Download Final Business Plan 2009

Three Valleys Water Final Business Plan Three Valleys Water Final Business Plan Our Final Business Plan is in three parts. Part A describes the strategy that shapes and is supported by the detailed plans set out in Parts B and C. Each part includes relevant rationale, methodologies, analysis, proposals, tables and table commentaries. The overall structure and sections of our Final Business Plan are shown below: A1 A2 A3 A4 A5 A6 A7 A8 A9 A10 Executive Summary What we are Achieving in 2005 -10 The Post 2010 Environment Listening to Our Customers and Meeting their Needs Competition The Main Components of the Strategy Implementing the Plan Income, Opex and Financing the Plan Board Endorsement Tables Abbreviations, glossary and index Section B The Company Environment B1 B2 B3 B4 B5 B6 B7 B8 B9 B10 B11 The Post 2010 Environment and the Longer Term Improving Efficiency Maintaining Service and Serviceability Quality Enhancements Maintaining the Supply-Demand Balance Consumer Services Strategy and Changes to Service Financial Projections Revenue Projections Overlap Programme Large Projects Capital Expenditure Incentive Scheme Abbreviations, glossary and index Section C Value for our Customers C1 C2 C3 C4 C5 C6 C7 C8 C9 Consumers’ Views Cost Base, Benchmarking and Efficiency Studies Asset Inventory Supply - Demand Appraisal Supplementary Information On Proposed Work – The PR09 Project Database Sewer Flooding – not required for this plan Tariffs and Revenue Forecasts Supplementary Information – CBA and Carbon Accounting Financial Modelling Dataset Abbreviations, glossary and index Section A: Company Strategy 3 April 2009 Page 1 of 54 Three Valleys Water Final Business Plan Section A: Company Strategy 3 April 2009 Page 2 of 54 Three Valleys Water Final Business Plan Contents A1 Executive Summary........................................................................................ 5 A2 What we are achieving in 2005-10 ................................................................. 7 A3 The Post 2010 Environment......................................................................... 11 A4 Listening to our customers and meeting their needs................................ 15 Customer service............................................................................................................15 Customer opinion and priorities....................................................................................16 How our bills compare ...................................................................................................19 Summary .........................................................................................................................20 A5 Competition ................................................................................................... 23 A6 The main components of the strategy ........................................................ 25 Balancing supply and demand ......................................................................................25 The case for metering ....................................................................................................................26 Approach to metering .....................................................................................................................26 Maintaining the twin-track approach ..............................................................................................27 Leakage ................................................................................................................................27 Water efficiency..............................................................................................................................27 Planning for new resources............................................................................................................28 Comparison of our proposed supply-demand programme with AMP4 ..........................................28 Quality and resilience.....................................................................................................29 Serviceability of above-ground assets ...........................................................................................29 Pollution risks ................................................................................................................................29 Flooding risk and Security ..............................................................................................................30 Comparison of our proposed quality programme with AMP4 ........................................................30 Care for the environment ...............................................................................................31 Corporate responsibility..................................................................................................................31 Abstraction ................................................................................................................................31 Carbon emissions and energy use.................................................................................................32 Waste materials..............................................................................................................................32 Minimising disruption to supply ....................................................................................33 Network serviceability.....................................................................................................................33 Trunk mains renewal ......................................................................................................................33 Comparison of our proposed infrastructure renewal programme with AMP4 ................................33 A7 Implementing the Plan.................................................................................. 35 Key outputs.....................................................................................................................35 Training and motivating our people ..............................................................................35 Implementing our capital plan ......................................................................................36 Maintenance Infrastructure.............................................................................................................37 Maintenance Non-Infrastructure.....................................................................................................38 Supply-demand ..............................................................................................................................38 Drinking Water Quality ...................................................................................................................39 Security and Resilience..................................................................................................................39 Section A: Company Strategy 3 April 2009 Page 3 of 54 Three Valleys Water Final Business Plan Environmental Programme.............................................................................................................39 Overlap programme .......................................................................................................................39 Sustainability Appraisal ..................................................................................................................39 Corporate and Social Responsibility ..............................................................................................39 A8 Financial Projections: income, opex and financing the Plan.................... 41 Overview of the drivers of K ..........................................................................................41 Income.............................................................................................................................42 Operating expenditure....................................................................................................42 Infrastructure renewals charge......................................................................................44 Current cost depreciation ..............................................................................................44 Return on capital ............................................................................................................44 Dividends ........................................................................................................................45 Interest.............................................................................................................................45 Financing the plan ..........................................................................................................45 Gearing, Taxation and allowed rate of return ...............................................................46 A9 Board Endorsement...................................................................................... 49 Introduction.....................................................................................................................49 Involvement of the Board from SDS to FBP..................................................................49 Process for completing the business plan ...................................................................50 Directors’ statement .......................................................................................................54 Section A: Company Strategy 3 April 2009 Page 4 of 54 Three Valleys Water Final Business Plan A1 Executive Summary In the next five years, we plan to achieve major improvements. We want to raise the bar significantly in terms of customer services, operational performance and the management of our resources. We are entering 2010-15 in a stronger position than for earlier pricing periods. Consequently we are well placed to achieve what is set out in our Plan. The key areas and issues are in summary: • • • • • • • • • • • • • We have striven to take full account of the fact that the recession is putting pressure on customers and have made a number of changes which significantly reduce price pressures. Our proposed charges are no higher than they need to be to provide the essential service levels our customers expect. We have improved customer service markedly without increasing costs and are rolling out a programme which puts our people and customers and their requirements at the heart of the business. This will further improve customer satisfaction and value for money but will not add to costs. Our customers are now benefiting from a supply-demand balance which we predict to be in surplus during the next period. Investment in increasing resources has been deferred until after 2026. We will concentrate on containing demand rather than increasing abstraction. We will do this mainly by continuing to reduce leakage coupled with a metering programme at a rate linked with house moves. We believe this will be costbeneficial in the wider sense and our customers expect it. We have a fuller understanding of our above ground assets which has enabled us to optimise our investment decisions based on risk. Our analysis clearly indicates that we need to increase investment in this vital area. We propose to continue with mains renewals at the same rate as in 2005-10 because it is having a positive effect on asset Serviceability. We need more time in practice to establish whether it is appropriate in the longer term. We plan to invest in schemes which will improve water quality and have a direct benefit for customers. We propose to improve resilience and increase security in all aspects. Operating costs have been consistently higher in this AMP than assumed at PR04. We have made significant efficiency gains but these have been eroded by costs beyond our control, such as energy and bad debts. Entering the next quinquennium we shall have to pay increased council charges, licence fees, permits and pension contributions at a time of reduced demand and lower income. Tender prices for capital expenditure show unit-costs are increasing. We will work with our customers to identify added value services they would like to see for AMP6. We will ensure that we mitigate greenhouse gas emissions and adapt to the effects of climate change. We have sought prudently to balance risk against cost in drawing up this challenging Plan which we are confident we can implement. Given this wider picture, the cost of our capital programme is relatively low. This Plan differs in some significant respects from our Draft Business Plan, notably leakage reduction, the pace and method of metering and the rate of mains renewal. We Section A: Company Strategy 3 April 2009 Page 5 of 54 Three Valleys Water Final Business Plan have listened attentively to feedback on the draft plan, carefully reassessed the position, and made changes as appropriate. We have, in the past, sought the views of customers but sense there has been an element of ‘we know best’ in our response. We are seeking to change and are heightening the importance of emotionally engaging with our customers. Customer services have already improved as a result of our ‘customer experience’ programme, where our people are encouraged to understand customers’ circumstances, engage with them more and address their needs at the first opportunity. Recent research shows that more than 90% of our customers are now satisfied with the service we provide. The recession will put significant pressure on our plans and our customers – especially on the ability of some of them to pay for water. We have taken account of the recent Ofwat– led Understanding Customer’ Views customer survey and of our own parallel surveys of customer opinion, and believe we can maintain and improve value for money for our customers while keeping price increases to a minimum. We have taken significant steps to increase metering, renew the network, and reduce leakage. However, having sufficient water and maintaining stable serviceability still pose significant risks. We have worked hard to balance those risks against the need for increased investment and the implications for customers. We have sought to make this Final Business Plan bolder, more customer-friendly, relevant to them and more coherent than our Draft Business Plan. It is also a Plan which will leave the company able to adjust direction – if necessary – at the next price review to respond to a changing world in uncertain times. Above all, it will provide a springboard