customer research triangulation - united utilities · 2018-09-01 · customer research...

Customer research triangulation Chapter 5: Supplementary document Document Reference: S3004

This report sets out how we have ensured that we have used appropriate customer research and information to produce valuations, and how we have then weighed up that evidence to produce an overall valuation. It covers the key aspects of valuation where we have triangulated a number of values from different aspects of research.

United Utilities Water Limited

Chapter 5: Supplementary Document - S3004 unitedutilties.com

Triangulation of customer research to value service improvements Contents 1 Introduction ................................................................................................................................................... 3

2 Valuing interruptions to supply ................................................................................................................... 15

3 Valuing safe, clean drinking water – taste, smell, discolouration and boil water notices ........................... 28

4 Valuing safe, clean drinking water – water quality compliance .................................................................. 39

5 Valuing supply-demand options .................................................................................................................. 41

6 Valuation of improving river quality ............................................................................................................ 49

7 Valuing reducing sewer flooding ................................................................................................................. 56

8 Valuation of reducing pollution incidents .................................................................................................... 62

9 Valuing support for customers in vulnerable circumstances ....................................................................... 66

10 Number of customers lifted out of water poverty ...................................................................................... 70

11 Appendix 1 – calculation of average WTP values ........................................................................................ 76

12 Appendix 2 – WTP variation with income and by region ............................................................................. 83

Copyright © United Utilities Water Limited 2018

2


Triangulation of customer research

1 Introduction

1.1 Objective of this report The objective of this analysis is to use our customer research to produce overall conclusions on the value to customers of service performance. These values can then be used in setting performance targets and incentive rates. This report sets out how we have ensured that we have appropriate customer research and information to produce valuations, and how we have then weighed up that evidence to produce an overall valuation. It covers the key aspects of valuation where we have triangulated a number of values from different aspects of research. For Outcome Delivery incentives where the value is based on a single source, or is derived from these triangulated values, the calculation is set out in the supplementary document S3001.

1.2 Research design principles and objectives Our approach is in line with Ofwat’s principle of using a range of techniques and a range of sources to understand customers’ priorities and needs. Different approaches to research each have their advantages and disadvantages. The use of different approaches enables cross-checks to be carried out, or results to be combined, as appropriate. We set out our overall approach to engagement in our Water UK “marketplace for ideas” paper1 and developed a plan based on this approach and an assessment of specific research needs for each aspect of service. The extent of research in individual areas depends on:

• The complexity of the issue – more complex issues may need more in-depth research

• The extent to which customer research can influence our proposed performance level

• The significance of customer research for setting incentive rates We have aimed for coverage which includes:

• Research which provides for trade-offs between different aspects of service – e.g. willingness to pay, plan acceptability testing, supply-demand sliders

• In-depth research which gives customers greater understanding – e.g. immersive research

• Research / analysis based on customers’ actual experience – e.g. revealed preference, post-incident research, analysis of customer contacts

• Research covering all price controls (we have addressed Bioresources’ service delivery through research on air quality and recycling)

1 Improving customer research and engagement, United Utilities, February 2016


3


We have discussed our programme and individual research projects with YourVoice at an early stage, and changed our proposals to reflect their comments. In addition to analysing our own results, we have reviewed our results against our own and other companies’ PR14 valuations.

1.3 The spread of customer research The table below shows which customer research has contributed to the assessment for each measure.

WTP Immersive research

Customer priorities

Testing our plan

Customer contacts

Customer Panel project

S/D sliders

Other

Your drinking water is safe and clean

Water quality compliance (CRI)

Properties at risk from lead

Derived from water quality values WRc

Taste and odour contacts

Research post-incidents

Looking after water in the home

From water efficiency and water quality valuations

You have a reliable supply of water now and in the future

Keeping reservoirs resilient

HSE

Interruptions to water supply

Drought risk resilience

From interruptions value

Water service resilience

From interruptions value

Leakage

Per capita consumption

Low water pressure

Mains bursts From interruptions and leakage values

Unplanned outage From interruptions value

National water transfer

Not applicable

Manchester & Pennine resilience

From interruptions and water quality values Specific research

The natural environment is protected and improved in the way we deliver our services

Abstraction Incentive Mechanism

Derived from river quality value

Improving the water environment


4


Pollution incidents

Enhancing natural capital value

Derived from own and other environmental valuations

Treatment works compliance


Further improving river water quality (removing phosphorous)


Protecting the environment from impact of growth and new development


Recycling biosolids

Improving air quality Govt. value

You’re highly satisfied with our service and find it easy to do business with us

Systems thinking Derived from various values

Developer experience (D-MeX)

Not applicable

Customer experience (C-MeX)

Not applicable

Street works performance

Govt. value

Supporting customers in vulnerable circumstances

Bills for you and future customers are fair

Lifting customers out of water poverty

Social tariffs research

Reducing void / gap properties

To be derived from impact on customers’ bills

We reliably remove and treat your wastewater

Sewer blockages Derived from flooding valuations

Sewer collapses Derived from flooding valuations

The risk of sewer flooding for homes and businesses is reduced

Flooding risk resilience

Not valued

Reducing future flood risk

Derived from flooding and environmental valuation

Engaging with customers to reduce flood risk


5


Internal flooding incidents

External flooding Incidents

The North West’s bathing & shellfish waters are cleaner through our work & the work of others

Improving Bathing and Shellfish water quality

Revealed preference

1.4 Research studies Research relating to individual aspects of service is discussed in the relevant section. The general research relating to a range of service performance is summarised in Sections 2.1 to 2.4 below. These studies are:

• Initial research on customer priorities

• Analysis of customer contacts

• Willingness to pay survey

• Testing our plan

• Customer panel (the panel has covered a number of different subjects, with the results discussed under each performance commitment

This report does not review our approach to individual research studies in detail. It is focused on the results, although where the approach affects the weight given to the results, this is considered here.

1.5 Initial research on customer priorities The objective of this research, carried out by Boxclever in 2016, was to explore customer priorities in relation to water service provision in our region. It included face-to-face depth interviews and 3,340 online surveys (3,000 residential and 340 SMEs). Customers were invited to spontaneously identify priorities, and to rank aspects of service from a prompted list. The diagram below shows customers’ ranking of potential areas for improvement.


6


Clean, safe and reliable water supplies are a top priority, but are not identified as the highest areas for improvement. Customers may be relatively satisfied with current performance. Addressing leakage emerges as a top area for improvement. Sewer flooding is in the top five both as a priority and an area for improvement.


7


1.6 Analysis of customer priorities and contacts We have compared the customer priorities considered above with customer contact volumes. We analysed 904,000 inbound customer contacts across multiple sources (Inbound telephone, Live Chat, Written Complaints, MP Enquiries and Twitter, Apr 2014 – December 2016). This showed 646,000 contacts (71%) closely relating to customer priorities identified in the YourChoice customer research project. The remaining contacts (259,000) were concerned with more general reasons for contact such as private problems, other organisations issues, changing appointments etc.). The graph below shows the categorisation of contacts. The upper block on the water quality bar is the number of incidents relating to two incidents affecting a large number of customers. Issues that appeared as high priorities in the customer research discussed in Section 2.1 also show a large number of contacts. Particularly notable points are:

• The high number of contacts relating to leakage

• The high number of contacts relating to internal sewer flooding, given the relatively small number of customers this affects

1.7 Willingness to pay The objective of this research was to measure customers’ willingness to pay for improvements by “choice experiments”, offering customers’ choices between packages of different service levels and bills. Nine aspects of service were included. The total sample was 1,745 customers, selected to be representative of our region. The results enable us to compare WTP values for:

• Local areas within our region

• Residential and businesses


8


• Households on low incomes and other households Details of the results are included as an appendix and under each performance commitment. Some general issues in the use of WTP values are:

• Representativeness of the sample

• Use of median or mean values

• Whether to use results averaged over the different service levels presented, or use the different values derived for each service level

• Scaling of the results from WTP per customer for a step change in service to company-wide WTP for a unit of improvement

Representativeness of the sample In carrying out the survey recruitment, the researchers aimed to make the sample as representative of UU’s total population as possible. The survey sample was close to UU’s total population. However, to make the results fully representative, weightings were applied to various demographic sub-groups (by region, socio-economic group, sex, vulnerability, metered / unmetered2. The report also identified WTP per customer for customers who had experienced a service failure. For some service attributes this was associated with higher WTP. This issue is commented on in the analysis for individual service attributes. One general issue is that those customers that have experienced either an unplanned or planned interruption to supply showed a significantly higher WTP across most service attributes, especially for water services. In the research, 27% of customers in the sample said that they had experienced an interruption in the last five years. Over the last four years, on average 4.1% of customers in each year have experienced an interruption of over three hours. Taking into account that some of the interruptions experienced in the sample would have been under 3 hours, there is no evidence to suggest that customers who experienced an interruption were over-represented. Median or mean values We have considered median figures as well as averages. There is a case for using median figures as this ensures that, when weighing costs against benefits, improvements are shown as beneficial when supported by a majority of customers. Use of results for different service levels The WTP research tested different service levels – generally one level of deterioration and two different levels of improvement. There was no consistent tendency for willingness to pay values for improvement to be greater or less than willingness to accept compensation for deterioration (WTA). Nor was there any consistent tendency for WTP to be higher or lower for the second increment of improvement than for the first. Therefore we have assumed that variation between different service level changes reflects the inevitable variability in WTP surveys, rather than any real differences in customer valuation. One factor is denominator effects. As noted in the Accent / PJM Economics report for Scottish Water3 willingness to pay values increase less than in proportion to the size of the risk reduction being valued. This

2 PR19 Willingness to Pay survey, Boxclever and Frontier Economics, August 2017 3 Analysis of PR14/SRC15 WTP Findings, A Report for Scottish Water, PJM Economics / Accent, 24 September 2016


9


denominator effect may be because survey participants concentrate on the issue being addressed rather than the size of the reduction. In the light of this, we have assumed that WTA and WTP are equal, over the range of service changes considered in the research. We have taken an average over the range of service levels. Scaling the results We have converted WTP per customer for a defined change to a company-wide WTP per unit and then scaled the results to reflect differences between average bills for the sample and for customers as a whole. This is illustrated in the table below: Internal sewer flooding

Service level Average WTP per customer

Average WTP (scaled to average bill)

Total household WTP (x 2.933m customers) (£’000)

Total household WTP per incident

800 (current)

1,100 -£4.34 -£3.71 10,886 £36,288

650 +£2.82 +£2.41 7,074 £47,158

500 +£5.58 +£4.77 13,997 £46,656

Average £43,375

The same approach is applied to each measure, for calculating median and average values, and for calculating business values.


10


Comparisons with PR14 results As noted above, we have compared our results with PR14 results from other companies and with UU’s own results. Frontier / Boxclever suggested that more weight is given to the PR19 survey than the UU PR14 results as:

• “it is the latest survey of customers’ views

• we used a Hierarchical Bayesian analysis and Choice Based Conjoint analysis, rather than the more basic logit modelling that was used at PR14

• the service levels that were shown in the PR19 survey are more relevant for the business plan choices UU has to make now

• UU’s PR14 results were not particularly consistent with valuations estimated elsewhere in the industry, whereas the PR19 results are more consistent

• We applied BE insights to the PR19 survey, which improves the cognitive validity of the results” We support this view but have included the PR14 comparisons in drawing conclusions

1.8 Customer panel Verve, a company offering community panel expertise, has developed an online customer community (the UU WaterTalk panel) for discussing various topics. The online platform allows UU to approach selected individuals and groups of customers from across the UU region, inviting them to participate in a range of quantitative and qualitative studies. The panel has 7,700 members. By providing more information to the panel than would be usual in more traditional research, members are able to more fully appreciate the issues being considered. The panel represents a cross-section of our customers and we can select participants to ensure that they are representative. There is a question about whether customer panels are more engaged than others and that this might introduce a degree of bias. The testing our plan research (discussed below) gave the opportunity to test whether the community panel was giving different results from a representative sample of customers. The panel selected, on average a package of improvements worth £18.05, compared with £15.45 for the representative sample. This suggests that the panel may be more likely to favour service improvements. This


11


needs to be considered when placing significant weight on panel results and may require some scaling down of results.

1.9 Testing our plan Following our initial analysis of our customer research, we set out, in consultation with YourVoice, a range of options for some key service measures. This was then used in a public consultation, and in research with a representative sample of customers, to:

• Assess the levels of acceptability of UU’s proposed plan for service improvement and associated bill impact

• Evaluate the adjustments that customers sought to the proposed plan for each service area, in the context of bill impacts, to provide guidance on adapting the proposed plan to further reflect customer views

It consisted of qualitative research and quantitative research involving 1,045 customers. The research was based on 1,045 residential customer interviews, each approximately 15-20 mins duration, of which 200 were in person and 845 were online. In addition, there were 211 online interviews with business customers. We also conducted a series of 47 in-depth interviews, of approximately 60 minutes, with targeted customer segments to aid our understanding of customer attitudes to the emerging business plan. This included a specific element of engagement with customers who are hard to reach and in vulnerable circumstances. The exercise at the end of the research gave customers the opportunity to trade off different aspects of service, with the resulting impact on bills shown. Customers were first shown each service area individually and asked to choose their preferred level of performance, in the context of bill impact. In each case there was at least one option above and below planned levels, with the option of no change being available in all cases. Customers were then asked to review their choices, with these all shown on one screen so that the overall impact and trade-offs could be seen. At this stage, the overall effect was that, for each aspect of service, customers chose, on average, a higher level of service than they had chosen when presented with the choices separately. We have used the valuations derived at this stage. The trade-offs between nine different areas of service were presented as in the picture below.


12


The proportion of customers choosing each different level of service enables an estimate to be made of willingness to pay for each area of service. For example, 54% of customers supported either the planned level of river quality improvement, or greater. This improvement had a unit cost rate of £818,000 per 1% improvement. Therefore the median WTP per 1% improvement is just above £818,000 per year. As discussed in relation to the willingness to pay survey, there is a case for using median figures as this ensures that, when weighing costs against benefits, improvements are shown as beneficial when supported by a majority of customers. We have also considered average WTP, assuming linear change in terms of support at different incremental costs e.g. if 60% of customers supported a service level at an incremental cost of 100 and 40% supported a service level at an incremental cost of 110, for those 20% of customers who supported 100 but not 110 then we have assumed an average WTP of 105 per unit. The graph below shows the results for the measures included in the testing.


13


1.10 Weighing up the evidence In weighing up the evidence, the following questions contribute to deciding how much weight to give each element of research:

Question Considerations

1. Is the research based on responses to questions or observed behaviour?

Observed behaviour may be more reliable evidence of customer valuation than stated responses.

2. Are customer responses based on actual experience or hypothetical situations?

Where customers have no direct experience of an issue then they may find it difficult to assess its significance.

