Annex 1
THE OFWAT
FRAMEWORK FOR
ASSESSING WATER
COMPANY CAPITAL
MAINTENANCE NEEDS
Over the last ten years Ofwat has developed
a staged framework to assist it in reaching an overall judgement
of likely capital maintenance needs for the next price limit period.
Subdivision of the asset systems
The first step has been to divide the asset
systems into four categories that follow broadly the different
functions of the assets (treatment and transportation) and accounting
practices. The four categories are summarised below.
— Water service infrastructure assets.
These include impounding reservoirs, raw and treated water trunk
mains, service reservoirs, distribution mains etc.
— Water service non-infrastructure
assets. These include treatment works, pumping stations, telemetry
and computer systems, meters, plant & vehicles, depots, offices
etc.
— Sewerage service infrastructure assets.
These include sewers, combined sewer overflows, associated storage
tanks, rising mains, outfalls etc.
— Sewerage service non-infrastructure
assets. These include sewage treatment facilities, sludge treatment,
pumping stations, telemetry and computer systems, plants &
vehicles, depots, offices etc.
OFWAT'S
ANALYTICAL FRAMEWORK
The framework is based on a structured series
of tests or questions. In each case Ofwat used the best available
data and expert/specialist consultants to inform its judgements
for each of the four categories above on these questions/tests.
Stage A—SERVICEABILITY ASSESSMENT
Understanding past performance, serviceability
and company actions necessary to deliver these outcomes. This
entailed:
— A review of the overall trends in
performance of the asset systems in delivering services to customers
using the available indicators and measures to assess whether
the flow of services was: improving (;), stable (;), deteriorating
(X) or marginal (?).
— Recording the levels of activity
and expenditure incurred by the company over time and the reasons
for annual variations to establish the typical level of activity
and expenditure for the period of the serviceability trend analysis.
Where the expert review identified improving
(;) or stable (;) trends this leads to a preliminary judgement
that the typical level of activity had been sufficient. Where
the trends were deteriorating (X) or marginal (?) Ofwat sought
an expert assessment of the likely uplift in the typical level
of activity that would have delivered stable serviceability.
Stage B—IS THE FUTURE PERIOD DIFFERENT?
Understanding any underlying concerns in the
asset systems to be maintained particularly where these resulted
in different challenges than had been met in the past. Essentially
what would be different about the next period that would necessitate
changes in the typical levels of activity that had been sufficient
in the past. This entailed:
— A review of the results of the most
recent assessment of overall asset condition and how this compared
with previous assessments to understand the reasons behind changes.
— A review of company submissions on
the changing requirements for capital maintenance with a focus
on implications of any increase in the size of the asset systems.
The results from the asset inventory assessments
were inconclusive. Generally companies attributed the reported
small net increases in proportions of assets in the poor condition
grades, to errors in the 1992-93 assessments rather than deterioration
in their systems. The company submissions tended to focus on a
wish to improve asset condition and not on threats to continuing
service performance. Whilst long term the evidence pointed to
likely needs for higher levels of activity in some companies,
Ofwat considered these needs were unlikely to surface in the next
price period.
Stage C—SCOPE FOR IMPROVEMENTS IN EFFICIENCY?
Understanding the relative efficiency of each
company, both in terms of its approach to capital maintenance
and capital works, and the potential for even the best performing
company to improve its efficiency over the next price limit period.
This entailed:
— A statistical assessment of the relative
performance of all the companies over the serviceability period.
Rolling investigations were used to identify the key explanatory
factors to include in econometric relationships and thus derive
relative cost rankings. These were developed into relative efficiency
rankings following reviews of special factor submissions from
the companies.
— Comparative capital works unit cost
assessments to look at the unit costs that underpin each company's
forecast forward capital expenditure programme.
— Reviews of the scope for continuing
improvements on capital productivity over the next price limit
period by comparing the use of up-to-date technology and practices
in the UK water sector with those in other sectors and elsewhere
in the developed world.
Companies found to be inefficient were assumed
to rectify this poor performance through a catch-up factor applied
to its capital costs and all companies would be expected to improve
year by year by a continuing reduction that represented a proportion
of the identified potential.
Stage D—IMPACT OF THE QUALITY IMPROVEMENT
PROGRAMMES?
Understanding the implications of each company's
water quality and environmental improvement programme for the
normal capital maintenance programme. This entailed:
— A review of the potential scope for
overlaps and synergies due to the interaction of the quality enhancement
and capital maintenance programmes where existing assets were
being replaced for quality improvement reasons. The review included
looking closely at the implications of earlier improvement programmes
on the typical levels of expenditure.
DEVELOPING THE
OFWAT FRAMEWORK
FOR THE
NEXT PRICE
REVIEW
More information, greater consistency between
companies, and longer trend data on service and serviceability
measures/indicators together with a further update on asset condition
will all lead to better understanding to inform the Ofwat judgements
in the next price review. Notwithstanding this Ofwat, the quality
regulators (DWI & EA) and the companies are all working to
develop various elements of the framework. Ofwat's involvement
in these developments is summarised below.
Stage A Developments
Ofwat and the DWI are working together to develop
better water quality related indicators to improve the robustness
of the serviceability assessments. A similar initiative is in
progress with the EA to develop better measures for the sewerage
service. The outcomes of the initial consultancy studies will
be shared with the industry later this year.
Stage B Developments
Ofwat has set down in a letter to companies
(MD161—April 2000) how it believes they should develop assessments
of an economic level of capital maintenance that is consistent
with the outcomes of the serviceability assessment and evolving
needs of their businesses. Ofwat is in dialogue with a number
of leading companies in this area with the aim of establishing
benchmark practices of this type of analysis.
Ofwat is also looking to develop better understanding
of the condition of the industry's asset stock with particular
attention on identifying deterioration rates and the risk to service
performance from any such deterioration.
Stage C Developments
Ofwat will be developing and refining its methods
and analysis of relative efficiency in the light of comments by
the Competition Commission.
January 2001
| 
