over the

last 18 months and the proposals within the plan are based on the extensive customer and stakeholder research which has been undertaken. All of the ‘Outcomes’ described in the consultation process are included and appear to be well defined with Measures and Targets where appropriate.

Measures and IncentivesThe Ofwat methodology requires UU to develop a system of rewards and penalties as part of its business incentives. The company is expected to:

•DelivertherightOutcomesforcustomersfor bills, services and the environment.

•Deliverwholelifecostsolutions.

•Encourageinnovation.

•Achievetherightapproachtorisk.

•Deliverappropriatereturnsforinvestors.

Ofwat required reward and penalty proposals to be reviewed by CCGs with constraints on overall rewards so that bills do not rise above what would be an acceptable level for customers. They also acknowledged that mechanisms need not be simple but the Outcomes need to be clear and straightforward for boards to use in decision making.

The CCG chair shared with members and UU the content of a recent lecture from Jonson Cox, Chairman of the Water Services Regulation Authority (Ofwat) where the subject of how companies share outperformance with its customers was debated. This was described as a complex area and the transparency of how companies share outperformance needed to reflect the needs of both customers and shareholders. This was an area that Ofwat expected CCG’s to explore. An example of sharing outperformance was presented by UU. In May 2013 the company had announced £200m was being reinvested across the North West to benefit customers and the environment. This funding resulted from efficiency savings in the company’s capital programme.

It was acknowledged by CCG members that there was already a precedent, and an appropriate audit trail with CCWater, where companies had evidenced where they had put ‘money’ back into either improved investment, a reduced K factor or bill reductions. CCWater had challenged Ofwat’s approach to setting Targets at the last price review specifically around energy costs and RPI which have significant impacts on customer’s bills.

“Reliability of water supply is not just an environmental issue, it s an economic concern too.”

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At the September 2013 CCG meeting UU explained how the company had developed its approach to Measures of success based on its customer and stakeholder engagement programme. The diagram shown above and presented by UU illustrated the link between Promises, Outcomes, Measures and Targets.

It was explained that not all of the Measures would have rewards or penalties attached to them i.e. some Measures would be KPIs or reputational Measures. Rewards and penalties would only be proposed where customers have indicated a willingness to pay for service improvements or to avoid deterioration. They would also not be applied where the company had existing regulatory or compliance commitments. CCG members challenged the rationale for not including some KPIs as incentives such as “customers helped and supported into making regular payments”. The company explained that this was an area that already had inbuilt incentives, i.e. if customers were not encouraged to pay their bills, this would affect the company’s profitability. In addition the proposed approach to “average cost to serve” provided the retail business with an incentive to be as efficient as possible in this area. Members also challenged where bio-diversity Measures appeared in the framework. UU advised that this was still a priority area for the business and formed an implicit part of the company’s plan. There was recognition amongst members that this was a complex element of Ofwat’s new methodology and that this needed to be simple enough for customers to understand. The company needed to be mindful of this when communicating to its customers. Members agreed that a small working group should be formed to look at this area in more detail and report back.

Progress of the ‘Measures subgroup’ was reported to the CCG meeting held in October 2013. UU’s incentive proposals included

15 financial incentive Measures, 12 penalty only incentives and 3 penalty and reward Measures. Some CCG members had concerns that whilst WtP findings might provide an indication of customer priorities it does not provide evidence of customer consent for increased charges as a reward for outperformance.

Two further meetings of the Measures subgroup were held in October. The questions raised by members during these meetings included:

•Whatistheimpactonperformanceand incentives if there was significant rain causing flooding yet the company had delivered all of the flood reduction and mitigation schemes? The company accepted this as its risk.

•Howdoestheincentivesystemdealwitha year on year under-performance? The company accepted that it would incur penalties.

•Inordertoaddressthecomplexityofthescheme the company has produced a performance / incentive table in order to provide more clarity of the scheme.

•Anumberofmeasureshavelargedeadbands which reduce the likelihood of incurring a penalty - is this a meaningful measure? The company altered some of the dead bands in response to this challenge.

•Therewasaneedforthemembersto understand the principles and calculations behind the incentive scheme. The company has shared some of this information with members.

The key findings of the Measures subgroup are:

•UUhasfollowedtheOfwatguidanceinproducing its incentives proposals.

•Thecompanyhadbeenopenandtransparent in providing information to CCG members.

The process of development of promises to incentives

Customer and stakeholder research have informed these

Willingness to Pay research, Acceptability Testing and

other customer research has influenced these

CCG and other stakeholders will inform

these

PromisesPerformance

targetsOutcomes CostStrategies `1

Incentives or KPIs

Measures of success

Business plan

56

•Thecompanyhasremovedallrewardsfromthe incentives proposals.

•TheEA’sconcernsregardingthelinkagebetween WtP and environmental performance is best dealt with nationally.

•TheMeasuressubgroupiscontentwiththemeasures and incentives proposed by the Company

CCG observations on Incentives

UU had presented the CCG with a measures and incentive mechanism which members found to be complex and were concerned about the customers’ ability to understand them. The question of having financial rewards without having specifically tested customer support for these was also challenged with the CEO, as was the issue that proposed rewards for performance on sewer flooding and pollution incidents could be perceived as rewards for levels of service failures. He acknowledged these concerns and UU later confirmed its decision to withdraw any rewards from the scheme. A mechanism for a penalties only scheme was agreed with the CCG.

Business plan

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Appendix 1: CCG member profiles

Appendices

Andrea Cook OBEChair, Customer Challenge Group – United Utilities

Andrea Cook has extensive experience of consumer representation and regulation in the provision of water, energy, legal and financial services and has been a highly effective campaigner for people who are poor or vulnerable for over 25 years. As a result of her work in the energy sector and her ability to influence at the most senior level, the homes of 4 million consumers were insulated and investment in energy efficiency by Government increased from £5 million a year to £200 million a year.

She is currently a non executive director on the Board of the Consumer Council for Water and Chair of its Northern region, working with Hartlepool Water, Northumbrian Water, Yorkshire Water and United Utilities. She leads on issues of fair charging and affordability. As an Independent Member of the Parole Board she works with criminal justice partners to protect the public by assessing whether prisoners can safely be released into the community. She is also an adviser to the States of Jersey and a member of the Board of its Energy Efficiency Service.

Andrea’s recent appointments have been as a Board member of the Energy Saving Trust (2009-2012) and the Legal Complaints Service (2005-2011). She was previously a member of the UK Round Table on Sustainable Development (1995-99), the Renewable Energy Advisory Committee (1995-2002) and the Advisory Group to the New Deal Task Force (1997-2001). Andrea was awarded the OBE in 1990 for services to the voluntary sector.

Bernice LawDeputy Chair, Customer Challenge Group – United Utilities

Bernice Law has worked in public service in the North West , mainly in Local Authorities for almost forty years, working latterly as the COO and Deputy Chief Executive at the North West Development Agency. She was Chief Operating Officer for the Liverpool Capital of Culture in 2008. Her current role is Operations Director at Liverpool Vision, the Mayor of Liverpool’s economic Development Company.

Bernice has held a number of non executive positions at Merseytravel, Marketing Cheshire and the Liverpool and Merseyside Theatres Trust.

Bernice is very active in the community, and is a school governor and has been a member of the Cheshire Advisory Committee which appointed Magistrates to the Cheshire bench

Appendix 1

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Andrew WhitePolicy Manager, Consumer Council for Water.

Andrew White is Senior Policy Manager for the Consumer Council for Water (CCWater), the statutory body which represents the interests of Water and Sewerage customers in England and Wales.

He has 20 years experience of regulation and consumer representation within the UK Water Industry. During that time he has held positions with Ofwat, WaterVoice and CCWater and worked closely with United Utilities to help secure significant service and performance improvements for customers. He has also led the work to represent the interest of the region’s customers at the last three price reviews.

Andrew has led CCWater’s national work on Fair Charging and Affordability since 2006. In that role he has helped gain recognition for the need for water affordability to be addressed and influenced the policy response.

Andrew now heads up CCWater’s social policy team which has responsibility for consumer protection, charges and tariffs, affordability, debt, customer vulnerability and business customers. He is currently working with the water companies in England and Wales on the development of social tariff proposals under the provisions of the Flood and Water Management Act, and on their research to test the acceptability of proposals with customers.

Dr Richard JarvisConsultant in Communicable Disease Control, Health Protection Agency

Primary Post: Consultant in Communicable Disease Control, Public Health England.In this role I prepare for and respond to incidents affecting the health of the public caused by infectious diseases and environmental hazards including chemicals, radiation and some physical hazards such as flooding, heatwaves and cold snaps. My geographical patch is Cheshire and Merseyside. I have particular interests in waterborne illness, environmental hazards, the health effects of climate change and the health benefits of sustainable development.

Other Roles:

•HeadoftheNorthWestSchoolofPublicHealth.Iamresponsibleforthe delivery of higher specialist training to 50 professionals wishing to become consultants in public health

•InterimDeputyDirectorofWorkforcedevelopmentNorthernRegion.

•IhaverecentlydemittedofficeasChairmanofthePublicHealthMedicine Committee of the British Medical Association, with both medical professional and trade union functions

•HonoraryClinicalLecturer.LiverpoolUniversity,includingteachingand examining on their Masters in Public Health course.

Damian WatersRegional Director – CBI North West

Damian Waters was appointed Regional Director of the CBI North West in January 2003 – prior that Damian was Assistant Director for the CBI North West and North Wales.

He studied Business and Finance at the North East Wales Institute of Higher Education and Lancashire Polytechnic between 1988 and 1991, obtaining first an HND and then a BA (Hons). He has worked as an accountant for an oil refining company and a production director for a manufacturing business in North Wales.

Damian is a member of the Nuclear Network North, the Centre for Global Eco-Innovation Advisory Board and a member of the Court of Governors of Lancaster University and The University of Manchester. For ten years he was Chair of Governors of Britain’s largest primary school. Damian is a Director of The Wild Media Foundation and a Trustee of The Cheshire Wildlife Trust and the People’s History Museum.

Appendix 1

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Joel TaggPolicy Advisor - BIS North West

Joel Tagg has worked in economic development and regeneration in the North West for more than ten years, previously working for the Government Office for the North West, and more recently for the Department for Business, Innovation and Skills. Tackling the causes of deprivation and supporting local businesses in the region has been a priority of work throughout his career. For the last four years his role has also included a low carbon / energy remit, and so he has experience of working with utility companies on delivery issues. Outside of work, Joel has been a Director of a property management company for the last eight years, and is active in local community issues where he lives.

Jacky AtkinsonInspector – Drinking Water Inspectorate

Jacky Atkinson has spent more than 35 years in the water industry as a water quality scientist, working in water quality regulation including development of compliance sampling programmes, writing quality manuals, monitoring the progress of drinking water quality capital schemes and catchment protection. She has worked as a water treatment process scientist, followed by a further spell in operational audit and operational risk management and more recently has worked in a water company regulations department as a point of contact with Ofwat for operational matters and regulatory reporting. She has been an Inspector in the Drinking Water Inspectorate since 2010 and was appointed as the Inspectorate’s project manager for PR14.

