Investors

Ensuring we meet customer needs

Customer Outcome Delivery Incentives (ODIs) are a measure used by Ofwat to monitor our performance.

They are designed with customers to make sure our objectives align with things that matter most to them. If we exceed these targets, we unlock significant financial outperformance rewards. If we fail to meet them, we incur a penalty.

How we decide our performance commitments

As part of our planning process for each five-year Asset Management Period (AMP), we conduct extensive customer research, speaking to around 250,000 people.

We look at all kinds of interactions with our customers and wider stakeholder base to fully understand our customers’ and stakeholders’ priorities.

We then work with our customers to develop the outcomes and performance commitments that most closely align to their priorities.

Setting these targets is part of an iterative process. We consider historic performance, customer affordability and our statutory obligations, and identify where customers support us in driving outperformance.

This determines which measures are suitable for financial incentives. These bespoke ODIs are submitted to Ofwat as part of our five-year business plan.

At the same time, Ofwat use a meta-analysis of all company research to consider what deliverables are common across all customers, no matter where they are in the country.

Ofwat use this analysis to drive consistency in the reporting of these measures and set them as common ODIs which companies can choose to include in their own suite of measures.

The highest customer priorities are converted into comparative ODIs, where companies are measured against each other and only the best companies unlock rewards in order to drive the industry towards better performance

Our performance commitments for the next five years

Our AMP7 plans, covering the five year period from 2020 to 2025, were approved first time, meaning we were fast-tracked and able to immediately start putting our plans into action.

Severn Trent Group made performance commitments for both Severn Trent and Hafren Dyfrdwy, which were assessed by Ofwat.

You can read or download both Severn Trent’s PR19 performance commitment and Hafren Dyfrdwy’s PR19 performance commitment from Ofwat’s website.

How the reward and penalty ranges are determined

As part of our customer research, we conduct willingness-to-pay surveys, alongside other cost-benefit assessments, to work out how much customers are willing to pay per unit of improvement in each measure.

This helps to crystallise customer priorities and understand the appropriate magnitude of incentive or penalty that should be attached to each unit of outperformance or underperformance against each target.

The reward or penalty incurred is determined by how many units the company is over or under the measured target.

We include this as part of our five-year business plan which we submit to Ofwat for review.

Ofwat take a view of everything in our plan and decide what changes they believe are needed to strengthen customer protection. This can be to the targets, the incentive rate per unit, or whether they want to cap rewards or penalties at a certain level.

Through the draft determination process, we discuss with Ofwat the impacts of their adjustments and provide additional evidence to justify our original proposals.

Ultimately, the Final Determination sets the parameters by which our financial incentives will be earned for the next five years.

How rewards and penalties are administered

The majority of ODI rewards and penalties are taken in period through revenue adjustments.

However, some ODIs that are measured over the course of the whole AMP have the net reward or penalty reflected through Regulatory Capital Value adjustments or future revenue at the end of the five year period.

We report on our ODI performance annually, and we claim our net ODI reward or penalty for the year with a two year delay.

This allows our actual performance to be independently verified by our auditors, and give Ofwat opportunity to approve the changes to price limits through the Scheme of Charges.

This system is intended to match the change in bills as closely as possible with the service delivered to trigger that change.

However, we can choose to defer payment of these rewards in order to reduce volatility in bill charges.

In the AMP7 Final Determination of December 2019, Ofwat determined that, from then onwards, any rewards in excess of 3% Return on Regulated Equity in any given year need to be split fifty-fifty with customers.

Our ODI performance through Asset Management Plan 6

£ million	Year 1 (2015/2016)	Year 2 (2016/2017)	Year 3 (2017/2018)	Year 4 (2018/2019)	Year 5 (2019/2020)	AMP 6 (2012/2013 prices)
Gross ODI earned	23	47	72	-4	36	174
ODI reward carried forward into AMP 7	-	33	78	-4	36	143*
Amount recognised 'in year'	23	14	-6	0	0
ODI recognised in revenue (two year lag)			23	14	-6

*All together we have deferred £191 million (in nominal prices) of customer ODI rewards from AMP 6 to AMP 7. These rewards are reflected within our Final Determination for AMP 7, and are evenly phased across the five years.