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Letters to Regulatory Directors
RD 20/05 14 November 2005 Dear Regulatory Director June Return 2005-10 This letter outlines our response to the consultation on the review of the June return 2005-10. The review has been carried out in depth within Ofwat and we are particularly grateful to the contribution of the companies and other stakeholders including those who participated in our workshop in September. This review of our information requirements is against a backdrop of a government wide initiative to reduce the regulatory burden. We fully support this principle. The review started in January of this year, with an informal consultation with companies. This was then followed by an in-house assessment of our information requirements, followed by the full consultation process. As part of this we also contributed to the Defra study on reducing red tape. The conclusion of our work is that our information requirements have reduced. However, the key message from the consultation was that fundamental change is not required and that companies welcomed continuity in how our information requirements are developed. In their responses some companies and Water UK expressed their overall concern that the amount of data to be collected in the June returns would not significantly reduce the cost of data capture. In our view further reductions in our information requirements, or exception reporting or auditing, could compromise our effectiveness as the economic regulator of what are essentially regional and local monopolies. It is our responsibility to protect consumers and we consider the data to be collected in 2006 and onwards is the minimum required to achieve this aim. Looking to the future, we welcome the opportunity to discuss with external parties our information requirements on a more regular basis and also working with CCWater on a joined up approach to information capture. Our consultation covered the following issues: 1. the proposed data requirements for the June return 2005-10; 2. whether there is any data considered to be superfluous or unnecessary (with reasons) and whether there is any duplication of data that could be avoided (either collected by others or submitted to us in other returns); 3. our proposal to retain the current structure of the June return; 4. our proposal to continue to collect submissions on the second Friday in June, but allow an additional week for the eight smaller water only companies; 5. our current proposals on serviceability indicators and reducing the threshold for reporting activity; 6. the proposal to co-operate with the Environment Agency on the collection of water resource, water balance and leakage data; 7. whether to retain the collection of the sewerage explanatory factors (tables 17a to g) in the June return; 8. the balance between the burdens of producing the commentary whilst ensuring we have the information we need; and 9. what feedback on the June return companies would find helpful. This letter sets out the main points raised by respondents for each of the issues, our conclusions arising from this consultation and next steps. We will place on our website a summary of the responses received and our response to the issues raised by each respondent. A list of respondents and copies of the responses will also be placed on our website. A copy of the summary document has been sent to all respondents. 1. Issue: the proposed data requirements for the June return 2005-10. Generally, respondents recognised the need for the additional data we identified relating to monitoring outputs and the closer alignment to the 2004 final determinations and the monitoring plan. The main objections raised to supplying some of this data centred on:
There was also a varied response to the deletion of specific data items. WaterVoice (Consumer Council for Water from 1 October 2005) questioned the deletion of the water efficiency data in table 1 of the June return in the light of the current debate on water efficiency. They consider that this information should continue to be collected whilst recognising that there may need to be a refocusing of water efficiency data in future years. They also objected to the deletion of:
They have also identified additional data requirements that they believe are necessary to monitor complaint handling and the reporting of telephone complaints; and to support the development of competition. Response: We recognise that some companies may have difficulties in providing some retrospective data. Some companies may have difficulty in splitting data retrospectively into the new age bands for bad debt. Where this is not possible, companies should submit numbers in the original format (ie <12 months and 24-48 months) with an explanation in their commentary to explain any difficulties. We will add guidance to the June return reporting requirements with further explanation. Companies already provide a split in turnover between households and non-households when submitting principal statements. We do not therefore believe it should be difficult for companies to continue to provide this information or provide it retrospectively. Companies should be able to provide the other splits of turnover as they did this for their business plans. The responses on reducing the number of data lines in table 1 relating to activities carried out by water companies to promote water efficiency appear to be fairly evenly spilt. Some companies welcomed the reduction. Others state it should be retained or said that the information has to be collated for other lines in other tables and therefore the workload is not reduced. WaterVoice's comments regarding the profile of the water efficiency debate at present are valid. We will therefore include the data we were proposing to delete in the June return 2006 but revisit it in light of forthcoming water efficiency discussions with the industry, government and other interested parties. For DG2, companies will still be required to include information about key changes to the register in the table commentaries. We find this commentary more useful than the combined rows we are deleting from the table because it links more directly to individual customers. For example, 'x' properties in 'y' area were removed from the register when mains were refurbished. Commentaries are part of the public June returns. The averaged cost data for sewer flooding can vary on an annual basis, making interpretation and