Bill DarbyshireEnvironment and Business Manager Environment Agency

Bill Darbyshire is the Environment Agency’s lead for protecting and improving the water environment. He has 25 years experience working as an engineering contractor; an environmental consultant and as an environmental regulator.

His current role is in leading the development of the strategic environmental plans which ensure that the rivers, lakes and groundwaters of the North West achieve their environmental potential to help underpin economic growth and deliver more for the communities in the region.

A passionate advocate for the environment, he believes that facing the big challenges of climate change, flood risk and river quality should be done in a way that brings benefits for all the people and businesses in the North West.

Neil ClarkArea Manager Natural England

Neil Clark has been working within the environmental sector for over 25 years. He has worked with water companies to develop and support rural communities, farmers and enhance the natural environment on a `catchment sale`, creating new biodiversity, while improving water quality `up stream` on programmes across the North of England. Neil was also the Area Manager for Cumbria in 2009 and helped lead a programme for recovery during the severe flooding, helping rural communities get back on their feet. Neil is a board member of Lancashire, Cheshire and Liverpool Local Nature Partnerships’ and an active member of the local Parish Council, chairing a group linking local schools to encourage access and enjoyment of a local wildlife reserve.

Appendix 1

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Jenny Stewart

Jenny Stewart is the Chief Executive of the Liverpool Chamber. Jenny joined HM Diplomatic service at just 17, and worked in the North America Department of the Foreign and Commonwealth Office. She also worked in the FCO emergency unit during the Falklands Island conflict. Later she joined the private sector with BT and since then has held senior level commercial posts. Jenny owned her own business in Sutton in Ashfield, and another on the Wirral, after which she became Membership Director at The Forum of Private Business, a business lobbying organisation with 25,000 members nationally.

Alistair Maltby

Alistair Maltby is Director for the North of England of The Rivers Trust, the national umbrella body for the river trust movement, and has been working in community-led river restoration for 16 years. A Chartered Environmentalist and Fellow of the Institute of Fisheries Management, Alistair has played a leading role in a number of innovative community-led approaches to river catchment management in the Westcountry, London and Cumbria, and was a founding trustee of the Association of Rivers Trusts, which went on to become The Rivers Trust itself. He is an advisor to Defra Water Quality, particularly on the development of the Catchment-based Approach, and a Marine Management Organisation Appointee for fisheries management on the NW Inshore Fisheries & Conservation Authority. Alistair was awarded a Churchill Fellowship in 2007 to study climate change resilience in river catchments.

Dr Tayo AdebowaleDirector Orkadia

Dr Adebowale is a Chartered Environmentalist, and Chartered Water and Environmental Manager, with over 25 years experience. She provides independent advice to a wide range of clients under the trading name of Cirkadia.

She is the Environment Agency Appointed Member for Sustainability, on the North West Regional Flood and Coastal Committee.

Tayo has over 9 years experience as a Non-Executive Director within the public sector (Natural England, and the Forestry Commission), assisting shape environmental policy and strategy).

She previously worked for Environmental Resources Management (ERM), and Jacobs Engineering. Her portfolio includes environmental projects relating to strategy, policy, sustainable development and sustainable business management / green economy (including energy and resource efficiency), wastewater treatment, water quality and management, land management and regeneration, environmental impact assessments, academia, stakeholder dialogue and partnership building, and environmental auditing.

Carol Graham

Carol Graham has worked with Citizens Advice in various roles for almost 20 years and has extensive experience of how debt and hardship can negatively impact on individuals, families and communities. Prior to working with Citizens Advice Carol worked in the financial services industry and retail.

Appendix 1

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Appendix 2: CCG terms of reference

1

1 Role United Utilities (UU) is developing its business plan for the future delivery of water and sewerage services, which will be used to agree changes in service and in prices over the period 2015 to 2020. Engaging with customers and other stakeholders will be a key component of this plan. The Customer Challenge Group (CCG) will:

Advise and challenge UU as it develops its engagement plans, ensuring the company considers a wide range of views and approaches to engagement.

Advise and challenge UU as it interprets these views, considering how customer and

stakeholder views are being taken into account in the company’s longer-term strategy and business plan.

Advise and challenge UU, and regulators, to consider opportunities for being more innovative

in delivering environmental and customer service outcomes in a sustainable and cost-effective way, and making sure plans are affordable and acceptable for most customers.

The CCG will be required to make one or more reports to Ofwat about:

a) UU’s engagement process the effectiveness and level of support for UU’s engagement with its various customers and

with the local customer challenge group; and whether the level of engagement and assurance is proportionate to the size of proposed

changes in service levels or bills.

b) UU’s strategy and business plan whether the plan facilitates the delivery of the required statutory outcomes and other

improvements which customers would like to see; whether UU has actively considered the opportunities for more innovative and sustainable

approaches to delivering the required or desired outcomes; whether UU’s longer-term strategy and business plan is an appropriate response to

customers’ views; whether UU’s business plan strikes a reasonable balance between the views of different

customers and stakeholders; whether UU has explored the range of cost-effective solutions and phased delivery of its

various outcomes to maximise acceptability to customers; and whether UU’s overall final business plan appears likely to be acceptable to a majority of

customers, highlighting any particularly affected customer groups.

Customer Challenge Group Terms of Reference

Appendix 2

62

2

2 Membership Independent Chair:

Andrea Cook Independent Deputy Chair:

Bernice Law Members with a statutory remit:

Environment Agency – Toby Willison Drinking Water Inspectorate – Milo Purcell Natural England – Neil Clark Consumer Council for Water – Andy White

Local members: Economic

CBI North West – Damian Waters Chambers of Commerce North West – Colin Daniels BIS North West – David Higham

Health

Health Protection Agency North West – Richard Jarvis Social

Citizens Advice – Carol Graham Voluntary Sector North West – Amanda Miller

Environmental

The Rivers Trust – Alistair Maltby Members sit on the group as representatives of their organisations. Deputies may attend if necessary. UU observers:

Director of Regulation Corporate Affairs Director Customer Services Director Strategic Asset Planning & Engineering Director

Secretary to be provided by UU.

Appendix 2

63Appendix 2

3

3 Governance The Chair will lead the meetings, with the Deputy Chair carrying this out in the Chair’s absence. UU will provide secretariat and administrative support, including booking meetings, arranging venues, producing agendas, circulating papers and publishing minutes. The CCG will meet as required. Meetings are likely to be every one to two months, but no less than quarterly. The work programme and approach will be agreed with members of the group. The CCG will be quorate if either the Chair or Deputy Chair is present, plus at least 4 other members. The CCG is committed to operating in an open and transparent manner; however there will be some limitations due to commercially confidentiality. All members will be asked to sign a confidentiality protocol. Agendas and other materials will be provided in a timely and accessible way. Minutes will be made publicly available on www.unitedutilities.com.

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Appendix 3: Willingness to Pay subgroup terms of reference

1 Role

Support the CCG in developing a common understanding of the Willingness to pay and associated

customer research Support the CCG in identifying the main priorities for UU’s customers Help shape, inform and input to key elements and effectiveness of the planned research Support the CCG in questioning and challenging the results

2 Membership

Chair:

Andrea Cook – Customer Challenge Group Chair ([email protected])

Members representing Customer Challenge Group

Environment Agency - Bill Darbyshire ([email protected]) CAB – Carol Graham ([email protected]) DWI – Jacky Atkinson([email protected]) CCW – Andy White ([email protected]) Deputy chair – Bernice Law ([email protected])

UU members:

Gaynor Kenyon - Corporate Affairs Director Janine White - Competition and Economics Manager Jill Pilling – PR14 Manager

3 Meeting dates

21st June 2012 17th January 2013 7th March 2013

PR14 CUSTOMER ENGAGEMENT

Customer Challenge Group Customer Research and Willingness to Pay Sub Group Terms of Reference

Appendix 3

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Appendix 4: Environmental subgroup terms of reference

1 Role

Support the Customer Challenge Group in developing a common understanding of environmental

issues in the North West. Support the Customer Challenge Group in identifying the main environmental priorities for the

North West, including their cost implications. Identify innovative, sustainable and/or cost effective solutions to support the delivery of the

environmental programme.

2 Membership

Chair:

Bill Darbyshire - Environment Agency ([email protected])

Members representing Customer Challenge Group

Environment Agency - Bill Darbyshire Natural England – Neil Clark ([email protected]) The Rivers Trust – Alistair Maltby ([email protected]) Consumer Council for Water – Andrew White ([email protected])

UU members:

Jo Harrison - Head of Wastewater Strategic Asset Planning Dave Champness - Head of Water Strategic Asset Planning Jill Pilling – PR14 Manager

3 Meeting dates

30th July 2012 1st October 2012 3rd December 2012 16th January 2012

PR14 CUSTOMER ENGAGEMENT

Customer Challenge Group Environmental Sub Group Terms of Reference

Appendix 4

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Appendix 5: CCG Challenge log

CCG Key Challenges and Observations UU Responses

CCG Report - Section 2General

Customer engagement - CCG challenged the extent and degree of customer engagement and wanted to ensure the company’s submission reflected the priorities of all customers.

UU agreed to reflect on any gaps in the engagement process. A standard agenda item was, therefore, introduced at future CCG meetings, enabling the company to provide greater visibility of its range of activities in this area.

Customer Promises

CCG challenge that as only 2 people had turned up for the ‘Young Singles’ focus group this was not a representative sample.

UU agreed and conducted telephone surveys with Young Singles to provide a suitable sample size

CCG reinforced the need to include those difficult to reach communities who may not have ready access to broadband or the internet.

Customer research was conducted in a number of formats, in person and via telephone interviews.

Customer engagement - CCG reinforced the need to ensure that a balance of views had been sought from different communities to ensure that the promises represented a broad range of customers.

The third party research consultants ensured that the survey samples were representative of the customer base.

Communities promise - On the removal of ‘communities’ from customer promises CCG questioned if customers may have had a different view regarding ‘communities’ if the UU funding had been seen as coming out of company out performance rather than possibly being regarded as a supplement on bills.

UU’s response was that although ‘supporting local communities’ was not to be a customer promise it had not changed their commitment to current and future involvement in this area Within the Strategic Direction Statement these commitments are evidenced by:

Reference to partnerships and community working.

Supporting apprenticeships and graduate programmes.

Helping business customers to put sustainability plans in place to improve their efficiency and resilience.

Promoting water efficiency through education and engagement programmes.

Appendix 5

67Appendix 5

Willingness to Pay and Acceptability Research

CCG involvement - CCG believed there was a need for increased engagement with the CCG members. In order to address this and oversee the willingness to pay programme.

CCG, with UU’s support established the Willingness to Pay (WtP) subgroup in June 2012. This enabled detailed scrutiny of the WtP research. Sub group members were fully engaged in all aspects of the research, including review of the methodology followed, observance at focus groups, review of all scripts, materials and showcards used, and piloting of survey material.

Focusgroups-InJune2012therewasachallenge from the subgroup regarding the need for greater involvement in the focus groups since these would identify the attributes which would inform the pilot stage of WtP research. Members had not been given the opportunity to attend.

UU agreed to run two further focus groups in July 2012 enabling subgroup members to attend and so ensure there was a robust approach to customer research that the CCG was content with right from the outset.

Research groups - CCG observers were concerned that the method would not be as successful with lower socio-economic groups.