for us to begin to lead the industry in some key areas rather than simply following it. To maintain performance levels, quality and resilience, as proposed in our Plan, requires an increase in our net capital investment from £408 million in 2005-10 to £456 million in 2010-15 (at 2007/8 prices). The main components are: • • • • • • asset maintenance supply-demand water quality security and resilience environment contributions from developers £354 million £68 million £23 million £24 million £8 million £21 million We forecast that operating expenditure in 2010/11 will be £115.3 million, falling to £112.9 million in 2014/15, (compared to the base year of £108.3 million). Of the 13% increase in charges in 2010/11, more than 8.3% is due to additional costs incurred in AMP4 that were not included in AMP4 price limits and 1.6% from future increases in indirect taxation. Only 1.6% of the price increase is from new activity and 3.5% from our capital investment programme to maintain serviceability. However, we also plan efficiency savings of £21 million by 2015, which reduces the first year factor by 2.1%. Our average household bill will rise in the first year by £19.55 but will then fall each year so that in 2014/15 the average bill will be only £12.69 higher than 2009/10 Table A1 : 1 2009/10 prices Av. Bill K Forecast of average household bill and K factors for AMP5 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 157.04 - 176.59 12.9 175.91 -0.4 174.46 -0.5 172.06 -1.0 169.73 -0.9 Section A: Company Strategy Av. AMP5 173.75 2.0 3 April 2009 Page 6 of 54 Three Valleys Water Final Business Plan A2 What we are achieving in 2005-10 We supply water to more than three million people in north London and the Home Counties, north and west of London. The area has four key characteristics: • water consumption per customer amongst the highest in the industry • an environment that is classified as water stressed and which is vulnerable to pollution • the pipe network in the most populous areas is in aggressive soil • high local costs, for example, of labour and construction Our priorities in AMP4 have been to overcome a deficit in the supply-demand balance and to maintain serviceability of the network. We believe we have been effective in applying our strategy, having achieved outputs beyond those forecast in the present five-year period. Compared to previous periods, we have increased substantially the rate of mains renewal and metering. We have also invested to make better use of our limited water resources, and have improved our operational performance in response to the challenges faced by the severe drought in 2006. As a consequence we are now forecasting a surplus of water over the next five years, and our customers are experiencing less disruption from bursts and interruptions to supply. We have begun to transform our customer service in the past 18-months through our ‘customer experience’ programme. We have already made tangible progress, which is changing the way customers feel about the service they receive. The number of telephone contacts received in 2008-09 is set to be 10% lower than the prior year, which was already 6% lower than the year before that. In parallel, customers’ satisfaction with our services, and their perception of value for money have increased. This is a long-term programme, still in its infancy. We expect further improvements to the ‘customer experience’ to be made throughout the next five years at no additional cost. Since 2005 we have managed our capital investment programme effectively. We are confident that by March 2010, all of the investment targets and defined outputs specified in the 2004 Determination and the Monitoring Plan will have been achieved, with the exception of domestic metering volumes. We have doubled our mains renewal rate to 0.8% of network assets per annum, particularly in the area of London Clay which is a more aggressive environment for iron pipes, the predominant material of our network. To 31 March 2009, we have renewed more than 500km of distribution mains, consistent with our PR04 Monitoring Plan. Customers are seeing the benefit, through reductions in mains bursts and supply interruptions. These improvements also indicate that our system is operating at a level consistent with ‘stable Serviceability’. We have continued to reduce leakage, and to date have achieved the leakage targets set out in our Monitoring Plan. We are confident that our target for 2008-09 will also be met, despite exceptionally challenging winter conditions experienced in January and February. Meeting the target in such circumstances would demonstrate our enhanced response capability and the improved serviceability of our infrastructure network, as noted above. In April 2005 we introduced compulsory ‘change of occupier’ metering for all customers, to supplement the continued promotion of optional metering. This was to encourage water saving and generate the margin to satisfy demand from additional customers. In the first three years of the quinquennium we installed or had in progress 99% of the Monitoring Section A: Company Strategy 3 April 2009 Page 7 of 54 Three Valleys Water Final Business Plan Plan target level for selective and optional meters. However, the significant slowdown in the housing market over the past 12-months will cause us to fall short of our target programme for the five years as a whole. We forecast that by 2010, 38% of all domestic properties will be metered, from 23% in 2005. To inform our future metering and tariff strategies, on 1 April 2009 we commenced a seasonal tariff trial covering 1,000 properties in Bishops Stortford, utilising automated meter reading (AMR) technology. As well as giving us an understanding of the demand effect of seasonal tariffs, we will gain experience in the logistics of managing an AMR network, and the infrastructure required to support it. Throughout 2008 we have been installing AMR devices at unsafe and difficult-to-access locations. From April 2009 we will be fitting AMR on all new housing developments of more than one property. We will now begin to gather the intelligence and evidence that will direct our future demand management strategy, regardless of the precise scenario we face. As part of this process we will be conducting trials of the next generation of metering technology. In 2007 we reported that meter reading performance data in the four prior years had been stated incorrectly in the annual June Return submission. In acknowledgement of the inconvenience caused, and in the interests of customers, we corrected our prices so as not to benefit from the 0.1% discretionary award at PR04. In the year to March 2009 our meter reading performance has improved further from the recovery in 2007-08, and the highest standard has been achieved on both DG8 measures. On the supply side, we have increased capacity since 2005 by 4% (34 Ml/d) after completing eight supply schemes and improving borehole performance through the lessons learned in the 2006-07 drought. Similarly, carefully targeted investment in our above ground assets has contributed to improved operational reliability, which has increased by 2% or 19 Ml/d. Over the five year period from 2002 we have maintained a consistently high level of water quality performance. In our June Return 2009 we will report a mean zonal compliance rate of 99.99% and an average annual performance of 99.98% for AMP4. In 2000, we identified widespread bromate pollution of groundwater in our operational area. We have been working with the Environment Agency (EA) since that time to ensure the polluter pays for the consequences of their actions. A public inquiry was held in 2007, but two years have elapsed without a decision from the Government. In December 2005, the Buncefield Fuel Storage Depot Fire occurred in our operating area. It was the largest peacetime fire in history which resulted in a strategically important groundwater source being taken out of supply. We have been working with the EA since 2005 and expect to re-commission the source in April 2009. As well as responding to specific pollution events, we have continued to develop our understanding of wider pollutants in the environment. We have prepared Water Safety Plans to assess and manage the risk of pollution at all our sources so that we can preserve the quality of water. Emerging pollutants such as metaldehyde represent a particular challenge and we monitor developments like these with much care. We expand on this topic in Sections A3 and A4. Operating expenditure has risen throughout the quinquennium, and since 2006-07 costs have been above the levels assumed when prices were last determined. Significant operating efficiencies have been achieved annually since 2005, but these have been eroded by considerable, real term increases in costs relating to power, bad debt, abstraction licences, insurance, metered account maintenance and production chemicals. Power costs (up 70% between 2002-03 and 2007-08 in real terms) and bad debts (up Section A: Company Strategy 3 April 2009 Page 8 of 54 Three Valleys Water Final Business Plan 130%) alone account for over £10 million of the £11 million increase in total operating expenditure experienced between 2002-03 and 2007-08 (2007-08 prices). The gap between actual operating expenditure and that which is currently funded will be corrected in charges from 1 April 2010, and this is one of the main pressures on price limits at PR09. Protecting the health and safety of our employees and members of the public is an essential part of what we do, and a barometer of our overall effectiveness. It reduces costs by improving productivity, reduces the risk of disruption, improves our reputation with stakeholders and provides better motivated and engaged employees. Our attention to health and safety is led by the Board, and since 2005 our performance has improved. In 2005-06, 15 reportable accidents were suffered by our employees and over 230 days lost as a result. In the year to March 2009 our performance has improved to 7 reportable accidents and less than 170 days lost. Although this represents significant progress we will not be satisfied until we are operating with zero accidents. Our improved performance has changed customers’ perceptions of the service we provide. This is illustrated in the results of our continual programme of customer research over the past five years, from December 2003 to our most recent survey in December 2008. 91% of customers are currently satisfied with the overall service, up from 78% in 2003, and satisfaction with water quality has risen to 81%, from 58% in December 2003. Furthermore, 76% of customers believe that the services provided represent good value for money, up from 62% five years ago. When prompted with information about the real cost, 92% of customers rated our current service as representing good value for money. However, the proportion of customers which considers metering charges to be fair has remained unchanged at 62%. We intend to improve this proportion in future. We have made significant progress since 2005, both in addressing the challenges we face and improving the service we provide to customers. The net result of our achievements is that we will enter the next pricing period in a more resilient and responsive position than we did in 2004-05, which ensures that future price limits will be lower than they would otherwise have been. Section A: Company Strategy 3 April 2009 Page 9 of 54 Three Valleys Water Final Business Plan Section A: Company Strategy 3 April 2009 Page 10 of 54 Three Valleys Water Final Business Plan A3 The Post 2010 Environment In our Strategic Direction Statement (SDS) we described changes that are likely to affect the way we provide water services during the next 25 years. We have considered the challenges from five key areas: • Our customers’ opinions and behaviour relating to the service we provide. • The social and economic context of our plan. • The legal and regulatory framework in which we operate. • How our activities will be influenced by market competition. • The challenges of the environment in which we operate. Customer views and behaviour Customers’ opinions are changing. They are demanding higher standards of service in all respects. We recognise that we need to change to meet and exceed their expectations. Although we can – and should – do more, our customers are now better informed than ever about where their water comes from, how it is abstracted, treated and distributed. Our research reveals growing interest in water but more needs to be done to convince customers that metering is the fairest way to pay for water. Our customers understand that better and timelier information about saving water and their consumption can help them use it more carefully and so mitigate the environmental effects associated with their demand for it. Social and economic context The economic downturn is having effects on customers’ ability to pay for their water, especially those on lower incomes and at risk of unemployment. This must be taken into account when making judgements about the affordability of charges. However, the critical long term need to maintain and improve our services to customers should not be determined by the circumstances of those least able to pay. The recession is affecting housing completions, the rate of metering and reducing nonhousehold demand and revenues. Our forecasts since our Draft Business Plan reflect these latest trends. We expect new housing numbers to be lower through AMP5 and to return to 2007/08 levels only by 2015. Home moves are much lower than previously forecast, although we expect the rate will respond more rapidly to an upturn in market conditions during AMP5. Lower regional economic growth will, however, have a long term effect on non-household demand for water and this will contribute to our baseline supply surplus until 2026. We expect the population in our area to continue to increase after 2010. But the number of occupants per household will fall – reflecting a national trend. Real incomes will broadly double during the next 25 years and these growth factors are likely to be amplified in the South-East of England. Our medium term forecast is that total demand for water is likely to increase. We expect that despite the recession the South-East will remain an area of above average economic growth in the longer term. Competition for labour will remain strong. Neighbouring water companies will seek similarly skilled labour to us as mains renewals, Section A: Company Strategy 3 April 2009 Page 11 of 54 Three