inter company comparison difficult. However, we will look in detail at cost data for 2005-10 as part of the preparation for the next price review. Information on actual costs associated with different types of scheme will be more useful than average costs. Research shows that customers are broadly happy with the levels of service they receive, so there is little justification for us to require companies to answer complaint letters more quickly than the 10 day performance targets set out in our final determinations. It is good practice for us to focus our information requests on key regulatory outputs. The objections to the data for reconciliation of operating profit to the tax charge and the allocation of capital expenditure for tax purposes centred on the possibility of differences between the analysis available to support the tax charge in the regulatory accounts and that for the final tax computation, and why we required it on an annual basis. The concern was that this would lead us to requiring substantial reconciliation which would be onerous for companies. We recognise that detailed analysis may not be available until the submission of the tax computation to Her Majesty's Revenue and Customs in March of the following year. We will therefore require the data one year in arrears to minimise the burden on companies. Therefore, in the June return 2006 we will be asking for tax information for the year ending 31 March 2005. This information is required primarily to inform our consideration of an interim determination application which includes a claim under the notified item for taxation. The need for such a notified item was strongly supported by the majority of companies in their representations to our draft determinations last year. We therefore included a one-way notified item for the impact on companies' tax charges of the introduction of IFRS and FRED 29 in our final determinations. Collection of this data on an annual basis will inform our general understanding of companies' tax position across the industry, enabling us to deal more effectively with any claim under the notified item. Where concerns have been raised by companies or other respondents to other discrete data items which we were proposing to delete, we have considered their reasons for inclusion and reflected this in the response document (available on our website). We will need to discuss more fully the additional data that WaterVoice proposed with its new successor body the Consumer Council for Water (CCWater) and will discuss consulting companies before including this data in the June return. Our initial view is that we will not be in a position to agree or include any of the additional data identified in the June return 2006. We expect that discussions on data requirements will continue between CCWater and us (and the Water Services Regulation Authority from 1 April 2006), and that any changes to the data requirements following consultation by CCWater with stakeholders will be reflected in the June return 2007. We would expect CCWater to justify any additional data requirements. 2. Issue: whether there is any data considered to be superfluous or unnecessary (with reasons) and whether there is any duplication of data that could be avoided (either collected by others or submitted to us in other returns). Companies and other interested parties raised objections or queries concerning specific data items. A summary of the objections and our response has been placed on our website. Response: Comments on the difference in reporting years between us and the quality regulators have been noted. As the economic regulator, we need to relate outputs and costs within financial years. The quality regulators generally report in calendar years. We have reduced our requirements and believe that any duplication of effort is a minor administrative point given the size and importance of the quality programme. 3. Issue: our proposal to retain the current structure of the June return. The proposal to retain the current structure of the June return was generally welcomed by the companies. WaterVoice and United Utilities suggested that we could split the June return into four mini June returns to reflect the four reports on company performance that we publish on an annual basis. Black and Veatch suggested splitting the return into two parts, technical and financial. Response: We agree that the current structure of the June return does align, in the main, with the four annual reports that we publish. We also agree that it would be useful for readers of the June return to be aware of the relationship between the June return and the four annual reports. We will make this more explicit in the June return reporting requirements. However, we do not agree that four separate reporting submissions or splitting the return into two parts would be more efficient or necessarily be more effective. The purpose of the June return is for companies to submit a consistent set of data across all of its activities and for us to understand the interaction between its financial performance, outputs and services to customers. The Board Overview of the June return brings together key data items in tables A to E from the underlying detail submitted in the main return. This link would be lost if companies were to submit separate returns, adding to the data burden for companies, who would then need to reinput data for the Board Overview tables. Further, splitting the report into more submissions would increase the resources required within Ofwat for the development testing and production of discrete information capture systems. 