General concerns were raised by the CCG Chair at a number of meetings around the slippage of the Willingness to Pay research programme and how this may impact the company’s ability to use the outputs in the plan.

The company strengthened the governance arrangements for the project and recruited additional resources to enable delivery.

WtPpilotstudy-ForthepilotstagetheCCG observations and challenges included:Stressing the need to avoid jargon and overly technical language to ensure customers understood the questions being asked, including the definitions of attributes.Ensuring that images and words used in the questions did not contain any bias.Asking how people with no sewer flooding experience could judge their response to this type of service failure.The treatment of leakage as an attribute.

UU invited CCG feedback and review of survey materials. Third party research consultants ensured the survey material was free from bias.

Questions asked about customers’ experience of sewer flooding and this information was used in modelling of willingness to pay.

Leakage was included in the WtP2 WRM study.

WtP research - The subgroup challenged UU and their consultants to ensure the questionnaire was developed without using the words ‘willingness to pay’ to reinforce the message that the research was about how customers value their service and not about how much they were prepared to pay for any improvements.

At a subsequent CCG meeting it was agreed by the CCG and UU that the words “willingnesstopay”wouldneedtoberetained for the current price review but should be re-visited in the future by Ofwat and the industry.

WtP research - One of the key questions asked was how the process addressed the issue of where the company is driven by statutory drivers and there is no choice about meeting future compliance targets.

UU agreed to address this by making the distinctions clear, ensuring there were no leading questions and changing some of the pictures used to support the questionnaire.

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WtP research - Another key input from the subgroup was the review of scripts and pictures to be used by researchers in asking customer questions and illustrating examples such as sewer flooding. Some changes to these were requested by the subgroup.

UU responded positively.

WtP research - At the CCG meeting in February2013membersraisedtheirconcerns with UU on the use of the title ’Willingness to Pay’, believing this could be misleading. It was recognised that the terminology was widely accepted by UKWIR but the CCG thought there was a need to consider alternative titles

At a subsequent CCG meeting it was agreed by the CCG and UU that the title would need to be retained for the current price review but should be re-visited in the future by Ofwat and the industry.

A CCG representative noted a significant and consistent differences in results from CAPI and online WtP Pilot and asked UU to consider this and the appropriate approach to the final survey.

Analysis was undertaken. It was agreed that nothing pointed toone approach (either CAPI or online) being more valid than the other.

It was agreed that both would be undertaken for main study but that the results would be reported separately and the most appropriate interpretation of data would be agreed with the CCG.

WtP results - The CCG and subgroup raised questions following the results presentation which included requests for more detailed breakdowns of the research data. The key challenge however was that the information presented provided only the combined survey results rather than the split of CAPI and online results as had been agreed. The CCG was insistent that this had to be rectified as clear direction had been given.

As a result of this challenge

separate results were subsequently provided to the subgroup which was fully engaged in the company’s proposals for the interpretation of the data. At the March CCG meeting a detailed explanation of the CAPI and on-line results was presented by UU to members and their decision to use the CAPI results was supported by CCG members.

WtP research - The survey design material for both water resources and sewer flooding was reviewed in depth by subgroup members and many changes to the structure and wording were recommended to make it easier for the customers to understand. A typical example was the term ‘surface water’ which was changed to ‘rain water’.

Almost all of the changes were incorporated into the final survey material.

WtP research - The CCG members expressed concern about the complexity and potential difficulty for customers completing the Water Resource Management (WRM) survey material for water resources.

UU presented options to mitigate this issue at the April subgroup meeting which were agreed. For example, the WRM survey was split into two.

WtP research - Subgroup members were involved in testing the WRM prototype which they found helpful in understanding the process. On advice from the subgroup, the resultant survey was separated into two surveys; one to cover water use restrictions and the other to cover water resources.

UU had also provided feedback on all the comments raised by the subgroup and explained how they had been taken on board.

Appendix 5

69Appendix 5

WtP research - The subgroup asked UU why it was developing Stage 2 in advance of reviewing the results from Stage 1. There was concern that without the evidence to support further research, investment priorities might be not fully aligned to customer needs.

UU assured the group that Stage 2 was to help the company understand the customer priorities in greater detail to enable better targeting of investment; and to explore specific sensitivities and refine UU understanding of the service or service levels that customers may value the most.

The company were challenged on a change in timing of the acceptability testing phase one research to that previously agreed with the sub group. There had been concern that taking too long over phase 1 could truncate the time available for phase 2 research

UU acknowledged that it should have fed back the problems in attempting to truncate research timelines to the WtP subgroup first, before peaking to the main CCG forum. WtP sub group agreed that research was to proceed but with regular progress reports to WtP group.

AT results - The subgroup challenged the fact that willingness to pay for improvements in service can only be demonstrated once true values (£) are attached to the improvement. This then tests the acceptability for customers across all income groups to pay more

UU agreed but stressed that the AT should in fact test WtP in absolute terms and saw value in the process for this Price Review in that the company was responsible for conducting WtP and AT alongside side each other. CCG was content with this approach providing WtP results were not used as an indicator of customers acceptance of bill increases to fund particular improvements.

The CCG challenged the company on the level of efficiencies included in each of the tested plans and whether there was scope for further efficiencies.

UU later increased the level of efficiency in the plan tested in stage 2.

AT results - The CCG challenged the company on how they had drawn conclusions from the results, particularly as Plan A did not meet the legal minimum requirements.

UU said that although there was a higher overall acceptability for Plan A, there was still a good level of acceptability for Plan B, but when bill impacts were introduced customers clearly preferred Plan A. They also said that they were working towards trying to deliver Plan B scope for Plan A costs.

AT results - There was discussion about what legal requirements had been left out of Plan A which caused CCG members some concern and they therefore challenged UU on the appropriateness of its approach for Stage 2 Acceptability Testing.

UU clarified that Plan A omitted the undertaking in respect of Vyrnwy where they hoped to persuade DWI that a lower cost approach might be appropriate. At that time this omission amounted to around 67p - £1.21 p on bills (depending on agreed approach).

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AT results - Some CCG members challenged the company on its proposal to test a single plan which reflected a relatively large increase in bills and asked the company to consider how these challenges could be addressed.As Phase 1 Acceptability had shown support for inflation only price increases there was a challenge from some members for a flat or price cut option to also be tested.

At the June 2013 CCG meeting UU said its intention was to use a single plan for this phase. It was committed to the size of survey in order to get statistically robust results and could therefore only test one scenario. It believed the scenario reflected the best balance of service improvements and customer acceptability.

The scope of the research then evolved through discussions with the DWI and Environment subgroup, and questions were added to align the survey with CCW guidelines. A revised scope and bill impact was presented to the subgroup in July 2013, with Stage 2 testing a single plan with a £9.87 bill impact. However there were some members who continued to be disappointed that the company was not going to test more than one plan.

The CCG asked UU how it would deal with some of the ranges of acceptability in the sub elements of the plan where the range was quite considerable.

UU advised that the main purpose was to test the overall acceptability of the plan. The company had however responded to feedback from customers where lower levels of acceptability had been shown and challenged itself to look hard at the investment planned and it had specifically challenged the EA on certain elements of the NEP.

The CCG questioned the areas of low levels of acceptability, for example investment in bathing waters by business customers.

The meeting was advised that the subgroup had discussed this issue and asked the company’s consultants, eftec to prepare a note outlining the value for money aspects that can be observed from the results. This was shared with the sub group in August 2013.

WtP group observations - Members observed that UU may have a communications challenge in respect of getting public support for investment in bathing water quality but could do this by identifying the legal obligations and linking this with the potential benefits of increased tourism to the region.

The CCG chair posed a question: If the company continues to drive down the bill impact below the number tested in AT2, is there any expectation from Ofwat’s methodology or Business Plan guidelines that suggests that companies must have tested their final Business Plan with their customers?

The testing results had demonstrated that the lower bill impact showed increased acceptability and therefore the company’s aspiration to drive this number down further could only increase the acceptability level

The company is also conducting a final piece of research on its plan before submission to Ofwat

Appendix 5

71Appendix 5

The chair of the subgroup presented to the meeting a report covering their findings which included the issue of inflation and the Retail Price Index (RPI). The subgroup was satisfied that the wording used by UU in WtP and AT research had appropriately addressed this issue. The wider CCG was made aware, however, that UU had not explicitly set out the full five year impact of RPI on customer bills in monetary terms in AT research materials and this differed from the approach which had been adopted by some other companies and which could be regarded as more transparent.

Although no specific guidance had been provided by Ofwat, UU had taken advice from its Consultants and the research agency on the presentation of RPI information and also believed that it was compliant with CCWater guidelines. Whilst acknowledging that some companies had taken a different approach, UU believed the research had clearly identified RPI and had explained to customers that this was a factor that would impact bills.

WtPfindings-Followingthesediscussionsthe chair of the subgroup stated that their review had been thorough and robust and recommended that the CCG accept the results of the WtP and AT research. They had concluded that it was not necessary to press UU to undertake any further testing.

It was noted that the results of Acceptability Testing phase 2 – 75-76% acceptance for a package with a cost of £9.87 above RPI were within the threshold identified as acceptable through CCWater’s research but were still significantly lower than the 86% acceptability achieved at phase 1 for a package which would see bills rise by RPI only.The company was challenged to continue to challenge itself to drive down costs in order to deliver a bill impact of inflation or less.

UU accepted the challenge and has sought to drive down the bill impact since acceptability testing phase 2. Its Business Plan delivers a reduction in bills for household customers by 2019/20, excluding the impact of inflation.

Water Resource Management Plan

West Cumbria - There was a discussion within the CCG meeting on the timing of changes of abstraction licences in the West Cumbria area and whether this could continue into the next AMP and therefore delay the impact of the proposed investment. Members asked to see the evidence and rationale for this investment starting in AMP6.

The Environment Agency’s review of consents process has concluded that the public water abstraction from Ennerdale needs to cease in order to return the conservation status of the River Ehen Special Area of Conservation to favourable for the freshwater mussel. The revocation of the UU licence needs to occur as soon as practicable, because until it is revoked there is a risk of further damage to the mussel population, and a significantly increased probability of a hosepipe ban affecting customers in the West Cumbria zone.

The company employed a mussel expert from the Freshwater Biological Association to peer review the evidence from the current independent mussel experts advising the EA, NE and the company on the mussel health. The FBA expert corroborated the evidence

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Stakeholder Engagement

Research - At the March 2013 CCG it was reported that members had provided feedback on the materials and format for the regional events.

Area event findings - There was a substantial willingness from stakeholders to work in partnership and that UU needed to capitalise on this and identify situations, or projects, were it was appropriate to be a partner rather than a leader.

Partnership working is featured in the company’s published Strategic Direction Statement, under the ‘dispose of your wastewater’, ‘give you value for money’ and ‘protect and enhance the environment’ promises. Working in partnership with regulators, local authorities and other stakeholders to deliver proposed solutions and resolve issues also features extensively in the company’s Business Plan. The company has also included a ‘partnership leverage’ KPI in its Business Plan.

Area event findings - UU should make better use of the relationship with partners to reach out to communities and to work through intermediary agencies with good local connections. (This was prompted by the case studies of partnering with local authorities which were included in the attendees’ information packs.)

