Regulating Water – together

Water_Collaboration_Image

The visit to Scotland has provided an opportunity for SA Water stakeholders to understand an exemplary process undertaken in regulatory price determinations in Scottish Water. Looking at the England/Wales process unearthed alternative views and process with some shared elements and many opposing views about what works best.

My Key takeaways?

  • The design of the process matters less than the approval of the process by stakeholders – which makes it legitimate. If everyone believes they can get a fair hearing, then the process is a good one.
  • We need to do more work understanding how to manage technical detail vs how to manage values. The skills and knowledge applied to each is quite different. Ideally diverse perspectives are applied in each case.
  • Independent and fair minded decision makers are important arbiters, but insufficient advocates. The ideal folk at the heart of the process are those who care deeply, have great credibility amongst those they advocate for, but who have that undervalued skill of being able to develop constructive dialogue with opposing interests.

please find my report from the journey below:

As background, the first few price resets for the business were typical (2002 to 2012). Economic indicators suggested Scottish Water could improve efficiencies when benchmarked against other utilities, Scottish Water provided detailed business planning and the regulator trawled through the detail looking for (and finding) areas of improvement. The incentives on the regulator were to make a case for lower prices/better service while also appearing reasonable.

As the room for productivity improvements became less clear cut, the ability for the regulator to make useful improvements to the water business decreased. In Florida, a consumer-led negotiation achieved more in price reductions than the regulator could have. Could this be true? And how?

Perspectives on stakeholder engagement

The libertarian academics argue that creating a consumer negotiation achieves two things –

1) providing the Utility with much truer insights into consumer priorities and values, thus validating opportunities to reduce costs/improve value against a litmus test of what consumers really think constitutes long term value.

2) taking the regulator as a middle man to the side of the process and therefore creating efficiency in the aim of delivering long term value by forcing the utility into direct decision making with its stakeholders.

This is an economics perspective.

A public policy perspective would be that helping stakeholders deliberate leads to better decisions. Empowering stakeholders to resolve their own differences and make decisions together is the most highly regarded approach across the engagement (IAP2) spectrum. In this context there are two dimensions (thanks Stephen Littlechild) the negotiation between SA Water and all consumers/regulator determines the size of the pie. The negotiation between different consumer priorities helps inform how the pie is shared. Questions about the level of detail needed to have such discussions and the timing of decisions (just for regulatory process vs ongoing) come into view about how successful stakeholder involvement can be.

An innovation perspective argues that user-led design provides the business with “outside-the-square” perspectives and allows it to learn and innovate for better outcomes. It is all too easy for the business, the regulator and all those who develop water sector expertise to be captured by the current paradigm. Improvements based on industry trends are easy, but adoptions from other sectors and coping with disruptive changes can benefit greatly from working with outsiders. OfWat talked about moving toward a co-design culture and highlighted a Welsh village which worked with its utility to agree the best way to manage a pipe replacement program that would have disrupted the whole village.

Finally, a management perspective recognises that good decisions are made within a collaborative organisation – and business planning should engage all parts of the organisation as stakeholders. This makes everyone more aware of the different trade-offs that are needed across the organisation and the higher aims that all departments contribute to. A customer centric approach extends the organisational sensemaking beyond staff to all the customers they affect every day. It also puts customer/stakeholder values as the chief aim from which all ambitions for long term, sustainable outcomes flow.

There is plenty of nuance in creating a successful process. Our visit highlighted many elements that contributed to the success in Scotland and helped us consider how these may be generated in South Australia. It is clear that transplanting the process from one jurisdiction to another cannot guarantee success. One of the best reasons for aspiring to negotiated settlement is the similarity of the Scottish situation to our own. A single, publicly-owned water utility, a regulator with only one water business to regulate and a small jurisdiction with the opportunity for strong relationships.

At the heart of the Scottish negotiated settlement process is collaboration and a move away from old frameworks of advocacy and making demands (power over) to one of constructive challenge, scrutiny and negotiation (power with). This is an enormous ask. The culture for collaboration can only be built slowly. Shared success and the sharing of power, slowly build trust – trust that the process works and trust in the people to play their roles well. Relationship building comes before trust can be guaranteed and before conversations can become honest enough.

