Annex 3
Ofwat INFORMATION NOTE NO 35A[4]
SERVICEABILITY OF THE WATER MAIN AND SEWER
NETWORKS IN ENGLAND AND WALES UP TO MARCH 1999
SERVICEABILITY TO CUSTOMERS
The water and sewerage companies are required to
maintain their extensive networks of water mains and sewers so
that they can provide services to current and future customers.
This note deals with the serviceability of underground water main
and sewer networks. Note 35B deals with the serviceability of
assets generally found above ground, such as water and sewage
treatment works.
At each periodic review of price limits, Ofwat
assesses each company's outputs in recent years and its plans
for the future maintenance of underground networks. Future price
limits are set at a level that provides for sufficient maintenance
of the networks.
Ofwat's assessment is based on the concept of
serviceability to customers. Ofwat examines the overall trends
in a range of indicators that describe the performance of the
underground networks in delivering services to the customer. By
examining the trends over several years, Ofwat can make a judgement
as to whether the capital maintenance carried out by the company
over the period has resulted in stable, improving or deteriorating
services to customers.
— If the assessment shows stable serviceability
then Ofwat's initial judgement would be that a continuation of
past levels of capital maintenance activity should be sufficient
for the next price limit period.
— If the assessment shows improving
serviceability then Ofwat's initial judgement would be that slightly
lower levels of capital maintenance activity should be sufficient
to deliver stable serviceability in the next price limit period.
— If the assessment shows deteriorating
serviceability then Ofwat's initial judgment would be that past
levels of maintenance activity have not been adequate. A decline
in serviceability would be considered a serious shortfall in company
performance. The company would need to rectify the shortfall as
a matter of urgency, but slightly higher levels of maintenance
activity might be needed in the future once the shortfall had
been eliminated.
Ofwat's assessment is that, overall, the serviceability
of underground water main and sewer networks is stable and, in
some companies, it is improving. This suggests that at an industry
level, a continuation of current levels of capital maintenance
activity should be sufficient to maintain serviceability to customers
in the next price limit period (2000-05).
Indeed continuing improvements in efficiency
and more accurately focused work using better information systems
now available, mean that a continuation of the current level of
capital maintenance will enable the companies to improve services
to customers.
Ofwat's approach based on serviceability to
customers is a top-down method that provides a strong and coherent
challenge to the detailed asset management plans of the companies.
These asset management plans need to link serviceability to customers
with information on the performance and condition of individual
assets or elements of the networks so that such capital maintenance
is carried out as is economic to do so.
THE SERVICEABILITY
OF THE
WATER MAIN
NETWORKS
The key indicators that Ofwat uses to decide
whether a company is maintaining the serviceability of its water
main networks are as follows:
Extent of low pressure problems (DG2)
Assessments of the number of properties at risk
from receiving unacceptably low pressure have been made for a
long time. This aspect of serviceability shows a steady improvement.
Data is now more robust.
Number of bursts
Bursts show an improving trend in recent years.
Bursts have continued to recover from a peak in 1995-96 when very
unusual climatic condition (a severe and prolonged drought and
a deep freeze followed by a rapid thaw) disrupted the trend.
Scale of interruptions of supplies to customers
(DG3)
Unplanned interruptions to supplies greater
than 12 hours show an improving trend in recent years, except
for 1995-96 as above.
— Quality compliance: There
has been a stable trend in this aspect of serviceability over
the last five years. Within distribution systems, unlined iron
mains create non-compliance problems. Focused work on these mains
has reduced the percentage of distribution zones where these problems
exist (down to 21 per cent in 1998 with only 1.7 per cent of samples
failing).
See Figure 1 for overall trends in water mains
serviceability.
THE SERVICEABILITY
OF THE
SEWER NETWORKS
The key indicators that Ofwat uses to decide
whether a company is maintaining the serviceability of its sewer
network are as follows:
— Properties flooded because of
insufficient sewer capacity (DG5): This trend, variable
in the past, has been broadly stable since 1990.
— Number of sewer collapses: This
trend is reasonably stable.
— Number of pollution incidents
occurring at combined sewer overflows and sewers: This
trend is reasonably stable. This is a new serviceability indicator
and has been introduced to complement the other indicators give
a more complete picture of service to customers.
See Figure 2 for overall trends in sewer serviceability.
THE 1999 PERIODIC
REVIEW
Ofwat set price limits for 2000-05 to provide
for sufficient maintenance of the water main and sewer networks
such that a prudent and well-managed water company would be able
to achieve stable serviceability to customers. In accepting the
price limits, companies are committed to carrying out sufficient
maintenance to achieve stable or improving serviceability to customers.
Each company had the opportunity to appeal to
the Competition Commission if it considered the price limits insufficient
for it to meet its obligations while providing a reasonable return
to its shareholders.