As above. Partnership working is a key theme in the company’s Business Plan.

Area event findings - UU needed to be more innovative about the way it communicates with customers.

UU responded by describing their continual review of new ways on communicating with customers including face-to-face road shows with specific themes; introducing interactive communications through its website and using other social media such as Twitter. As part of its Business Plan proposals, the company will continue to invest in its channels so that they meet emerging customer needs.

Strategic Direction Statement

DraftSDS-FollowingtheCCGreviewofthe draft SDS the following observations were made:The wording was generally plain and easy to understand although some changes were recommended.There was a recommendation that reference to reducing carbon could be made more visible alongside the outcome for climate change.The outcomes reflected a good summary of what customers had said they valued.Some issues, for example ‘clean beaches’, were not totally within the company’s gift to resolve.It was important to see the measures that relate to each outcome and the resulting customer benefits.

The wording of the SDS was amended to address the comments received. The ‘climate change’ outcome was amended to include reference to ‘reduced carbon footprint’.

The measures relating to each outcome were shared and reviewed at CCG meetings, and by the Outcomes sub group.

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SDS consultation - The CCG asked how the company intended to consult with Housing Associations and Local Authorities given the specific issues regarding the tenanted population and changes in housing benefits

UU has an on-going relationship with the Northern Housing Consortium and meets on a regular basis to discuss issues. The specific issue described was discussed at one such meeting.

CCG Report - Section 3Environment

Cost build up - These headline costs were challenged and the company was asked to provide more information on the costs presented as legal minimum; greater clarity on costs associated with hydraulic flooding and why the cost per property seemed high; greater clarity on the cost division between legal minimum and improved service.

Legal minimum costs:The company provided a breakdown of legal minimum costs, which clarified the elements regarded as legally necessary and those elements regarded as optional.

WFD costs:The company provided a breakdown of costs between legal minimum and improved service, and further detail on the overall programme.

Flood risk costs:The company provided more detail on the costs.

The company reviewed its proposed investment, including the average cost per property for hydraulic flooding. As a result, this cost significantly reduced from that challenged.

Ennerdale: The company explained that it had examined a range of options to resolve the issues in West Cumbria. These included demand side measures, but these were neither sufficient to meet the scale of the supply demand deficit, nor cost beneficial.

Detailed timelines and scenarios have been shared with the CCG through the process, and the West Cumbria scheme has been subject to on-going dialogue with EA and other stakeholders under the WRMP review process.

The EA reviewed the delivery timeline for the company’s proposed Thirlmere option.

WFD-TheCCGsubsequentlyagreedthatessential schemes are required under theWFDtopreventanydeteriorationofwater quality and those schemes related to bathing and shellfish waters.

The company discussed at length with CCG the right proportion of investment that should be included in AMP6. To ensure intergenerational equity, the CCG agreed that the proposal of 16% of the investment was appropriate.

On the proposed approach to addressing water resource requirements in West Cumbria some members of the CCG Questioned whether in-zone supply and demand measures might be more cost effective in addressing resource shortfall than pipeline from Thirlmere.

The company provided justification for the proposed approach including the uncertainty around whether adequate water resources are available within the zone.

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Sewer flooding - The CCG questioned whether these schemes could be regarded as cost effective. The assumed unit cost of £325k was far in excess of what had been undertaken in previous AMP periods.Because of the strong concerns and challenge raised by CCG members in respect of sewer flooding costs a meeting with UU was held in August to establish a better understanding of how these costs had been developed.

The key outcomes from the meeting were:

Costs and project objectives were refined further and the overall bill impact was expected to be only slightly less than that tested in Acceptability stage 2 research.

UU had always previously cited that the hydraulic programme would address just 207 properties – with an associated unit cost of £325k. At the meeting it was established that around 410 properties (i.e. an additional 203 properties) will also have their risk reduced, at a cost of £86m for the hydraulic programme. Some of these properties have not yet flooded and so are not currently on the register but have been proactively identified as at risk of flooding by UU.

In light of the above and changes to assumptions about the cost of schemes the unit cost for the hydraulic programme was clarified as £260k for 110 properties and £190k for 300 properties.

UU acknowledged that, in hindsight, it would have been better to present unit costs as an average rather than a maximum and to have presented the full picture in terms of the overall number of properties which will benefit from its proposals.

In working through the revised costings for the overall flooding programme (hydraulic and ‘flooding other causes’), which total £210m, it was pointed out to UU that there was possible double counting of a figure of £15m for climate change. The company subsequently acknowledged this and revised the costs accordingly.

Assuming the information UU provided was correct regarding the £86m hydraulic programme addressing issues at 410 properties, rather than 207, then CCG members were more comfortable with the company’s unit cost assumptions.

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Ennerdale - There was concern that the in-zone solution had not been sufficiently worked up and that one sixth of the overall cost of the Thirlmere scheme may not cover the work needed to be done in AMP6.

Based on its experience of delivering similar large scale pipeline schemes, UU assumed that even starting the scheme in AMP5 using transition funding, it will not receive National Park planning and environmental permissions before 2018. Therefore, the majority of the construction spend is currently expected to occur in AMP7.

However, should the approvals process conclude faster than anticipated, it does not want to constrain the amount of construction in AMP6 (and unnecessarily delay the scheme’s implementation) due to a lack of funding. It is therefore proposing that this scheme is assessed by Ofwat in thesamewaythat“overlapprojects”werehandled in PR09 i.e. funding levels will be corrected at PR19, reflecting the actual proportion of the scheme that is delivered in AMP6.

UU also arranged for independent scrutiny of the Ennerdale solution, which was undertaken by EA.

Price controls

Separation - CCG members questioned the water industry and UU’s view on this separation, and what measures UU would put in place to protect domestic customers if they had to pay more as a result.

The company explained that the debate on price separation is regarded by Ofwat as having been concluded, and the questions now are about the definition of retail and wholesale services.

Separation - Members asked what measures UU was putting in place to protect domestic customers from having to pay more.

The company responded that steps would need to be taken to ensure that domestic customers were not cross subsidising commercial customers. Competition arrangements are currently set out by the Costs Principal in legislation, but it has made competition more difficult and it is planned to be repealed.

Vulnerable customers - The CCG emphasised the need for UU to protect vulnerable customers where possible; members hoped that the CCG would be able to challenge and work with the company to achieve bills in 2015-2020 that are affordable for a majority of customers.

Despite the significant cost challenges it faces, the company’s Business Plan delivers a reduction in bills for household customers by 2019/20, excluding the impact of inflation.

The company’s Business Plan also outlines the range of schemes it offers to help those struggling to pay or in debt, and how it will build on these going forward.

Deprivation and affordability

A CCG member questioned whether interventions to alter pipework to allow metering an efficient use of resources when Assessed Volume Charges can deliver a lower charge without such plumbing work. Some companies have introduced a lower level AVC for those in sheltered accommodation.

UU believe its approach is cost effective, will reduce unwanted contacts and meet customer demand for a water meter versus an assessed charge.

This approach is aimed at a range of customers, not just those in sheltered accommodation.

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Deprivation impact - Members asked how they could gain more evidence in this area to understand the impact on the company. However they also pointed out that the higher bills that the company was testing at that time could potentially undermine the case for a’ special factor’ if it was felt that the company had not taken social and economic deprivation into consideration in setting its price limits.

At the October 2013 CCG meeting the company presented the further evidence requested by members to show how deprivation and affordability affects retail costs.

The company believed that the impact of socio economic deprivation on its costs to be material and significantly different to other companies. As such, the company will be submitting a case for an adjustment to the ACTS to reflect the impact of this issue.

There was general consensus amongst CCG members that UU’s operating environment has an impact on its cost to serve and that Ofwat should consider this and the extent to which it needs to be reflected in price limits. This will be important to ensure sufficient funding is available for the company to continue to operate support and assistance schemes for those who are struggling to pay.

Historically, there has been recognition of the deprivation issue by Ofwat. The company’s Business Plan will include a case for Ofwat to recognise deprivation as an issue for the North West and, therefore for UU.

Financing

Financing-TheCCGmemberswantedthecompany to be transparent in presenting financial information, for example, if it had outperformed against its PR09 submission and the impact of a lower cost of capital and higher level of RPI. There was a discussion about the legacy debt that is carried forward and how long before that is effectively paid off. The CCG stated it would like to see how UU plans to spread the cost across future generations in the build-up to developing the Business Plan. Members asked about interest rates and how they are applied.

The company has provided an explanation and detail on a range of financing considerations, including how UU is financed, its performance in previous AMPs, and mechanisms for funding and outperformance. This included an explanation on how interest rates are applied to the cost of capital, and how outperformance is given back to customers and shareholders in a 70%/30% ratio at the next price review.

Financing-Thisledtoadiscussionabouthow clear this is to customers. CCG members believed that customers would not feel they were getting benefit from any outperformance particularly if the messaging to them was around bills in the next five year period ‘not going up by as much as they would otherwise have done’. Customers wanted to see price reductions in the current climate.

The company provided a detailed overview of funding mechanisms and how the benefits of outperformance are shared. The company’s approach is the current framework for regulatory outperformance.

Financing–Therewasachallengethatcompanies may take a conservative view to ensure outperformance.

The company explained that they must take a reasonable view of financing arrangements that protects the interests of both its customers and shareholders and that some of the economic issues that are currently being experienced could not have been predicted at the time of the Final Determination for AMP5.

Sewer flooding - Members asked whether there was any allowance made for heavy rainfall where surface water had impacted on the sewerage system.

UU explained the scenarios whereby weather conditions could be taken into account and discounted from the reported performance.

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Customer dividend - Members asked whether the company should consider the concept of a customer dividend that could be positioned alongside investor dividends. This ‘rebate’ could be founded on a number of scenarios ranging from increased investment, a social tariff or something more embracing that would benefit all customers.

The company’s approach in this area is the current framework that exists for regulatory outperformance.

Corporate responsibility - Members questioned how much information should be communicated to customers about financing and outperformance and the challenge of customers actually understanding the mechanisms that the company uses to share this. Members debated the impact of communicating outperformance and how this could be perceived by investors and shareholders. This discussion extended to UU’s corporate responsibility to the North West and how much money is invested to support the community.

The company explained that there are several ways in which UU demonstrates its social responsibilities such as links with capital schemes and support for local communities when the company is conducting major works in an area through to the charitable trust fund it set up to help customers in debt.

Economic impact - Members asked about the impact of UU’s work in the North West and the resultant impact on the economic climate in the region and whether there was any documented evidence which could be made available to them.

The company advised that there is an external report by Regeneris that was sourced through the North West Development Agency, which evidences UU’s impact on the NW economy. This suggests that the company’s current £3.5bn capital programme converts to a £7bn impact on the wider North West economy and the 5,000 direct employees of UU translates to 9,000 jobs in the North West when the supply chain is taken into account. The report was made available to CCG members.

Integrated asset planning

Investment decisions - UU are often charged with being capital scheme dependent – are the company’s systems developed to ensure that the interests of the customers (least cost) are aligned to the interests of the company (lowest whole life cost)?

UU’s corporate systems ensure that investment decisions are made on a lowest whole-life cost basis and this does result in the least cost impact on customers. UU’s whole life cost model generates an equivalent revenue number as a net present value (NPV) which is the basis for decision making.

