How can water companies deliver more value to society under PR19?

25 August 2017

By Will Evison, Oliver Willmott and Nicky Fomes

Context: Northumbrian Water have launched their first major impact report, ‘Our Contribution’. They opted to use PwC’s Total Impact Measurement and Management approach, and we also provided expert advice to support their important efforts.

To operate successfully, water companies are highly dependent on the natural environment, local relationships, their extensive network infrastructure, the skill and dedication of their people, and their sources of finance.

In other words, they are highly dependent on natural, social, manufactured, human and financial ‘capital’ - sometimes referred to as “the five capitals”. Only by maintaining and effectively combining these capitals can a water company ensure that its customers will have sufficient clean water and that wastewater can be effectively dealt with, now and in the future.

While water company financial accounts capture impacts on manufactured and financial capital, typically they do not reflect wider environmental and social impacts. These ‘externalities’ are nonetheless critical, as they can enhance or undermine the natural, social and human capital that are the basis for future success.

It is commonplace to assume that some of the financial capital generated by a firm will be re-invested in manufactured capital, to underpin the firm’s future output. Importantly though, companies can also choose to invest in human, social and natural capital where such investments are expected to provide positive returns. Water companies in particular have major opportunities to invest in natural capital: upstream in their catchments to manage flow rates and provide cleaner raw water which requires less chemical intensive treatment; and downstream to help manage storm water and remediate wastewater.

In addition, the unique way that the sector is regulated can provide extra incentives to invest in natural, social and human capital. The next chapter in this regulation, PR19, promises to do just this. PR19 will determine:

  • the maximum revenue companies can earn from their customers in 2020-2025;
  • the customer outcomes that companies must deliver within their allowed revenue; and
  • the incentives/penalties for outperforming/underperforming stretching new performance targets.

As explained in our recent blog and report the draft methodology for PR19 significantly raises the bar, calling for “…ambitious and innovative business plans…” which include bespoke commitments on vulnerable customers, the environment, and long term resilience.

Whilst the draft methodology is challenging, its focus on long term benefits and resilience ‘in the round’ provides clear scope for companies to emphasise natural, social and human capital in their performance commitments, in addition to manufactured and financial capital. After all, only a business which protects and enhances all the assets it relies on, and relates this effectively to its stakeholders, can expect to be resilient in the long term.

Ofwat is also expecting more from customer engagement, including stronger evidence that customers genuinely value the outcomes that water companies put forward. In a five capitals context, this could, for example, include evidence that customers prefer natural capital options for water treatment – like newly created wetlands or revegetation of uplands – over chemical based alternatives – to justify greater investment in the former.

Furthermore, as regionally-based organisations, most of the impacts that water companies have on the capitals are felt by people who are also their direct customers. This means that customers also stand to benefit indirectly when water companies do things to enhance local social and natural capital – for example, by expanding apprenticeship schemes, supporting local suppliers or improving recreational access to land and reservoirs. If companies can demonstrate how these activities deliver benefits to local communities (who are also customers), and help to build resilience and control costs in the long term, customers are likely to be supportive.

One company that is innovating the way it enhances and demonstrates its value to its key stakeholders in a robust, informative and analytical way, is Northumbrian Water.

In their first major impact report, ‘Our Contribution’, the company has taken a significant step towards understanding and communicating its impacts and dependencies on the five capitals. They opted to use PwC’s Total Impact Measurement and Management approach, and we also provided expert advice to support their important efforts.

Notes:

Total Impact Measurement and Management (TIMM) is PwC’s framework for quantifying and valuing changes in all the capitals. By including environmental and social impacts alongside traditional financial metrics in a common currency, it enables companies to bring actionable management information on the business’s key dependencies and impacts into the heart of its decision-making.

For more on Total Impact Measurement and Management, visit http://www.pwc.co.uk/totalimpact

For more water industry insights and reports, visit http://www.pwc.co.uk/industries/water/insights.html

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