Valleys Water Final Business Plan AMR and meter installation are all vigorously promoted. We will have to compete with them, and others, to secure the skilled support we need. Demand for these services will keep contractor prices high, despite the effects of the recession. We will also have to compete with the Government’s investment in public sector infrastructure programmes to stimulate the economy. Short-term demand for skilled labour to prepare for the Olympics in 2012 places pressures on the same workforce. Input prices are likely to remain higher than average and will affect wage rates, contractor prices, fuel, materials and waste disposal charges. We see no evidence that these general trends will change. Our close proximity to London means it will continue be more expensive and more difficult to carry out street works than in other parts of the country. We will find better ways of working to minimise these difficulties but it will continue to be a problem. It is likely we will need to trade carbon dioxide permits in the future and make use of the financial values of greenhouse gas emissions for investment and operational purposes. The introduction of a financial value for carbon, as the shadow price of carbon, allows us to compare the relative costs and benefits of different investment options. As the shadow price of carbon changes over time the relative benefits of different options will be considered. Legal and regulatory framework Longer term, the Water Framework Directive should have a beneficial effect on the quality of raw water in our catchments. We support much of what is proposed in River Basin Management Plans (December 2008) and are keen to see the use of water protection zones to safeguard public water supplies. We will continue our pro-active stance on minimising pollution threats to our resources by working with the EA and third parties which use and store chemicals, both to encourage enhanced stewardship but also to ensure the ‘polluter pays’ wherever possible. Our area has been designated as being under severe water stress and there are limited opportunities to develop new resources. We expect to continue to be challenged by the EA and local groups over the effects of abstraction from our groundwater sources on the flow in local chalk rivers. We have been working with these groups since 1992 and have commissioned a number of research projects. We have been asked to undertake seventeen more projects in AMP5 under the National Environment Programme which embrace 30% of our groundwater licences at a cost of £7.4 million. Also, we have been notified that abstraction licences relating to 14.8 Ml/d are to be revoked “as soon as possible”. We have advised the EA that the timing of the licence changes must allow us to evaluate the full cost of the proposals and to carry out the capital investment needed to replace the lost resources. We have suggested 2015 for this to come into effect. We are concerned that future licence changes would place unjustifiable upward pressure on customers’ bills. Licence changes incur substantial costs even when in a period of supply surplus. Operating plant may become redundant and low cost, local supplies have to be replaced by more expensive water from other areas. We will urge the EA to maintain an appropriate balance between environmental benefits and bills. We are concerned that future Catchment Management Plans and River Basin Plans may propose more licence changes to meet Water Framework Directive targets, but no measures are included in the draft plans post 2015. We are not permitted to include the effect of such potential changes directly in our investment plans. This means we could invest in assets that may become disused before the end of their useful life – which would be wasteful. Section A: Company Strategy 3 April 2009 Page 12 of 54 Three Valleys Water Final Business Plan The EA has declined to provide guidance on the long term prognosis for our groundwater licences, so we have considered the effect of potential changes on our plans using our own estimates. There remains significant uncertainty over the future cost of access to water resources. This risk will increase if proposals to convert all licences to a time limited basis between 2021 and 2027 – indicated in Future Water and the latest consultation on abstraction charges – are accepted. Market competition After 2010 competition is expected to grow and new legislation is likely to be introduced to provide a greater degree of choice to a larger proportion of our customer base. We are already considering how to prepare separate accounts and expect that choice of supplier will soon be extended to all non-household customers. Medium to longer term we anticipate more competition for abstraction rights as sustainability reductions limit the amount of water available for public water supply and trading of abstraction licences develops. Our view of market competition is covered further in section A5. Environment in which we operate Since there are few cost-effective options for increasing supply in the next five to 10 years, the post 2010 environment will be very different. Our twin-track approach to balancing supply and demand will rely more heavily on demand-side measures than at any time in the past. To maintain our long term strategy to manage demand we need to continue metering, leakage control and water efficiency measures where these are beneficial in a wider context. We are predicting that much of the demand-side savings achieved will be maintained in the longer term, but we must have other options in case they prove transient. We are working with other companies in the South-East to explore the optimum use of resources in the future and to prepare for the development of new regional resources. At the same time, we need to respond to the effects of climate change. It will alter rainfall and consumption patterns, reduce the amount of water available for supply, result in extreme weather events and cause significant variability in the quality of our source water. We will need to monitor hydrological patterns for an early warning of droughts and floods. Our adaptation plans address responses to flooding, potential temperature increases and on the consequences for water quality and treatment. We have re-appraised risks and developed a programme of work needed to complete physical security improvements and tackle flood risk. The flooding in summer 2007 caused us to reflect on whether planning standards used in the past will remain appropriate after 2010. As part of our continuous programmes for improving water quality, we are monitoring how changes in temperature can affect different treatment processes to ensure this can continue to be managed effectively. We do not anticipate that water quality will be affected by saline ingress, but we are monitoring our sources to ensure we are aware of all risks. Our mitigation programmes, where we seek to increase the energy efficiency of equipment and processes to reduce the carbon footprint of each unit of water we produce, are compatible with our plans to manage demand. There is a direct correlation between energy consumed and water used, so water efficiency savings will equate to energy and carbon dioxide savings. Section A: Company Strategy 3 April 2009 Page 13 of 54 Three Valleys Water Final Business Plan Water resources in our area have suffered from pollution for many years. Our experience in recent years is that one groundwater source is lost annually due to pollution and it takes on average five years to restore the source – often only following substantial investment. We have real concerns about the discovery of the pesticide, metaldehyde, in raw water supplies. The only known treatment method is Reverse Osmosis, which is extremely costly and not currently in use in our area. This emphasises the importance of curtailing the use of this pesticide at source. We consider the implications of metaldehyde pollution further in Section A5. Emerging quality issues mean the traditional ‘end of pipe’ treatment solutions may not be viable. So we plan to increase our activities within our catchments. We will work with the Environment Agency, farmers and local authorities to encourage robust standards of stewardship and thereby reduce the risk of pollution. This approach is compatible with Future Water, River Basin Management Plans and Water Safety Plans. At all times we must have regard for the most cost-effective way of managing pollution and will maintain a watchful eye. In the immediate post 2010 environment our risk assessment work and water safety plans demonstrate the need for a continuing programme of investment in water quality treatment improvements. Section A: Company Strategy 3 April 2009 Page 14 of 54 Three Valleys Water Final Business Plan A4 Listening to our customers and meeting their needs Customer service Customers’ expectations are changing. They are demanding higher standards of service and want improved access through a variety of engagement points. Customers expect our people to be knowledgeable, to understand their circumstances and to be able to capture their feedback. During the next five years the experiences we create for our customers will inform our thoughts and underpin everything we do. Some customers are concerned about being able to afford their water bills. We have taken this into account when considering our plans and ensured charges will rise no higher than they need to be to maintain Serviceability. Improvements in customer-facing services are being made by changing the way we work. This will be achieved at zero cost to the customer, but will lead to an improved sense of value for money. Customers have a variety of sources – including the internet – from which they can obtain information or which enable them to voice their opinion very publicly. Technology is providing us with exciting opportunities to transform the way we interact and engage with our customers. Our customers are now better informed than ever about where their water comes from; how it is abstracted, treated and distributed. Contact with customers presents opportunities to build on this, e.g. to promote the efficient use of water, and we will continue to improve our dialogue with them to ensure they have the information they need to inform the way they choose to use it. We want to hear what our customers think of the service we provide. We survey them twice a year and our most recent research reveals: • • • • • • • 91% are satisfied with the overall service provided a growing interest in the role of water in the environment customer satisfaction levels with the quality of drinking water are at 81% 62% recognise that metering is the fairest way to pay for water. increasing numbers of customers are positive about automated call handling 76% spontaneously rate the service as representing good value for money all would prefer no increase in water bills. We will continue to listen to our people and use information gained from customer conversations to make changes to our processes, products and services. We will welcome and respond quickly to customer feedback from any source and model our company around their needs. In particular, we will work with our customers and provide more information about how we work to improve perception of ‘value for money’. But we know our customer service will only ever be as good as the degree to which our people are willing to commit to it. This is why we have made significant changes to the way we train, motivate and reward our people during the past 18 months. We began a new programme to improve ‘customer experience’ through our customerfacing teams in 2008 and we will build on the improvements we have already achieved during AMP5. Our customers no longer accept reactive service and are intolerant of errors and delays. They want to trust that we will install their meter with minimal inconvenience; read their Section A: Company Strategy 3 April 2009 Page 15 of 54 Three Valleys Water Final Business Plan meter accurately; and provide bills at a frequency, and by a payment method, that suits them. Through our ‘customer experience’ programme we are confident that we can reduce repeat and avoidable contacts, and complaints. We are aiming to reduce both written and telephone complaints by 25% from the 2008/09 level between 2009/10 and 2014/15. Similarly, we are planning to curb avoidable contacts by 25% from the 2008/9 level between 2009/10 and 2014/15. During the next five years we will investigate and develop services associated with metered customers and advanced meter reading to develop products and services customers will want. The aim will be to provide a service which is so attractive it encourages customers to ask for a meter. Customer opinion and priorities Our formulation of this Final Business Plan has been influenced by the views of customers and other stakeholders. We have carried out research from a number of sources, namely: 1. 2. 3. 4. 5. 