Climate change - How are issues such as climate change and environmental impacts assessed during the project development process?

UU’s approach to climate change is set out in their corporate strategy and covers both adaptation and mitigation. In terms of adaptation, they follow DEFRA’s best practice and incorporate the findings of CIP09 into design and modelling for future investment. This is reflected in the base assumptions that apply to all projects, such as rainfall impacts. These base assumptions are periodically reviewed and any changes would be built into future designs from the point of change.

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Community engagement - How does the company engage with communities to ensure that local knowledge is incorporated into scheme development?

At a project level, UU’s Project Management system includes many prompts about obtaining local community knowledge, such as the following assessments:

•InitialCustomerAssessment•CustomerImpactAssessment•CommunityImpactAssessment

The knowledge derived from these assessments is built into the project’s Stakeholder Management and Communications Plan which is regularly reviewed and updated as the project continues.

R&D - Is the company robust enough to bring new ways of working into its project development system?

UU has committed to investing in research and develop (R&D) and implementing new technologies and solutions to its capital programme and offering new services to customers. The company strategy is to have innovationasacorevaluesothatstaff“liveand breathe” innovation and are constantly finding new ways to provide better value for money. R&D is a key enabler to deliver incremental, breakthrough and fundamental innovations which meet both the short and long term promises of the business and our customers.

Business Plan

A CCG member had concerns re UU’s level of acceptance for failures for water quality and observed that UU should be delivering 100% compliance. He expects to see a plan that moves towards this position.

In AMP6 the company is planning performance improvement in its Water Quality Service Index, which includes compliance with water regulations as a sub-measure.

There is a significantly reducing cost-benefit for the interventions required to guarantee 100% compliance. The company believes that its rate of progress in AMP6 is an appropriate pace of improvement, balancing cost and customer affordability. Future targets will be reassessed in light of customer willingness to pay and acceptability testing at PR19.

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Members:•Askedhowtheycouldgainassurances

that the company was delivering solutions that are fit for purpose and that it had considered ranges of solutions to meet desired outcomes

•Soughtassurancesthatconsiderationsfor climate change and carbon neutral solutions had been factored in.

The company explained that there is a common framework for a risk based/forward looking assessment of what assets needed maintaining and what costs should be applied. The company uses a tool (PIONEER) that models historical data and looks at the probability of failure across a number of asset types. This enables models to be developed to predict where investment is required.

The company explained that this tool was used at the last price review and had been explained to Ofwat in detail. The tool enables users to incorporate lessons learnt from projects to refine the system on an on-going basis.

The company explained the methodology and approach for costing solutions in more detail at the Optioneering Solutions sub group meetings on 19 and 26 June 2013. Supplementary information and a Briefing Note were also produced to support the materials presented to members at these meetings.

Measures of Success, Outcomes and Incentives

A CCG member challenged Proposed Measures of Success for helping those who struggle to pay (Per Household Consumption and No. water meters installed for free) It was suggested numbers helped through assistance schemes is a better measure.

The company modified the measures of success accordingly.

CCG members challenged the rational for not including some KPIs as incentives such as “customers helped and supported into making regular payments”.

Members also challenged where bio-diversity measures appeared in the framework.

Members provided feedback on the draft measures:•Itwasfeltthereneededtobeaspecific

measure relating to those customers who are struggling to pay and how the company was helping them.

•Membersaskedforclarityonwhichweremandatory/regulatory measures and which were the company’s proposed measures

Measures of success were amended as a result of CCG feedback and internal UU challenge, and clarity was provided on mandatory vs. company proposed measures.

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Some CCG members had concerns that whilst WtP findings might provide an indication of customer priorities it does not provide evidence of customer consent for increased charges as a reward for outperformance.It was also noted that the proposed rewards in respect of pollution and sewer flooding performance ran the risk of being perceived as rewards for ‘failures’ i.e. flooding and pollution.It was not clear how incentives would encourage improved environmental performance.The complexity of the methodology and the proposals makes it difficult to understand and would therefore be difficult for customers to understand.A number of the proposed penalties have large ‘dead bands’ which reduces the likelihood of incurring penalties. There is a need to understand how these have been set in order to ensure incentives are meaningful.

The company has followed Ofwat methodology in using WtP valuations. The penalties (being based on WtP) reflect customer preferences. In addition, the incentives are part of a suite of factors which drive performance (reputational, SIM, enforcement action, cost impacts).

The company has also reconsidered the balance of rewards and penalties:

•Therewardelementhasbeenremovedfrom the Outcome Delivery Incentives.

•Changeshavealsobeenmadetotheapplication of the penalty on a number of incentives, to make them more effective.

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Appendix 6: DWI statement and decision letters

Drinking Water Inspectorate Statement for United Utilities’ Customer Challenge Group Report to Ofwat

1. Introduction

1.1 The Drinking Water Inspectorate (DWI) is the independent regulator of drinking water quality in England and Wales. We protect public health and maintain confidence in public water supplies by ensuring water companies supply safe clean drinking water that is wholesome, and that they meet all related statutory requirements. Where standards or other requirements are not met, we have statutory powers to require water supply arrangements to be improved.

1.2 We publish information about drinking water quality and provide technical advice to the Secretary of State for the Environment, Food & Rural Affairs, and to Welsh Ministers.

1.3 For PR14, water companies are expected to ensure that their business plans make provision to meet all their statutory obligations, including the need for public water supplies to be safe, clean and wholesome, and that provision is made for a sustainable level of asset maintenance to maintain public confidence in drinking water quality. Ministers summarised these requirements in Defra’s Statement of Obligations1, and in their further guidance on PR14 matters to Ofwat. In addition, the Inspectorate set out in DWI Information Letter 01/2013 – The 2014 Periodic review of Prices – Guidance for water companies, published on 1st February 2013 supplementary guidance to companies

1 http://www.defra.gov.uk/publications/files/pb13829-statement-obligations.pdf

on the regulatory framework for drinking water quality, statutory requirements, the Inspectorate’s role in the Price Review process and our requirements for companies seeking technical support. The Inspectorate also published separate PR14 guidance on a range of specific issues. All of the Inspectorate’s published PR14 guidance is available on the DWI website.

1.4 It is worth noting the particular emphasis that Ministers placed in their Guidance on the resilience of supply systems, and that the Inspectorate placed on existing duties to manage the introduction of new sources and to plan supply arrangements to protect consumers and ensure no deterioration in the quality of their supplies.

1.5 The Inspectorate has a position on all of the water companies’ customer challenge groups in England and Wales. The Inspectorate’s representative on United Utilities’ Customer Challenge Group has supported the process by acting as an independent member with the overall remit of ensuring that the Company business plan proposals reflect the views of consumers and place drinking water quality at the forefront of such plans.

2. Formal Drinking Water Quality Proposals Requiring DWI Technical Support

2.1 As with previous periodic reviews, water companies seeking technical support from the Inspectorate must demonstrate the need for each proposal. The case for justification must be accompanied by evidence of the company’s options appraisal process to identify the most robust,

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sustainable and cost-effective solution, with evidence that the preferred solution will adequately address the risk and deliver the required outcome within an appropriate timescale.

2.2 United Utilities submitted 7 formal proposals for drinking water quality to the Inspectorate, listed in the table below.

2.3 The Company is to be commended on the quality of the submissions to the Inspectorate, most of which were received in advance of our deadline of 31st July 2013, and which complied fully with our PR14 guidance. The Inspectorate met with the Company before the proposals were submitted, and in addition discussions took place at CCG and Quadripartite Meetings.

2.4 The Inspectorate has formally supported 6 of the Company’s proposals and we will put legal instruments in place to make these proposals legally binding programmes of work. Our final decision letters were sent to the Company on 4th, 7th and 8th October 2013.

2.5 The catchment management proposals are to address a variety of parameters and are included in the NEP. Metaldehyde is widely used in agriculture for the control of slugs, and

is not removed by existing treatment processes for pesticide removal. 2012 was a very wet year and United Utilities detected metaldehyde in the River Dee and Llangollen Canal for the first time. We recognise that companies need to focus on catchment activities to aim to reduce the risks to drinking water quality and therefore we will put legal instruments in place for the metaldehyde proposals. The River Dee proposal covers Huntington and Sutton Hall WTWs, and the Llangollen Canal proposal covers Hurleston WTW. The other catchment proposals are twin-track approaches that include operational and treatment measures to address specified parameters.

2.6 The proposal for the abandonment of Dark Lane WTW because of concentrations of nickel in the raw water is commended for support. We have not supported the proposal as a quality enhancement scheme because the Company has existing controls in place to manage the risk to consumers, and the evidence provided by the Company does not clearly demonstrate that there is an increasing risk to consumers. We acknowledge, however, that compliance with the standard is being maintained by controls that are unsustainable in the longer term,

PR14 DWI Ref.

Scheme Name

Quality Parameter(s)

Scheme Type

Preferred Option

DWI Final Decision

UUT016 Sweetloves WTW

Taste & Odour

Catchment Management + operational measures

Catchment Actions plus reservoir mixing

Regulation 28 Notice

UUT017 Loveclough WTW

Taste & Odour

Catchment Management + operational measures

Catchment Actions plus reservoir mixing


UUT018 Dark Lane WTW

Nickel Other Source abandonment

Commend for Support

UUT019 Wayoh WTW Pesticides - MCPA

Catchment Management

Catchment Actions plus replacement of RGF media with GAC if required


UUT020 River Dee Pesticides - metaldehyde


Catchment actions

S19 Undertaking

UUT021 Llangollen Canal

Pesticides - metaldehyde


Catchment actions

S19 Undertaking

UUT109 Lead Strategy

Lead Catchment Management

Package of measures


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and we agree that it is necessary, and is in consumers’ best interests, for the proposal to abandon Dark Lane WTW and to supply the area with an alternative source to be carried out.

2.7 The Company submitted a proposal to address lead in drinking water, which will be covered by a Notice. The standard for lead will reduce from 25μg/l to 10μg/l in December 2013, and the package of measures included in the Company’s proposal will improve compliance with the new standard and reduce consumers’ exposure to lead from drinking water.

2.8 In addition United Utilities invited us to review a high level summary of its proposals for catchment management, which represent a continuation of its existing SCaMP2 initiative. The schemes are included in the NEP and are not listed in the table above. We are happy to commend these proposals for support because we recognise the benefits that this work will contribute to delivering sustainable drinking water quality in the longer term. The proposals are consistent with the requirements of Water for Life, the Government’s white paper setting out its vision for water management in England, and with the Inspectorate’s own PR14 guidance.

2.9 United Utilities has an existing AMP5 Undertaking in place to clean and refurbish the three pipelines of the Vyrnwy Aqueduct that transports water from Oswestry WTW to Cheshire and Merseyside. The scheme is a phased programme of work, for completion by the end of AMP6, which the Company has partially completed. On 31st July 2013 the Company submitted a formal request to the Inspectorate to change this proposal. Research undertaken by the Company has identified an alternative approach to mitigating discolouration in the zones supplied which would result in a financial saving for customers over AMP6. We have agreed to support this change with a revised Undertaking that will include a caveat that if the revised proposal does not deliver the same benefits to consumers, the Company must complete the original planned work on the aqueduct, which would take place during AMP7.