3. Are all aspects of benefit included? For example, research based on actual behaviour will exclude altruistic or non-use values. This is likely to be significant for sewer flooding and environmental issues.

4. How much information has been provided on the relevant aspects of service, and how much time given to consider information?

More information may give a more realistic assessment of value.

5. Is the research carried out in the context of overall potential choices and impact on bills?

Willingness to pay may be higher where a customer is no aware of potential trade-offs.

6. Is the research representative e.g. size of sample, structured, random, or self-selected?

Information from unrepresentative groups of customers should not be used to draw conclusions about customers’ overall priorities.

There are inevitably trade-offs between these, e.g. providing more information on an individual issue makes it more difficult to consider trade-offs, as there is a limit to how much information can be provided. We have used colour-coding to assess each element of research, with the darker colour meaning the research is stronger against that criterion. An example is shown below.

Q1 – observed or response

Q2 – actual or hypothetical

Q3 – all benefits included

Q5 – level of information

Q6 - context Q7 – representative

Immersive

WTP

Panel – acceptability

Panel - WTP

Customer contact data

n/a n/a

Following this assessment of the customer research, we produce an overall conclusion on valuation for each service measure.


14


2 Valuing interruptions to supply

2.1 The significance of interruptions to supply valuation for our business plan

Valuations of interruptions to supply are needed for:

• Setting incentive rates for the common measure for water supply interruptions (average minutes interruption per customer)

• Weighing up costs and benefits for potential schemes to reduce the risk of long-term supply interruptions

In terms of significance for customers, in relation to both service and bill impacts, the results were particularly important for our proposed Manchester & Pennine resilience scheme, which will significantly reduce the risk of water supply failures linked to the Haweswater aqueduct. For this project, triangulated results from general customer research were used for initial evaluation of options, and then supplemented by specific research in relation to short-listed options). In terms of potential bill impact, this project has a greater impact than any other proposed changes to service. It was, therefore particularly important to establish robust values for long-term interruptions. Customers may never experience such interruptions so we carried out innovative research to try to establish informed valuations.

2.2 Research studies used The research studies and data used in the analysis are:

• Customer priorities research (“YourChoice”, June 2016)

• Immersive research (August 2017)

• Willingness to pay (June 2017)

• Customer panel – interruptions to supply (August 2017)

• Analysis of customer contact data (August 2017)

• Testing our plan (November 2017)

• Comparison with PR14 willingness to pay results

2.3 Customer priorities Interruptions were ranked 7th of potential areas for improvement. This was expressed in relation to short-term interruptions, and the ranking of ensuring that there is enough water may indicate a higher priority in relation to avoiding long-term interruptions. Business and residential responses were similar.

2.4 Immersive research The immersive research involved innovative engagement on resilience and environmental issues. Most customers have not experienced service disruptions related to resilience issues. This lack of experience makes


15


the context provided in customer engagement even more important. The research design drew from behavioural economics insights. The objective of this research was to immerse participants in interruptions to supply. The concept was to bring quite complex issues to life, in the most clear and accessible way for domestic customers who are not at all familiar with the issues. A series of simulated text message, telephone and newspaper notifications was used to demonstrate the impact. Customers were given prioritisation tasks to allocate 20 litres of water across household activities, to consider how they would ration water during an interruption, and a supermarket task where participants had to prioritise what they would buy during an interruption. There were 93 residential participants, who were broadly representative of the region in terms of age, sex and socio-economic status. The activities led to customers giving a higher priority to long-term interruptions. Before the exercise, avoidance of supply interruptions of longer than one day was participants’ second lowest priority (sixth out of seven). However, following the immersive session on supply interruptions, this service aspect increased as a priority for informed customers, seeing the single biggest increase in ranking, up to the aggregate fourth most prioritised service aspect. Water quality issues still ranked higher. Mean Willingness to Pay (WTP) to reduce risk of a three-day supply interruption

Number of people with lower risk Mean WTP (£ per HH / year)

1 million £3.00 (0.7%)

2 million £3.21 (0.8%)

2.1 million £3.76 (0.9%)

The WTP to avoid a long-term interruption can be calculated by:

Company-wide residential WTP = Mean WTP x no. of customers (2.9 million) / risk of an interruption. The resulting valuation of one customer being affected by a 3-day interruption (based on 1 in 100 risk) ranges from £460 to £861 (average £609).

2.4.1 Representativeness of the research The immersive research concluded that participants ranked supply interruptions as being more important once they had been through the workshop. The research explores how consumers value interruptions, having attempted to make consumers understand what it is like to be without water. However, this may mean that the results are not representative of UU's customer base as a whole (many of whom will not have experienced a long-term supply interruption). We do not consider that this is a significant issue, because:

• For purposes of making decisions on avoiding long-term interruptions, we need to know how customers would value an interruption if it actually happened. For this purpose, a more informed valuation is appropriate

• In practice, the valuation was actually less than the less-informed valuation from WTP research (see Section 2.3 below)

We consider that this research met the objectives set out by Ofwat that companies should make more use of “revealed preference WTP techniques and experiments and by applying behavioural economics insights to the


16


design and interpretation of the engagement”4. If the value differs from the value which would be obtained from a less-informed customer sample, then we consider to be a more reliable estimate of customer value, rather than a biased value (either upwards or downwards).

2.4.2 Desired compensation levels Participants were also asked about the compensation they might expect for an interruption. They were told about statutory compensation rates (£20 for a one-day interruption, £40 for a three-day interruption and £150 for a 14-day interruption). The information on compensation rates is likely to have influenced the compensation level which customers expected, and may have depressed values compared with what they would have expected without prior information.

Length of interruption Mean compensation value (total) Mean compensation value (per day and as % of annual bill)

1 day £27.30 £27.30 (7%)

3 days £105.00 £35.00 (8%)

14 days £497.10 £35.51 (8%)

2.4.3 Immersive research – business customers We subsequently repeated the immersive research exercise for business customers, with 31 small business customers taking part. The exercise explored the potential impact on their business of an extended water supply interruption. The mean willingness to pay to reduce risk of interruptions was very similar to that for households, as shown in the table below. Both residential and business customers were willing to pay 0.7% to reduce risk to around 30% of customers. However, required compensation was, not surprisingly, significantly higher (a daily rate of 17% to 31% of the annual bill, compared with 7% to 8% for residential customers. Mean Willingness to Pay (WTP) to reduce risk of a three-day supply interruption

Number of people with lower risk Mean WTP (% per business / year)

25,000 0.63%

50,000 0.65%

Desired compensation levels

Length of interruption Mean compensation value (total) Mean compensation value (per day and as a % of annual bill)

1 day £847 £847 (31%)

3 days £2,037 £679 (25%)

14 days £6,528 £466 (17%)

4 Ofwat’s customer engagement policy statement and expectations for PR19, May 2016


17


2.5 Willingness to pay

2.5.1 Representativeness of sample Section 2.3 of the Introduction to this report describes our Willingness to pay research, in terms of overall approach, representativeness of the sample, etc. Representativeness of the sample is also discussed in more detail in the WTP report by Frontier Economics / Boxclever. WTP was higher among customers who said that they had experienced a water supply interruption. However, as noted in the Introduction, the proportion of customers experiencing an interruption was broadly similar to that in our customer base as a whole. Therefore there is no need for any adjustment for this issue.

2.5.2 Willingness to pay results For interruptions, customers were presented with options on the number of unplanned interruptions – two levels of improvement and one for deterioration. The average willingness to pay for improvement / accept compensation for deterioration are shown in the table below. Average Median

Residential £404 £337

Businesses £299 £51

Total £703 £388

Residential Businesses Total

Median £337 £51 £388

Mean £404 £299 £703

In percentage terms, business customers’ WTP was similar to that for residential customers. Information is also available on WTP by income group. The WTP value for low-income groups is just over 60% of the average. The WTP research also provided information on relative importance of different aspects of service in driving choices. As with the priorities research, this indicated that reducing interruptions to supply was not amongst customers’ highest priorities.

2.6 Customer panel The objective of this research was to answer the following questions:

• How many customers have experienced an interruption, and at what point is it considered ‘unacceptable’?

• How important do customers think it is that United Utilities works to reduce the impact of supply interruptions?


18


• Are customers prepared to pay to reduce the time it takes to resolve any supply interruption, and if so, how much?

• Are customers prepared to pay to reduce the number of households affected by any supply interruption, and if so, how much?

The relevant findings are summarised below:

2.6.1 Inconvenience Duration

0-3 hours 4-6 hours 7-12 hours 13-18 hours 19-24 hours Average

Not inconvenient 77% 15% 5% 1% 2.4 hours

A bit inconvenient 64% 23% 10% 2% 1% 3.6 hours

Very inconvenient 40% 33% 21% 2% 4% 5.8 hours

Unacceptable 17% 34% 33% 2% 12% 8.9 hours

A small majority (51%) of customers would regard an interruption of longer than 6 hours as unacceptable, which rises to 84% for an interruption of over 12 hours.

2.6.2 Ranking Which would you rather have to deal with assuming the issue will be resolved in 6 hours? • Low water pressure - 62% • They are equal - 18% • Boil water - 14% • No water - 6%

2.6.3 Willingness to pay We asked customers whether they would be willing to pay to reduce number of interruptions, and duration of interruptions. A majority were willing to pay for fewer interruptions, but not shorter duration. In both cases impacts on bills of between 50p and £15 were put forward. The table below shows that there was a minority of customers willing to reduce interruption time, even for lower bill impacts. For number of interruptions, there is a majority up to a £1.50 bill impact. Starting point – 120,000 homes, 6 hour interruption time

% willing to pay Reduce interruption time by: Amount

48% 45 minutes 50p

44% 75 minutes £1

Reduce number of homes affected Amount

66% 15,000 50p

59% 30,000 £1

52% 40,000 £1.50

46% 45,000 £2


19


From the WTP for reducing number of homes affected, the implied valuation of a 6-hour interruption is £101 (based on options which were supported by a majority of customers). This calculation is set out below. Reduction in homes affected (typically a 6-hour interruption)

WTP per customer Number of residential customers (000s)

Valuation per property benefiting (WTP x number of households / reduction in properties affected)

40,000 £1.50 2,900 £109

30,000 £1 2,900 £97

15,000 50p 2,900 £97

Average £101

For options to reduce interruptions duration, there was a lower level of support. This could suggest there should be a different valuation used to assess actions to reduce interruption duration than for actions to reduce number of interruptions. The above evidence suggest that the valuation per minute may be about 20% lower for reducing duration than for reducing number of interruptions. It is, however, questionable whether there is a need to apply such a different valuation, because:

• This research applied to reducing duration between 6 hours and 3 hours. Other evidence discussed above suggest that the valuation of interruptions increases with duration, for interruptions going beyond one day

• The Ofwat common measure for interruptions is for customer minutes, not distinguishing between changes in duration and changes in number of interruptions. The difficulty in achieving the target for this measure means that we are not likely to be distinguishing at this stage between options to reduce duration and options to reduce number of interruptions

• The evidence is not clear-cut, in that on average customers thought that a 3.6 hour interruption was only “a bit inconvenient”, whereas a 5.8 hour interruption was “very inconvenient”, suggesting that reducing duration could be important to customers

This issue is discussed further in the analysis of setting targets and incentives. It is likely to be an area for further research in future.

2.6.4 Representativeness of sample Half had experienced an interruption to their water supply at home in the last five years, with low water pressure being the most common issue. (32% low pressure, 17% no water). The expected proportion of customers who had experienced an interruption over a five-year period would be around 20%. However, not all the problems referred to above would have been sufficient to be regarded as an interruption (e.g. interruption may have been for less than 3 hours, or pressure may have been low but still above the minimum standard). Therefore it is not clear that the sample is unrepresentative. It is, however, possible that customers who have been interrupted are slightly over-represented, which may raise slightly the overall WTP.

2.7 Analysing customer contact data The objective of this analysis was to use data on customer contacts arising from incidents (sewer flooding and supply interruptions) to consider:

• What does the data tell us about customers’ relative priorities to avoid different service interruptions?

• What are the impacts on customers from different types of supply interruptions?

• What can we learn about who contacts, when and how? Customer contact data (number of contacts per incident) suggests sewer flooding is between 170 and 1,500 times worse than an unplanned supply interruption.


20


The ratio implied by the WTP survey is: – 93 using the internal flooding WTP – 19 using a weighted average of internal and external values

Since we get more calls per internal incident, the appropriate figure would be between these two – a midpoint figure is 56. The analysis also provided information on contacts by duration of incident. After an initial peak, the number of contacts per affected customer declines, then increases again after 6 hours, supporting other evidence that inconvenience rises once an interruption exceeds 6 hours.

2.8 Testing our plan

Our customer panel, and issues such as its representativeness, are described in section 2.4 of the Introduction to this report. Interruptions was one of the nine measures included in the research, which allowed customers to make trade-offs between different aspects of service and the level of bills. Assuming linearity in the rate of change in willingness to pay, it is possible to estimate median willingness to pay by interpolation between observations. The approach is as follows:

• In our research for testing the acceptability of our plan, 47% of customers supported a change of 1 minute or more in average interruptions per customer

• This had an incremental cost of £2.883m (for households)

• Assuming linearity between this proportion of customers willing to pay and 100% at zero cost, the median WTP for 1 minute is £2.719m

• Dividing by the number of customers and multiplying by 360 to give the value for a single interruption, this produces a value of £321 per 6-hour interruption for median household WTP

The calculation is set out in the table below. Residential

Service improvement 1 minute or more

Incremental cost £2.883m

% willing to pay 47%

Incremental cost £0m

% willing to pay 100%

Cost change per 1% willing to pay 2.883 / (100 – 47) = £0.054m per 1%

Median calculation 2.883 – 0.054 x 3 = £2.719m

We applied the same approach to the business results. The median and mean figures are shown below.


21


Residential Businesses Total

Median £321 £54 £375

Mean £329 £102 £431

2.9 Manchester resilience We carried out customer research into alternative solutions with different levels of risk of water quality problems or supply interruptions (as illustrated below). We have used customer choice between the options to assess willingness to pay to avoid interruptions.

This analysis shows a median WTP to avoid an interruption of £240 per day for residential customers (for interruptions of 2 weeks / 3 months.

2.10 Comparison with electricity results The inconvenience of the loss of electricity supply could be considered comparable to loss of water supply. Research on customer valuation of loss of supply5 showed a valuation of between £11 and £27 for a 4-hour interruption, depending on time of day and season (i.e. £66 to £162 for one day). This is towards the lower end of our range of valuations.