6. TVW Customer research (routinely, twice a year, most recent Dec 08). TVW Willingness to pay for our business planning (focus groups Jul 07 and main survey Oct 07). TVW Consultation on our Strategic Direction Statement (Dec 07). TVW Consultation on our Draft Water Resources Management Plan (Aug 08). Stakeholder feedback on our Draft Business Plan (Nov 08). Ofwat: Understanding Customers’ Views (Feb 09). The process in preparing our business plan began with customer consultation on their willingness to pay (WTP) for changes in levels of service for the business plan. This showed that their priorities for investment were: Highest WTP Lowest WTP • • • • • • • • save water through water efficiency and reducing leaks reduce greenhouse gas emissions improve the aesthetic quality of tap water reduce disruption to supply reduce water hardness reduce the number of water quality failures maintain the flow in low-flow rivers make hosepipe bans more infrequent. Consultation for our Strategic Direction Statement (SDS) took the form of a number of focus groups. Stakeholders indicated: support for metering and the use of appropriate tariffs bad debt was unacceptable support for water savings that housing development should take account of water availability new homes should be water efficient further leakage reduction was fair if householders are to save water little knowledge of the regulatory process that more communication was essential. Section A: Company Strategy 3 April 2009 Page 16 of 54 Three Valleys Water Final Business Plan The outcomes from this consultation defined our objectives for our business plan to align with customer priorities: enough water will be available to our customers by normal means in all but extreme circumstances water will be of the right technical and aesthetic quality we will have the right care and consideration for the environment in what we do there should be minimal disruption to supply in the course of our normal operations water should remain affordable for customers. The figure below shows how our business strategy model addresses these priorities. It includes our strategic objectives and shows how our standards of achievement are defined by our performance indicators. Figure A4 : 1 Visualisation of how customer priorities relate to our business functions Our Draft Water Resources Management Plan (DWRMP) took account of our stakeholders’ preferences and priorities as well as their feedback during the drought of 2006. Our plan was published for stakeholder consultation between May and August 2008. The 38 responses we received addressed a number of technical and strategic points, notably: • the twin track approach was supported, with emphasis on demand management • metering was favoured, subject to it being cost-beneficial and affordable • innovative tariffs Section A: Company Strategy 3 April 2009 Page 17 of 54 Three Valleys Water Final Business Plan • • • • • • • • further leakage reductions water efficiency and water reuse efficient use of existing resources a need for improved clarity in how risk affects plans more co-operation in regional resource management the effects of climate change the environmental effect of abstraction the ‘polluter pays’ principle These points were reflected in our Statement of Response to the Secretary of State in January 2009. The outcomes from the DWRMP stakeholder consultation reinforced the priorities developed from our Strategic Direction Statement. However the Final Business Plan must take account of overall customer views of the service they receive. Our regular programme of quantitative research surveys is important here. Surveys are presently undertaken twice a year. The views of our customers have been researched twice in recent months; firstly, as part of our continuing bi-annual survey and second, in Understanding Customer Views, research commissioned by DEFRA. The methodologies followed in these surveys were very different. Most importantly, Understanding Customer Views surveyed customers simultaneously on both water and sewerage services. Some of the results suggest that customers have difficulty differentiating the two, and the results are near identical. Notwithstanding, the survey results are very similar. Both recorded high levels of customer satisfaction overall with the water service (TVW survey: 91% / Understanding Customer Views: 88%) and agree that safe water supply is the most important aspect of service. (TVW survey: 81% / Understanding Customer Views: 88%). 24% of customers in our survey spontaneously rated our service as representing poor value for money. This fell to just 8% when informed of current actual charges. In Understanding Customer Views, 35% of customers spontaneously rated the water service as poor value for money. This fell to 26% when informed of service standards. We believe the difference in value for money ratings is a function of the different methodologies used and the type of information provided to enlighten the ‘uniformed’ customer. Both illustrate the importance of providing clear information to customers about the service they receive. Both surveys also highlight that customers are reluctant to pay more for an improved service. Our survey showed that 79% of customers want service levels maintained with no price change. In Understanding Customer Views, 64% of customers said that the effect on bills of our Draft Business Plan proposals was unacceptable. We have since looked hard at the Plan and made extensive revisions. Given the current high satisfaction levels, and the present economic environment, we understand why customers do not want to pay more for an improved service. We have reflected this in our Final Business Plan. The ‘customer experience’ related improvements are free to customers, which we expect to increase the perception of value for money. The other improvements that we propose derive from compliance with regulatory obligations and investment in our assets to maintain their serviceability. Section A: Company Strategy 3 April 2009 Page 18 of 54 Three Valleys Water Final Business Plan Table A4 : 1 Comparison of Customer Research Studies Three Valleys’ own research Willingness to Pay Tracking Survey Tracking Survey Understanding Customers’ Views (wave 1) (wave 2) Sept – Nov 08 Sept – Oct 2007 July 2008 Nov 2008 524 500 500 250 Water only Water only Water only Mixed water and sewerage services Interview – Structured choice experiment Telemarketing Telemarketing Structured interviews Most important aspect of current service N/A N/A 81% Tap water quality 88% Clean, safe reliable drinking water Satisfaction N/A 81% 91% 88% Uninformed water service considered to be not poor VFM 66% 61% 76% 65% Informed water service considered to be not poor VFM N/A 87% 92% with value benchmark 74% with service standards Sample size Service surveyed Method N.B. Where percentages are not provided, this reflects the differences in methodology between studies as questions were asked on different bases. Both our own research and Understanding Customers’ Views explored views about willingness to pay / priorities for investment. They showed that customers place a high priority on managing resources and demand. Minimising disruption was closely followed by preferences for managing the appearance, taste and smell of water and water safety. A relatively low priority was given by customers in both cases to further investment for managing extreme events and the frequency of supply restrictions. The proposals in our Plan reflect these preferences and we believe they will have the support of our customers. Stakeholder opinion Throughout the Business Planning process we have engaged with our stakeholders formally through such forums as the four quadripartite meetings and informally, through one-to-one briefings. We have opened our propositions and arguments to third party challenge and sought to reflect their responses constructively in our submission. The EA has been consistent in promoting demand-side measures and would like to see universal metering to all homes as soon as possible. CC Water has wanted to test the appropriateness of our proposals in the present climate and to ensure that price increases are kept to a minimum. It has also urged for increases to be smoothed over the AMP, thereby deferring some of the burden to later years when the economy has recovered and customers’ ability to pay has improved. How our bills compare Figure A4:2 below shows that increases in our bills have been considerably lower than for gas, electricity, and local council tax. Bills have been largely stable in real terms over the last decade. Section A: Company Strategy 3 April 2009 Page 19 of 54 Three Valleys Water Final Business Plan Figure A4 : 2 Comparison of Three Valleys’ average water bill with other utilities £1,400 Annual household bills (at 2007/8 prices) £1,200 Council tax and rates £1,000 Gas £800 £600 Electricity £400 Water bill and proposed average charge for 2010 to 2015 £200 £0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 However, we are aware that rising water bills could create hardship for some customers. We have sought to keep the cost of water to a minimum, while meeting our obligations to provide safe and reliable supplies. Some customers are in ‘water poverty’ and we want to assist them. We will continue to offer a range of payment options and will increase access to our Water Sure tariff. We want to help our most vulnerable customers by developing special tariffs, providing more frequent billing, and offering flexible payment options. We believe the growing problem of people who cannot pay their bills should not be crosssubsidised by those who are able to pay. Water poverty and people who are unable to pay should be the dealt with through the Government’s social policies. Summary We have listened to our customers and this Final Business Plan addresses their needs and their priorities. It also reflects the priorities listed in our Strategic Direction Statement: Affordability – we should put our customers first, listen to their needs and meet or exceed their expectations, while ensuring water supplies remain affordable. Customer service – we will aim to reduce avoidable contact and increase our emotional engagement with customers to always seeking to exceed their expectations in the service we provide Meeting demand – water should be available to our customers by normal means in all but extreme circumstances Quality – our water should continue to be of the highest quality The environment – we should care for the environment in all we do, including by reducing emissions which contribute to climate change Section A: Company Strategy 3 April 2009 Page 20 of 54 Three Valleys Water Final Business Plan Minimising disruption – there should be minimal disruption to supply in the course of our normal operations These priorities have informed and directed us in agreeing this Plan. We have sought to balance a realistic view of the current economic climate from the customers’ perspective with the activities and the pace at which we should proceed. We have used the results of our ‘best practice’ approaches to asset management, water resources planning, environmental assessment, cost benefit analysis and economic optimisation work. Section A: Company Strategy 3 April 2009 Page 21 of 54 Three Valleys Water Final Business Plan Section A: Company Strategy 3 April 2009 Page 22 of 54 Three Valleys Water Final Business Plan A5 Competition The company is part of a very large worldwide water group – Veolia Water. It has 150 years’ experience of winning business in markets for water and wastewater services. Almost everywhere, this entails competition for the market, that is, competition for timelimited contracts to provide aspects of water service, rather than competition in the market to provide a service to individual customers. As the government, Ofwat and independent reviewers have recognised, in the water sector, while competition for the market is increasingly common across the world, competition in the market is rare. Within the UK, Three Valleys Water is part of a subsidiary group (Veolia Water UK, Ireland and Northern Europe) which is one of main suppliers of competitively-obtained water service contracts. That group is aiming at least to double the size of that business in the next few years. While Three Valleys Water must always operate at arms length from its parent so far as its regulated business is concerned, its expertise is available to the wider business on reimbursement terms. In this way, we have a significant practical role in encouraging the development of competition in the water sector and in turn we are influenced by the competitive activities of our company colleagues: the educational value of this competition can be used to benefit the customers of our regulated business. We are following closely the evolution of proposals for the encouragement of competition in the market. It seems to us that these are not likely to develop rapidly for political reasons, especially in a time of deep recession: the public is cautious about competition in water which current market difficulties are likely to have exacerbated. As an incumbent company, we are preparing for extended competition, but the pace depends on the decisions of the Government and regulators. A major extension to competition seems unlikely in the next five years, and will in part depend on the outcome of the next election. It will begin with widening the scope for commercial customers to choose their supplier: we shall need to contest to retain these customers if we can. This is a risk to the volume of water currently sold to commercial customers, which is already tending to fall. Longer term, once accounting separation has taken place, perhaps reinforced by legal separation, there is the possibility of contested retail services. Our intention to make a step change in the quality of customer service (as detailed above) has not been driven by the prospect of competition in retail services. But to the extent that we achieve the improvements which we are attempting to put in place, we shall be better placed to defend our existing market share in a competitive market on the one hand and also to enlarge it on the other. The mechanics and politics (national and local) of developing markets in abstraction and abstraction rights are also difficult. Such developments could have significant implications for this company. We have already referred to the pressure on abstractions in our area, particularly from the chalk aquifer and there are significant risks that the EA will seek major reductions in our existing abstraction rights during the next 10 or 15 years. If we were also at risk of having rights bid away, and/or of having to enter the market for replacement water, there could be considerable implications for the customers of our regulated business. Explicitly, the economic pricing of water resources in water-stressed areas could have the effect of driving up prices for consumers of a public water service by more than the gains resulting from a more economically-efficient allocation of the resource as agricultural, horticultural and industrial users may be in a position to bid up the price. (This is a different matter from competition in the mechanics of abstraction and treatment, which could be of benefit to water consumers, for example, through competition for providing these processes, as already referred to.) Section A: Company Strategy 3 April 2009 Page 23 of 54 Three Valleys Water Final Business Plan Subject to properly carrying out our functions, we alive to opportunities for inset appointments near our territory. At the same time, we are watchful of the possibility of insets (whether green-field or comprising existing customers) within our area. We see the transformation of customer services, assisted by advanced technology, as an exciting area for us to build competitive advantage. Section A: Company Strategy 3 April 2009 Page 24 of 54 Three Valleys Water Final Business Plan A6 The main components of the strategy Balancing supply and demand In the current period, we have tackled a longstanding resource deficit by investing in new resource capacity; by