2.10 It should be noted that these improvement schemes will make only a small contribution to enabling the Company to meet its legal obligations in respect of drinking water quality. These obligations are met overwhelmingly by the Company making sufficient provision for operational and maintenance requirements in its business plan, and by its use of those resources. These are matters for the Company to determine and deliver. For its part, the Inspectorate will continue to keep under review, and report on, the performance of the Company in meeting its legal obligations. Statutory powers are available to secure or facilitate compliance, if necessary.

2.11 The summary of improvement schemes above reflects the position at the time of writing this statement. Further discussions are needed with the Company to finalise details. We will advise the CCG and Ofwat of any material changes.

2.12 This statement will be copied to David Champness of United Utilities, and any queries arising should be directed to Jacqueline Atkinson, Inspector, Drinking water Inspectorate, telephone number: 03000686402; email [email protected].

Milo PurcellDeputy Chief Inspector (Regulations)

Drinking Water InspectorateArea 7e, 9 Millbankc/o Nobel House17 Smith Square London SW1P 3JR

29th October 2013

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Department for Environment, Food and Rural Affairs

Home Page: www.dwi.gov.uk E mail: [email protected]

Llywodraeth Cymru Welsh Government

DRINKING WATER INSPECTORATE Area 7e, 9 Millbank

c/o Nobel House 17 Smith Square

London SW1P 3JR

Direct Line: 030 0068 6413 Enquiries: 030 0068 6400

E-mail: [email protected] DWI Website: http://www.dwi.gov.uk

4th October 2013 Dr Charmian Abbott Water Quality and Public Health Manager United Utilities DWI ref: UUT016 Lingley Mere Business Park Great Sankey Warrington WA5 3LP Dear Charmian, PERIODIC REVIEW 2014: United Utilities DWI Scheme reference: UUT016 Sweetloves WTW – Taste and Odour FINAL DECISION LETTER The Inspectorate has completed its detailed assessment of the scheme proposed by UUT to provide a combination of catchment and operational measures to secure compliance with the taste and odour standards for drinking water quality reasons at Sweetloves WTW. The detailed assessment also took in to consideration the outcome of the risk assessment report submitted to the Inspectorate as required by regulation 28(1) of the Water Supply (Water Quality) Regulations 2000 (Amendment) Regulations 2007 for the Sweetloves connected supply system. A summary of the outcome of our assessment of this scheme is attached. Based on the information submitted by the Company, the Inspectorate supports the need for a scheme to deliver compliance with the standards for taste and odour in the water supply zones supplied by Sweetloves WTW, for water quality reasons, and the supported scheme shall be included by the Company in its Final Business Plan submission, subject to the caveats listed in the attachment. In this instance the Inspectorate intends to issue a Notice under Regulation 28(4) of the Water Supply (Water Quality) Regulations 2000, as amended, that requires the Company to mitigate the risk of taste and odour that has been identified as a risk to wholesomeness in the water supplied from Sweetloves WTW. It is expected that the Company will continue to monitor taste and odour in the water supplied to consumers, and that it will take all reasonable steps to prevent contraventions of the taste and odour standards.

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I am copying this letter to Claire Daniel at Ofwat; Anne Dacey at the Environment Agency, Steven Hobbs, at CCWater, Andrea Cook Chair of United Utilities Customer Challenge Group. Yours sincerely

Milo Purcell Deputy Chief Inspectorate (Regulations)

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PERIODIC REVIEW 2014 SUMMARY OF DWI ASSESSMENT - MINDED TO SUPPORT Comment Water company:

United Utilities

DWI scheme reference(s):

UUT016

Scheme name:

Sweetloves WTW – Taste and Odour

Proposal:

Provision of a programme of catchment management activity and operational measures at Sweetloves WTW to secure compliance with the taste and odour standards for drinking water quality reasons.

Supporting evidence:

Risk assessment report for Bolton supply system dated July 2013, submitted on 12/07/13. Sweetloves WTW technical submission for PR14 received 12/07/13, and covering letter.

Conclusion:

Subject to the caveats listed below, the Inspectorate supports the need for the following scheme: A twin-track proposal to undertake catchment management actions to slow the deterioration of raw water quality, and to implement operational measures to mitigate the risks to drinking water quality. The proposal is to install reservoir mixing to reduce algal blooms (Phase 1). If this is unsuccessful, the proposal is to install GAC replacement of sand in RGFs (Phase 2).

Timescale:

Completion date: Phase 1 – 31/05/2015 Phase 2 – 30/04/2018

Estimated cost:

Estimated cost of Phase 1 is £516k Capex Plus £4.5k p.a. Opex, plus £100k for the catchment actions. Estimated cost of Phase 2 is £1.036m Capex, £0 Opex, with additional Capex of £94.8k every 3 years for GAC regeneration. Catchment actions would still be required.

Legal Instrument Required:

Notice under Regulation 28 (4)

Caveats: Subject to Phases 1 and 2 being listed as actions in the Notice, with a demonstration of benefits stage after completion of phase 1.

Comment: DWI has no role in determining proportional allocation

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of expenditure. Where DWI technical support is given, this should not be taken by the company to imply that the scheme will be partially or wholly funded as a Quality item. Schemes that require a legal instrument are considered necessary to meet statutory drinking water quality requirements. These schemes will be transposed to formal programmes of work by DWI as soon as possible and their implementation and completion will be monitored, audited and closure confirmed by DWI.

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London SW1P 3JR



4th October 2013 Dr Charmian Abbott Water Quality and Public Health Manager United Utilities DWI ref: UUT017 Lingley Mere Business Park Great Sankey Warrington WA5 3LP Dear Charmian, PERIODIC REVIEW 2014: United Utilities DWI Scheme reference: UUT017 Loveclough WTW – Taste and Odour FINAL DECISION LETTER The Inspectorate has completed its detailed assessment of the scheme proposed by UUT to provide a combination of catchment and operational measures to secure compliance with the taste and odour standards for drinking water quality reasons at Loveclough WTW. The detailed assessment also took in to consideration the outcome of the risk assessment report submitted to the Inspectorate as required by regulation 28(1) of the Water Supply (Water Quality) Regulations 2000 (Amendment) Regulations 2007 for the Loveclough connected supply system. A summary of the outcome of our assessment of this scheme is attached. Based on the information submitted by the Company, the Inspectorate supports the need for a scheme to deliver compliance with the standards for taste and odour in the water supply zones supplied by Loveclough WTW, for water quality reasons, and the supported scheme shall be included by the Company in its Final Business Plan submission, subject to the caveats listed in the attachment. In this instance the Inspectorate intends to issue a Notice under Regulation 28(4) of the Water Supply (Water Quality) Regulations 2000, as amended, that requires the Company to mitigate the risk of taste and odour that has been identified as a risk to wholesomeness in the water supplied from Loveclough WTW. It is expected that the Company will continue to monitor taste and odour in the water supplied to consumers, and that it will take all reasonable steps to prevent contraventions of the taste and odour standards.

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90





United Utilities


UUT017

Scheme name:

Loveclough WTW – Taste and Odour

Proposal:

Provision of a programme of catchment management activity and operational measures at Loveclough WTW to secure compliance with the taste and odour standards for drinking water quality reasons.


Risk assessment report for Rossendale supply system dated July 2013, submitted on 12/07/13. Loveclough WTW technical submission for PR14 received 12/07/13, and covering letter.

Conclusion:

Subject to the caveats listed below, the Inspectorate supports the need for the following scheme: A twin-track proposal to undertake catchment management actions to slow the deterioration of raw water quality, and to implement operational measures to mitigate the risks to drinking water quality. The proposal is to install reservoir mixing to reduce algal blooms (Phase 1). If this is unsuccessful, the proposal is to install GAC replacement of sand in RGFs (Phase 2).

Timescale:

Completion date: Phase 1 – 31/05/2015 Phase 2 – 30/04/2018

Estimated cost:

Estimated cost of Phase 1 is 303k Capex Plus £3k p.a. Opex,, plus £100k for the catchment actions. Estimated cost of Phase 2 is £223k Capex, £0 Opex, with additional Capex of £24k every 3 years for GAC regeneration. Catchment actions would still be required.



Caveats: Subject to Phases 1 and 2 being listed as actions in the Notice, with a demonstration of benefits stage after completion of phase 1.

Comment: DWI has no role in determining proportional allocation

Appendix 6

91Appendix 6





92






London SW1P 3JR



8th October 2013 Dr Charmian Abbott Water Quality and Public Health Manager United Utilities DWI ref: UUT018 Lingley Mere Business Park Great Sankey Warrington WA5 3LP Dear Charmian, PERIODIC REVIEW 2014: United Utilities DWI Scheme reference: UUT018 – Dark Lane - Nickel FINAL DECISION LETTER – COMMEND FOR SUPPORT The Inspectorate has completed its detailed assessment of the scheme proposed by UUT to abandon Dark Lane WTW to achieve compliance with the standard for nickel in the zones supplied by the WTW, and to supply the areas with an alternative water supply. The proposal is for drinking water quality purposes. The detailed assessment also took in to consideration the outcome of the risk assessment report submitted to the Inspectorate as required by regulation 28(1) of the Water Supply (Water Quality) Regulations 2000 (Amendment) Regulations 2007 for the Dark Lane connected supply system. A summary of the outcome of our assessment of this scheme is attached. Based on the information submitted by the Company, the Inspectorate commends for support the proposal to abandon Dark Lane WTW and to supply the consumers with water from an alternative source (Royal Oak WTW), and we agree that the proposals should be included by the Company in its Final Business Plan submission. We consider that formal enforcement action and putting in place a legal instrument is inappropriate at this stage. We confirm that the proposed scheme is consistent with the requirements of “Water for Life” the Government’s white paper setting out its vision for water management in England, defined further in Defra’s Statement of Obligations published in October 2012. We also confirm that the proposed scheme is consistent with the Inspectorate’s guidance on principles for the assessment of drinking water quality provisions within the PR14 process, as set out in DWI Information Letter 01/2013, published on 1st February 2013. In particular, we are satisfied that the proposed scheme adopts a sound risk based approach to management of water supplies from source to tap using a water safety plan approach.

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93Appendix 6




We are unable to support the proposal as a quality enhancement scheme because the Company has existing controls in place to manage the risk to consumers of being supplied with unwholesome water, and the evidence provided by the Company does not clearly demonstrate that there is an increasing risk of consumers being supplied with unwholesome water as a result of increasing concentrations of nickel in the raw water. We acknowledge, however, that compliance is currently maintained by controls that are unsustainable in the longer term, and we agree that it is necessary, and is in consumers’ best interests, for the proposed scheme be carried out to abandon Dark Lane WTW and to supply the area with an alternative source. The Inspectorate is prepared to review this decision should circumstances change significantly. I am copying this letter to Claire Daniel at Ofwat; Anne Dacey at the Environment Agency, Steven Hobbs, at CCWater, Andrea Cook Chair of United Utilities Customer Challenge Group. Yours sincerely


94




PERIODIC REVIEW 2014 SUMMARY OF DWI ASSESSMENT – COMMEND FOR SUPPORT Comment Water company:

United Utilities


UUT018

Scheme name:

Dark Lane WTW – Nickel

Proposal:

To abandon Dark Lane WTW because of a risk of exceedances of the PCV for nickel, caused by high (and reportedly increasing) levels in Dark Lane boreholes.