5 The Value of Lost Load (VoLL) for Electricity in Great Britain, Final report for OFGEM and DECC, 2013


22


2.11 Comparisons with PR14 results The immersive value of £609 for a 3-day interruption is similar to those obtained by other companies in WTP studies at PR09 (based on anonymised results from Accent’s comparison of PR14 WTP values). This is shown in the table below, for the three companies that valued long-term interruptions. Company Duration Value Duration Value Duration Value

L 3-6 hours £206 2-3 days £491 2 weeks £1,102

J 6-12 hours £790 1 week £800

B 6 hours £671 2 weeks £2,042

However, as the table also shows, WTP values for short-term interruptions are not proportionately lower. This goes against the evidence above that inconvenience increases more than proportionately with duration. There was a very large variation in WTP values at PR14 (from £50 to £1,670 for an interruption of up to 6 hours. This suggests that WTP values for interruptions need to be cross-checked or calibrated against other data, as the range is much larger than could reasonably be explained by local variations in willingness to pay for interruptions. The Accent analysis did not include UU’s WTP results. The UU figure was that an increase of one 6-hour interruption to supply was valued at £14,930, whereas a reduction of one 6-hour interruption to supply had no value. This result is so counter-intuitive, and so far outside the range of other results, that little weight can be put on it.

2.12 Weighing up the evidence The diagram below assesses the different pieces of evidence against our criteria.






Immersive

WTP

Panel – acceptability

Panel – WTP


n/a n/a

Manchester resilience

Testing our plan

The reasons for this assessment are that:

• The immersive and Manchester resilience research were able to provide much more information, because they were focused on a single issue.


23


• The WTP and testing our plan research provided a context, because customers had the opportunity to trade off different areas of potential improvement.

• Immersive research is scored higher as to whether it is observed or a response to questions, and relates to actual experience, because the research was designed to simulate the experience of an interruption.

The conclusions to draw from this depend on the weightings given to different questions.

• We consider that the level of information given is particularly significant, which suggests a strong emphasis on immersive research results.

• Context can be important – WTP for single issue surveys tends to be higher than WTP when choices are presented. This may suggest single-issue results should be scaled down. However, for this service area, the results from the WTP choice experiment are higher than for the single issue research results, so this does not apply.

2.13 Results and conclusions The table below summarises the results for residential properties:

6 hours 1 day 3 days 14 days Average per day

Immersive – compensation £27.30 £105 £497.10 £27 to £36

Immersive - WTP £609 £203

WTP - median £337 £1,348

Panel – acceptability Very inconvenient Unacceptable

Panel – WTP (reducing number of interruptions)

£101 £404

Panel – WTP (reducing duration) £0 (median) £0

Customer contact data* £20 to £170 £80 to £680

Testing our plan (expressed in research as customer minutes)

£321 £1,284

Manchester resilience £3,360 £240

* Based on multiple of sewer flooding WTP Immersive compensation results may be low because customers may relate required compensation to their bill rather than to the real disbenefit of an interruption. This result may provide a lower bound. In addition, it provides a way of scaling interruptions of different lengths. Our general approach is to use median WTP results as a starting point and make adjustments based on the results from other research. However, in this case, the results suggest that the WTP surveys results may be too high, as they are significantly greater (in terms of value per day) than Panel and immersive results. Therefore they may represent an upper bound rather than an appropriate starting point. The immersive WTP results are around the median level from the results above. The general principles we have used in setting a central estimate of benefits are that:

• There should be a rising rate per day, reflecting the immersive and panel results of rising inconvenience over time

• Greatest weight should be put on the immersive research, as this provided the most information on experience of interruption and therefore is the most informed choice


24


• The value for short-term interruptions should be within the range of results from the research The comparisons are shown graphically below.

Therefore the approach adopted is:

• To use the £609 immersive value as the starting point

• To value 1 and 14-day interruptions using the ratio between different interruption lengths indicated by the immersive compensation results

• To use a lower value for 6-hour interruptions, reflecting the rate at which WTP rises with interruption length shown by the immersive research

This produces the results shown in the table below, which produces a 6-hour figure within the range shown by the research. We consider these figures to be reasonable central estimates, based on the range of results from the research.


25


Residential Properties 6 hours 1 day 3 days 14 days

Overall value £35 £160 £610 £2,880

Per day £140 £160 £203 £206

We also considered an alternative approach, taking a simple average of the different results. This would give a figure of £486 for a one-day interruption. However, we consider that greatest weight should be put on the immersive research, since:

• The highest level of information was provided

• The lower value accords with customers’ general priorities (with reducing short-term interruptions not being among the highest priorities)

o It ensures that we are not using a figure which would be above WTP for customers on low incomes (WTP among low income customers was only about 60% of the average)

For businesses, we have similarly used the immersive research. This produces the results set out below.


26


6 hours 1 day 3 days 14 days

Residential

Overall value £35 £160 £610 £2,880

Per day £140 £160 £203 £206

Businesses

Overall value £15 £67 £257 £1,214

Per day £59 £67 £86 £87

Total

Overall value £50 £227 £867 £4,094

Per day £199 £227 £289 £293

Applications

• For an overall figure for an interruption of between 3 and 14 days, we propose to use a figure of £290 per day

• Interruptions in the common measure for supply interruptions performance are generally of short duration. Using the short duration value, of £50 for a 6-hour interruption, gives a value of 13.9p for one minute (the average duration of an interruption from 2014-15 to 2016-17 was 6 hours). Multiplying this by the number of customers (3.1 million) gives a valuation of £430,000 for improving overall performance by one customer minute

• For the purposes of assessing resilience risk, we propose to use a benchmark of risk of a 12-hour interruption. This was the point at which a clear majority of customers regarded an interruption as being unacceptable


27


3 Valuing safe, clean drinking water – taste, smell, discolouration and boil water notices

3.1 The significance of valuing taste, smell and discolouration for our business plan

Valuations are needed for:

• Weighing up costs and benefits for potential schemes to improve drinking water discolouration or taste and smell

• Setting incentive rates for our performance commitment on customer contacts and taste and smell.

• Initial evaluation of options affecting water quality risks relating to our Manchester and Pennine Resilience scheme

The evaluation of options for Manchester and Pennine Resilience was particularly important, as it is the most significant project in our plan. Investment to make improvements to taste and odour is a relatively small part of our plan. However, it is clearly a significant issue for customers (as shown in the discussion below of customer research) so it is important that incentive rates appropriately incentivise further improvement and provide sufficient compensation if we do not hit our targets. Our main discolouration issue is the potential requirement to clean the Vyrnwy aqueduct to reduce discolouration. This, however, will be a DWI requirement, with the incentive rate based on cost, so valuation is not required for this purpose.

3.2 Research studies carried out The research studies and data used in the analysis are:



• Lancashire boiled water incident (Franklaw) research (January 2016)

• Buckton Castle research (February 2017)

• Customer panel – drinking water taste, smell and appearance (August 2017)

• Analysis of customer contact data (April 2014 to January 2017)


• Analysis of PR14 willingness to pay results

3.3 Customer priorities The objective of this research was to explore customer priorities in relation to water service provision in our region. Drinking water safety has highest priority, and providing water that tastes and smells good, and is not discoloured, was third highest. The rankings were the same in terms of willingness to pay for improvement (although only a minority was willing to pay for improvement).


28



Section 2.3 of the Introduction to this report describes our Willingness to pay research, in terms of overall approach, representativeness of the sample, etc. For drinking water taste, smell and discolouration, we used two measures:

• Water discolouration customer contacts

• Water taste and smell customer contacts The ranges put to customers are shown in the following table: Service level range Deterioration Current Improvement 1 Improvement 2

Water discolouration customer contacts

8,300 5,500 4,500 4,000

Water taste and smell customer contacts

2,700 3,500 2,600 2,300

The mean / median willingness to pay for improvement / accept compensation for deterioration are shown in the table below. (See Appendix 1 for derivation of these figures from the original WTP values in the research). Total WTP per unit

Mean WTP Median WTP Service level range Residential Business Residential Business Water discolouration customer contacts (per contact)

£6,235 £1,498 £3,179 £61

Water taste and smell customer contacts (per contact)

£24,050 £28,407 £12,503 £10,215

Information is also available on WTP by income group, as shown in the table in the appendix. The WTP value for low-income groups is just over 60% of the average. Business customers’ WTP was particularly high for water quality and for taste and smell contacts. For these service measures, the WTP results were not significantly different for water discolouration and taste and smell for customers who had experienced these problems, so we have not considered whether these customers were overrepresented in the survey. The WTP research also provided information on relative importance of different aspects of service in driving choices. Safe, clean drinking water is the highest priority, and discolouration was ranked higher than taste and smell, despite a lower WTP value.

3.5 Lancashire boiled water incident research In August 2015, during routine tests we found the cryptosporidium parasite in water samples taken from Franklaw treatment works. Customers served by Franklaw were issued with a ‘Boil Water Notice’ advising customers, as a precaution, to boil any water to be used for consumption, for rinsing dishes and for preparing food. This resulted in around 320,000 customers in Blackpool, Fylde, Preston, South Ribble & Wyre being without drinkable tap water and having to boil water for consumption. The boil water notice was lifted,


29


starting with a partial lifting on 27th August, with the final areas were announced as free of contamination on 6th September. We carried out research to explore the consequences of this incident for our residential and business customers. This provided information on customer ranking of different water supply failures. We consider that priorities for customers who have actually experienced such problems are particularly important. This is because they are likely to be a more accurate representation of how customers will react to and value service disruption than will be gained from asking customers hypothetical questions. Households


30


Businesses

These results are summarised in the graph below:


31


3.6 Buckton Castle research (February 2017) United Utilities (UU) had an incident on Sunday 11th December at Buckton Castle water treatment works affecting 17,000 properties covering the areas of Stalybridge, Dukinfield, Hyde, Saddleworth, Greenfield and Ashton-Under-Lyne. Customers at these addresses were advised to boil their drinking water and this advice remained in place until the evening of 13th December. As with the Lancashire boiled water incident, we carried out customer research after the incident, including asking customers to rank a boil water notice relative to other water supply failures. Customers ranked a supply interruption as the worst disruption and a taste and smell problem as worse than discolouration, though less strongly than in the case of Franklaw customers.

Households

10

13

19

43

14

28

25

27

71

56

52

20

5

3

4

10

No water supply (unplanned)

Taste or smell problem but still safe to drink

Discoloured water which is safe to drink

Hosepipe ban

% participants

Better Same


32


3.7 Customer panel – drinking water taste, smell and appearance (August 2017)

Our customer panel, and issues such as its representativeness, are described in section 2.4 of the Introduction to this report. This panel research on drinking water sought to address 3 questions:

• How important an issue do customers perceive changes to taste, smell and / or appearance of drinking water to be?

• What do customers do when a change occurs?

• What does United Utilities need to do when a change occurs? It included two 2 qualitative online communities (one on taste and smell and one on taste and odour), each of 30 customers. This was to understand in-depth reactions to scenarios on changes in drinking water. There was also an on-line survey, with 2,513 responses. Data were weighted to ensure it is representative of our customer base in terms of age, gender and region. 39% of customers claim to have experienced a change in drinking water in the past (taste, smell or appearance). A change to the appearance of water – especially particles or discolouration – causes a stronger reaction than a change to the taste or smell, and as a result, is more likely to lead to contact with United Utilities. This is summarised in the diagram below. On average, 37% of customers with a drinking water issue contacted United Utilities.

Non Households

5

18

16

30

16

25

26

37

74

53

47

13

6

4

11

21

No water supply (unplanned)

Taste or smell problem but still safe to drink

Discoloured water which is safe to drink

Hosepipe ban

% participants

Better Same


33


3.8 Analysis of customer contact data (April 2014 to January 2017) We have analysed trends in customer contacts over time and between regions of the company to establish whether there are consistent trends. As the graph below shows, levels of contact for both discolouration and taste and smell are both broadly constant over the period. However, contacts for discolouration are consistently higher – about twice the number for taste and smell. The number of contacts does fluctuate when individual incidents affect large numbers of customers. In particular, there is a spike in taste and smell contacts from Manchester, Bolton and Stockport in Autumn 2016.

3.9 Testing our plan We included water taste and smell in the service attributes for testing our plan. 42% of customers chose no improvement and 35% of customers chose improvement above our plan level of 10% improvement. The overall WTP derived from the results is shown in the table below (using the approach described in the

Over 35s more likely to contact

44% of those who had an

issue with the appearance of their

water contacted United Utilities

32% of those who had an issue with the taste

of their water contacted United

Utilities

32% of those who had an issue with the smell

of their water contacted United

Utilities

Males and over 35s more likely to contact


34


Introduction to this report). These relatively low figures partly reflect that all options had relatively low incremental costs). Residential Businesses Total

Median £3,810 £1,160 £4,970

Mean £4,250 £1,220 £5,470

3.10 Comparisons with other valuations The table below shows comparisons of our results with those from PR14 studies (based on anonymised results from Accent’s comparison of PR14 WTP values)6 and also shows United Utilities PR14 values. UU PR19 –

Mean WTP UU PR19 –

Median WTP PR14 –

Mean WTP

Service level range Residential Business Residential Business Residential Business

Water discolouration (per contact)

£6,235 £1,498 £3,179 £61 £126 to £15,061 (median =

£1,426)

£133 to £27,960 (median =

£1,748)

Water taste and smell (per contact)

£24,050 £28,407 £12,503 £10,215 £196 to £28,537 (median =

£2,008)

£450 to £106,972 (median =

£1,892)

United Utilities

Water discolouration (per contact)

£340 improvement /

£910 deterioration

£0 improvement /

£130 deterioration

Water taste and smell (per contact)

£1,380 improvement

£5,000 deterioration

£700 improvement /

£980 deterioration

The comparisons show that:

• Our PR19 results are relatively high compared with PR14 values from other companies, although not outside the range

• We have a greater difference between taste and smell and discolouration values than generally found elsewhere

• The UU PR14 results were significantly lower than PR19 results. However, we have significantly improved our approach from PR14, and there were a number of anomalous results from our PR14 research (see sections on flooding and water supply interruptions for examples). This difference does not, therefore, cause any concern on its own

6 Comparative Review of Willingness to Pay Results - Final Report, Accent, June 2014


35


We also have information on PR19 valuations from companies (received after completing our triangulation). This again showed that our values were relatively high but not outside the range for other companies. Since some of our research compares interruptions with other water supply issues, the values we are using for interruptions are shown below. These are used in setting valuations where interruptions, discolouration and taste and smell issues can be directly compared (see Section 5). 6 hours 1 day 3 days 14 days

Residential

Overall value £35 £160 £610 £2,880

Per day £140 £160 £203 £206

Businesses

Overall value £15 £67 £257 £1,214

Per day £59 £67 £86 £87

Total

Overall value £50 £227 £867 £4,094

Per day £199 £227 £289 £293

3.11 Weighing up the evidence – taste, smell and discolouration In weighing up the evidence, the following questions contribute to deciding how much weight to give each element of research. We have used colour-coding to assess each element of research, with the darker colour meaning the research is stronger against that criterion.