4. Issue: our proposal to continue to collect submissions on the second Friday in June, but allow an additional week for the eight smaller water only companies. Since 1999 the companies have submitted the June return on the second Friday in June, with the reporters' and auditors' reports following one week later. A number of companies felt that, although they had managed to submit the return in early June, it would be beneficial if the return could either be submitted later in June or early July. WaterVoice stated that if the annual return was split into four returns the levels of service information could be submitted earlier by companies. Response: The June return is the key submission which allows us to monitor companies' performance and take regulatory action, where necessary. Where service failures have occurred in the reporting year, it is important that plans for rectifying the situation are agreed early in the following reporting year. We also ask for an early June submission to enable customers and other key stakeholders to compare and use the companies' preliminary results with our analysis of the performance of the appointed business. The reports are currently published between September and December each year. However, we have considered the points raised by companies with reference to the timing of the submission and we will allow an additional week for submission by all companies. This will also allow additional audit time for reporters and auditors, as their reports follow one week later after the company's submission. This decision reflects our recognition of the additional data that will be required with the retention of the sewerage explanatory factors and the decision to proceed with our proposal to unify the collection of water resource, water balance and leakage data with the Environment Agency. However in a periodic review year we will need the companies to submit the return in the first week in June. 5. Issue: our current proposals on serviceability indicators and reducing the threshold for reporting activity. There was a mixed response to the threshold for reporting activity. In general, the water and sewerage companies welcomed the reduction of the threshold for reporting of more than 10% of Gross Modern Equivalent Asset value or £5 million. Concerns were raised by a small number of the water only companies that the threshold would not capture the activity levels being carried out by water only companies. The majority of companies questioned the usefulness of the data we collect for serviceability indicators and specific data items such as the MTBWO (mean time between work orders). Response: In relation to activity reporting, we intend to clarify definitions to address some of the detailed points made by respondents. We believe that there remains a strong case to move to the broad approach proposed in the consultation, with a closer alignment between monitoring plan and June return definitions. It is up to companies to provide further details of their activity in the commentary, if they believe that the reported figures do not fully represent their maintenance activity. The consultation responses raised a wide range of issues concerning our approach to monitoring serviceability. We propose to drop the measures most commonly criticised by industry respondents (ie the iron pick-up indicator for water mains and the mean time between work orders for pumping assets). However, we will look for suitable alternatives. An UKWIR project, 'Review of Serviceability Indicators' will report shortly, and we understand that it will contain a range of proposals for developing the measurement of serviceability. We will review the outcome of this study, and we are likely to consult again with the industry on specific proposals. It is likely that some issues will require more detailed consideration and will not be resolved in time for the June return 2006 and will be carried over into the June return 2007. When we have the outcome of the UKWIR report we will consider how best to engage with the industry to achieve consistent and workable measures. 6. Issue: the proposal to co-operate with the Environment Agency on the collection of water resource, water balance and leakage data. The proposal to unify the collection of data was generally welcomed by the industry. However, respondents raised concerns on specific data requirements identified by the Environment Agency, the alignment of data requirements between us and the Environment Agency and the effect of the data in the June return on the timing of the submission. Response: We have extended the date of submission of the June return for companies and reporters in recognition of the data requirements for water resource, water balance and leakage data. The Environment Agency is currently consulting through Water UK on the proposed data requirements. We will liaise with the Environment Agency on the final reporting requirements before issuing the reporting guidance in December 2005. 7. Issue: whether to retain the collection of the sewerage explanatory factors (tables 17a to g) in the June return. Four of the water and sewerage companies had no objection to retaining the sewerage explanatory factors, whilst three made no comment. Atkins (reporters for five of the companies) and Yorkshire Water requested that the submission reverts to September. South West Water supported our proposal if we delayed the submission of the June return to the third Friday in June. However, United Utilities were happy to retain, subject to its recommendations on the structure and submission schedule for the June return as a whole. Response: We will retain the sewerage explanatory tables in the return. Our review has led to a reduction in data. By including these tables in the June return we can reduce some data that was collected in other tables. 8. Issue: the balance between the burdens of producing the commentary whilst ensuring we have the information we need. The industry recognised that the commentary is an important part of the June return, providing us with context and detail to the data information collected in the tables. However, they questioned whether the review of information puts the commentary requirements through the same challenge process as the data requirements. Specific issues identified by companies and reporters were that:
Response: Over the autumn we will be reviewing the reporting guidance on commentaries to ensure that no unnecessary burden is being placed on companies. We welcome the comments received on the structure of the guidance for commentaries and will take these into account in drafting the guidance for 2006. We have responded to queries relating to the guidance but in order to formalise the process we will also include a pro forma in the December guidance, which will allow companies, reporters and auditors to raise queries or issues that they believe exist within the reporting guidance. This will then enable us to improve on the guidance before issuing the final guidance with the information capture system at the end of March. This will ensure consistency of reporting across companies. Further pro formas will be made available for issues arising during the reporting process and if appropriate intermediate calculations. In writing the guidance we will take into consideration the comments relating to data requests within commentaries and where it is appropriate include the data requirements in the current June return tables. However, there is some data that is only required for a very short period of time, such as the early start programme data, and other data that is required to explain the outputs/financial data being reported. In these instances we will continue to only require the data in the commentaries. 