Interestingly, the American examples seem to balance hard nosed negotiation, resort to litigation and stronger joint understanding between customers and businesses. Collaborative progress does not seem to be at the heart of the US processes and when quizzed on this, Stephen Littlechild acknowledged that Americans have a stronger acceptance of private sector ownership and expectation that the key to success in business is good customer service. One of the concerns of the SA group was that a business can “capture” consumer negotiators in much the same way as it captures regulators. Outside parties never get to see information the business does not want them to see. If consumers agree with the negotiated result, can it be a bad result? Probably so – with grave concern that information asymmetry always benefits the business. The acceptability test becomes quite important. Tony Smith at CC Water pointed out that the water businesses had performed better than the FTSE. If they felt the regulatory process was too limiting, they could take their money elsewhere – but he felt they wouldn’t when profits were quite obviously reasonable. The issue of Thames Water shifting profits offshore was raised (even the Financial Times felt this showed the system was broken) and business behaviours like offshoring profits really do undermine the business’s social license. One benefit of a process with stronger customer involvement might be in increasing the power of customers to revoke social license.

The Scottish Water process appeared successful from the outset but during the first phase, “learning” there was little at stake in decision making terms. Trust was built as Scottish Water realised the ‘daft laddy’ questions to present proposed decisions at high level and in terms of customer value were valid and actually improved the business in how they thought about their work and communicated it. The willingness of Scottish Water to reflect on criticism and bring better information back to the Customer Forum built trust and demonstrated that the business was listening.

There is probably a year in this first phase that helped create the relationships. All three senior leaders – the Chair of the Customer Forum, CEO of Scottish Water and CEO of WICS have an excellent rapport and commitment to making the process work with honest conversations and plenty of out-of-session communications. This culture-making from the top is really important. It reminds me that the best teams perform when team members can openly challenge each other without reducing the strength of the relationships.

 

Insights

Others have written about the process so I will not provide detail. A number of design features were highlighted by those we talked to.

– aligned objectives. Broadly stable prices over the long term appears to be an agreed policy objective that brooks no argument. A customer orientation by Scottish Water (new at the time but strategically part of who the organisation wanted to become) helps set the tone for a positive relationship with the CF. WICS assertion that customer values are essential to priority setting is easy for all parties to accept.

– clarity on role. Policy – which could be contentious, had already been set by the Scottish Government. The tram tracks (band of acceptable financial outcomes) had been provided by WICS.

– diversity of perspectives. Many well respected senior folk and a few newer faces make up the Customer Forum. All have been chosen for their ability to think constructively together, to scrutinise, analyse and challenge and to ultimately make agreed judgement for long term public benefit. Some have only a lay perspective with no expertise in water.

– no one on the Forum as a representative. This provides a filtering effect to move away from what can be short term demands and feelings to a longer term deliberative judgment.

– excellent well respected Chair. “Peter ran the forum like a parliamentary committee” “don’t give the position to someone who is out to make a name for themselves”

– tripartied appointment of the Chair between WICS, SW and CAS

– performance indicators. Arguably the most powerful impact of the customer forum in Scotland has been in showing the business what customer expectations they need to perform to and negotiating new, customer oriented performance indicators.

– jointly agreed customer research. There were times when CAS commissioned independent research too but in general there was great benefit in the CF and SW jointly agreeing the research, questions, interpretation of results.

 

(the ongoing role of CAS is interesting. It has been able to remain strongly in its advocate and representative role. It has been able to continue pushing for change in government water policies and in the business approaches. But Gail Walker spoke highly of the stronger working relationship. The fact that many of the customer principles and approaches that she had been advocating for over many years, had been accepted by the business, “lock stock and barrel” seemed to be testament to the customer forum approach having an influence over the business and paving the way for new ways of thinking about consumer needs.)

 

One conclusion needs to be that a genuine collaboration between SA Water and a customer forum would lead to long term benefits for consumers, better decision making on investment and service priorities and a more open and customer focused organisation. Scottish Water suggested they saw major corporate benefits and would comfortably continue to resource this approach. The level of funding was considered “5m when a regulatory reset was a seperate line item, it is now integrated into the business in so many ways that if it is more than that, it would still be worthwhile.”