increasing source performance and reliability; and by containing demand, especially through metering and reducing leakage. As a result, we now have a supply surplus, reduced bursts and have lowered leakage. In contrast to our Draft Plan, we have taken full account of this most up to date information and, in particular, have amended and reduced the pace of metering in order to reduce costs for customers in the shorter term. But, long term, uncertainties and challenges remain and this Final Business Plan takes this range of factors into account. A key factor which we must never lose sight of is that our supply area is designated as suffering severe water stress. By 2010, we expect that 38% of dwellings in our supply area will be metered. This is lower than we forecast at the previous Periodic Review in 2004 because of the present slowdown in house construction and home movers. We expect the pace to pick up again with improved economic conditions. As projected by the Government, we expect that 250,000 new properties will be built in our supply area by 2030. We predict that the total demand for water from our customers will increase, mainly as a result of population growth of 360,000 (12%), by 2030. We need to monitor this carefully and amend our approach accordingly so that we can meet our statutory duties to supply the water our customers need. Business customers have been affected by the recession. We are experiencing lower levels of demand and so have updated our long term forecasts in line with regional economic indicators and the latest Treasury forecasts. Our forecasts indicate that even without any action on supply or demand, our supplydemand balance should remain in surplus until around 2025. The least-cost planning approach indicates that neither metering, nor leakage control, is cost-effective until 2035 and then in only one of our zones. On this planning basis, the actions which seem likely to be cost-effective are: First phase of investment required to maintain security of supply (2025-2030) • water resource schemes in the Northern Zone. Second phase of investment required to maintain security of supply (2030-2035) • water resource schemes • local community water efficiency • local water re-use schemes Third phase of investment required to maintain security of supply (post 2035) • metering • leakage • regional resource schemes. So the choice facing us is either to follow the least-cost planning route (which suggests only a supply-side approach to maintain the supply-demand balance) or to maintain the emphasis on the demand-side of the twin-track strategy as well, and continue to meter customers on some form of compulsory basis coupled with further reductions in leakage. . Section A: Company Strategy 3 April 2009 Page 25 of 54 Three Valleys Water Final Business Plan The case for metering The case for placing the emphasis on the demand side, in particular through metering, is compelling and is supported by customers, regulators and Government because: • there is continuity of strategy and policy • the Government’s policy paper, Future Water, strongly advocates a demandside policy • less water is taken out of the environment • it is compatible with the long-term aims of the Water Framework Directive • it is a sustainable approach using less energy, less carbon and less water • it enables us to charge customers in a way they perceive to be fair as those with high consumption pay proportionately • it encourages domestic and commercial customers to save water • it provides future opportunities for changes in the structure of tariffs, so that customers can make their own choices on water use • it reduces our vulnerability to licence reductions which are not allowable in our planning • it creates opportunities for transforming improvements in customer services. We are not yet able to ascribe accurate monetary benefits to each of these factors, but are confident that, as part of a demand-side strategy, it will prove to be cost-beneficial. Approach to metering The questions here are: how fast should we go? Should we stick to compulsory metering on change of occupier? Should we switch to compulsory street-by-street metering, selecting the most water stressed areas first? A customer affected by compulsory street-by-street metering reduces his demand by the same amount as one affected by change of occupier metering. Street-by-street metering will be cheaper (though less than 10%), but these savings are offset by additional costs involved in overcoming customer resistance and disruption. It would also be inappropriate in the present recession, as the water-stressed areas likely to be selected for metering would most affect those least able to pay. Our surveys show that, while the majority of our customers agree that metering is the fairest way to charge for water, just over half of non-metered customers are in favour of compulsory metering. We fear this level of support would fall away if we enforced streetby-street metering. As an alternative we propose to meter properties when there is a change of occupancy, as now. We believe this policy is sufficient to preserve the supplydemand balance at present, and it has the added benefit of not changing the level of bill for those who remain in the same dwelling. The long-term resource deficit in the South-East is a major concern for all the water companies in this region. We are cooperating with each other and the EA to promote water efficiency and to create a climate of acceptance and support for universal metering. We intend to explore vigorously the opportunities for ‘smart metering’ and the scope for innovation. We will pilot test next-generation meter reading equipment and explore collaborative arrangements to mitigate risk and costs. We will prepare for widespread implementation by ensuring our infrastructure will cope with the changes. Section A: Company Strategy 3 April 2009 Page 26 of 54 Three Valleys Water Final Business Plan Maintaining the twin-track approach In parallel to metering, we will continue to increase the amount of water available by optimising the use of existing resources, improving reliability of plant, and preparing to develop new resources in the longer term. Both ‘tracks’ are essential because we need to adapt to the effects of climate change and population growth, and anticipate reductions in our ability to abstract water (to protect local environments). This strategy is explained in detail in our amended Draft Water Resources Management Plan published in January 2009. The key elements are: Resources – make the best use of our existing resources Leakage reduction – reduce leakage because it is a high priority for our customers. Environment – continue to work with the Environment Agency, Natural England and local environmental groups to explore changes that are supported by good cost benefit cases Water efficiency – continue to offer water efficiency advice and water saving services to customers and enhance activities where these are cost-effective or cost-beneficial New customer services – investigate new methods, technologies and systems for charging for water in order to provide a more effective basis for encouraging sustainability and to offer services our customers want Long term security of supply – maintain a rolling, comprehensive programme of studies to enable us to have sound long term plans for new strategic resources if they become necessary Leakage We have successfully reduced leakage in the current AMP and have achieved each annual 2 Ml/d leakage target between 2005 and 2009. The steady rate of change has also been achieved using progressively fewer resources. We are on track to lower leakage by 10Ml/d by 2010, compared to 2005 levels, and propose to continue this rate to 2015 This means that we will continue to operate below our economic level of leakage (ELL) and socially efficient level of leakage (SELL). Our longer term plan forecasts similar reductions in 2015 -2020 but lower savings in the following two periods. As discussed in the 2008 June Return submission, we have agreed with Ofwat and the EA to adopt a new, improved method of leakage calculation from 2010. This Plan is presented using the new methodology. The earlier methodology will continue to be employed for consistency in June Return submissions until March 2010. The current and revised methods of calculation produce distinctly different assessments of the level of leakage. These are not comparable. The new figure is 40 Ml/d higher than the old one. The actual rate of leakage from the network remains unchanged. Water efficiency We will continue with our water efficiency programme and, in particular, our award winning education and communications programmes. We have reported our activities to satisfy our Section A: Company Strategy 3 April 2009 Page 27 of 54 Three Valleys Water Final Business Plan statutory obligations in our June Return each year. In light of our supply surplus, it is not cost-effective or cost-beneficial to increase these activities. We have serious reservations about proposals to increase investment in water efficiency. The cost is not currently included in prices and they have not been demonstrated as cost beneficial. Increasing activities in line with Ofwat’s current expectation would significantly affect prices and overlooks the value of our extensive education and communications programmes. If we are required to meet arbitrary activity targets, it would put our current programmes at risk as there would be no incentive to retain them. 7,000 pupils visit our Education Centre each year and we teach 13,000 children in schools on our ‘outreach’ programme. All these children take part in memorable demonstrations of water efficiency and environmental sustainability, and we know from the positive feedback we receive that families and friends are also influenced. Hence, the effect reaches out beyond the children who participate. The children we educate are our future customers and we believe that continuing this programme is enormously constructive. If the effectiveness of our education and communication programmes is properly acknowledged, we believe we can meet our water efficiency targets without further investment, and without affecting customer bills. Planning for new resources We have sought in our Plan to take a responsible and sustainable approach to managing the supply-demand balance. We will actively review, update and modify our plans in response to changing circumstances. We recognise the importance of effective long-range planning in respect of new schemes given the lead-times involved. Comparison of our proposed supply-demand programme with AMP4 Table A6:1 below shows the key changes in both activity and cost for the key programme elements for AMP4 and AMP5. Table A6 : 1 Key changes in our supply – demand programme AMP4 Detn. AMP4 Detn. AMP5 AMP5 activity £ million activity £ million 201,000 44.4 137,000 33.6 New development 42,260 homes 37.0 27,822 homes 31.8 Long term studies 6 2.5 2 1.1 Total capex - 83.9 - 66.5 0.05 Ml/d 1.2 6.2 Ml/d * 8.7 15,317 repairs 9.5 17,421 repairs 13.3 - 10.7 - 22.0 Metering – optant and selective Water efficiency Leakage Total opex * Education service recognised within targets Section A: Company Strategy 3 April 2009 Page 28 of 54 Three Valleys Water Final Business Plan Quality and resilience We intend to manage our physical assets so that we supply water that fully complies with the water quality regulations and meets our customers’ wish for water of the right aesthetic quality. The Drinking Water Inspectorate (DWI) supports our proposals to invest in new or modified treatment at four sites. These investments will cost £23 million and will ensure that our water continues to meet the required quality standards and is acceptable to our customers. Specifically, we plan to remove manganese at two sites and invest in a programme of mains cleaning in those areas to clear deposits from the pipes which have caused complaints of discolouration. We also need to invest to reduce the risk of cryptosporidium at one site and nitrate at another. Serviceability of above-ground assets We have extensive above-ground assets and it is essential they remain serviceable to provide an uninterrupted supply of high quality water. We have invested in surveying our assets and developing more accurate tools to model whole-life costs of operation and maintenance. Building our assessment from component level has provided a comprehensive and accurate assessment of the investment needed to maintain their condition. This in turn has significantly improved our understanding of these assets in support of future plans, while minimising pressure on customers’ bills. Our assessment has also taken account of wider social and environmental benefits and a cost-benefit assessment has been carried out for all capital investment, even where this relates to baseline serviceability investment. We have also examined how critical schemes are in terms of the likelihood and consequences of failure, for example, where we need to replace large reservoir structures. Our informed conclusions are that an increase in investment is needed in comparison with earlier years. However, we plan incremental increases in expenditure and activity, so that we can successively test the merits of individual schemes over the next five years and use these results in planning for the following five years. This is a prudent approach which has the benefit of reducing pressure on customers’ bills. We propose to limit investment to £159 million to maintain our above-ground assets during AMP5. Pollution risks We have experienced a number of pollution events and threats in our operating area during the past 15 years. These have come from chemical spills, fertiliser applications and the use of pesticides and herbicides. Long lasting pollution incidents affect headroom because it must allow for pollution risks. We will remain vigilant in our efforts to prevent these events. We undertake comprehensive risk assessment work in our catchments and have devised water safety plans. We also promote responsible behaviour, good stewardship and champion the ‘polluter pays’ principle and in AMP5 we intend to appoint two Catchment Management Officers. Reducing the risk of pollution and pollutant load will minimise operational costs and reduce carbon emissions. By increasing our resilience in this way, we expect to reduce the need for ‘end of pipe’ treatment solutions in the long term. Metaldehyde Metaldehyde is a new and serious pollution threat. It is the active ingredient in slug pellets. It is used by farmers to protect crops, and is finding its way into water courses and Section A: Company Strategy 3 April 2009 Page 29 of 54 Three Valleys Water Final Business Plan reservoirs. It cannot be removed by our existing treatment methods. It has been detected at very low levels in water going into supply from treatment works which supply around 57% of our customers. There is no risk to health but water containing it does not comply with EU water regulations. The problem is being dealt with by the Metaldehyde Stewardship Group (MSG) which to seeking to bring about significant reductions in the levels in raw water. Three Valleys’ plan to deal with metaldehyde has two components. First, we will contact potential polluters to encourage better management of the pesticide. Secondly, if the risk to our sources rises to unacceptable levels they will be taken out of service. In the short-term this has been reflected in our headroom assessment but this is not sustainable in the longer term. The threat of metaldehyde is such that it must be eliminated at source. Flooding risk and Security We have reviewed the threat to our operational assets from flooding, as required following the Pitt Review. Approximately one-third of the water that we supply is abstracted from the River Thames and treated at sites on the Thames flood plain. The resilience of our surface water treatment systems is such that the additional investment required to protect against flooding is modest (£3.8 million). We will also improve security against vandalism and other threats. Power outages We are increasingly concerned by the unreliability of electricity supplies. In this current period we have experienced supply failures even at sites with two separate feeds. Furthermore, we are not convinced that the precautions being taken by the electricity companies are adequate to protect their assets from flooding. 