WTP

Lancashire boiled water incident research

Buckton Castle research

Customer panel


n/a n/a

Testing our plan

Willingness to pay research and testing our plan are ranked relatively low in terms of whether they are based on observed behaviour or a response to survey questions, and whether they are responses to hypothetical questions or actual experience. We have scored research higher where it is based on actual experience of water supply disruption. All three research approaches are scored highly in terms of reflecting all benefits – the scoring for this criterion is only affected if research was focusing on a specific aspect of a service improvement.


36


The Franklaw, Buckton Castle and customer panel research level of information score higher on level of information because focus on a single issue means that more information can be provided. The downside of a focus on a single issue is that it cannot be in the context of the range of other potential service changes and impacts on bills, so there is no scope for trade-offs. Therefore these aspects of research have a lower score than willingness to pay or testing our plan for context. The conclusions to draw from this depend on the weightings given to different questions. We consider that the level of information given and the extent to which customers have experienced service issues are both particularly significant. This suggests that we should use other research results to adjust WTP values, where they are in conflict. However, the WTP and testing our plan research provided a context, because customers had the opportunity to trade off different areas of potential improvement. This may lead to lower WTP than that derived when customers consider a single issue. Therefore we need to exercise caution in increasing WTP values based on the results of individual studies.

3.12 Results and conclusions – taste, smell and discolouration Where interruptions and discolouration / taste and odour can be directly compared, i.e. for incidents affecting a known number of people and for a given duration, then we intend to use the interruptions value as a starting point and scale the values using the Franklaw and Buckton Castle results. This is because we have a variety of sources of evidence on interruptions values so consider this to be the strongest evidence. The weights we have used are shown below. This is the approach used for evaluation of options for Manchester and Pennine Resilience, as:

• We are evaluating proposals with a known number of customers at risk, for both water quality and water supply interruptions

• We need valuations for water quality which are directly comparable to those for supply interruptions Weighting different impacts Customer impact Weighting

No water – service interruption 1.0 (default)

Discoloured water (safe to drink) / Taste or odour issues (safe to drink) 0.6

Boil water notice 0.35

Do not drink 0.8

Do not use 1

In terms of valuing customer contacts, a customer contact and an interruption cannot be directly compared. This is because:

• An issue with discolouration or taste and smell may be continuous or repeating, but is only recorded as one contact (unless the customer contacts us again). For interruptions, we have different values by duration, and each interruption is recorded

• Not all customers with water quality issues contact us Our general approach is to use WTP values as the starting point for valuation, making adjustments to reflect results from other research. We have used the WTP values as a starting point for valuing contacts, and this is the valuation we use for setting targets and incentive rates. We are only proposing a performance commitment on taste and smell, so this is the key aspect of performance to derive a value. However, we are also taking into account the evidence on relative importance of discolouration and taste and smell. Customers


37


do rank taste and smell issues as worse than discolouration but the difference may not be as large as the WTP values suggest. As noted in the Accent / PJM Economics report for Scottish Water7 willingness to pay values increase less than in proportion to the size of the risk reduction being valued. This denominator effect may be because survey participants concentrate on the issue being addressed rather than the size of the reduction. Absolute WTP values are similar for discolouration and taste and smell are similar, but the discolouration WTP is being spread over a larger number of contacts. The values we have are: Water taste and smell or discolouration valuations

Total

Discolouration WTP - median £3,340

Discolouration WTP - average £7,731

Taste and smell WTP - median £22,718

Taste and smell WTP - average £52,457

Taste and smell – testing our plan (mean) £5,470

Taste and smell – testing our plan (median) £4,970

We consider that a taste and smell valuation should be less than the median WTP, in view of the other evidence on relative importance of discolouration and taste and smell, and the results from testing our plan. Other companies’ PR14 and PR19 results also suggest that our value from WTP research is relatively high. Our proposed valuation is £18,000 per contact, i.e. three-quarters of the way between discolouration and taste and odour median WTP. We consider that the valuation directly related to taste and smell should be given the greatest weight, rather than a half-way point. We do not consider that the evidence is strong enough to justify moving further away from the WTP valuations. From the Accent comparisons of PR14 results, three out of eight companies had valuations higher than this figure for taste and smell. We propose that if a discolouration valuation is required, it should be higher than the median discolouration value, applying the same reasons as those for reducing the taste and smell value. We have set a discolouration value which produces the same weighted average for taste and smell and discolouration combined, as shown below. Total No of contacts

Discolouration WTP - median £3,340 5,500

Taste and smell WTP - median £22,718 3,500

Weighted average £10,876

Discolouration WTP - valuation £6,343 5,500

Taste and smell WTP - valuation £18,000 3,500

Weighted average £10,876

7 Analysis of PR14/SRC15 WTP Findings, A Report for Scottish Water, PJM Economics / Accent, 24 September 2016


38


4 Valuing safe, clean drinking water – water quality compliance

4.1 The significance of valuing safe, clean drinking water for our business plan

Valuations of safe, clean drinking water are needed for setting an incentive rate for the common measure for water quality compliance (as previously measured by % compliance, now replaced by the Drinking Water Inspectorate’s new Compliance Risk Index). DWI enforcement of standards ensures that water quality is maintained. Water quality compliance is a high priority for customers, so it is important that the penalty is appropriate, but it is not the main mechanism for ensuring compliance. The target for this measure will be full compliance with standards, so there is no need for consideration of alternative targets or influence of customer research on investment choices.

4.2 Research studies carried out

The limited impact of customer research on targets and investment choices meant that we carried out less extensive research on this service aspect than for other aspects of service delivery. For example, there is no choice to be offered on drinking water quality compliance so we did not include compliance choices in acceptability testing. In addition, compliance cannot be directly observed by customers. Customer contacts relate to issues which can be perceived by customers, such as taste and smell. Therefore customer contacts cannot be directly attributed to compliance, although they do give a general indication of the significance customers attach to water quality. There is some debate about whether it is appropriate or necessary to carry out customer research on water quality compliance willingness to pay, or whether health benefits should be valued directly (see, for example the UKWIR report on WTP8). However, we consider that maintaining high compliance has benefits in terms of customer confidence in water supply which go beyond directly measurable health benefits. Therefore we included compliance in our main WTP study.

4.3 Customer priorities The objective of this research was to explore customer priorities in relation to water service provision in our region. Drinking water safety has highest priority, and was also highest in terms of willingness to pay for improvement (although only a minority was willing to pay for improvement).


For drinking water compliance, we used the measure of percentage compliance with the standards. The service levels put to customers are shown in the following table:

8 Carrying Out Willingness to Pay surveys, UKWIR, 2011


39


Service level range Deterioration Current Improvement 1 Improvement 2

Water quality pass rate 99.90% 99.96% 99.98% 99.99%

The mean / median willingness to pay for improvement / accept compensation for deterioration are shown in the table below. Total WTP per unit Mean WTP Median WTP

Service level range Residential Business Residential Business

Water quality pass rate (£’000 per 0.01%)

10,578 85,382 5,286 35,556

Water quality pass rate (£’000 per 0.01%) Deterioration only

2,381 5,786 277 184

On this issue the incentive will be penalty-only, unlike most of our other Outcome Delivery Incentives, which have outperformance payments and underperformance payments. Therefore the above table shows valuation for deterioration, as well as the average across the whole range of measures put to customers (which is the value we have used in general for application of WTP results). For this measure, unlike most others, there is a large difference between the valuations for deterioration and for improvement. The differences between deterioration and improvement probably reflect in part the different denominators for deterioration and improvement. As discussed in the introduction WTP values tend to reflect the importance customers give to an issue, rather than the scale of change made. Information is also available on WTP by income group, as shown in the table in the appendix. The WTP value for low-income groups is just over 60% of the average. Business customers’ WTP was particularly high for water quality. The WTP research also provided information on relative importance of different aspects of service in driving choices. Safe, clean drinking water is the highest priority.

4.5 Comparisons with other valuations There are no comparisons available on water quality compliance, as most companies (including United Utilities) did not include it in WTP surveys at PR14.

4.6 Conclusions The wide range of estimates produced by the WTP survey, and the lack of available evidence, from other research, could indicate that further research is needed. However, the DWI is introducing a new measure (the Compliance Risk Index) on which there is limited evidence on performance. This switch to a new measure makes the setting of an appropriate rate more complex, even if we had further research. The appropriate incentive rate to set, taking into account customer research and other issues relating to the measure, is considered in our report on setting targets and incentive rates.


40


5 Valuing supply-demand options

5.1 The significance of valuing supply-demand options for our business plan


• Weighing up costs and benefits for potential supply-demand schemes, both for the Water Resource Management Plan and the business plan

• Setting incentive rates for our performance commitments on leakage and water efficiency The valuation of leakage is particularly important, in view of the priority given to it by customers. The key issue is whether, and how far, to go beyond the economic level of leakage, in terms of balancing the savings from reducing leakage against the additional costs.

5.2 Research studies carried out Our approach to customer research in relation to balancing of supply and demand is aligned with that recommended in UKWIR research:

“Customers may have preferences in respect of which interventions should be used to achieve a particular level of security of supply. Furthermore, leakage reduction in itself is often a top priority for customers, although it is not clear what customers think when they value leakage reductions (i.e. is it the environmental impact of leakage reductions? Or do they value greater security of supply or greater efficiency and, thus, the potential for lower bills? It is recommended that customers’ valuations and preferences regarding these service measures [leakage, water efficiency and metering] are examined separately (e.g. through separate surveys and / or qualitative customer research”9.

The UKWIR project reviewing PR14 research10 gave specific guidance on engagement with customers on leakage:

“In future, companies need to articulate the rationale for managing leakage levels in ways that are meaningful to customers. Severn Trent’s interactive ‘supply and demand’ model to understand customer priorities is a good example. This tool enabled customers to understand the wider impact of investment in reducing leakage. It also distinguished between above ground and below ground leaks which is an important categorisation for ‘uninformed’ customers”.

In view of the guidance on appropriate approaches to supply-demand options, we did not include these options in our main WTP survey. Instead, we carried out specific research on these options. In addition, we included them in our initial research on customer priorities and our analysis of customer contacts. The elements of the specific research were:

• Interactive “sliders” research

• Customer research (qualitative and quantitative) on supply-demand options

• Customer panel research on willingness to pay for leakage reduction

9 Carrying out Willingness to Pay Surveys, NERA / Accent for UKWIR, 2011 10 Post-PR14 Customer engagement, Communications and Education, Blue Marble Research for UKWIR, 2014


41



5.3 Customer priorities and contacts The objective of this research was to explore customer priorities in relation to water service provision in our region. Leakage issues were two of the top ten customer priorities, and the top two priorities for improvement (reducing the level of leakage and responding quickly to leaks and bursts on the highway). The analysis of customer contacts also showed the high priority given to leakage, with it leading to the highest number of contacts (see section 2.2 of the Introduction to this report).

5.4 Interactive “sliders” research We developed an interactive digitally-based tool to allow customers to explore the choices and trade-offs in balancing supply and demand. This was similar in its nature to that described above in the UKWIR report. Customers were presented with options to balance supply and demand and were shown the impact on bills as they changed each option to achieve an overall balance. The options available were:

• Encouraging customer metering

• More frequent use of hosepipe bans in dry periods

• Taking more water from rivers in dry periods

• Increasing size of reservoirs

• Promoting water efficiency

• Reducing visible leakage

• Reducing non-visible leakage

• Taking more water from rivers

• Taking more water from underground The tool was developed by Supercharge, a software development company with a focus on user experience design. Frontier Economics contributed to designing the tool, developing the questions to put to customers and testing, applying behavioural economics insights. We tested the remote completion of this customer choice experiment. Participants received minimal context and information upfront and after completion we asked control questions to test understanding and analysed heat maps to assess whether people were exploring the range of choices. Following the testing we made further changes to improve the experiment. We then tested it with our online customer community. Verve, a company offering community panel expertise, has developed an online customer community (the UU WaterTalk panel) for discussing various topics. The online platform allows UU to approach selected individuals and groups of customers from across the UU region, inviting them to participate in a range of quantitative and qualitative studies. The panel has 7,700 members. By providing more information to the panel than would be usual in more traditional research, members are able to more fully appreciate the issues being considered. We used the Panel for this sliders research. The summary below is based on 866 responses.


42


Before the main exercise, customers were given some introductory questions, with slider values between -50 and +50. An example is shown below.

The average scores are shown in the table below. Average scores Median scores

Would you rather that we reduce water bills or invest to protect the environment?

+1.6 (protect the environment)

+2

Do you think we should find and fix more leaks from water mains, meaning there will be fewer leaks and therefore we will need to take less water from rivers, lakes and reservoirs?

-21.3 (reduce leakage)

-23

During a year when it rains a lot less than normal, we will need to either take more water from rivers and lakes (reducing water levels for fish) or impose hosepipe bans on households. How do you think we should balance these two choices?

-22.8 (protect the environment)

-28


43

https://uu-customerchoice.co.uk/supply-demand/onboarding


To reduce the need for hosepipe bans or take more water from rivers, we could encourage people to use less water in their homes. How much do you think we should do this?

-23.7 (encourage water

efficiency)

-28

These answers showed a strong tendency to support protection of the environment. The responses to the main sliders exercise are summarised below. Leakage

• Customers chose a total leakage reduction of 44 Ml/d, on average

• The net willingness to pay, above the cost of options to increase supply, was around 40p per cubic metre

• There was no preference for reducing visible leakage more than non-visible leaks Hosepipe bans

• Only 14% of customers wanted less frequent hosepipe bans

• The average choice was 1 ban in 13 years – an additional 10 Ml/d was made available as a result of the choices made

Drought permits

• There was a slight preference for less frequent drought permits (1 in 24 years on average) – a reduction of 10 Ml/d resulted from the choices made

Water efficiency

• Most customers chose some water efficiency measures

• No expensive schemes included so not possible to say whether it would be chosen over schemes to increase supply capacity

Metering

• The average choice was 75% of customers to be metered

• 14% of customers chose no increase from current levels

• 43% of customers chose near-universal metering (90% +) Supply options

• Customers chose more water from reservoirs and boreholes and less from rivers than in the starting position, despite the higher costs of these options

In relation to leakage, a cost curve is built into the model, as illustrated below for non-visible leakage. This drives the bill changes when a customer chooses a change in leakage. The level of leakage reduction a customer chooses reflects the point up to which the customer is no longer prepared to pay the incremental cost of further reduction, i.e. their marginal WTP. For example, if a customer chooses a 40 Ml/d reduction in leakage then their WTP is just over 50p. The distribution of customer choices is shown below.