 

The OfWat processes are different in England and Wales. The proposals endorsed by Customer Challenge Panels may not be taken into account by OfWat in the final determination. The CCPs’ main role is to report to the regulator about the effectiveness of the Water business’s customer engagement. Strictly speaking, if the business is listening to its customers well, their priorities will inform the business plan. Regardless of the differences, both jurisdictions believed that turning the water businesses to face their customers was leading to improved businesses. In England and Wales, the regulator can easily see this impact with differing results across the 17 or so businesses under regulation. One comment was that about half of these businesses might drop customer engagement tomorrow if the regulator didn’t force them to do it – these were not considered the best performing businesses.

 

We were also able to talk to an independent academic, Martin Lodge, who could contrast the WICS and OfWat processes. One takeaway from that discussion was that the detail within the process was less important than the endorsement of all the actors within the process. Ie legitimacy becomes a key part of process design, and if everyone can agree that a process will get good results, they will work toward that.

Another important point that Martin made relates to how well the system works when the issues at play create deeper divisions. He gave the example of the aviation airspace regulation and concluded that having the ability to revert to the regulator as ultimate judge becomes an important fallback in the context of difficult decisions.

 

So a number of key questions need to be asked:

  • how do we make sure new approaches deliver better decision making?
  • how do we build a genuine collaboration? (and a realistic timeframe/resource for this)
  • who will provide the best reflection of consumers long term interests?
  • what new roles should we envisage for the existing actors?
  • what is an efficient use of everyone’s time?
  • how much detail is enough to launch an effective challenge?

 

Better Decision Making

I believe in the following key components:

  • Don’t underestimate the power of diversity. Water folk all labour under a water infrastructure paradigm. Economists see the world in a certain way. We need these dominant types to try hard at creating a shared view of the challenges and potential solution, only partly through schooling others about their world view and more importantly by thinking through the impact of other world views on their perception of the issues.
  • Anyone can give good advice about the way they would make a decision if they are given time to understand the trade offs and deliberate over the issues.
    • This means we shouldn’t dismiss people’s views just because they are non-expert. It is our responsibility to define issues in terms of the customer value trade-offs that we are asking about.
    • It means we shouldn’t dismiss advocates just because they start from an extreme and uncompromising point of view. What we can ask of advocates is that they approach conversations with respect and that they believe in the good-will of both sides in a debate.
  • We need to see the decisions that are made throughout SA Water all the time and challenge the business to do a good job of articulating customer values so that all decisions can be confidently framed for customer outcomes.
    • Note that Scottish Water was sending its operational staff out to do customer interviews, understanding that everyone in the business needs to improve their understanding of those they serve.
    • Note the 9 criteria by which OfWat will evaluate PR19. These criteria provide an interesting list of ‘customer value’
      •  engaging customers;
      •  addressing affordability and vulnerability;
      •  delivering outcomes for customers;
      •  securing long-term resilience;
      •  targeted controls, markets and innovation;
      •  securing cost efficiency;
      •  aligning risk and return;
      •  accounting for past delivery; and
      •  securing confidence and assurance.

 

Collaboration

  • The best collaborative culture will take time to establish
  • There is always risk of capture.
  • Strong relationships that can survive robust challenge and differing points of view are essential.
  • The ultimate goal should be a porous organisation that is collaborating with stakeholders and customers at all levels simply because SA Water works better that way. The internal processes that establish this culture and listen to staff who will have their own customer insights are equally important to any high level processes established under the banner of ‘customer engagement’.

Choosing the negotiating team

The negotiating team can be understood in a similar way to a board. A board acts in the interests of the business. It has access only to high level information but operates with high levels of trust through the CEO to see that the business performs well. Shareholders elect the best board they can because they know that the right diversity of skills and perspectives working as a team will ‘steer’ the organisation in the right direction. The board is expected to be networked and knowledgeable, act strategically, manage risks, monitor performance and set goals. They are expected to be able to dive into the detail and challenge the business when things go wrong. To manage all this at a high level the board needs to monitor performance and also be concerned about the systems and processes that reliably produce the intended results.

 

The negotiating team needs to act like a board which is tasked with stakeholder outcomes, ie the best interests of all South Australians. It needs to be clear when the organisation acting in its own interests is likely to contradict customer interests and it needs to be given access to information when required to dive into the detail around issues that raise concerns.