30% of our water is produced on the Thames flood plain, and we propose to install on-site standby generation to 10 sites at a cost of £3.1 million. Comparison of our proposed quality programme with AMP4 Table A6.2 below shows the key changes in both activity and cost for the key programme elements for AMP4 and AMP5. Table A6 : 2 Key changes in our non-infrastructure and quality investment programmes Maintenance Non-Infrastructure Drinking water quality (DWI) AMP4 Detn. AMP4 Detn. AMP5 AMP5 activity £ million activity £ million programme 123.4 programme 159.3 4 sites 22.9 programme 17.0 18 sites 8.1 5 sites Security and emergency programme Environment programme 8 sites 45.1 Flood risk n/a 0 30 sites 3.8 Resilience n/a 0 10 sites 3.1 - 168.5 - 256.3 Total Section A: Company Strategy 3 April 2009 Page 30 of 54 Three Valleys Water Final Business Plan Care for the environment Our customers place a high value on water efficiency and reducing climate change. Our commitment is evidenced by our ISO 14001 certification for all of all our abstraction and treatment sites. We also take account of a wide range of social and environmental considerations in formulating our investment decisions for our Final Business Plan. For AMP5 we will continue to assess, manage and reduce the effects of our activities on the environment and to preserve and enhance the biodiversity of our land holdings. Our existing education programme, aimed at current and future customers, will continue to concentrate on water conservation, reducing waste and sustainable development. Corporate responsibility We have a well established programme to manage our corporate responsibility and, in this Plan period, we aim to introduce a number of changes to our processes so that our decision-making is better informed. In particular, we are considering the wider social and environmental benefits when making decisions about our functions and investment decisions. Key processes in our decision making are detailed below. Social and environmental assessment for our DWRMP. This process has helped us consider the wider consequences of our water resources strategy. All options for supply-demand investment will be considered in this context in the future. Economics of supply and demand. The effect on wider social and environmental costs was considered in assessing all the options for managing the supply-demand balance and in assessing the economic level of leakage. Common framework. All investments to maintain and renew our assets now include consideration of social and environmental costs. Cost benefit analysis. We have carried out cost benefit analysis to explore how customer preferences and investment decisions will affect our carbon footprint. Carbon reduction commitment. We have examined the likely implications of the new Climate Change Bill and have considered how we need to change our operations to minimise our carbon footprint. These are reflected in our Plan. All these points and processes are being enshrined into our normal practice. Abstraction Abstracting water affects the natural environment. We believe that extending metering, rather than developing new resources, is less detrimental to the environment. We are working with the EA to identify where we can modify abstraction regimes to improve the water environment. The EA proposes to reduce our abstractions at two sources by a total of 14.8 Ml/d. We have challenged its proposals as we believe they are not cost-beneficial; significant extra costs will be incurred with uncertain benefits to the environment. We have included these changes in our FBP because the EA is able to revoke licences. We plan to continue working with the EA on its programme of AMP5 studies. We estimate the cost to be £7.4 million for 17 studies, including projects to meet the requirements of the Water Framework Directive. We have reservations that some of this work will not Section A: Company Strategy 3 April 2009 Page 31 of 54 Three Valleys Water Final Business Plan represent value for money. Furthermore, we are concerned that certain schemes appear speculative, could affect up to 30% of our resources, and be disproportionate in cost. Carbon emissions and energy use Reducing the amount of water we treat and put into supply will lead to less pumping, lower chemical and electricity usage and lower carbon dioxide emissions. We calculate that our Plan for AMP5 will reduce carbon dioxide emissions by 3,500 tonnes in 2015; or 10% from 2006-07 levels. There will also be consequential reductions in sewage treatment. We are seeking to improve our energy management across the business. The relocation of the staff to new office headquarters in May 2009 from four regional sites will reduce business travel and allow more efficient use of energy in offices. In parallel we have introduced flexible working to reduce home-to-work travel, and are promoting more environmentally-friendly travel arrangements. Our new head office building utilises harvested rainwater. Taps are low flow, sensor controlled, and the shower heads are water efficient. Solar panels on the roof will supply 60% of the hot water. Cooling, heating and ventilation will be provided via a system of chilled beams which keep the air in the office at a set temperature. The building makes maximum use of natural daylight and has energy-efficient lighting controlled by daylight and occupancy. We will pursue opportunities to develop renewable energy although opportunities are limited because of the topographical nature of our area. However, we are exploring ways of achieving higher levels of energy efficiency. When we renew assets, we will seek to improve their wider environmental performance. As we upgrade water treatment facilities, we will substitute gaseous chlorine in favour of safer disinfectants and improve water efficiency in production. Waste materials Our programme of mains renewal and leakage control means that we will have to excavate large volumes of soil. Currently we recycle 53% of excavated materials, 33% more than in 2007-08. We would like to make even greater use of trenchless techniques to reduce the need for excavation, but are often hampered by local circumstances and the congestion of utilities in the ground. Where this is the case, we aim to raise the percentage of excavation waste that is processed and re-used. Section A: Company Strategy 3 April 2009 Page 32 of 54 Three Valleys Water Final Business Plan Minimising disruption to supply Network serviceability Interruptions to supply are caused mainly by burst mains. They result in unplanned interruptions to our customers’ supplies, disrupt traffic, and cause localised flooding and damage property. Our distribution network is more than 14,000 km in length. In our most populated regions, it lies in London Clay that is both aggressive to ferrous pipes which make up the majority of our network, and prone to movement from shrinkage and expansion. The effects of climate change will exacerbate these inherent weaknesses. We strive to improve our responsiveness to these events. Burst frequency is a key indicator of network Serviceability and we regard it as imperative to reduce the rate of bursts. We must replace those mains most likely to fail. There is a clear relationship between the rate of renewal and the certainty of meeting the target number of bursts used to assess Serviceability. In our Draft Business Plan we judged that we needed to be more certain that we would meet the targeted number of bursts and so proposed to renew our mains at the rate of 148 km/yr. This has been a difficult judgement to make and one which has taken up considerable time in the Board’s deliberations on the Plan. However, our modelling shows that a rate of 148 km/yr would give only a small increase in certainty for a relatively large increase in costs. In reality, customers are unlikely to see any material benefit in service unless there is a further, significant increase in renewal activity to above 200 km per annum. We have taken into account the current economic climate, and the fact that we have been running at our higher renewal rate only since 2005. We have concluded therefore that it would be appropriate to continue renewals at a rate of 126 km per annum over the next five years. By the time we prepare for PR14 we will be clear on the consequences of renewing at 126 km per annum and whether this is the correct rate. Trunk mains renewal We have completed extensive surveys of our trunk mains network to assess its condition and performance. At PR04 we justified uplift in trunk main activity but deferred this to allow us to focus on the increased distribution main programme. This change cannot be put off again if we are to maintain the integrity of our vital trunk main network. Our latest assessment shows we need to double the rate of renewal to 25 km every five years in order to prevent the risk of service failure rising beyond current levels. This programme will be targeted to renew specific sections of the network that have been problematical. These projects will be defined outputs. The increase in renewal will reduce the likelihood of major bursts which would otherwise disrupt supplies to large numbers of customers and commercial businesses. This table shows how the mix and cost of infrastructure renewals has changed compared with PR04. The proposed programmes for trunk and distribution main renewal will target renewal on individual mains so as to have the greatest effect on Serviceability, as measured by Ofwat’s Serviceability indicators (burst rate; unplanned interruptions; pressure; and iron in distribution). Comparison of our proposed infrastructure renewal programme with AMP4 Table A6:3 below shows the key changes in both activity and cost for the key programme elements for AMP4 and AMP5. Section A: Company Strategy 3 April 2009 Page 33 of 54 Three Valleys Water Final Business Plan Table A6 : 3 Key changes in infrastructure renewal programme Distribution mains Trunk mains Communication pipes Total AMP4 Det. AMP4 Det. AMP5 AMP5 activity £ million activity £ million 630 km 109.0 630 km 126.1 8 km 7.0 25 km 19.3 23,000 no. 17.0 30,500 no. 26.0 - 133.0 - 171.4 Section A: Company Strategy 3 April 2009 Page 34 of 54 Three Valleys Water Final Business Plan A7 Implementing the Plan Key outputs The objectives outlined in Section A1 are summarised below: • increase customer satisfaction • achieve service performance at ’good’ levels and improve year on year from the 2007-08 base year value • reduce both avoidable contacts and complaints (written and telephone) by 25% between 2009-10 and 2014-15 • complete our seasonal tariff trial • pilot new generation meter technology • develop a metering strategy which will provide new and improved services for customers • increase household meter penetration by a third to 50% by 2015 (and 90% by 2030) • maintain security of supply and a score of 100 • achieve stable Serviceability for both infrastructure and non-infrastructure assets • achieve 100% mean zonal compliance for drinking water quality • address discolouration and compliance risks through investment at four sites • keep leakage at or below the economic level and reduce it by 2Ml/d per annum • provide domestic water supplies to 28,000 new homes • reduce carbon emissions from 2007-08 levels by 3,500 tonnes by 2015. We have a clear rationale for selecting these outputs and timings. We have planned our investments using Common Framework methods and optimisation techniques. Our water quality and resilience investments are based on careful risk assessments. Our cost benefit analysis work, validated by an independent academic expert, demonstrates that the Plan will generate net benefits to our customers, to the environment and society in general. Training and motivating our people We need the right blend of people and contractors with all the necessary skills and professionalism to implement the Plan. We attach great importance to well motivated, skilful and loyal people. In 2009 we will have relocated our administration and engineering teams from the old headquarter buildings of our predecessor companies to a new purpose built site. This will improve communications and business efficiency generally. In the last two years we have introduced a range of initiatives to improve collaborative working, motivation and engagement. These are proving effective as the most recent survey of October 2008 shows: • I feel that my contribution is valued: 69% (up 25% on the prior year) Section A: Company Strategy 3 April 2009 Page 35 of 54 Three Valleys Water Final Business Plan • • • • Management is able to communicate effectively with colleagues: 69% (up 25%) Colleagues are able to communicate effectively to management: 76% (up 23%) I get recognition for doing a good job: 59% (up 20%) I believe that the Company has a clear strategy: 74% (up 19%) It is important that we continue with our current programme and improve the level of engagement even further. Only when this is achieved can the ‘customer experience’ be enhanced to the full. Implementing our capital plan Net capital expenditure needed to achieve our objectives in the five years ahead is £456 million and details of our programme are shown in Table A7:1 below. Our Final Business Plan capital programme proposals are £48 million higher than the AMP4 programme but £71 million lower than our Draft Business Plan. New operating expenditure resulting from our capital investment will amount to £3.6 million by the end of 2015. We will ensure that capital and operating costs are no higher than necessary to achieve our objectives. In assessing our programme we have sought to balance benefit, cost and risk. We have carried out a ‘whole-life’ Cost Benefit (CB) appraisal of our capital programme except where investment is essential to meet regulatory requirements or to maintain the level of serviceability of our assets. 