Annex 4
Ofwat INFORMATION NOTE NO 35B[5]
SERVICEABILITY OF WATER TREATMENT WORKS,
WATER STORAGE, WATER PUMPING STATIONS, SEWAGE TREATMENT WORKS,
SEWAGE PUMPING STATIONS AND SLUDGE TREATMENT FACILITIES IN ENGLAND
AND WALES UP TO MARCH 1999
SERVICEABILITY TO
CUSTOMERS
The water and sewerage companies are required to
maintain their non-infrastructure assets so that they can provide
services to current and future customers. This note deals with
the serviceability of water and sewerage non-infrastructure assets.
These consist mainly of surface assets such as water and sewage
treatment works, sludge treatment facilities and company buildings.
Note 35A deals with the serviceability of underground networks
of water mains and sewers.
At each periodic review of price limits. Ofwat
assesses each company's outputs in recent years and its plans
for the future capital maintenance of non-infrastructure assets.
Future price limits are set at a level that provides for sufficient
maintenance of the non-infrastructure assets.
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 non-infrastructure
assets in delivering service to customers. 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 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 judgement 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 non-infrastructure assets in stable and, for 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 WATER
SERVICE NON-INFRASTRUCTURE
ASSETS
The key indicators that Ofwat uses to decide
whether a company has maintained the serviceability of water non-infrastructure
assets are as follows:
— The number of water treatment
works where enforcement action was considered because of contraventions
of the coliforms standard: This trend dropped significantly
between 1992 and 1995 and has remained stable since.
— The percentage of the total number
of determinations taken at water treatment works containing coliforms:
This trend is stable.
See Figure 1 for overall trends in these indicators.
The Drinking Water Inspectorate has published information on both
these indicators in its annual report since 1990.
THE SERVICEABILITY
OF SEWERAGE
SERVICE NON-INFRASTRUCTURE
ASSETS
The key indicators that Ofwat uses to decide
whether a company has maintained the serviceability of sewerage
non-infrastructure assets are as follows:
— The percentage of sewage treatment
works failing numeric consents: This aspect of serviceability
showed a steady improvement from 1989 to 1994. Since then, the
position has been stable.
— The percentage of equivalent population
served by non-compliant works failing look-up table consents:
This parameter continues to show an improving trend.
See Figure 2 for overall trends in these indicators.
The Environment Agency provides data on these
indicators every year in its July Return to Ofwat.
THE 1999 PERIODIC
REVIEW
Ofwat set price limits to provide for sufficient
maintenance of the non-infrastructure assets 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 NON-INFRASTRUCTURE
ASSET STOCK
In August 1998, each water 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 at 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.
Table 1
WATER TREATMENT WORKS, STORAGE AND PUMPING
STATIONS—1992-93 AND 1997-98—ASSET TOTAL STOCK
| Type of Asset
| 1993
Total
Stock
(nr)
| 1993
Gross
MEA
(£bn)
| 1998
Total
Stock
(nr)
| 1998
Gross
MEA
(£bn)
|
| Water treatment works | Surface water works
| 423 | £5.3 bn
| 678 | £6.0 bn
|
| | Ground water works
| 672 | £1.1 bn
| 935 | £1.7 bn
|
| Storage | Service reservoirs
| 4,802 | £4.5 bn
| 4,645 | £4.2 bn
|
| | Water towers
| 610 | £0.3 bn
| 556 | £0.3 bn
|
| Pumping stations | Intake
| 245 | £0.4 bn
| 232 | £0.4 bn
|
| | Source |
1,952 | £1.3 bn
| 2,192 | £1.2 bn
|
| | Booster |
3,852 | £1.4 bn
| 3,874 | £1.3 bn
|
CONDITION OF WATER NON-INFRASTRUCTURE ASSET STOCK
| |
| Grade 1 | Grade 2
| Grade 3 | Grade 4
| Grade 5 |
| Proportion | 1993
| 24% | 35%
| 23% | 13%
| 5% |
| | 1998
| 23% | 33%
| 29% | 11%
| 4% |
ASSET PERFORMANCE
| 1993 | 1998
|
| 76% Fully serviceable and acceptable
| 77% Fully serviceable and acceptable
|
Note: MEA values in this table are in 1999 prices.
The updated information provided by the companies has been
aggregated to create an industry picture of the water and sewerage
non-infrastructure assets covering the asset stock, its valuation,
its condition and its individual performance (see Tables 1 and
2).
The Business Plan assessments of non-infrastructure assets
were updated in accordance with the standardised reporting requirements
issued by Ofwat for submission H. The companies updated assessments
were reviewed and challenged by independent Reporters.
The gross replacement cost of water non-infrastructure assets
with modern equivalent assets (MEA) in 1998 was estimated by the
companies to be around £15.4 billion. Fifteen per cent of
water non-infrastructure assets were assessed to be in relatively
poor condition compared to 18 per cent reported as being in poor
condition in 1993. Ofwat's assessment is that there is no evidence
of a significant deterioration in the condition of water non-infrastructure
assets. A continuing water quality programme will result in improvements
to the non-infrastructure asset stock over the next price limit
period.