 

There seem to be three key elements of each individual to consider:

  • Passions: What do they care about? What is their world view? Do we trust that these passions can be aligned with the long term interests of all South Australians? Will this give them a ‘strong backbone’ when pushing for the outcomes to be the best they possibly can be? Who will be the beneficiaries of any discretionary effort that this passion unlocks?
  • Incentives: How will they be compensated? Is their reputation at stake? Will doing/keeping the job override their passions? (ie not a good outcome)
  • Skills: Can they be tough negotiators? Can they understand the detail sufficiently to challenge it? (see also ‘how much detail?’) Do they have the interpersonal skills to create a good productive environment? Will they succeed in improving the way SA Water understands, communicates and measures customer value?

 

 

Role of existing representatives

The process is legitimised by existing representatives and their trust in the outcomes is important. While everyone retains their right to advocate for stronger outcomes for their stakeholders, the chances of achieving these improve if they are considered from the outset. Damning feedback/submissions at the end of the process would suggest that the process has failed.

The work of designing future pathways is always a process of bringing everyone on a journey, or at least the majority. The negotiators must bring the existing representative bodies along and those bodies must bring their constituencies along too.

People may not agree, but they must, at the minimum, understand why decisions have been made and they must feel listened to.

 

 

Efficiency

An overwhelming amount of advocate and customer time appears to be taken up by the proposed process. This is hard to justify in a small jurisdiction like South Australia.

At an individual level, an advocate or irate customer champions something they care about. The level of time and effort they choose to invest can demonstrate how important the issue is to them and also reflects the the amount of time and effort they have available. Those with less availability want their interactions with the process to be as efficient as possible or they want to trust a process where sufficient resources are applied to dealing with the issues they raise.

The SA Water and regulatory cost-benefit is quite different. In the context of billion$ expenditures and asset base, small additional investments in planning and design can pay dividends. If the business is oriented to:

  • Delivering efficiently
  • Delivering the right things
  • Innovating and planning effectively for the future

Then everyone is better off.

 

Models for consideration:

  • The public policy and regulatory consultation models are well understood but may not be considered efficient or effective
  • Citizens juries place high value on deliberation and do not question the time intensiveness of the process
  • Co-design and user-led design funds professional design expertise to be the listeners and testers of outcomes. It recognises that design is an iterative process and that users don’t always think through their choices but their behaviour speaks volumes about their values.

 

How much detail is sufficient?

There was much talk about ‘looking under the bonnet’ and improving how much visibility and understanding was afforded to the negotiators. This metaphor can be extended. If an innovative future is to be adequately considered, other insights might need to be included to explore alternative arrangements of the components under the bonnet.

 

Agenda setting is also a critical issue. If SA Water sets the agenda, the negotiating panel may never get to see aspects of the business that are worth challenging. In Scotland the regulator deliberately designed a number of brainstorming sessions between stakeholders, policy makers and regulators to explore issues that it saw as worthy of broader discussion.

The process builds on the status quo. Is this acceptable? When should this be challenged? It could be argued that the existing social contract may not be up for challenge, but it should always be visible and SA Water should be able to articulate it clearly in terms of the long term value it produces.

 

Some folk will burrow into the detail and sometimes this is necessary to challenge the basic assumptions that SA Water uses. The negotiating team can improve the way information is framed and Scottish Water highlighted the improvements it had made as it got better at understanding how to deliver its information in terms of customer value. It had also changed its performance measures, so that conversation about what the organisation is trying to deliver is likely to change.

 

Like a board, managing and communicating trade-offs at the high level is essential to most of the smooth operation of the process. Using the ‘burrowers’, applying additional resources/expertise to problematic areas and being prepared to go into detail when necessary is also important. How to know when to dive deeper? Like a board, the negotiators need to have good visibility to how well the SA Water processes work and they need intelligence from other sources to monitor the organisation and its customer engagement.

 

Appendix: Consumer Principles developed by CAS, consumer water advocates in Scotland

CAS principles

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About Heather

I am an energy and climate change specialist with a background in industrial energy efficiency and climate change policy.
This entry was posted in Policy Ideas and tagged , . Bookmark the permalink.

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