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Don’t wait for Ofwat – act now on resilience in the round

By Richard Khaldi, PA water sector regulatory expert

There's no shortage of information in the public domain to help industry understand 'resilience in the round' and Ofwat's thinking on the challenges. There are many things we already know, not least that the importance of resilience in the water sector has been growing. Ofwat got a new resilience duty in 2014 and several high-profile operational failures have moved the debate from one about policy to one about operations.

Yet lots of people seem to be waiting for the PR19 methodology consultation before starting work. I think there's no need to wait, no reason why you can't act now.

We already know the key themes

From the publications already available, I've identified some key themes. The first is resilience will be measured in the round. Ofwat's going to look beyond more traditional views of resilience – environmental, infrastructure and financial – and examine all of the threats that a water company could possibly face in the 21st century. And companies will have to confirm their assessment of, and approach to, new threats such as cyber security, supply chain failure and succession planning. Ofwat's also flagged that corporate leadership will form a key part of their assessment of resilience in the round.

The next theme is innovation and how it must be embedded within any company's response to the resilience challenge. Ofwat's December 2015 guidance on how it will embed resilience within its own work showed they saw a clear opportunity for water companies to innovate on customer engagement, operational solutions and evaluating alternatives to traditional engineering approaches. They also highlighted the opportunities that markets could bring in delivering higher levels of resilience within the sector. But none of these opportunities can be exploited effectively unless a company has a culture of innovation. Here at PA we've considered and researched how best to achieve that and it's clear there are no shortcuts.

And in all this you have to look long term. Just looking to the end of the next AMP cycle isn't going to cut the mustard on resilience. That's entirely logical given the critical nature of the services and their long asset-life, but it will be challenging. Companies will have to think carefully about how they can provide, for example, cyber security, supply chain and corporate leadership resilience over a long period. And let's not forget your corporate governance processes will come under scrutiny too.

So your board will need to assure itself of the robustness and accuracy of the position. As Ofwat has said: "We expect companies to provide us with the complete picture in their plans… applying rigorous processes and analysis and clear governance." So you'll need a robust assessment framework. That framework must also be suitable for an ongoing assessment with Ofwat making it clear that a resilience compliance statement must be included as part of each company's published annual performance report.

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Will the PR19 methodology consultation say much more?

Given the information we already have, does it matter what the methodology consultation says on resilience? In my view, the answer's no. Clearly companies will be keen to see what additional information and/or guidance Ofwat provides but I think it's unlikely it will give much more detail. I think the closest comparison is likely to be performance commitments from PR14 when Ofwat set out its expectations but left the detail for companies to decide. This approach would also support the competitive nature of Ofwat's price review process and the additional rewards on offer to companies who innovate and push boundaries within the sector. So there's no reason not to start considering resilience in the round prior to the PR19 consultation.

There's not long to wait to see if my predictions are accurate. I'll publish the third of my blogs shortly after the consultation comes out and discuss what more Ofwat has said on resilience, and give my further thoughts on how companies should go about meeting the resilience challenge.

Further reading

 

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