9. Issue: what feedback on the June return companies would find helpful. The water and sewerage companies welcomed the feedback and meetings to discuss the June return 2005. Response We will continue to report back to all companies on the June return, providing written feedback to all companies and, if necessary, holding meetings. During a periodic review year, we will report back on the draft business plan, but not specifically on the June return. 10.Other issues raised by respondents 10.1 Issue: involvement in the review of information requirements. At the September workshop we outlined the role of the Data Supervisory Group (DSG) in our process for reviewing information requirements. A number of the participants expressed an interest in being involved in this process. Response: We will be approaching companies, reporters, auditors, CCWater, the Environment Agency and the Drinking Water Inspectorate to set up a consultative group at which the decisions made by DSG can be discussed and debated prior to either further consultation or implementation. Our initial view is that the group will consist of:
We would expect the group to meet at least once a year to discuss future information requirements. We are hoping to arrange the first meeting shortly to discuss the data proposed by WaterVoice in response to this consultation and how to take forward any data requirements of CCWater. 10.2 Issue: reporting requirements Reporters raised the issue of company specific guidance. Their view is that there is a growing tendency to include 'generic' guidance and also that amendments to guidance are sometimes issued on an ad hoc basis. Response: The 'generic' guidance that may be included in the company specific guidance to reporters may concern a particular issue that we wish to bring to reporters' attention for that particular report year only. If this requirement is required on an annual basis it should be included in the June return reporting requirements. We currently issue the June return reporting requirements in the previous December, with an update to reporting guidance issued with the June return information capture system in March. We attempt to avoid ad-hoc changes to the reporting guidance, but also want to be able to respond to queries arising from the guidance from companies, reporters and auditors. Where appropriate, we may issue further clarification if we think this will have a material affect on the company's submission or the work of the reporter and auditor. 10.3 Issue: June return queries A small number of companies questioned whether all the queries were necessary and whether it was always necessary to ask for reporter and auditor comments. Response: We endeavour to limit the queries to those that we believe are material: policy team leaders review the queries for materiality. Queries are copied to the reporter and auditor where we require their input and a number are copied to them on an information only basis. 10.4 Issue: June return vs regulatory accounts Five companies queried the duplication of the data required for the regulatory accounts in the June return. Response: The regulatory accounts tables in the June returns provide us with the data in an electronic format, which is vital for our analysis and form the basis of the data presented in the financial performance and expenditure report. We hope that by delaying submission by one week this will lessen the administrative burden for companies, bringing closer together the collection of the June return and the preparation of the regulatory accounts. 11. Next steps We said in RD11/05 that we may need to carry out a further consultation in the autumn to consider changes to the regulatory accounting guidelines (and hence the regulatory accounts tables within the June return) to:
We recognise that companies will need time to consider our proposals in this area and may need time to amend their reporting systems to reflect any changes in the structure of the regulatory accounts tables. We will therefore consult in December this year for changes to the regulatory accounts and equivalent June return tables for the year ended 31 March 2007. In the 2007 regulatory accounts and June return we will expect companies to restate data for the 2006 year end in the revised format. There are a number of changes to statutory reporting requirements which we will need to take account of in the 2006 regulatory accounts and June return (for example reporting of pensions). We will set out in our consultation in December how companies should deal with those changes for the 2006 year end. Our consultation in December will also set out our proposals concerning the disclosure of information relating to the links between directors' pay and standards of performance. We will require companies to disclose this information in their 2006 regulatory accounts. Following our consultation in December we will confirm our final reporting requirements in this area in our annual RD letter on the regulatory accounts in April 2006. We also plan to issue a questionnaire to companies later this year asking for further detail on bad debt. The primary purpose of this will be to allow us to understand more fully debt write off, bad debt charges and provisioning policies. However, if we believe the responses to that questionnaire have implications for the information we currently collect on bad debt, we intend to reflect any changes in the June return 2007. We will be issuing the new June return reporting requirements to all registered holders by the end of December 2005. The June return 2006 Information Capture System will be issued by 31 March 2006. Other than clarification on data definitions, it is not envisaged that the data requirements for the June return 2006 will differ substantially from those proposed in the consultation document except where explicitly stated in our response. We await the outcome of the review of the Environment Agency data with Water UK. Yours sincerely ROGER DUNSHEA Director of Operations  |
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