THE UNDERGROUND
ASSET STOCK
In August 1998, each company provided an assessment
of its asset stock as at March 1998 in the Asset Inventory and
System Performance submission. In April 1999, each company was
given the opportunity to update its asset stock assessment in
the Business Plan submission. Here the company could report its
latest assessment of assets as of March 1998 where changes had
arisen from the reassessment of unit costs, the completion of
further asset stock surveys and the resolution of outstanding
issues with the Reporter.
The Business Plan assessments of the water main
and sewer networks were updated in accordance with the standardised
reporting requirements issued by Ofwat in submission H. The updated
company assessments were reviewed and challenged by independent
reporters.
The updated information provided by the companies
has been aggregated to create an industry picture of the water
main and sewer networks covering the asset stock, its valuation,
its condition and its individual performance (see Tables 1 and
2 below). The information has been compared with that set down
in Information Note 35, that summarises the asset stock as reported
by companies in the 1994 Strategic Business Plans.
Table 1
WATER MAIN NETWORKS (as at March 1998) ASSET
STOCK
| <=300 bore (km) | <=600 bore (km)
| <=900 bore (km) | >900 bore (km)
| Total Stock (km) | Gross MEA (£bn)
|
| 245,000 | 51,000
| 21,000 | 8,000
| 325,000 | £39bn
|
| ASSET CONDITION | Grade 1
| Grade 2 | Grade 3
| Grade 4 | Grade 5
|
| Proportion | 46%
| 31% | 12%
| 6% | 5%
|
| ASSET PERFORMANCE 72% performing satisfactorily or better
|
Notes:
MEA value in this table is in 1999 prices.
Notes on Condition Grades for water mains:
Condition grade 1: No failures, fully complies with modern
standards.
Condition grade 2: No significant failures (minimal impact
on service performance), not quite consistent with modern standards.
Condition grade 3: Deterioration beginning to be reflected
in service levels or increased operating costs.
Condition grade 4: Considerable corrosion affecting service
performance, nearing end of useful life, frequent bursts.
Condition grade 5: Substantially derelict and source of service
problems, no residual life.
The gross replacement cost of all the potable water mains
with modern equivalent assets (MEA) was estimated by the companies
to be about £39 billion. Around 11 per cent of the potable
water mains were assessed to be in relatively poor condition (condition
grades 4 and 5) compared to 9 per cent reported as being in poor
condition in 1993.
Many companies have attributed small changes in the reported
proportion of water mains in poor condition over the last five
years to improvements in their management information systems
and reporting methods. Analysis of the companies' Business Plans
confirm Ofwat's assessment that there is no evidence of a significant
deterioration in the condition of the aggregate potable water
main network stock.
The proportion of potable water mains assessed to be satisfactory
is smaller than that stated in 1994. One reason for this is that
many water companies now have a better knowledge of the performance
of elements of their networks. It should be noted that around
7 per cent of the water main networks are likely to be improved
as part of the water quality programme between 2000 and 2010.
Table 2A
SEWER NETWORKS (as at March 1998) CRITICAL SEWERS—ASSET
STOCK
| <=150 bore (km) | <=300 bore (km)
| <=600 bore (km) | <=900 bore (km)
| >900 bore (km) | Total Stock (km)
|
| 5,900 | 27,800
| 18,800 | 7,900
| 9,400 | 69,800
|
| CRITICAL SEWERS—ASSET CONDITION Grade 1
| Grade 2 | Grade 3
| Grade 4 | Grade 5
| Gross MEA (£bn) |
| 60% | 17% |
13% | 8%
| 2% | £43bn
|
CRITICAL SEWERS—ASSET PERFORMANCE 94% performing satisfactorily or better
|
Table 2B
SEWER NETWORKS (as at March 1998) NON-CRITICAL SEWERS—ASSET
STOCK
| <=150 bore (km) | <=300 bore (km)
| <=600 bore (km) | Total Stock (km)
|
| 98,000 | 116,000
| 18,000 | 232,000
|
| NON-CRITICAL SEWERS—ASSET CONDITION Grade 1
| Grade 2 | Grade 3
| Grade 4 | Grade 5
| Gross MEA (£bn) |
| 58% | 19% |
13% | 8%
| 2% | £61bn
|
| NON-CRITICAL SEWERS—ASSET PERFORMANCE 94% performing satisfactorily or better
|
Notes:
MEA values in sewer tables are in 1999 prices.
Notes on Condition Grades for sewers:
Condition grade 1: No structural defects.
Condition grade 2: Minor cracking in brick sewers but no deformation
or loss of bricks, line and level as built; for other sewers some
circumferential cracking or moderate joint defects.
Condition grade 3: Some deformation in brick sewers, displaced
bricks, occasional connection defects; for other sewers some deformation
(up to 5 per cent), cracking or fractures or joint defects or
minor loss of level or badly made connections.
Condition grade 4: Deformation in brick sewers up to 10 per
cent, some brick loss or moderate loss of level; for other sewers
deformation of up to 10 per cent, cracked or fractured or serious
loss of level.