44


To determine the incremental WTP for leakage reduction over other ways of balancing supply and demand we have subtracted the average incremental cost of supply options from the incremental cost of leakage control. This gives the net WTP to reduce leakage. There are two ways of calculating a WTP – taking the incremental cost at the average or median leakage choice, or taking the average of the incremental cost from each of the choices. The non-linear relationship between costs and leakage means that these approaches give significantly different answers. This is shown below. WTP (per cubic metre)

Median WTP 44p

WTP – incremental cost at average choice 44p

Average WTP 66p

5.5 Customer research (qualitative and quantitative) on supply-demand options

We carried out customer research for the Water Resources Management Plan on a range of supply-demand options and issues. The WTP results are shown in the table below: Residential Businesses

Hosepipe bans – reduce frequency to 1 in 40 years £4.26 2.7%

Drought permits – reduce frequency to 1 in 40 years £4.35 2.8%

Customers were presented with fourteen options to balance supply and demand, including leakage, demand management and supply capacity options. Some results from this were:

• The preference for leakage reduction, the most preferred option, was 10.7 times greater than the base option of more frequent hosepipe bans

• Ten options were preferred over hosepipe bans and only increasing frequency of drought permits was less preferred

• Water efficiency was 5 times preferred to more frequent hosepipe bans

020406080

100120140160180

-25 -15 -5 5 15 25 35 45 55 65 75

Num

ber

of c

usto

mer

s

Leakage reduction (Ml/d)

Choice of leakage reduction - non-visible leakage

-0.50

0.00

0.50

1.00

1.50

2.00

-20 0 20 40 60 80 100

£ / c

u m

Leakage reduction (Ml/d)

Incremental costs - non-visible leakage


45


• The preference for leakage was about twice that for water efficiency, but both were preferred to supply capacity options

5.6 Customer panel research on willingness to pay for leakage reduction

The objective of this research was to assess the extent to which customers thought reducing leakage is a priority, and whether customers were willing to pay more to reduce leakage. The survey was carried out with 3,261 Panel members and the data were weighted by age, gender and region to be representative of the UU customer base. The willingness to pay results are shown in the table below. Half the customers were shown the 40 Ml/d option and associated potential bill impacts, and the other half the 80 Ml/d option. WTP was slightly lower for lower income customers.

Addition to bill % WTP to reduce leakage by 40 Ml/d by 2030

Addition to bill % WTP to reduce leakage by 80 Ml/d by 2040

All customers Income <£20,000

All customers Income <£20,000

20p 80% 79% 60p 78% 73%

40p 75% 76% £1.20 72% 69%

60p 71% 71% £1.80 68% 66%

80p 66% 64% £2.40 57% 55%

£1 62% 58% £3 51% 49%

WTP figures can be derived from this of £2 to £3 per cubic metre.

5.7 Testing our plan In testing our plan, we put forward a proposed leakage reduction of 7%, with options for no change or for further improvement. 67% of residential and 70% of business customers chose our Plan level or further improvement (the highest level except for supporting customers in vulnerable circumstances). The average and median WTP values derived are shown below (see Introduction for the method of calculation). WTP (£ per cubic metre) Residential Businesses Total

Median 0.65 0.17 0.82

Mean 0.65 0.17 0.82


46


5.8 Comparison with PR14 results As noted in Section 2, we do not consider that WTP surveys are an ideal approach for assessing WTP for supply-demand choices. However, some companies did include leakage in their WTP surveys at PR14. The results for the four companies compared in the Accent study are shown below. Willingness to pay for leakage reduction £ / Ml/d

Residential Business Total £ per cu m

35,614 56,612 92,227 0.253

122,335 N/A 122,335 0.335

267,960 39,706 307,667 0.843

247,500 118,800 376,200 1.031

Compared with these values, the sliders research is in the middle of the range, and other research is above the highest figure observed here.

5.9 Weighing up the evidence We have used colour-coding to assess each element of research, with the darker colour meaning the research is stronger against that criterion.





Q6 - context

Q7 – representative

Sliders Supply-demand options

Leakage – customer panel

Testing our plan

The greater level of information available provided by the slider research means that more weight should be put on this research than the other two studies. For the sliders research customers were able to make trade-offs between different options to balance supply-demand options and see the impact. Providing this information is in line with UKWIR recommendations in this area. For the panel research and testing our plan, choices on leakage were being made without knowing the effect of leakage measures. WTP is often higher for single issues than where customers are presented with choices between improvements for different aspects of service. Adding all individual WTP values from single-issue surveys would give a higher value than a survey where customers are given a choice on all issues simultaneously. Therefore valuations lower than those obtained from the panel and supply-demand research may be appropriate. The research testing our plan also showed lower valuations than the supply-demand and panel research. Testing our plan gave options across the range of service areas and we consider that this means it should be given the second strongest weight.


47


5.10 Results and conclusions All the research shows a preference for demand management options over supply capacity options, with customers willing to pay more for demand management and leakage reduction. There are significant differences between the three studies, with the sliders research giving the lowest values. This is to be expected, in view of the fact that the trade-offs between option and overall bill changes were clearest in the sliders’ research. For hosepipe bans the evidence was contradictory, with the supply-demand research showing a willingness to pay for less frequent bans but the sliders research suggested customers were not willing. For drought permit frequency, both sliders and supply-demand research showed some willingness to pay for reducing frequency, but the WTP value was much higher in the supply-demand research. The research does not directly give valuations for water efficiency but customer relative preferences for leakage reduction / water efficiency / supply capacity options (with water efficiency occupying an intermediate position) gives a basis for setting values. All our research shows a preference for demand management options over supply capacity options, with customers willing to pay more for demand management and leakage reduction. We have considered options for valuation using intermediate values between the sliders results and the valuations from the sliders and research testing our plan. Applying 20% weight to each of these valuations would give an overall weight of 60% to sliders and 40% to testing our plan. This is shown below, together with a valuation giving greater weight to the research testing our plan. Value per cu m

Sliders (median) 44p

Sliders (average choice) 44p

Sliders (mean WTP) 66p

Testing our plan (median) 82p

Testing our plan (mean) 82p

Average (based on 20% weight to each value) 64p

60% weight to acceptability, 40% weight to sliders research intermediate value (55p)

71p

In view of the strong customer support for leakage reduction and the emphasis put by stakeholders on this issue we have chosen the higher of the two values. A valuation of 71p per cubic metre is equivalent to £259,000 per Ml/d.


48


6 Valuation of improving river quality

6.1 The significance of valuing improving river quality for our business plan


• Weighing up costs and benefits for potential schemes to improve river water quality, relating to both water and wastewater activities

• Setting incentive rates for our performance commitments on river water quality River improvements are a significant part of our proposed programme (£4 out of a £17 total bill impact of our proposed package of service improvements). Although decisions on the programme are ultimately taken by the government, we aim to influence the decisions by putting forward customer views, as expressed in our research and engagement. Valuations may also affect decisions about whether to go beyond the initial programme. Where schemes have not been included in the programme, but we identify a lower-cost solution, we need to be able to weight up the benefits against the costs to decide whether it should be implemented.




• Immersive research (August 2017)


• Analysis of PR14 willingness to pay results We also reviewed research relating the river Petteril in Cumbria. This provides guidance on preferences between catchment management and sewage treatment, which can be used when making decisions about our approach to delivering improvements. However, it does not provide sufficient quantitative information to influence valuations. Much of the programme in this area relates to delivering improvements in sewage treatment which has a long-term effect on river quality, such as treatment to remove phosphorous. However, there are some schemes to increase storage capacity to address unsatisfactory intermittent discharges where the effects may be similar to those considered when carrying out research relating to pollution incidents. The pollution valuations reinforce


49


the priority given by customers to environmental issues but cannot readily be translated into a value by river length. This could also risk double-counting. The customer contact analysis described in section 2.2 of the introduction does not show river quality as a driver for customer contacts. However, this probably results the lack of direct impact on customers rather than any reflection on the priority customers give to this issue. Therefore we consider that, while other research provides general information about customer priorities for the environment, the research listed above is the most relevant to informing customer valuations of river quality.

6.3 Customer priorities The objective of this research was to explore customer priorities in relation to water service provision in our region. Improving sewage treatment to protect the environment was a priority, but lower than some other aspects of service (10th out of 26 aspects prevented). Lack of knowledge about environmental impact of UU’s activities could be a factor limiting the extent to which customers see it as a priority. The impact on the environment of sewage treatment mainly relates to the effect on river quality but, as noted in the Boxclever report, there is limited understanding of this. This emphasises the need for more in-depth research, and was the reason for implementing immersive research on river quality (see Section 3.3).


The measure used was % of rivers reaching a good standard, with options presented ranging from 20% to 90%. The average / median willingness to pay for improvement / accept compensation for deterioration are shown in the table below (see appendix 1 for details of calculation of overall WTP values and the Introduction for other information, e.g. about the representativeness of the sample). Total WTP per 1% change in river quality (£’000) Mean WTP Median WTP

Residential Business Residential Business

1,027 427 316 76

The WTP research also provided information on relative importance of different aspects of service in driving choices. Cleanliness of rivers and lakes was second highest in importance.

6.5 Immersive research The objectives of this research were to:

• Immerse customers on issues that they tend to be less familiar with

• Provide an engaging and interactive environment

• Draw from behavioural economics insights when designing the research

• Collect customer valuations on resilience and environmental services

• Test how immersion affects customers’ views on these topics The following ecosystem services were covered in the research:


50


• A healthy river to support wildlife

• Managing land to protect wildlife

• Visual appearance of rivers

• Safety of rivers for recreational use

• Green spaces for recreation and well-being The activities helped customers to understand the different ways a river gets polluted and illustrated the environmental challenges which UU faces. There were 104 participants, who were broadly representative of the region in terms of bill size, age, sex and socio-economic status. At the end of the session, participants were presented with a table that had five cards on it, each representing the five ecosystem services. On each card there were three levels of service improvement, each with an associated additional cost to the participant’s water and wastewater bill, as indicated below.

Mean WTP for each ecosystem service was shown in the report. The scale of improvement which this is associated with can be derived by applying an average unit cost. For example, for “A healthy river to support wildlife”, the average WTP was £1.83. Customers were presented with a choice to improve 250 km for £2, so £1.83 improves 228 km.


51


Ecosystem service Mean WtP per

household Implied improvement Mean WTP per 1%

improved

Green spaces for recreation

£0.17 40 projects, including 13 big sites n/a

A healthy river to support wildlife

£1.83 buys 228 km of rivers (3.4%) which will support wildlife

54p

Visual appearance of rivers

£1.20 buys 200 km (3%) of rivers with better visual appearance

40p

Safety of river for recreational use

£0.11 provides 62 km (0.9%) of rivers safe for recreational use

12p

Biodiversity £0.12 41 projects on UU Land & 25 other projects

n/a

The categories “healthy rivers” and “visual appearance” can clearly be regarded as equivalent to the river quality measure. Phosphorous removal affects these two aspects and this accounts for 65% of the potential programme. Safety of rivers for recreational use could be affected by unsatisfactory intermittent discharges. This is a smaller part of the programme (11%) but is also a smaller component of the improvements which were included in the immersive research. Therefore we consider that this aspect should also be included in the WTP for river improvements. Biodiversity and green spaces for recreation can be regarded as separate and will be evaluated as part of our natural capital performance commitment. Taking the healthy river, visual appearance and safety measures as being relevant for the river quality valuation, this gives a total WTP per customer of £1.06 per 1% of rivers improved. These numbers can then be multiplied by numbers of customers, to give the following values per 1% improvement.

Mean WTP per 1% improved (£’000) Mean WTP per km (£’000)

3,076 45

6.6 Testing our plan The acceptability testing showed 54% of residential customers and 66% of business customers supported our plan level of improvement or higher. Average and median WTP values are shown below.

£’000 per 1% improved Residential Businesses Total

Median 813 248 1,061

Mean 805 244 1,049

6.7 Comparisons with other valuations The table below shows comparisons of our WTP results with those from PR14 studies (based on anonymised results from Accent’s comparison of PR14 WTP values)11. Comparisons were made per km of river length, so our value per 1% of river length is converted to per km (based on our total river length 0f 6,941 km).



52


Results shown for PR14 are mean values. The range and median of these mean values is shown (taking a mean of the means could give too much weight to extreme outliers). Per km of river improved to good (£’000)

UU PR19 – Mean WTP

UU PR19 – Median WTP

PR14 – Mean WTP

Residential Business Residential Business Residential Business

15 6 5 1 1 to 257 (Median 18)

0.3 to 94 (Median 1.5)

United Utilities Improvement 9 0

Deterioration 52 115

The comparisons show that the total mean WTP of £21,000 per km is very similar to the industry median of the means (£19,500 per km). The UU values for PR14 do not appear credible (particularly the very high business value for avoiding deterioration but zero valuation for improvement).







WTP

Testing our plan

Immersive

Willingness to pay research and testing our plan are ranked relatively low in terms of whether they are based on observed behaviour or a response to survey questions, and whether they are responses to hypothetical questions or actual experience. We have scored immersive research higher in this respect. Providing an immersive experience means that customers’ responses are closer to being based on actual experience rather than being hypothetical responses. All three research approaches are scored highly in terms of reflecting all benefits – the scoring for this criterion is only affected if research was focusing on a specific aspect of a service improvement. Immersive research scores highest on level of information because the duration of the exercise and the focus on river improvement means much more information can be provided. The downside of a focus on a single issue is that it cannot be in the context of the range of other potential service changes and impacts on bills, so there is no scope for trade-offs. Therefore immersive research has a lower score than willingness to pay or testing our plan for context. All three studies were broadly representative of our customer base.


53


We consider that the level of information given and the extent to which customers have experienced service issues are both particularly significant. This suggests that significant weight should be given to the immersive research. However, WTP may be higher for single issues than where customers are presented with choices between improvements for different aspects of service. Adding all individual WTP values from single-issue surveys would give a higher value than a survey where customers are given a choice on all issues simultaneously. Therefore a figure lower than that obtained from the immersive research may be appropriate. Both the WTP research and the research testing our plan gave customers the opportunity to trade off different aspects of service. Therefore they receive a higher score in relation to context.

6.9 Results and conclusions Immersive results are at the higher end of the range of results. We consider that an appropriate valuation is in between WTP values and immersive values. Immersive research provides the most informed valuations, but does not give the opportunity for trade-offs between different potential improvements which is given by the WTP research and research to test our plan. Single issue studies tend to give higher values than research where customers can make trade-offs. The valuations are set out in the table below. £’000 per 1% improved Total Average

WTP - median 392 933

WTP – mean 1,474

Testing our plan - median 1,061 1,055

Testing our plan - mean 1,049

Immersive – mean WTP 3,076 (residential only)

3,999*

* Uplifted by 30% to allow for businesses (in line with residential – business ratio for WTP and testing our plan) An approach based on an average of median and mean values, and giving equal weight to the three sets of results gives an overall average of £1,996,000 (which is around one-third of the way between WTP mean and immersive values). An approach giving equal weight to the medians of testing our plan and WTP (our standard approach is to use WTP median values), and the immersive research value, gives an overall average of £1,803,000. We have chosen to use this lower value. £’000 per 1% improved Residential Businesses Total

Median - WTP 316 76 392

Median – testing our plan 813 248 1,061

Immersive research 3,076 883* 3,959

Average 1,401 402 1,803

* Uplifted by 29% to allow for businesses (in line with residential – business ratio for median values for WTP and testing our plan)


54


This value is then divided by 2, to allow for the totex sharing mechanism, to give an incentive rate of £901,000 per km. We consider that having in-depth research combined with research allowing for trade-offs means that there is a good balance of research. However, the difference between the results means that there is some uncertainty about an appropriate overall value.