81 projects in our programme have a positive costbenefit or are required to maintain serviceability. We have justified a further 18 projects based on wider non-financial benefits or as being essential to maintain serviceability. Details of our Cost Benefit Analysis (CBA) programme are reflected in Sections C8 (methodology), C5 (outputs) and C4 (metering and leakage) in particular. Section A: Company Strategy 3 April 2009 Page 36 of 54 Three Valleys Water Final Business Plan Table A7 : 1 Comparison of FBP capital expenditure proposals with AMP4 and DBP AMP4 £ million Capital Expenditure Category 2007/8 prices Draft Business Plan Final Business Plan £ million £ million 2007/8 prices 2007/8 prices MI Maintenance Infrastructure 164.1 201.6 194.9 MNI Maintenance Non-Infrastructure 123.4 160.1 159.3 Q Drinking Water Quality 11.8 22.9 Q Security & Emergency 16.4 17.0 Q Environmental Programme 7.2 8.1 S/D Supply Demand Balance 107.3 157.1 68.0 ESL Flood Risk 0 2.3 3.8 ESL Resilience 0 0.0 3.1 Gross Capex 439.9 556.4 477.2 Contributions (31.8) (29.3) (21.5) Net Capex 408.1 527.1 455.7 45.1 The majority of changes from Draft to Final Business Plan reflect our responses to the Capital Incentive Scheme baseline assessment. This is covered in detail in Section B11. The main elements of the capital programme are described below. Maintenance Infrastructure This is the expenditure required to renew underground assets such as trunk mains, distribution mains, and communication pipes. In 2005-10 we have doubled the rate of renewal to 126 km of distribution mains per year. These renewals are targeted to reduce bursts. We believe we are already seeing some benefits from the higher renewal rate and we are expecting to remain within the assessment boundaries for ‘stable’ Serviceability despite the severe upsurge in burst mains during the two prolonged spells of very cold weather in early 2009. We are planning a similar level of activity for the next period. Within the proposed £195 million programme we plan to renew 25 km of trunk mains, 126 km of distribution mains each year and replace 30,500 galvanised iron communication pipes. We have maintained our distribution mains renewal rate for AMP5 but the location of the work poses more challenges compared to AMP4. A higher proportion is in traffic sensitive streets or with high density of services. This limits the amount of cheaper, trench-less work we can do. Despite a rigorous competitive tendering process we are experiencing a sharp increase in contract tender rates for the renewals programme. Renewing 126 km of mains each year would maintain a 95% probability of the burst rate remaining within defined limits for ‘stable’ Serviceability. Furthermore, we would have a 50% probability of achieving the reference level for bursts by 2015. We have considered carefully the benefits of a higher mains renewal rate of 148 km a year. This would increase the confidence of achieving the bursts reference level in 2015. However, as we have only three years of data to assess the benefits of the higher rate of renewals since 2005, there is insufficient evidence to justify changing this now. We will monitor this situation closely during AMP5 and will determine whether a different rate of renewal is warranted at PR14. Section A: Company Strategy 3 April 2009 Page 37 of 54 Three Valleys Water Final Business Plan Maintenance Non-Infrastructure We are proposing investment of £159.3 million for our operational, management and general assets and IT systems. £117.2 million is required to maintain above ground operational assets such as service reservoirs, pumping stations, water treatment works and meters. This proposed investment is based upon sophisticated modelling techniques using detailed reviews and assessments of our assets at component level to predict the economic level of renewal and maintenance. We have looked carefully at this programme to ensure a proper balance is achieved between risk and benefit. Our approach is new and we need to ensure it is robust. We have therefore deferred some of the work suggested by the process until the next quinquennium, by which time we will have tested the efficacy of the technique. We have also deferred some specific projects, such as replacing service reservoirs, in order to limit the effect of our plans on customer bills. £16.4 million is required for management and general assets needed for operations, such as vehicles, offices, depots and laboratories. £25.7 million is required for replacement of key IT systems, including our works management and billing systems to maintain essential serviceability. Supply-demand Supply-demand expenditure includes the resources and investment required to increase the amount of water available for use. It includes our investment in the infrastructure required to connect newly built properties to the existing water supply system. Leakage. Work to produce leakage savings of 2 Ml/d per annum requires expert detection techniques as well as skilled repair crews. In 2009 we have negotiated a new contract covering the maintenance and repair of mains. The form was sufficiently flexible that we can extend the contract for the whole period 2010-2015. Metering. We propose to invest £34 million on the meter installation programme. We will fit meters in an estimated 28,000 new homes, the majority of which will be with automatic meter reading (AMR) devices funded by the developers. The metering policy will be similar to AMP4, but volumes will be lower as a result of the recession. We expect to install 169,000 meters in 2010-15 compared with 201,000 in AMP4. This will increase penetration to 50% by 2015. We will continue with our programme of consumption studies, including our large scale trial of more than 1,500 AMR units in conjunction with a seasonal tariff trial. Other investment. £32 million relates to the costs of connecting new homes and businesses, of which we will recover contribution of £15 million from property developers. We are also proposing to carry out trials of next generation metering technology (NGMT) in developments of new homes. This will help us establish the best combination of systems to meet customers’ future needs and confirm cost-benefits in preparation for a larger programme in succeeding years. In particular we have begun a joint study with Bellway Homes to evaluate the effect of the Code for Sustainable Homes on consumption and NGMT will provide the higher definition meter reading pattern needed to achieve accurate results. The remaining expenditure relates to feasibility and planning studies to determine the need for a new regional reservoir in the upper Thames region. This would regulate the flow in the Thames so that we are able to abstract additional supplies at our intakes at either Iver, Egham, Chertsey or Walton. Section A: Company Strategy 3 April 2009 Page 38 of 54 Three Valleys Water Final Business Plan Drinking Water Quality Our water quality programme is similar in overall scale to that in 2005-10. The average cost per project is higher as the treatment schemes are more complex. The £23 million proposed for 2010-15 is for investment in new and upgraded water treatment facilities at four sites. This will deal with nitrate, cryptosporidium, and manganese. To ensure the manganese scheme is effective, we will need to also remove deposits in the neighbouring pipe network. Security and Resilience Of the £25 million planned expenditure, £17 million is to improve physical security at our operational sites in accordance with Government guidelines. We propose to invest £4 million improving flood defences to ensure continuity of supply in circumstances similar to summer 2007. We plan to spend a further £3 million installing standby generation to increase our resilience to electricity supply failures. Environmental Programme We propose £6 million to carry out detailed environmental studies into the effects of water abstractions on local rivers and biodiversity. The studies will determine whether we should change the volumes or locations at which we abstract water. The supply-demand investment programme includes £1.5 million for a new pipeline in preparation for notified licence reductions in 2015. We will consult the EA to ensure this is the most appropriate solution to local over-abstraction. Over £1 million is proposed to install new screens on main river intakes to protect young fish. Overlap programme Early commitment to the first two years of AMP5 will help to maintain the momentum of our capital programme. We propose overlap arrangements for our security and resilience works, and for the replacement of two service reservoirs. Sustainability Appraisal We recognise the need to develop further our investment and project planning to reflect the wider goals as identified within our own Strategic Direction Statement and the Government’s Sustainable Development Principles. We have been reporting against the Business in the Community (BiTC) Indices of Corporate and Environmental Engagement since their inception in the early 2000s. We incorporate this integrated approach into our activities and can demonstrate how we seek balance the conflicting needs of stakeholders. We plan to extend this framework to our investment planning. Corporate and Social Responsibility Our Corporate Responsibility Statement of Policy and Principles states that: Our Business – In the interests of our stakeholders we will conduct our activities as efficiently, effectively, ethically and profitably as possible as a long term goal. Our Workplace – We will act in a manner consistent with maintaining the welfare and interests of our people and where possible we will seek to make a positive contribution to them. Section A: Company Strategy 3 April 2009 Page 39 of 54 Three Valleys Water Final Business Plan Our Community – We will act to maintain assets to ensure that high standards of service and benefit to stakeholders can be ensured both now and in the longer term. Our Environment – We will seek to contain any negative environmental effects of our activities to the practicable minimum. We are developing a methodology which will enable us to assess our projects and investments in the light of these guiding principles. Our assessments will allow us to: • recognise the value of a project in environmental, social and financial terms • identify how changes in the scope of a project may affect other stakeholders • be alive to stakeholders changing interests • demonstrate to others how and where additional value may be added to investments • identify risks and opportunities • further develop our corporate responsibility principles by showing their clear application to investments • show how conflicting pressures affect decision making • evaluate success against a broader range of criteria • influence future decision making. We believe the use of cost benefit analysis, carbon accounting and other social and environmental assessment tools will help responsible decision making. Section A: Company Strategy 3 April 2009 Page 40 of 54 Three Valleys Water Final Business Plan A8 Financial Projections: income, opex and financing the Plan Overview of the drivers of K We have used Ofwat’s Reservoir model (Version 2.9) to provide the financial projections, including price limits, in this Final Business Plan (FBP). The modelled price increase profiles are as follows: Table A8 : 1 2009/10 prices Av. Bill K Forecast of average household bill and K factors for AMP5 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 157.04 - 176.59 12.9 175.91 -0.4 174.46 -0.5 172.06 -1.0 169.73 -0.9 Av. AMP5 173.75 2.0 There are three main drivers of the proposed changes in K. Broadly these are operating expenditure (which accounts for 2/5ths), current cost depreciation (CCD) (1/5th) and the loss of income (1/3rd). Of the opex increase, 1/3rd is due to the rebasing required to the start of the next AMP period. This represents a ‘catch-up’ of the gap between current expenditure and that assumed at the last determination. A further half of the opex related increase is attributable to costs beyond our direct control, notably pensions, rates and abstraction charges. The final 1/6th relates to new proposed expenditure. As part of the business planning process we have completed a comprehensive revaluation of all our assets, to assess their condition, performance and remaining useful lives. This has led to an increase in the CCD charge which accounts for approximately 1/5th of the increase in K. The third main category affecting K is the loss of income arising from the recession. This amounts to 1/3rd. Our average household bill will rise in the first year by £19.55 but will then fall each year so that in 2014/15 the average bill will be only £12.69 higher than 2009/10 We would have preferred to profile the price increase so that the first year K would have been 11.6% with K zero in each of the following years but Reservoir would not support this change. Section A: Company Strategy 3 April 2009 Page 41 of 54 Three Valleys Water Final Business Plan The various influences on K are shown below and are explained in more detail thereafter: Table A8 : 2 Key financial factors influencing K PR04 Detn. 2009/10 £m 07/08p FBP 2010/11 £m 07/08p K% Operating Expenditure 104.0 115.3 5.1% Infrastructure Renewals Charge 32.0 35.3 1.5% Current Cost Depreciation 35.9 41.9 2.7% Tax 13.7 13.7 -0.0% Return on Capital 45.6 45.1 -0.2% Required Revenue 231.1 251.3 - Base