Condition grade 5: Collapsed or severely deformed sewers or
missing inverts or extensive areas of missing fabric/bricks.
The gross replacement cost of sewers with modern equivalent
assets was estimated by the companies to be about £104 billion.
Around 10 per cent of sewers were assessed to be in relatively
poor condition (condition grades 4 and 5). Analysis of the companies'
Business Plans confirm Ofwat's assessment that the current levels
of sewer maintenance have been sufficient to maintain the overall
condition of the aggregate sewer stock.
RECENT ACTIVITY
LEVELS
The aggregate activity in kilometres on the potable water
network over the last eight years is summarised in Table 3. This
includes work to improve quality compliance as well as that necessary
just to maintain the water networks.
Table 3
ACTIVITY ON POTABLE WATER NETWORK
| Activity | 1991-92
| 1992-93 | 1993-94
| 1994-95 | 1995-96
| 1996-97 | 1997-98
| 1998-99 |
| Relining | 2,642
| 2,077 | 2,011
| 2,037 | 1,380
| 1,896 | 2,380
| 1,899 |
| Renewal | 2,442
| 2,359 | 2,187
| 2,330 | 2,739
| 3,329 | 3,490
| 3,893 |
| New Mains | 2,808
| 1,953 | 1,787
| 1,809 | 1,635
| 1,670 | 1,549
| 1,248 |
| Total Activity | 7,983
| 6,481 | 6,078
| 6,270 | 5,849
| 6,894 | 7,419
| 7,040 |
The aggregate activity in kilometres on the critical sewer
network over the last eight years is summarised in Table 4 below.
Table 4
ACTIVITY ON CRITICAL SEWERS
| Activity | 1991-92
| 1992-93 | 1993-94
| 1994-95 | 1995-96
| 1996-97 | 1997-98
| 1998-99 |
| Renovation | 131
| 89 | 59
| 80 | 104
| 143 | 178
| 182 |
| Replacement | 165
| 146 | 111
| 68 | 76
| 105 | 92
| 80 |
| New Sewers | 507
| 455 | 334
| 350 | 228
| 272 | 212
| 372 |
| Total Activity | 803
| 690 | 504
| 498 | 408
| 520 | 482
| 634 |
ACCOUNTING TREATMENT
FOR NETWORK
ASSETS
In the late 1980s, the water industry in England and Wales
adopted renewals accounting for the very long-lived network assets
(called infrastructure assets). This was a move away from conventional
depreciation based on assumed asset lives. The actual age of network
assets has little or no impact on whether they are performing
satisfactorily or are in need of routine maintenance, renovation
or replacement. Renewals accounting is based on an operational
assessment of activity needed to maintain the serviceability of
the underground infrastructure over a reasonably long period (15
to 20 years).
An operational assessment is made by each company to estimate
the long-term capital maintenance needed to maintain the networks.
For accounting purposes, this is averaged to derive an infrastructure
renewals charge (IRC) made in the annual profit and loss account.
In price setting at the 1999 Periodic Review, Ofwat assumed
an IRC for the purposes of financial modelling. The IRC was based
on past investment levels and Ofwat's projections of investment
needs for the future.
Annual variations between actual expenditure and the relevant
IRC are carried forward in the company balance sheets as either
a liability or prepayment. An accrual is a liability indicating
that the water company will need to carry out higher levels of
maintenance sometime in the future for which it has already been
remunerated. A prepayment indicates that the water company is
ahead of the original plan and there will be a likelihood of lower
levels of maintenance for a year or so in the future.
RENEWAL OR
TERMINATION OF
LICENCES
One of the key tests of a company's stewardship is whether
serviceability to customers has been maintained over the period
of its licence. Each company was granted a 25 year licence in
1989. The respective Secretary of State, on advice from the Director,
has to give 10 years notice of termination. In the absence of
such a notice, the licence rolls on year by year. Decisions on
whether to issue notices of termination or licence extensions
can be taken in 2004.
Any work needed to rectify a deteriorating trend in serviceability
to customers would need to be carried out either before licence
transfers or as part of the new licence, but at no cost to customers.
The need for such work at a licence transfer would be reflected
in the company value at transfer. Such a potential liability should
provide an incentive for the companies to ensure that they maintain
the serviceability to customers of the water main and sewer networks.
March 2000
4
Information Note No 35-January 1997 summarises the position up
to March 1996 and underground asset stock reported by the water
companies in their Strategic Business Plans in March 1994. Information
Note No 35A was first released in February 1999 and included a
summary of the underground asset stock based on company data from
the Asset Inventory and System Performance submissions, (PR99H).
This revision includes an updated underground asset stock summary
based on company data from the Business Plans, (PR99K). Serviceability
graphs Fig 1 and Fig 2 have also been updated to include 1998-99
data. Back
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