55


7 Valuing reducing sewer flooding

7.1 The significance of valuing reduction in sewer flooding for our business plan


• Weighing up costs and benefits for potential schemes to reduce sewer flooding

• Setting incentive rates for internal and external sewer flooding, including our separate performance commitments on hydraulic flooding, and for our asset health measures (sewer blockages and sewer collapses).

Addressing sewer flooding is a significant part of our proposed programme and is a major issue for customers affected so valuation of sewer flooding is an important part of our research. Valuations may also affect decisions about whether to go beyond the initial programme. Where schemes have not been included in the programme, but we identify a lower-cost solution, we need to be able to weight up the benefits against the costs to decide whether it should be implemented.




• Analysis of customer contact data (August 2017)

• Repeat flooding research (August 2017)


• Analysis of PR14 willingness to pay results

7.3 Customer priorities In our customer priorities research, reducing sewer flooding was ranked fourth in terms of priority and 5th highest in terms of service areas requiring improvement. This is relatively high for an issue which only affects a small proportion of customers. Qualitative research in both this survey and the research to test our plan, discussed below, showed that customers recognise that sewer flooding is a serious problem which needed to be given priority.


Section 2.3 of the Introduction to this report describes our Willingness to pay research, in terms of overall approach, representativeness of the sample, etc. We have generally used WTP values as our starting point for valuation. Use of median figures ensures that any proposed changes justified by cost-benefit analysis are supported by a majority of customers. We have also considered average figures, however, and taken these into account along with other evidence.


56


As noted in Section 3.5 below, experience of sewer flooding could affect customers’ willingness to pay for improvement. However, the number of customers included in the survey who had experienced flooding was small (30 for internal flooding and 71 for external flooding), so could not have much impact on the results. In addition, for internal flooding the WTP for those who had not experienced any service failure was not significantly different from the mean. For sewer flooding, we used two measures:

• Number of internal sewer flooding incidents.

• Number of external sewer flooding incidents. The average willingness to pay for improvement / accept compensation for deterioration are shown in the table below. Total WTP per incident Mean WTP Median WTP

Service level range

Residential Business Total Residential Business Total

Internal flooding £43,375 £19,074 £62,449 £11,440 £4,270 £15,710

External flooding

£4,193 £2,300 £6,493 £1,664 £118 £1,792

The WTP research also provided information on relative importance of different aspects of service in driving choices. Internal and external flooding ranked 6th and 9th respectively, out of nine attributes.

7.5 Analysis of customer contact data As discussed in Section 2.2 of the Introduction, we receive a high number of contacts relating to internal sewer flooding, given the relatively small number of customers this affects. We carried out more detailed analysis of contacts. The objective of this was to use data on customer contacts arising from incidents (sewer flooding and supply interruptions) to consider:

• What does the data tell us about customers’ relative priorities to avoid different service interruptions?

• What are the impacts on customers from different types of supply interruptions?

• What can we learn about who contacts, when and how? Customer contact data (number of contacts per incident) suggests sewer flooding is between 170 and 1,500 times worse than an unplanned supply interruption. The ratio implied by the WTP survey is:

– 93 using the internal flooding WTP – 19 using a weighted average of internal and external values

Since we get more calls per internal incident, the appropriate figure would be between these two – a midpoint figure is 56. We are using a residential value for a 6-hour interruption of £35 (see section on valuing interruptions), which indicates a sewer flooding value of £6,000 to £53,000. This is a combined value for internal and external flooding, so the average and median WTP values are both within the range.


57


7.6 Repeat flooding research Repeat sewer flooding due to lack of sewer capacity often cannot be resolved without significant capital investment. This is unlike flooding due to blockages, which can be resolved by clearing the blockage and may be unlikely to recur. The complaints and contacts received from customers show the problems caused by severe flooding, including the following examples:

• Escalated complaints following frequent flooding at several properties in the same streets, including MP involvement

• Claims of serious ill health as a direct result of regular flooding and due to the emotional fear of flooding whenever it rains

• Claims that market valuations of properties are £20,000 lower due to flooding

• Distress at being trapped - unable to move from the properties affected as potential buyers are told of the flooding problems

• Buckets being used by elderly residents at times of heavy rainfall / restricted toilet use

• Lack of interest in receiving GSS payments, with a wish to know what action is being taken to sort the problem

• Not being able to go on holiday for the fear of flooding whilst they are away, then feeling that they can’t have a break from the threat of flooding

• Stress and anxiety caused by being away from home during severe rainfall

• Not being able to look after their homes and carry out improvements as it will be ruined and undone by the next flood

• Reports detailing the effects on the mental health of their partners who suffer OCD symptoms in the aftermath of flooding events and during periods of heavy rainfall – this affecting their mental health and the relationship with their partners

• Reports that customers are not able to live a normal life due to the threat of flooding

• Customers offering to pay thousands of pounds themselves towards solutions, in one instance to prevent his elderly wife dealing with the issues if he died

• Mitigation only offering some help – an instance where repeat external flooding led to a young child’s coffin being carried through sewer flooding of a front garden to the funeral car still caused understandable upset

It is clear from these contacts that repeat flooding needs to be given greater weight than addressing one-off incidents. The question is – how much greater weight? The objective of this research was to establish whether repeat sewer flooding should be given a different value from the average for a sewer flooding incident. The research involved:

• Three phone interviews with affected customers

• 491 face-to-face interviews with a sample broadly representative of the general population of UU customers along lines of age, gender, social grade and location

• Ten phone interviews with customer affected by repeat flooding Two approaches were used:

• Customers were directly asked “Do you think the experience of an additional sewer flooding is worse than the first?” If they said yes, they were asked to choose a number for “how much worse”.


58


• Customers asked to choose between preventing repeat flooding in 100 properties and one-off flooding in 500 properties. Depending on what they chose, they were then presented with additional numerical trade-offs, to determine their repeat factor

Customers found this a difficult question to answer, partly because most had not experienced flooding, but also because many felt that all customers should be helped, and they were reluctant to prioritise. However, on average, customers did give a higher priority to repeat flooding. Answers from those who had experienced flooding were similar to those from customers who had not experienced it. The results suggested a repeat flooding factor of between 3.4 and 6.5 and we have used an intermediate figure of 5, for a repeat flooding incident, i.e. a ratio of consumer detriment comparing a one-off flooding incident with a flooding incident at a property or garden which has flooded before. We consider that this is reflective of the additional stress placed on customers who are at risk of repeat flooding.

7.7 Testing our plan In testing our plan research, 49% of customers chose no change and 51% chose our proposed level of improvement or higher. This was a higher level of choice of no improvement than for all other measures except interruptions and helping customers struggling to pay. The incremental costs for improvement were set at £47,600 per incident, for our planned level of improvement. This suggests median WTP of just under £47,600. This high value may partly reflect the high level of incremental costs in all options. For external flooding, there was higher support for improvement (60% choosing planned improvement or higher). The median WTP was around £4,700. The average and median WTP values are shown below. £’000 per incident Residential Businesses Total

Internal flooding

Median £46,155 £17,560 £63,715

Mean £68,917 £24,012 £92,929

External flooding

Median £4,430 £1,221 £5,651

Mean £4,438 £1,320 £5,758

The qualitative research showed that, although customers generally regarded addressing sewer flooding as a priority and recognised it as traumatic, some thought the cost too high relative to the numbers benefiting. Example quotes were “It’s too high a cost for too few to benefit”, “It’s grim, my conscience makes me feel I should go with what UU suggest but it costs too much to do more”, and “We should try to reduce but I don’t want to pay lots”. First or second hand experience increases willingness to invest.


59


7.8 Comparisons with other valuations The table below shows comparisons of our results with those from PR14 studies (based on anonymised results from Accent’s comparison of PR14 WTP values)12. UU PR19 –

Mean WTP UU PR19 –

Median WTP PR14 –

Mean WTP

Service level range Residential Business Residential Business Residential Business

Internal flooding £43,375 £19,074 £11,440 £4,270 £22,00 to £367,000 (median = £111,000)

£3,000 to £350,000 (median = £25,000)

United Utilities Improvement £43,830 £55,950

Deterioration £185,770 £111,780

External flooding £4,193 £2,300 £1,664 £118 £3,000 to £22,000

(median = £4,000)

£500 to £17,500 (median =

£4,100)

United Utilities Improvement £20,490 £0

Deterioration £28,520 £18,050

The comparisons show that our results for PR19 are relatively low compared with others. Our PR14 results were higher but show a number of anomalies, including an implausibly large difference between WTP values for deterioration and improvement, and a zero value for business WTP for improving external flooding.







WTP

Repeat flooding research

n/a


n/a n/a

Testing our plan

We consider that the level of information given and the extent to which customers have experienced service issues are both particularly significant. This suggests that we should use analysis of customer contact data to adjust WTP values, if they were in conflict with the analysis of contacts. However, as discussed above, the WTP values are within the range indicated by the customer contact analysis.



60


7.10 Results and conclusions The results from WTP and the research testing our plan are shown in the table below. £ per incident Testing our plan WTP

Internal flooding

Median £63,715 £15,710

Mean £92,929 £62,449

External flooding

Median £5,651 £1,782

Mean £5,758 £6,493

For some of the performance measures, we have used median WTP values. However, a value above median is appropriate in this case, in view of the results from testing our plan and the comparison with other companies. We consider that it is still appropriate to give strongest weight to the WTP median figures. A large change from this figure would affect the balance between flooding and other service measures, without sufficient evidence that this is appropriate. We propose valuations based on 80% weighting to median WTP values and 20% weighting to median values from testing our plan. This would place our estimates within the range of other companies’ research at PR14, and recognises the results from acceptability testing. In addition, we have split the valuation between repeat incidents and non-repeat incidents. Analysis of the last five years’ data showed 29% of flooding incidents to be repeats. We have used a valuation of repeat flooding incidents at five times that for non-repeats. The split of valuation can then be derived which produces the above overall flooding valuations, i.e. 0.29 x repeat flooding value + 0.71 x non-repeat value = all incident value. The all incidents value is then a weighted average of the repeat and non-repeat values. Splitting values between repeats and non-repeat incidents Internal External

Repeat incidents £58,900 £5,950

Non-repeat incidents £11,780 £1,190

All incidents £25,311 £2,556


61


8 Valuation of reducing pollution incidents

8.1 Objectives and analysis Valuations of pollution incidents are needed for:

• Setting incentive rates for the common measure for pollution incidents.

• Weighing up costs and benefits for potential schemes to reduce the number of pollution incidents. We have been aiming for a balance of our customer research between different aspects of our service delivery. In terms of customer research in relation to the environment, we decided that the focus of our environmental programme would be on improving river quality, rather than on pollution incidents. This is because there will be a large statutory programme for river quality, which we aim to influence by putting forward customer views, as expressed in our research and engagement. In addition, we have reduced the number of pollution incidents to a point where there is limited scope for further improvement without very high costs. Therefore our proposed expenditure to reduce pollution incidents further is small. In addition, the potential impact of incentive underperformance / outperformance on bills is limited because of the relatively small number of incidents. However, this is a significant issue for customers and stakeholders, so it is important that the incentive rate is sufficient to provide an appropriate penalty for underperformance, and encourage further improvement where it is worthwhile. The focus of our customer research on environmental issues has, however, been predominantly on river quality, because of the much larger scale of the improvement programme.





• Analysis of PR14 willingness to pay results For pollution incidents our sources for valuation are our main Willingness to Pay survey (June 2017) and our research to test our plan (November 2017). We have, however, checked the results against our research on customer priorities (June 2016). Our immersive research on the river environment gives information on customer valuation of environmental improvements and demonstrates consistency in that customers were willing to pay for healthy rivers to support wildlife, improving visual appearance of rivers, and safety of rivers for recreation. All of these can be affected by pollution incidents. However, the results cannot be directly used for valuing a pollution incident. Our valuation for improving 1% of rivers (seventy kilometres) is £2m, i.e. just under £30,000 per kilometre. In comparing this with a pollution incident, issues to take into account are that:

• A Category 3 pollution incident, although defined as minor impact, may be more visible than a river quality improvement, e.g. minor fish kill

• The length of river affected could be less or more than a kilometre

• The effect of a pollution incident is transient whereas a river quality improvement is continuous


62


Taking these issues into account, river quality valuation can only provide a very broad cross-check on pollution incident valuation. The customer contact analysis described in section 2.2 of the introduction does not show pollution incidents as a driver for customer contacts. However, this probably results the lack of direct impact on customers rather than any reflection on the priority customers give to this issue.

8.3 Customer priorities The objective of this research was to explore customer priorities in relation to water service provision in our region. Preventing pollution incidents was a priority, ranked 5th out of 26 aspects presented). In terms of priorities for improvement, preventing pollution from UU activities was only ranked 9th among areas where UU need to improve delivery (identified by 17% of customers; leakage was highest with 34%). Only 8% of customers were willing to pay for improvements (the same as for recycling treated wastewater back to the environment so that wildlife is protected, and for taking water for consumption out of rivers and lakes in a responsible way that doesn't harm wildlife or the environment). The qualitative research did, however, indicate that pollution incidents was the highest priority among environmental issues.

8.4 Willingness to Pay Section 2.3 of the Introduction to this report describes our Willingness to pay research, in terms of overall approach, representativeness of the sample, etc. The measure used for pollution incidents was the number of Category 3 incidents. The average willingness to pay for improvement / accept compensation for deterioration are shown in the table below. Total WTP per pollution incident (£’000)

Mean WTP Median WTP Residential Business Total Residential Business Total

331 271 602 64 53 117 The WTP research also provided information on relative importance of different aspects of service in driving choices. Avoiding pollution incidents was 9th out of 10 in importance. This apparent contradiction between a low level of importance and a high valuation per incident can be explained by the low number of incidents. Customers can place a high valuation on an individual incident without it being a big driver of their choices in terms of a service package. The change in number of incidents, and therefore the bill impact, is small between service options.

8.5 Testing our plan Section 2.5 of the Introduction describes our approach to testing the plan, including issues such as how representative our sample was. Pollution incidents, along with leakage and helping customers in vulnerable circumstances, was one of the highest priorities for making further improvement to our plan (43% of residential customers and 41% of business customers supported a higher level of improvement – joint top with leakage and helping customers in vulnerable circumstances). This is despite the incremental cost being £368,000 per incident for the first level of improvement, and £613,000 for the second level of improvement.