The aggregate asset stock, condition and performance information
from PR99H for sewerage non-infrastructure assets is summarised
below.
Table 2
SEWERAGE NON-INFRASTRUCTURE—1992-93 AND 1997-98—ASSET
STOCK
| Type of Asset | 1993
Total
Stock
(nr)
| 1993
Gross
MEA
(£bn)
| 1998
Total
Stock
(nr)
| 1998
Gross
MEA
(£bn)
|
| Sewage treatment works | Preliminary treatment
| 219 | £0.9 bn
| 89 | £0.3 bn
|
| | Primary treatment
| 655 | £0.6 bn
| 657 | £0.6 bn
|
| | Secondary treatment
| 4,327 | £11.8 bn
| 4,062 | £11.1 bn
|
| | Tertiary treatment
| 1,146 | £3.7 bn
| 1,476 | £4.7 bn
|
| Sludge treatment facilities | Liquid disposal
| 486 | £1.3 bn
| 232 | £1.1 bn
|
| | Cake disposal
| 123 | £0.4 bn
| 167 | £0.7 bn
|
| | Compost disposal
| 1 | £0.001 bn
| 9 | £0.02 bn
|
| | Ash disposal
| 6 | £0.2 bn
| 7 | £0.2 bn
|
| | Other disposal
| 33 | £0.09 bn
| 414 | £0.2 bn
|
| Sewage pumping stations |
| 16,996 | £3.0 bn
| 18,216 | £3.8 bn
|
CONDITION OF SEWERAGE NON-INFRASTRUCTURE ASSET STOCK
| |
| Grade 1 | Grade 2
| Grade 3 | Grade 4
| Grade 5 |
| Proportion | 1993
| 23% | 35%
| 29% | 9%
| 4% |
| | 1998
| 20% | 31%
| 34% | 11%
| 4% |
ASSET PERFORMANCE
| 1993 | 1998
|
| 78% Fully serviceable and acceptable
| 80% Fully serviceable and acceptable
|
Note: MEA values in this table are in 1999 prices.
Notes on Condition Grades
Condition grade 1: Sound modern structure, operable and
well maintained.
Condition grade 2: As 1, but showing some minor signs
of deterioration. Routine refurbishment and maintenance required.
Condition grade 3: Functionally sound, but appearance
significantly affected by deterioration, structure is marginal
in its capacity to prevent leakage, mechanical and electrical
plant and components function adequately but with some reduced
efficiency and minor failures.
Condition grade 4: Deterioration has a significant effect
on performance of asset, due to leakage or other structural problems.
Mechanical and electrical plant and components function but require
significant maintenance to remain operational.
Condition grade 5: Serious structural problems having
a detrimental effect on the performance of the asset. Will require
major overhaul/replacement in short term.
The gross replacement cost of sewerage non-infrastructure
assets with modern equivalent assets was estimated by the companies
to be around £23 billion. Around 15 per cent of sewerage
non-infrastructure assets were assessed to be in relatively poor
condition compared to 13 per cent reported as being in poor condition
in 1993. Many companies have attributed small changes in the reported
proportion of non-infrastructure assets in poor condition over
the last five years to improvements in company management information
systems and reporting methods. Ofwat's assessment is that there
is no evidence of a significant deterioration in the condition
of sewerage non-infrastructure assets. It should be noted that
around £3.5 billion of work on sewerage non-infrastructure
assets will be carried out over the next five years as part of
the continuing quality programme.
ACCOUNTING TREATMENT
FOR NON-INFRASTRUCTURE
ASSETS
Capital maintenance expenditure is that carried out by companies
to renew or replace worn-out assets and should maintain the asset
base in a steady state. Depreciation is a measure of the consumption,
use or wearing out of an asset over the period of its useful economic
life. Companies allow a monetary value for the depreciation of
non-infrastructure assets in their annual profit and loss account.
This is shown both in historic cost terms (ie based on the original
cost of the assets) and in current cost terms (based on the cost
of replacing the asset today).
In a steady state, it follows that, in the long run, the
current cost depreciation charge in the company accounts should
reflect, or be broadly equivalent to, actual levels of capital
maintenance expenditure. Current cost depreciation charges are
remunerated to companies through the price setting mechanism when
price limits are set.
In the 1999 Periodic Review, companies were required to demonstrate
that capital maintenance expenditure on non-infrastructure assets
will be broadly equivalent to depreciation on these assets over
23 years, from 1992-93 to 2014-15.
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 additional
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 companies to ensure
that they maintain the serviceability to customers of water and
sewerage non-infrastructure assets.
March 2000
5
Information Note No 35B was first released in February 1999 and
included a summary of the non-infrastructure asset stock based
on company data from the Asset Inventory and System Performance
submissions, PR99H. This revision includes an updated non-infrastructure
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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