Risk assessment report for Southport supply system dated July 2013, submitted on 12/07/13. Dark Lane WTW technical submission for PR14 received 12/07/13, and covering letter.

Conclusion:

Subject to the caveats listed below The Inspectorate commends for support the need for the following scheme: Abandonment of Dark Lane WTW and reinforcement of the network to allow the areas supplied to receive water from the Northern Trunk Main and a new WTW – Royal Oak.

Timescale:

Completion date: 30/04/2019

Estimated cost:

Estimated Capex: £3.86 million Estmated Opex: £0


No

Caveats:

Comment: There are no clear grounds for enforcement in this instance, but the DWI supports the proposal for reasons explained in the covering letter.

DWI has no role in determining proportional allocation of expenditure. Where DWI technical support is given, this should not be taken by the company to imply that the scheme will be partially or wholly funded as a Quality item.

Appendix 6

95Appendix 6






London SW1P 3JR



4th October 2013 Dr Charmian Abbott Water Quality and Public Health Manager United Utilities DWI ref: UUT019 Lingley Mere Business Park Great Sankey Warrington WA5 3LP Dear Charmian, PERIODIC REVIEW 2014: United Utilities DWI Scheme reference: UUT019 Wayoh WTW – Pesticides, including MCPA FINAL DECISION LETTER The Inspectorate has completed its detailed assessment of the scheme proposed by UUT to provide a combination of catchment and operational measures to secure compliance with the pesticide standards for drinking water quality at Wayoh WTW. The detailed assessment also took in to consideration the outcome of the risk assessment report submitted to the Inspectorate as required by regulation 28(1) of the Water Supply (Water Quality) Regulations 2000 (Amendment) Regulations 2007 for the Wayoh connected supply system. A summary of the outcome of our assessment of this scheme is attached. Based on the information submitted by the Company, the Inspectorate supports the need for a scheme to deliver compliance with the standards for taste and odour in the water supply zones supplied by Wayoh WTW, for water quality reasons, and the supported scheme shall be included by the Company in its Final Business Plan submission, subject to the caveats listed in the attachment. In this instance the Inspectorate intends to issue a Notice under Regulation 28(4) of the Water Supply (Water Quality) Regulations 2000, as amended, that requires the Company to mitigate the risk of taste and odour that has been identified as a risk to wholesomeness in the water supplied from Wayoh WTW. It is expected that the Company will continue to monitor taste and odour in the water supplied to consumers, and that it will take all reasonable steps to prevent contraventions of the taste and odour standards. I am copying this letter to Claire Daniel at Ofwat; Anne Dacey at the Environment Agency, Steven Hobbs, at CCWater, Andrea Cook Chair of United Utilities Customer Challenge Group.

96




Yours sincerely


Appendix 6

97Appendix 6





United Utilities


UUT019

Scheme name:

Wayoh WTW – Pesticides, including MCPA

Proposal:

To implement a phased programme of work. Phase 1 is to undertake catchment management work and make improvements to the PAC dosing. Phase 2 is to replace the sand/anthracite media in the RGFs with GAC, and would be implemented if Phase 1 did not adequately mitigate the risk.


Risk assessment report for Bolton supply system dated July 2013, submitted on 12/07/13. Wayoh WTW technical submission for PR14 received 12/07/13, and covering letter.

Conclusion:

Subject to the caveats listed below, the Inspectorate supports the need for the following scheme: A phased approach to undertake catchment management actions to slow the deterioration of raw water quality, and to implement operational measures to mitigate the risks to drinking water quality. Phase 1 is to undertake catchment management work and make improvements to the PAC dosing. The latter action is reported as completed on 05/08/13. Phase 2 is to replace the sand/anthracite media in the RGFs with GAC, and would be implemented if Phase 1 did not adequately mitigate the risk.

Timescale:

Catchment work will continue until 2020. Phase 2, if required, will be completed by 31/08/17

Estimated cost:

The cost of the catchment work is allocated to NEP. The installation of PAC dosing was completed in AMP5 and has no cost implications for AMP6. Estimated cost of Phase 2 is £3.14m Capex plus £8k p.a. Opex. Ongoing Capex of £139k every 2 years for GAC regeneration.

98






Caveats: Subject to Phase 2 being listed as an action in the Notice, with a demonstration of benefits stage for completion by an appropriate date during the AMP, also subject to agreement with DWI.

Comment: DWI has no role in determining proportional allocation of expenditure. Where DWI technical support is given, this should not be taken by the company to imply that the scheme will be partially or wholly funded as a Quality item. It is noted that there is an NEP Phase III scheme for Wayoh to implement relevant measures identified in the safeguard zone action plan to reverse deteriorating trend of pesticides in raw water (ref. 6UUD029). Schemes that require a legal instrument are considered necessary to meet statutory drinking water quality requirements. These schemes will be transposed to formal programmes of work by DWI as soon as possible and their implementation and completion will be monitored, audited and closure confirmed by DWI.

Appendix 6

99Appendix 6






London SW1P 3JR



4th October 2013 Dr Charmian Abbott Water Quality and Public Health Manager United Utilities DWI ref: UUT020 Lingley Mere Business Park Great Sankey Warrington WA5 3LP Dear Charmian, PERIODIC REVIEW 2014: United Utilities DWI Scheme reference: UUT020 River Dee Catchment – Pesticides, including Metaldehyde FINAL DECISION LETTER The Inspectorate has completed its detailed assessment of the scheme proposed by UUT to provide a combination of catchment and operational measures to secure compliance with the pesticide standards for drinking water quality at Huntington WTW and Sutton Hall WTW. The detailed assessment also took in to consideration the outcome of the risk assessment report submitted to the Inspectorate as required by regulation 28(1) of the Water Supply (Water Quality) Regulations 2000 (Amendment) Regulations 2007 for the Huntington and Sutton Hall connected supply systems. A summary of the outcome of our assessment of this scheme is attached. Based on the information submitted by the Company, the Inspectorate supports the need for a scheme to deliver compliance with the standards for pesticides in the water supply zones supplied by Huntington WTW and Sutton Hall WTW, for water quality reasons, and the supported scheme shall be included by the Company in its Final Business Plan submission, subject to the caveats listed in the attachment. The Inspectorate issued a minded to enforce letter to United Utilities on 13th June 2013 in respect of breaches of regulatory requirements identified following the assessment of the company’s compliance data for 2012 in respect of metaldehyde at Huntington No.1 New water treatment works. The Company submitted a draft Undertaking to the Inspectorate on 10/07/13 (Ref. UUT3236). The Inspectorate will agree the content of the Undertaking with United Utilities in due course. It is expected that the Company will continue to monitor metaldehyde in the water supplied to consumers, and that it will take all reasonable steps to prevent contraventions of the pesticide standards.

100






Appendix 6

101Appendix 6





United Utilities


UUT020

Scheme name:

River Dee Catchment (Huntington WTW and Sutton Hall WTW ) – Pesticides, including Metaldehyde

Proposal:

A programme of catchment management activities aimed to mitigate the risk of exceedances of the pesticides standards (specifically metaldehyde) in water supplied to consumers.


Risk assessment report for the Wirral supply system dated July 2013, submitted on 12/07/13. River Dee Catchment technical submission for PR14 received 12/07/13, and covering letter. MTE letter issued to Company 13/06/13, and draft Undertaking received 10/07/13.

Conclusion:

Subject to the caveats listed below, the Inspectorate supports the need for the following scheme: A programme of catchment management activities aimed to mitigate the risk of exceedances of the pesticides standards in water supplied to consumers.

Timescale:

The catchment investigation measures detailed above will be completed by 31 March 2017 following which a summary of any additional measures identified will be provided to the Inspectorate in line with the draft Undertaking submitted to the Inspectorate on 10 July 2013.

Estimated cost:

Estimated capital costs of £0.300m for additional sampling and analysis, with an additional £0.946 on capital items. One-off operating costs of £0.577m to implement the catchment activities. There are no net additional operating costs associated with this option.


Undertaking under S19.

102




Caveats:

Comment: DWI has no role in determining proportional allocation of expenditure. Where DWI technical support is given, this should not be taken by the company to imply that the scheme will be partially or wholly funded as a Quality item. It is noted that there is an NEP Phase III scheme for Huntington WTW (but not Sutton Hall) to implement relevant measures identified in the safeguard zone action plan to reverse deteriorating trend of pesticides in raw water (ref. 6UUD032). Schemes that require a legal instrument are considered necessary to meet statutory drinking water quality requirements. These schemes will be transposed to formal programmes of work by DWI as soon as possible and their implementation and completion will be monitored, audited and closure confirmed by DWI.

Appendix 6

103Appendix 6






London SW1P 3JR



4th October 2013 Dr Charmian Abbott Water Quality and Public Health Manager United Utilities DWI ref: UUT021 Lingley Mere Business Park Great Sankey Warrington WA5 3LP Dear Charmian, PERIODIC REVIEW 2014: United Utilities DWI Scheme reference: UUT021 Llangollen Canal Catchment– Pesticides, including Metaldehyde FINAL DECISION LETTER The Inspectorate has completed its detailed assessment of the scheme proposed by UUT to provide a combination of catchment and operational measures to secure compliance with the pesticide standards for drinking water quality at Hurleston WTW. The detailed assessment also took in to consideration the outcome of the risk assessment report submitted to the Inspectorate as required by regulation 28(1) of the Water Supply (Water Quality) Regulations 2000 (Amendment) Regulations 2007 for the Hurleston connected supply system. A summary of the outcome of our assessment of this scheme is attached. Based on the information submitted by the Company, the Inspectorate supports the need for a scheme to deliver compliance with the standards for pesticides in the water supply zones supplied by Hurleston WTW, for water quality reasons, and the supported scheme shall be included by the Company in its Final Business Plan submission, subject to the caveats listed in the attachment. The Inspectorate issued a minded to enforce letter to United Utilities on 13th June 2013 in respect of breaches of regulatory requirements identified following the assessment of the company’s compliance data for 2012 in respect of metaldehyde at Hurleston water treatment works. The Company submitted a draft Undertaking to the Inspectorate on 10/07/13 (Ref. UUT3235). The Inspectorate will agree the content of the Undertaking with United Utilities in due course. It is expected that the Company will continue to monitor metaldehyde in the water supplied to consumers, and that it will take all reasonable steps to prevent contraventions of the pesticide standards.

104






Appendix 6

105Appendix 6





United Utilities


UUT021

Scheme name:

Llangollen Canal Catchment (Hurleston WTW) – Pesticides, including Metaldehyde

Proposal:

A programme of catchment management activities aimed to mitigate the risk of exceedances of the pesticides standards (specifically metaldehyde) in water supplied to consumers.


Risk assessment report for the Crewe supply system dated July 2013, submitted on 12/07/13. Llangollen Canal Catchment technical submission for PR14 received 12/07/13, and covering letter. MTE letter issued to Company 13/06/13, and draft Undertaking received 10/07/13.

Conclusion:

Subject to the caveats listed below, the Inspectorate supports the need for the following scheme: A programme of catchment management activities aimed to mitigate the risk of exceedances of the pesticides standards in water supplied to consumers.