63


The median and mean WTP values are shown in the table below. Mean WTP Median WTP

Residential Business Total Residential Business Total 256 71 327 277 75 352

8.6 Comparisons with other valuations The table below shows comparisons of our WTP results with those from PR14 studies (based on anonymised results from Accent’s comparison of PR14 WTP values)13. The median shown for PR14 is the median of average WTP values. Per Category 3 pollution incident (£’000)

UU PR19 – Mean WTP

UU PR19 – Median WTP

PR14 – Mean WTP

Residential Business Residential Business Residential Business 331 271 64 53 22 to 54,100

(Median 43) 4 to 24,900 (Median 11)

United Utilities PR14 Improvement 305 306 Deterioration 828 688

Our average values are significantly higher than the values obtained by other companies at PR14, with the exception of one extreme outlier. Median values are, however, more similar. Our PR19 results are lower than our WTP values for PR14, particularly in comparison with the values to avoid deterioration. As discussed in relation to other aspects of service, a number of anomalies in the PR14 results mean that limited weight can be put on them. Taken overall, the PR14 WTP values do not suggest that our WTP or testing our plan values are unreasonable.

8.7 Weighing up the evidence We have used colour-coding to assess the research, with the darker colour meaning the research is stronger against that criterion.






WTP

Testing our plan

Both WTP and testing our plan research score highly in terms of being representative and providing context, with options for improvements in other aspects of service being presented at the same time. They score less well in terms of the research providing limited information on the issues and on being a response to hypothetical questions, rather than being based on actual behaviour or service experience. However, we consider that the results are sufficient to derive valuations, given the limited potential impact on bills of this issue and the limited use made of the results.



64


The valuations derived from these two pieces of research are higher, relative to other aspects of service, than the customer priorities research discussed in Section 3.1 above indicates. This may indicate the lack of knowledge of the extent of environmental impact of United Utilities’ activities. The current level of pollution incidents is, however, provided in the WTP and testing our plan research.

8.8 Results and conclusions In view of the strong level of support for reducing pollution incidents in the testing of our plan, we consider that it is appropriate to use a value above the median value from WTP values. Giving equal weighting to WTP and testing our plan values would give a value of £350,000. This is above most other results from PR14, but we consider it appropriate in view of the consistently high values from the research. The customer priorities research suggested that it was not a high priority for improvement but this is likely to be attributable to customer lack of awareness of pollution incidents, and environmental impacts of water companies generally. No environmental impact issue was given a high priority. However, when given information on incidents, customer do regard pollution as a priority. Given the visible impact of pollution incidents, we do not consider that the valuations below are out of line with the £30,000 per kilometre valuation of river quality improvements discussed above. Pollution incident valuation £’000 per incident Total Average

WTP – median 117 360

WTP – mean 602

Testing our plan - median 327 340

Testing our plan - mean 352


65


9 Valuing support for customers in vulnerable circumstances

9.1 The significance of valuing support for customers in vulnerable circumstances

Valuations are needed for assessing whether customers would support provision of additional assistance for customers in vulnerable circumstances. Unlike most other measures, we will not be using the valuation as a basis for setting the incentive rate. We will be setting the incentive rate on the basis of recovering additional costs of providing additional support. The expenditure in this area is a relatively small part of our total expenditure (currently £0.3m per year, which is around 0.02% of our total annual expenditure). In terms of options for additional spend on which we consulted, our proposals in this area added 20p (0.05%) to bills, compared with a total of £17 for other proposed improvements. The valuation research in this area has been more limited than for some other aspects of service delivery because of the relatively small impact on bills.

9.2 Research for valuation A number of research projects have contributed to developing the way in which we assist customers in vulnerable circumstances. Our research on preferred communication channels and payment methods included in-depth interviews with customers in vulnerable circumstances (including migrant workers, carers, disabled customers and large families). We also used experience during the cryptosporidium outbreak to redesign our service to customers in vulnerable circumstances. Organisations such as Age UK, StepChange and Citizens Advice have helped us put in place the measures and support that customers value most. We have then worked with a wider community of stakeholders and our independent Customer Advisory panel to further improve our Priority Services propositions. However, for the purpose of assessing customer support for providing additional help to customers in vulnerable circumstances, there are two relevant studies:



9.3 Quality of service issues A factor in considering customer valuation in this area is the difficulty in quantifying the service provided. For the purpose of customer research, we have used the relatively simple measure of number of customers supported. However, the nature and quality of support is important. Therefore, in addition to the quantitative measure of number of customers supported, we will be committing to achieving and maintaining certification under BS18477 ‘Inclusive service provision. Requirements for identifying and responding to consumer vulnerability’. This standard was developed by consumer organisations, charities and government bodies. Achievement of the standard requires, amongst other things, for organisations to have:

• Flexible services through empowering staff to resolve problems in the best interest of customers

• Staff who are trained in recognising and dealing with the signs of vulnerability


66


• A wide range of contact channels, easy to understand bills and letters, and an accessible website

• Policies and plans that ensures we respond to customer feedback and continually review existing services to identify and deliver on opportunities for improvement.

In order to receive accreditation we will be required to evidence how we provide our support to vulnerable customers, for instance scheme accessibility and staff training. Accreditation will also be subject to independent audit. In addition to meeting this standard, we will:

• Continue to produce annual affordability and vulnerability reports, with oversight by YourVoice.

• Standardise performance reporting, revealing benchmarks for good service across the industry, including awareness metrics

• Continue the roll-out of sharing information on Priority Services registrations between water and energy, building on trial with Electricity North West

• Run annual Priority Services satisfaction surveys to reveal how satisfied registered customers are with the Priority Services offering

We will also be setting targets for contact times for contacting priority customers and for delivering bottled water if water supplies are disrupted, and offering alternative accommodation in the event of internal sewer flooding.

9.4 Customer priorities Our initial priorities research included “Ensuring that the water needs of customers in vulnerable circumstances are met” as one of a list of areas that UU should focus on. 62% of customers supported this (7th in a list of 11 areas, with support ranging from 31% to 78%).

In terms of valuation, the source is the customer research testing our plan. This is described below.


67


9.5 Testing our plan In Autumn 2017 we tested an initial version of our business plan. Participants were able to provide feedback on the acceptability of this overall package and could indicate against the service areas where they would like the company to do more or less (with associated bill changes) over the next 5 years. Further details of the research are included in Section 2.5 of the Introduction to this report. The sample was representative of our region, in terms of age and socio-economic characteristics. In-depth interviews with targeted customer segments included a specific element of engagement with customers who are hard to reach and in vulnerable circumstances. The background information provided to customers in the research testing our plan was:

UU is working with Age UK, MIND, The Alzheimer’s Society and Citizens Advice Bureau to support customers who may be in vulnerable circumstances, whether these are physical (e.g. disability, illness or mental health concerns); financial (e.g. suffering from financial stress or disadvantaged due to financial circumstances); language (e.g. English is not their first language or they have literacy or numeracy needs); and life events (such as pregnancy, job loss or bereavement). United Utilities can provide additional services for customers in such difficult circumstances through its Priority Services scheme. This is designed to provide for the customer’s particular needs so the right help can be provided to them. United Utilities can provide support for an even larger number of customers by investing further in the Priority Services scheme.

Qualitative feedback Customer willingness is driven by relative cheapness and awareness of vulnerability - “I can double the number helped for only a few extra pence”.

• Customers are aware of the growing incidence of mental illness & dementia

• Issues that make someone vulnerable such as a disability, illness or old age are outside of their control o This is the main reason for the difference in willingness to pay between those financially

struggling and those seen as vulnerable and in need of extra support o Customers do not see language or financial issues as vulnerabilities

• Customers don’t understand what help is provided but expectations are fairly high so UU must not over-promise

• Willingness to support vulnerable customers cut across affluence

• Many would have spent even more than the maximum proposed but lack the context of the numbers in need

• Those choosing to maintain current performance are largely driven by a desire to keep tight control of extra costs o This measure acts as a bellwether as these customers are likely to have chosen current

performance for everything else Quantitative results 71% of residential customers supported our planned level of improvement or higher (higher than for any other measure). The support for improvement beyond planned level was greater than for any measure except leakage (43% compared with 44% for leakage reduction). Support among business customers was less strong but there was still a clear majority supporting our planned improvement or higher.


68


The results are shown in the table below. The overall median WTP is £35 per customer helped.

Number of customers helped % support Bill impact (£) Per 10,000 customers helped

(£)

Company-wide WTP – per customer

Residential

42,000 29% 0

65,000 28% 0.2 0.087 £25.23

95,000 43% 0.3 0.1 £29.20

Median £27.89

Businesses

42,000 33%

65,000 36% £0.95 0.413 £6.82

95,000 30% £1.43 0.477 £7.87

Median £7.28

Total

Median £35.17

9.6 Weighing up the evidence In the other sections of this report, we have weighed up the research evidence against a number of criteria in order to come to an overall conclusion. For this measure, we are dependent on a single research study and the issue is whether this is sufficient to come to a conclusion on customer support for additional help to customers in vulnerable circumstances. In addition, as it is an aspect of service where there is limited experience of valuations, PR14 results are not available for comparison.






Testing our plan

The research on testing our plan scores highly in terms of being representative and providing a context, with options for improvements in other aspects of service being presented at the same time. It scores less well in terms of the research providing limited information on the issues and on being a response to hypothetical questions, rather than being based on actual behaviour or service experience. However, we consider that the results are sufficient, given the limited potential impact on bills of this issue and the limited use made of the results.


69


9.7 Results and conclusions We consider that the results of the acceptability testing support the improvement proposed in the “testing our plan” research and a cost-based incentive based on an additional cost of up to £35 per customer helped, i.e. the median from the acceptability testing.

10 Number of customers lifted out of water poverty

10.1 The significance of valuing lifting customers out of water poverty

Valuations are needed for assessing whether customers would support provision of additional assistance for customers in water poverty. We are basing our proposals on the bill impact which we tested in the acceptability testing (see Section 3.3. below. This was based on the cost of the scheme which we will be implementing. We were testing acceptability of a scheme cost, rather than establishing a valuation. We will be setting the incentive rate on the basis of recovering additional costs of providing additional support. The potential additional expenditure in this area is significant in terms of the impact on bills. In our consultation on business plan options, our proposals in this area added £3 (0.7%) to bills, out of a total of £17 for proposed improvements. Water poverty is defined as 3% of annual household income, after housing costs, on water and wastewater services. This is aligned to the UK water poverty benchmark, as set out in the report Water Poverty in England and Wales, Fitch and Price, Centre for Utility Consumer Law, 2002. This definition is widely used, e.g. by CCWater in documents such as their “Living with Water Poverty”14 research. The measure of success will be the number of unique customers lifted out of water poverty as a result of our action at any point in the year. Evidence for this will be: -

• The number of customers on a qualifying discounted tariff, for example Help to Pay or Back on Track, where charges are reduced to a sufficient level to ensure annual charges are less than 3% of annual income

• The number of customers on the Payment Matching Plus scheme where outstanding customer payments for the current year are reduced to less than 3% of annual income

• The number of customers where a trust fund grant has alleviated their indebtedness to a sufficient level that outstanding customer payments for the current year are reduced to less than 3% of annual income

• The number of customers where other forms of our action has enabled them to reduce current year charges and/or increase income (e.g. via an extended Town Action Plan visit) that results in their being lifted out of water poverty

14 https://www.ccwater.org.uk/wp-content/uploads/2014/09/Living-with-water-poverty-in-2014-Report-of-research-findings.pdf


70


10.2 Research studies carried out We have carried out extensive customer research, trials and engagement with stakeholders to develop our approach to helping customers who struggle to pay their water bills. However, in terms of establishing customer priorities and valuations, the relevant research studies are:


• Social tariffs research (July 2017)

• Testing our plan (November 2017) We consider that this gives a balance between more in-depth research, making customers more aware of the issues, and research enabling customers to trade off reducing water poverty against other potential areas of service improvement. We will also be consulting customers again on this issue as part of our final acceptability testing. In this policy area, stakeholder engagement and national policy are key influences as well as customer research. We also considered research by Boxclever from PR14, where a majority of customers would support a social tariff, but this was conditional on people receiving it being truly deserving.

10.3 Customer priorities research Our initial priorities research included “Provide financial help and support to those who are struggling to pay their water bill and those with special circumstances (e.g. disabilities, learning difficulties, medical conditions etc.)” as one of the issues which customers were invited to prioritise. This emerged as just outside the top priorities, as shown below, but was a higher priority among lower socio-economic groups.


71


10.4 Social tariffs research The context for this research was that 16,000 customers receive the “help to pay” social tariff, but more than 200,000 could be eligible. The existing cross-subsidy, at 43p per year, is low compared to other water and sewerage companies. This research was designed to understand whether there was customer support for and how customer support changes with context and information. The survey had nine different variants. These included three different primes (different information presented in the survey introduction – personalised information on customers benefiting, general information on the purpose of the scheme, or information on the size of current water bills. There were also and three different frames (different ways of asking the question), as shown in the table below. The sample of 1,800 was large enough to be representative for each of the 9 variants separately. It was representative of UU customers’ distribution of age, gender and social grade. All respondents were chosen randomly from a list of phone numbers in UU-served postcodes. In all three primes, it was made clear that customers helped would still pay, but their bill would be lower as a result of the scheme. Framing had the strongest effect on customers. The three frames produced somewhat different results. In all three cases, ranges of bill impacts from zero to £3.95 were put to customers. The results are shown in the table below. The results were checked excluding customers potentially eligible for the social tariff (53 customers) and they were not significantly different.

% willing to pay

Specific amounts put to customers Frame 3 – multiple choice

Average results

Frame 1 Start high

Frame 2 Start low

Addition to monthly bill

0 36% 39% 61%

8p 4% 0% 12%

15p 19% 3% 7%

35p 16% 6% 16%

95p 26% 51% 5%

Median 27p 95p 0

Mean 42p 55p 21p

Per year

Median £3.19 £11.40 0 £4.86

Mean £5.01 £6.56 £2.49 £4.69

The range of figures is quite wide but taking a median or mean of the six figures indicates a figure of just under £5 for how much customers are willing to pay to support customers struggling to pay. This does not give a unit rate per customer helped as it is an overall figure. For the purposes of assessing customer willingness to pay on


72


this issue, an overall amount which customers are willing to pay is particularly important. Within this overall amount, the number of customers helped and the amount of help given to each customer can be varied.

10.5 Testing our plan In autumn 2017 we tested an initial version of our business plan. Participants were able to provide feedback on the acceptability of this overall package and could indicate against the service areas where they would like the company to do more or less (with associated bill changes) over the next 5 years. Further details of the research are included in Section 2.5 of the Introduction to this report. The sample was representative of our region, in terms of age and socio-economic characteristics. In-depth interviews with targeted customer segments included a specific element of engagement with customers who are hard to reach and in vulnerable circumstances. The exercise at the end of the research gave customers the opportunity to trade off different aspects of service, with the resulting impact on bills shown. The background information provided to customers in the research testing our plan was:

Customers in severe financial hardship may sometimes find paying their bills beyond their means, and this can lead to ‘bad debt’ that is hard to recover. Additional support in terms of flexible payment arrangements for these customers can reduce the bad debt costs that United Utilities incur, which is around 4% (£17) of the average annual water bill. United Utilities can invest further in flexible payment plans and other support services, to reduce the number of customers in water poverty and keep bad debt as low as possible to avoid putting others into financial strain.

The testing our plan research used the cost of the proposed scheme to determine the bill impact to customers. This cost is the basis on which the scheme will be implemented. Therefore we will be setting the incentive rate on the basis of recovering additional costs of providing additional support. Qualitative feedback Customers acknowledge the issue but are uncomfortable whether it’s genuine – “Some do need help but some could do a lot more to help themselves”.

• Most recognise financial pressures, but as they’re working hard and prioritising bills themselves, so should others o Affluent customers seem least able to personally identify with the causes (a potential reason for

lower prioritisation in Cheshire)

• Water is seen as the most basic of bills, and not a particularly expensive one, so many question why customers can’t pay and why it’s a priority for UU

• Customers are unaware of social tariff provision unless directly affected o A few have experienced help (Back on Track is perceived as individual assistance & one customer

praises the Matching Plus scheme)

• ‘Water poverty’ is emotive and implies a lack of water which seems disingenuous – financial hardship is a better description

• Half of customers choose current performance because they feel others should work as hard as they do to pay their bills, and distrust those who ‘plead poverty’ o Many question how UU are able to assess genuine need

• Those agreeing with the plan empathise and want to help ‘within limits’


73


• Maximum contribution is largely supported by those who’ve experienced severe hardship in the past, can see they’d benefit themselves, or the most conscientious

Quantitative results 51% of residential customers supported our planned level of improvement or higher (lower support than for most other measures). Support among business customers was stronger (59% supporting our planned level or higher). The results are shown in the table below. Number of customers helped % support Bill impact (£) Per 10,000

customers helped (£)

Company-wide WTP – per customer

Residential

41,500 0

71,000 38% 3 1.017 £295

170,000 13% 10 1,01 £293

Median £3 £294

Businesses

41,500

71,000 42% £14.32 0.622 £80

170,000 17% £47.73 0.793 £80

Median £21 £80

Total

Median £4 £374

The total median WTP per customer helped is, therefore around £374 and customers are, on average, willing to pay around £4 extra on bills. The relatively small majority support for this area indicates that we need to be seen to address customers’ concerns about ensuring that only those in genuine need benefit. The acceptability qualitative research showed that concerns about whether people were in real need were a significant issue.

10.6 Weighing up the evidence For this measure, we have two sources of valuation:

• Social tariffs research, which gave more information about the issues

• Research to test our plan, which provided less information but gave a context in that customers could trade this off against other potential service improvements

Both research studies scored highly in terms of being representative of the customer base. Taken together, we consider that they give us a reasonable evidence base for our plan.


74







Testing our plan

Social tariffs research

10.7 Results and conclusions The results from our two research studies are summarised below. Combined WTP – residential and businesses WTP – total bill impact WTP – per customer helped

Median – testing our plan £4 £374

Median – social tariff research £5

The results are sufficiently close to give some confidence in the bill impact which we can include in our plan. However, the reservations expressed by a significant number of customers in the acceptability research and in PR14 research means that we need to be able to demonstrate that we are supporting those who genuinely struggle to pay their bills.


75


11 Appendix 1 – calculation of average WTP values Calculation of unit Willingness to Pay This appendix shows how we have used the results from our Willingness to Pay survey to produce company-wide valuations for a change in service of one unit, e.g. one flooding incident or one contact about water taste and smell. The valuations produced from the survey are a valuation per customer for a step change between service levels. The calculations are:

• We multiply average / median willingness to pay per customer by the total number of customers, and divide by the number of units of improvement, to get company-wide willingness to pay per unit of improvement

• We multiply the resulting unit WTP by average bill for all customers / average bill of surveyed customers (effectively assuming that WTP is proportionate to bill size)

• We average the unit improvements for each of the step changes in service to give an overall average (we discuss the reasons for choosing an overall average are discussed in Section 2.3 of the Introduction to this report)


76


Calculation of Unit Willingness to Pay Average residential bills

All customers 419 Surveyed customers £489.92

Average Median

Total per customer

Company total per

unit

Scaled for average bill

Total per customer

Company total per

unit

Scaled for average bill

Safe, clean drinking water

% compliance £'000 per 0.01%

£'000 per 0.01%

£'000 per 0.01%

£'000 per 0.01%

Current 99.96%

Residential

Deterioration 99.90% -£4.87 -2,381 -2,036 -£0.57 -277 -237

Improvement 1 99.98% +£12.66 18,569 15,881 +£6.29 9,224 7,889

Improvement 2 99.99% +£16.53 16,157 13,818 +£9.25 9,042 7,733

Average 12,369 10,578

6,181 5,286

Businesses

Deterioration 99.90% -0.63% -5,785 -5,785 -0.02% -184 -184

Improvement 1 99.98% 4.88% 134,089 134,089 2.12% 58,252 58,252

Improvement 2 99.99% 6.34% 116,272 116,272 2.63% 48,233 48,233

Average 85,382 85,382

35,556 35,556

Total

Deterioration 99.90% -7,821 -421

Improvement 1 99.98% 149,969 66,140

Improvement 2 99.99% 130,090 55,966

Average 95,960 40,842

Water discolouration

Contacts £ Per contact

£ Per contact

£ Per contact

£ Per contact

Current 5,500

Residential

Deterioration 8,300 -£7.07 -7,402 -6,330 -£1.08 -1,132 -968

Improvement 1 4,500 +£2.51 7,376 6,308 +£1.75 5,153 4,407

Improvement 2 4,000 +£3.63 7,092 6,065 +£2.49 4,866 4,162

Average

7,290 6,235

3,717 3,179


77


Businesses

Deterioration 8,300 -0.01% -16 -16 0.00% 0 0

Improvement 1 4,500 0.01% 74 74 0.00% 0 0

Improvement 2 4,000 1.20% 4,403 4,403 0.05% 183 183

Average

1,498 1,498

61 61

Total

Deterioration 8,300 -6,346 -968

Improvement 1 4,500 6,382 4,407

Improvement 2 4,000 10,468 4,345

Average

7,732 3,240

Water taste and smell

Contacts £ Per contact

£ Per contact

£ Per contact

£ Per contact

Current 2,700

Residential

Deterioration 3,500 -£4.17 -15,285 -13,072 -£0.42 -1,532 -1,310

Improvement 1 2,600 +£1.56 45,618 39,014 +£0.84 24,719 21,141

Improvement 2 2,300 +£3.20 23,459 20,063 +£2.40 17,606 15,058

Average 28,121 24,050 14,619 12,503

Businesses

Deterioration 3,500 -1.78% -12,221 -12,221 -0.09% -618 -618

Improvement 1 2,600 0.82% 45,187 45,187 0.34% 18,736 18,736

Improvement 2 2,300 2.02% 27,813 27,813 0.82% 11,290 11,290

Average 28,407 28,407 10,215 10,215

Total

Deterioration 3,500 -25,293 -1,928

Improvement 1 2,600 84,201 39,877

Improvement 2 2,300 47,876 26,348

Average 52,457 22,718

Unplanned interruptions

Number £ Per 6 hr interruption

£ Per 6 hr interruption



Current 38,000

Residential

Deterioration 59,000 -£5.05 -706 -604 -£0.43 -60 -51


78


Improvement 1 30,000 +£0.82 302 258 +£1.82 671 574

Improvement 2 13,000 +£3.48 408 349 +£3.84 450 385

Average 472 404 394 337

Businesses

Deterioration 59,000 -0.42% -111 -111 0.00% 0 0

Improvement 1 30,000 0.86% 593 593 0.08% 55 55

Improvement 2 13,000 1.54% 339 339 0.45% 99 99

Average 348 348 51 51

Total

Deterioration 59,000 -715 -51

Improvement 1 30,000 851 629

Improvement 2 13,000 688 484

Average 751 388

Internal sewer flooding

Number of incidents

£ Per incident

£ Per incident

£ Per incident

£ Per incident

Current 800

Residential

Deterioration 1,100 -£4.34 -42,398 -36,260 -£0.85 -8,296 -7,095

Improvement 1 650 +£2.82 55,197 47,206 +£0.65 12,646 10,816

Improvement 2 500 +£5.58 54,555 46,657 +£1.96 19,186 16,409

Average 50,717 43,375 13,376 11,440

Businesses

Deterioration 1,100 -0.44% -8,079 -8,079 -0.01% -184 -184

Improvement 1 650 0.01% 516 516 0.01% 516 516

Improvement 2 500 2.65% 48,627 48,627 0.66% 12,111 12,111

Average 19,074 19,074 4,270 4,270

Total

Deterioration 1,100 -44,339 -7,278

Improvement 1 650 47,722 11,332

Improvement 2 500 95,284 28,520

Average 62,449 15,710

External sewer flooding

Number of incidents

£ Per incident

£ Per incident

£ Per incident

£ Per incident

Current 6,100


79


Residential

Deterioration 7,300 -£2.89 -7,054 -6,033 -£0.96 -2,348 -2,008

Improvement 1 4,800 +£1.57 3,531 3,020 +£0.66 1,488 1,272

Improvement 2 3,500 +£3.65 4,123 3,526 +£1.77 2,003 1,713

Average 4,903 4,193 1,946 1,664

Businesses

Deterioration 7,300 -1.00% -4,570 -4,570 -0.02% -91 -91

Improvement 1 4,800 0.02% 80 80 -0.03% -120 -120

Improvement 2 3,500 1.06% 2,249 2,249 0.18% 382 382

Average 2,300 2,300 118 118

Total

Deterioration 7,300 -10,603 -2,099

Improvement 1 4,800 3,100 1,152

Improvement 2 3,500 5,775 2,095

Average 6,493 1,782

Pollution incidents Number of incidents

£’000 Per incident




Current 160

Residential

Deterioration 175 -£4.75 -930 -795 -£0.32 -64 -54

Improvement 1 130 +£1.05 103 88 +£0.55 53 46

Improvement 2 100 +£2.61 127 109 +£2.22 109 93

Average 387 331 75 64

Businesses

Deterioration 175 -1.11% -408 -408 -0.01% -4 -4

Improvement 1 130 1.45% 266 266 0.53% 97 97

Improvement 2 100 1.52% 139 139 0.65% 60 60

Average 271 271 53 53

Total

Deterioration 175 -1,204 -58

Improvement 1 130 354 143

Improvement 2 100 248 152

Average 602 118


80


River quality % at good standard

£’000 per 1%

£’000 per 1%

£’000 per 1%

£’000 per 1%

Current 30%

Residential

Deterioration 20% -£8.81 -2,585 -2,211 -£1.24 -363 -311

Improvement 1 60% +£5.41 529 452 +£2.96 289 247

Improvement 2 90% +£10.01 490 419 +£6.05 296 253

Average 1,201 1,027 316 270

Businesses

Deterioration 20% -1.08% -593 -593 -0.02% -11 -11

Improvement 1 60% 1.88% 345 345 0.60% 110 110

Improvement 2 90% 3.75% 344 344 1.17% 107 107

Average 427 427 76 76

Total

Deterioration 20% -2,804 -322

Improvement 1 60% 797 357

Improvement 2 90% 763 360

Average 1,455 346

Bathing waters No. at excellent standard

Current 12

Residential

Deterioration 8 -£6.86 -5,028 -4,300 -£1.13 -826 -706

Improvement 1 22 +£6.55 1,920 1,642 +£5.09 1,491 1,275

Improvement 2 31 +£11.05 1,706 1,459 +£7.67 1,185 1,013

Average 2,885 2,467 1,167 998

Businesses

Deterioration 8 -2.70% -3,715 -3,715 -0.83% -1,142 -1,142

Improvement 1 22 0.22% 120 120 0.25% 136 136

Improvement 2 31 0.43% 123 123 0.33% 94 94

Average 1,319 1,319 458 458

Total

Deterioration 8 -8,015 -1,848


81


Improvement 1 22 1,762 1,412

Improvement 2 31 1,582 1,107

Average 3,786 1,456


82


12 Appendix 2 – WTP variation with income and by region Disaggregated Willingness to Pay results This appendix shows WTP results disaggregated by income and region. This allows us to explore whether there are particular regional priorities within our company area. We can also review the extent to which WTP is lower for customers with lower income. We can then consider whether to constrain service improvements to ensure that the overall bill impact is affordable for low-income customers. WTP – comparison of average and low incomes All Income <£20,000 % of average

Interruptions (reduction by 10,000) £1.85 £1.18 63%

Water quality pass rate (£’000 per 0.01%) £4.22 £3.38 80%

Water discolouration customer contacts (per 1,000 contacts)

£2.49 £1.87 75%

Water taste and smell customer contacts (per 1,000 contacts)

£9.60 £5.48 57%

Internal flooding (per 100 incidents) £1.10 64%

External flooding (per 100 incidents) £0.14 84%

Bathing waters (per bathing water achieving excellent standard)

£0.98 £0.66 67%

River quality (per 1% change) £0.41 £0.25 61%

Pollution incidents

WTP – regional comparisons

Region

WTP to reduce interruptions by 10,000

Water quality pass rate (per 0.01%)

Water discolouration customer contacts (per 1,000 contacts)

Water taste and smell customer contacts (per 1,000 contacts)

Cheshire £1.80 £4.60 £3.04 £12.88

Cumbria £3.40 £7.11 £5.95 £33.02

Greater Manchester £1.47 £3.42 £2.16 £7.88

Lancashire £2.30 £6.07 £2.93 £11.14

Merseyside £1.70 £2.71 £1.35 £5.28

All £1.85 (0.44%) £4.22 (0.86%) £2.49 (0.51%) £9.60 (1.96%)

Business customers 0.43% 1.55% 0.27% 5.16%


83


Region Internal flooding (per 100 incidents)

External flooding (per 100 incidents)

Pollution WTP per incident

Cheshire £1.82 £0.13 14p

Cumbria £3.93 £0.49 37p

Greater Manchester £1.30 £0.15 12p

Lancashire £2.00 £0.30 13p

Merseyside £1.61 £0.05 9p

All £1.73 (0.35%) £0.17 (0.03%) 13p (0.03%)

Income <£20,000 £1.10 (64% of average)

£0.14 (84% of average)

9p (69% of average)

Business customers 0.35% 0.04% 0.05%

Region WTP per bathing water River quality – WTP per 1% change

Cheshire 90p 48p

Cumbria £1.51 62p

Greater Manchester £1.10 35p

Lancashire £1.03 37p

Merseyside 59p 42p

All 98p (0.20%) 41p (0.08%)

Business customers 0.24% 0.08%


84

customer research triangulation - united utilities · 2018-09-01 · customer research...

Documents