Timescale:

The catchment investigation measures detailed above will be completed by 31 March 2017 following which a summary of any additional measures identified will be provided to the Inspectorate in line with the draft Undertaking submitted to the Inspectorate on 10 July 2013.

Estimated cost:

Estimated capital costs of £0.192m for the additional sampling, analysis and direct capital infrastructure. One-off operating costs of £0.049m to implement the catchment activities. There are no net additional operating costs associated with this option.


Undertaking under S19.

106




Caveats:

Comment: DWI has no role in determining proportional allocation of expenditure. Where DWI technical support is given, this should not be taken by the company to imply that the scheme will be partially or wholly funded as a Quality item. It is noted that there is an NEP Phase III scheme for Huntington WTW (but not Sutton Hall) to implement relevant measures identified in the safeguard zone action plan to reverse deteriorating trend of pesticides in raw water (ref. 6UUD022). Schemes that require a legal instrument are considered necessary to meet statutory drinking water quality requirements. These schemes will be transposed to formal programmes of work by DWI as soon as possible and their implementation and completion will be monitored, audited and closure confirmed by DWI.

Appendix 6

107Appendix 6






London SW1P 3JR



4th October 2013 Dr Charmian Abbott Water Quality and Public Health Manager United Utilities DWI ref: UUT109 Lingley Mere Business Park Great Sankey Warrington WA5 3LP Dear Charmian, PERIODIC REVIEW 2014: United Utilities DWI Scheme reference: UUT109 Lead Strategy FINAL DECISION LETTER The Inspectorate has completed its detailed assessment of the scheme proposed by United Utilities to secure compliance with the new standard for lead in drinking water due to take effect on 25th December 2013, in zones supplied by United Utilities. A summary of the outcome of our assessment of this scheme is attached. Based on the information submitted by the Company, the Inspectorate supports the need for a scheme to deliver compliance with the standard for lead in water supply zones supplied by United Utilities, for water quality reasons, and the supported scheme shall be included by the Company in its Final Business Plan submission, subject to the caveats listed in the attachment. In this instance the Inspectorate intends to issue a Notice under Regulation 28(4) of the Water Supply (Water Quality) Regulations 2000, as amended, that requires the Company to mitigate the risk of failures of the standard for lead that has been identified as a risk to wholesomeness in water supply zones supplied by United Utilities. It is expected that the Company will continue to monitor lead in the water supplied to consumers, and that it will take all reasonable steps to prevent contraventions of the lead standard. I am copying this letter to Claire Daniel at Ofwat, Steven Hobbs at CCWater, Andrea Cook Chair of United Utilities Customer Challenge Group. Yours sincerely

108





Appendix 6

109Appendix 6





United Utilities


UUT109

Scheme name:

Lead Strategy

Proposal:

Provision of a comprehensive package of measures to mitigate the risk of consumers’ exposure to lead and failures of the new standard for lead in drinking water due to take effect on 25th December 2013, in zones supplied by United Utilities.


Lead Strategy technical submission for PR14 received 12/07/13, and covering letter.

Conclusion:

Subject to the caveats listed below, the Inspectorate supports the need for the following scheme: Provision of a a comprehensive package of measures to mitigate the risk of consumers’ exposure to lead and failures of the new standard for lead in drinking water in zones supplied by United Utilities. The proposed strategy is consistent with published DWI guidance.

Timescale:

Ongoing programme of work to 31/03/2020.

Estimated cost:

Estimated cost £7.968 million (Totex)



Caveats: Comment: DWI has no role in determining proportional allocation


110


Home Page: www.dwi.gsi.gov.uk E mail: [email protected]


DRINKING WATER INSPECTORATE Area 7E, 9 Millbank, c/o Nobel House,

17 Smith Square London SW1P 3JR


E-mail: [email protected]

DWI Website: http://www.dwi.gov.uk guardians of drinking water quality

27th September 2013

Dr Charmian Abbott United Utilities Water plc Lingley Mere Lingley Green Avenue Great Sankey Warrington WA5 3LP

DWI Ref: UUT 2349

By email only

Dear Charmian, RESPONSE TO PROPOSED CHANGES OF TECHNICAL SOLUTION FOR THE VYRNWY LDTM SCHEME (UUT 2349) Thank you for the Change of Technical Solution report submitted on 31st July 2013 providing a formal request to change the technical solution for UUT 2349 Vyrnwy LDTM refurbishment scheme. The Inspectorate notes and accepts the changes to the technical solution for the reduction of iron in the zones supplied by the trunk main, subject to the Company’s agreement that should the revised solution fail to deliver the equivalent benefit to the original planned work on the Vyrnwy trunk main, the Company will revert to the original scheme for delivery during AMP7. The revised proposal is to halt the cleaning/refurbishment of the Vyrnwy LDTM following cleaning/refurbishment of 85.5km between Oswestry and Malpas (Lines 1-3) and cleaning 15 km between Norton Tower and Prescot (line 3) to monitor and fully assess the benefits of the work to date, to review and improve manganese performance at Oswestry WTW and determine whether the cleaning of 1/3 of the Vyrnwy LDTM has delivered the necessary benefits. I note that a revised draft Undertaking is appended to the report, which has some key milestone dates yet to be confirmed. Please submit an updated draft with confirmed dates to the Improvement Programmes mailbox, for

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111Appendix 6


Home Page: www.dwi.gsi.gov.uk E mail: [email protected]


agreement with the Inspectorate. A revised action plan (step (b)) will also be required. The reference number for the new undertaking is UUT3247. I am copying this letter to Mark Worsfold at Ofwat and, because of the significance that this proposal has for the Company’s PR14 business plan, I am also copying it to Andrea Cooke, Chair of United Utilities’ Customer Challenge Group. Please contact me if there is anything you would like to discuss. Yours sincerely,

Jacqueline Atkinson Inspector (Regulations)

112

Appendix 7: Environment Agency Evaluation of United Utilities Business Plan for 2015 to 2020

Introduction The Environment Agency (EA) role in the Price Review is to work with water companies and others to plan environmental improvements to better protect the water environment and secure wider benefits for society and the economy. One of the ways we do this is through the National Environment Programme (NEP) which forms an essential part of United Utilities (UU) Business Plan and sets out the statutory requirements needed to achieve environmental standards related to water.

This report presents the views of the Environment Agency and confirms that from the information provided the Company is planning to meet its statutory environmental requirements set out in Defra’s statement of obligations. The report summarises our views of the evidence provided to date and reflects the discussion between the EA and UU.

OverviewUnited Utilities has been open and transparent in its planning and has been fully engaged in discussions to explore options for delivery of statutory programmes. The Company Strategic Direction Statement commits the company to playing its part in managing the major environmental challenges in the North West, particularly around the quality of our bathing waters, contributing to a significant reduction in flood risk and finding a sustainable solution to water resources in West Cumbria.

General CommentsDelivery of statutory and environmental requirementsUU has confirmed that the plan will deliver all statutory obligations and consolidate improved performance over the last few years.

Measures identified within the National Environment Programme (NEP). All measures set out in the National Environment Programme have been incorporated into the final business plan.

The Company has made provision to achieve “outcomes”fromthe2ndcycleRiverBasinPlan and has presented a programme of delivery to ensure Water Framework Directive obligations can be achieved by 2027.

Phase 5 of the NEP will be issued in 2016 following the approval of the 2nd Cycle River Basin Plan for the North West. The Company is committed to continue working with the EA as the River Basin Plan is developed and to ensuring that the actions and outcomes are wherever possible incorporated into the business planning process.

Transitional investment programme.Ofwat has approved a transitional investment programme for those schemes which require an early start, either to ensure that investigation results are fed into the development of the business plan or to meet statutory dates.

Delivery and incentives The Company has set a number of penalty incentives around environmental issues. The EA will continue to monitor progress against all the commitments in the business plan and continue to use influencing and regulatory tools as appropriate.

Change mechanism. A clear and unambiguous change mechanism is essential to ensure delivery of a large and complex programme; the detail of this will continue to be developed ready for the implementation of the plan.

Innovation and the catchment based approachThe Company is committed to embedding the “catchmentbasedapproach”initsthinkingand is developing innovative techniques to reduce the environmental impacts of its work.

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113Appendix 7

This includes working with communities and third sector delivery organisations such as Rivers and Wildlife Trusts.

Water Resources Alignment of the Water Resource Management Plan (WRMP) The Company’s Water Resources Management Plan (WRMP) forms the water resources supply-demand balance component of the business plan. The proposed project to deliver a sustainable solution for West Cumbria water supplies needs to be accelerated to ensure that the environment is protected; effective use of the transitional funding arrangements is essential to achieve this objective.

Abstractions from the most seriously affected sites.It is important to manage the impact of abstractions at sites that are, or are likely to be, causing damage to the environment. The Company has made provision for a number of sites and is committed to joint working on NEP phase five to identify any further sites that may need actions to protect the environment.

LeakageThe Company will continue to maintain leakage at the sustainable economic level. The Environment Agency has encouraged the Company to introduce new monitoring technologies to reduce its impact on the water environment.

ReducingFloodRiskDrainage Strategy Framework The Company has embedded the Drainage Strategy Framework principles within the AMP6 plans and has committed to reducing the risk of sewer flooding across the network.

Reservoir safetyThe Company is committed to maintaining reservoir safety, an important duty given the potential high impact reservoirs pose to public safety.

Wastewater Pollution incidents and compliance. The Company is committed to an ongoing reduction in serious (category one and two) pollution incidents by 2020 and to reducing category 3 and 4 incidents over the same period.

The roll out of monitoring systems across the network is expected to provide more real time data on events

The Company has improved its performance of its permitted sites and its ambition is to achieve 100% compliance with all its

permits, as they are legal obligations. The plan incorporates an ambition to embed and improve performance at these sites over the period of the plan and will be monitored closely by the Environment Agency.

Concluding remarks and recommendations 1. From the information provided I understand

that you are planning to meet your statutory environmental requirements set out in Defra’s statement of obligations. The EA welcomes this commitment and I look forward to receiving your board’s written assurance that you will deliver all your environmental obligations.

2. Continued close working with the EA is essential as plans develop to ensure the environment is protected, particularly those schemes identified for transitional investment, where urgent action is need to delivery as soon as possible. Where necessary the company will need to agree an appropriate package of mitigation and compensation measures to address any ongoing environmental impacts.

3. Working on the 2nd Cycle River Basin Plan and NEP stage 5 will enable discussion about any necessary refinements to the plan in 2016.

4. We will continue to work with UU to provide clarity on standards around chemicals and phosphates to support them in making effective investment decisions.

This summary reflects the position at the time of writing the statement. Further discussions are required to finalise details and ensure that the latest understandings are incorporated into the Business Plan.

The statement has been copied to CCG and United Utilities

In conclusion, I would like to thank UU for the way they have engaged in open and transparent discussions during the process. This has helped build a solid foundation for environmental improvements over the AMP6 period which will bring benefits to the environment of the North West.

Bill DarbyshireNW Environment and Business Manager Environment Agency

26 November 2013

Documents

Customer Challenge Group North West - United Utilities · Customer promises 19 Willingness to pay 25 Water resource management plan 34 CCWater threshold of acceptability research