Revenue - 223.7 3.3% Base Year Revenue Growth - -1.3 0.6% K Factor % 12.9% Income Our Plan seeks to recover only the revenues necessary to enable our appointed business to carry out its functions. Our average required revenue forecast for AMP5 is £249.1 million a year. The recession is having a marked effect on the regional economy and our commercial customer base in particular. Demand has reduced significantly during 2008 and we have reviewed our forecast of regional growth and commercial activity. This indicates a further long term reduction in demand. The very latest Treasury forecasts have been used to assess the depth and duration of the recession and the effects on commercial demand in particular. Household consumption has also begun to fall and evidence suggests this will continue as unemployment and personal debt levels grow. The main changes in our demand forecasts are shown in table A8:3 below. Table A8 : 3 Changes in Total Demand Forecasts for 2010-15 Total demand for 2010-15 as forecast at PR04 Total demand for 2010-15 as forecast at DBP Total demand for 2010-15 as forecast at FBP million m3 million m3 million m3 Measured billed 800 816 661 -138 Unmeasured billed 577 522 650 73 Total demand 1377 1338 1311 -65 Difference in total demand FBP-PR04 million m3 We have reduced our demand forecast from the draft resulting in lower income assumptions. The total effect on K of reduced income as a result of the recession is 3.9%. Operating expenditure Section A: Company Strategy 3 April 2009 Page 42 of 54 Three Valleys Water Final Business Plan Base operating expenditure in 2007-08 was £108.3 million, higher than the £105.9 million assumed and funded at PR04. The material increases from the PR04 determination were power, bad debt, abstraction licences, insurance, metered account maintenance and production chemicals. Whilst we have realised efficiency savings in many areas since 2002-03, they have been offset by these costs. Energy costs, up 70% in real terms since 2002-03 and bad debt, up 130%, have alone added £10 million to operating costs in five years. Roughly one-third of the contribution of opex to our first year K reflects the rebasing to actual costs. Another third of the opex contribution to K comes from rising pension costs. Our pension funds have been adversely affected by the recession and mortality rates are higher in our area, increasing pension costs further. The result is that pension costs have risen by £5 million from the 2007-08 level. We also face increases in costs originating from the Government and its agencies, such as business rates, abstraction charges and the carbon reduction commitment. Business rates are predicted to increase by £2.4 million to over £12 million in 2010-11, based on the Valuation Office’s revised assessment. The exact increase will be known in advance of the Final Determination. Three Valleys Water was formed in 1994 with the merger of three companies, and in 2000 merged with a fourth company. Throughout this time we have operated from the offices of the founding companies. In 2009 we are relocating to a new site, which we will lease, thus incurring a net opex charge of £1 million per annum. Section B3 of the Plan assesses the cost benefit of the relocation, which we deem to be positive. Customers will also benefit when the old buildings are sold. By 2010-11 we predict that operating expenditure will be £115.3 million, up £7 million from 2007-08. By 2014-15 this will have fallen to £112.9 million as a result of efficiencies. The increase in operating costs in 2010/11 compared to 2009/10 corresponds to an average increase of 5% per household, adding around £8 to average bills. Thereafter, costs over the period of AMP5 will remain relatively static, the total forecast for 2010-2015 being £572 million. We will, however, strive to improve our efficiency in terms of both our capital and operating expenditure. We have closely analysed our operating costs and compared ourselves with other companies in the industry. We have participated in an industry-wide study carried out by economics consultants and have commissioned our own efficiency investigations. When all relevant factors are taken into account, our operating expenditures are in line with the best performing companies. Nevertheless, we believe opportunities for efficiency savings remain and we are working vigorously to realise them. We carried out an analysis of our costs identifying savings and improvements in reorganising how we work. Our move to a new headquarters in May 2009 will bring not only environmental benefits, but help realise efficiencies in communications and travel costs. The establishment of a ‘shared service’ company will create new opportunities for further efficiencies. And we expect our efforts in customer services, e.g. to reduce repeat calls and complaints, to realise savings. Following these initiatives, we expect efficiencies to offset the increasing costs of council tax, abstraction charges and pensions. We have set a cumulative efficiency target of 1.2% per annum for operating expenditure for AMP5. This would reduce our costs by nearly 6% by 2015, a total of £21 million in AMP5 with a consequential reduction in bills. Section A: Company Strategy 3 April 2009 Page 43 of 54 Three Valleys Water Final Business Plan Infrastructure renewals charge The infrastructure renewals charge (IRC) is an accounting charge which pays for the investment needed to renew our underground network of pipes. We have set the charge to recover our forecast expenditure during the next 15 years and to unwind the infrastructure renewals prepayment as opposed to reflecting 5 years back and 10 years forward previously. This forward looking approach is in line with price setting methodology for companies setting their IRC on a medium term basis and sees an increase to £35.3 million for the first year of AMP5 against the PR04 determination of £32 million and represents 1.5% of the first year K. Current cost depreciation Distinct from previous reviews, when assets were sampled, we have carried out a comprehensive survey and revaluation of our entire asset stock. We have identified over 35,000 renewable items, and have assessed their condition, performance and remaining useful lives. The thoroughness of this approach gives us a high degree of confidence in the valuation of our assets and the current cost depreciation (CCD) charge. We have applied consistent asset lives to calculate both the base depreciation charges and our forecast of maintenance non-infrastructure expenditure. We are satisfied that current cost depreciation in present value terms is broadly equivalent to actual and forecast capital expenditure on asset renewal over the long term. So there is no case for an adjustment to current cost depreciation Return on capital Our Plan proposes a rate of return necessary to attract investment and retain investor confidence. We have taken advice from economic consultants, NERA and conclude that our weighted average cost of capital is 6.00%. The components are summarised below. Table A8 : 4 Weighted average cost of capital Cost of capital % Key points Risk-free rate 2.50 NERA assessed, Dec 08 Debt premium 2.50 Latest forecasts from our banking advisors Pre-tax cost of debt 5.00 Output from other calculated inputs Equity risk premium 5.40 NERA mid point assessment, Dec 08 Equity beta 0.67 NERA’s beta adjusted for our gearing Cost of equity 6.10 Output from other calculated inputs Tax Rate 28% Government quoted tax rate Gearing 40% Board reflection of gearing at end of AMP period Small company premium on cost of debt 0.10 NERA assessment, Dec 08 Small company premium on cost of equity 0.50 Our assessment explained below Weighted Average Cost of Capital 6.00 Output from other calculated inputs Our assessment includes a small company premium of about 0.33%. We believe a small company premium remains appropriate for the following reasons: • we understand the derivation of Regulatory Capital Values (RCV’s) within the industry and the important part played by the small company premium in their Section A: Company Strategy 3 April 2009 Page 44 of 54 Three Valleys Water Final Business Plan calculation for water only companies (WOC’s). Water and Sewerage Companies (WASC’s) were valued by reference to their market capitalisation immediately post privatisation. Good evidence such as this was unavailable for WOC’s so their RCV’s were set at a proportion of the indicative values used in the first price limit calculations. These represented comparable values to the WASC’s. Clearly, that proportion of indicative value, being a proxy for market value, was influenced by the existence of a small company premium. It would transgress all principles of good regulation to disrespect, retrospectively the fundamental basis of valuation for WOC’s by failing to preserve the existence of a small company premium. • capital market evidence shows equity investors continue to differentiate between companies by demanding higher average returns from smaller companies • evidence shows that annual rates of return for water-only companies are far more variable than for water and sewerage companies. We conclude that a risk premium remains appropriate because the returns from wateronly companies are more risky. Dividends We assume dividend payments equal to a 6.6% real rate of return on the RCV value of equity. This is equal to our valuation of the cost of equity, including the small company premium. During the planning period we aim to achieve a current cost dividend cover ratio of at least 1.0. This will ensure that the management of economic risks is rewarded without reducing the real value of the financial capital of the Company. Interest Our Plan assumes that the interest rate on new debt is equal to the cost of debt in our cost of capital calculation. Interest on our existing debt is calculated as the actual cost of debt on those borrowings. Financing the plan In order to finance the capital expenditure programme proposed in our Final Business Plan we will need to obtain additional finance of £50 million. We have access to sufficient debt finance to fund our planned activities at the cost of capital we propose provided there is no further worsening of credit market conditions. We will seek to finance new investment through efficient sources of debt finance. This requires long-term commitment and upholding our ‘investment grade’ status with current and future debt providers. There is severe pressure in the current market demonstrated by the downgrading of current ratings. Our analysis suggests that we will be able to maintain credit ratings outputs consistent with good quality investment grade, albeit below current ratings. This is dependent upon attaining a rate of return equal to the cost of capital, achieving the cash flows we have modelled, and maintaining the current level of gearing. The critical values for financial indicators are higher than for water and sewerage companies because credit rating agencies differentiate between water-only companies and water and sewerage companies. However our financial projections are exposed to the following risks which we believe should be subject to notified item protection: Section A: Company Strategy 3 April 2009 Page 45 of 54 Three Valleys Water Final Business Plan • The notified item for bad debts should be continued as bad debts continue to increase. It is likely they could worsen still further if the current economic downturn is protracted. • Traffic Management Act (TMA) charges are uncertain and will not be reflected in base year (2008-09) reported Opex. While we will respond to the incentives in the TMA by finding better ways of working on public highways, actual costs are likely to be significantly higher than those in the base year. • Adoption of FRED 29, an international financial reporting standard, which will require us to treat infrastructure maintenance investment within depreciation rather than as an expense during the year. This will increase the amount of tax payable well beyond the levels allowable under Ofwat’s current approach to setting allowed tax. • We operate in a designated water stressed area and our abstraction licences and those of our neighbours are at risk of variation and revocation. Therefore we are exposed to abstraction charge risks. Our Final Business Plan assumes the continuation of the substantial effect clause, and that the materiality thresholds for individual components for interim determination remain at 1%. We have dropped from the FBP the notified item relating to optant metering included in AMP4 as we believe the circumstances of the inclusion have now changed and the risk has now been mitigated. Gearing, Taxation and allowed rate of return We have set gearing at 40% and tax at 28%. This does not match Ofwat’s proposed approach to assume a gearing level of around 55%, and fund the corporation tax arising from this assumption. Were the proposal to be implemented, we forecast that the resultant price limit would under-fund our tax charge by c.£4 million a year. From discussion with Ofwat we understand that the rationale is to remove the advantage that would be gained by an appointee deliberately switching gearing to the parent company, to inflate the tax charge and hence price units. Whilst sympathetic to the reasoning for the proposed change, it unduly penalises us and our parent even though we have never exploited the mechanism. For avoidance of doubt, our current level of debt is £220 million (or 33% net debt to RAV) whereas our parent has no debt and in excess of £25 million in cash. It is for the Appointee’s Board to determine the most efficient financing structure to meet their circumstances and the interests of customers and shareholders within the price setting package. This is a principle to which our Board attaches great importance. It considers the Company’s actual gearing and projected level of gearing, of 40%, are appropriate, and in the best interests of the Company. The proposed change in approach provides an onerous financial disincentive for the Company to maintain its desired level of gearing, and encourages an increase in gearing at a time when additional debt is difficult and expensive to access, and when the national economy is suffering from excessive over-leveraging. Furthermore if we decided to increase gearing beyond 45% net debt to RAV we would require an expensive balance sheet restructure due to the Company’s level of historic cost reserves. We strongly believe it would be inappropriate for Ofwat to implement this change during the current global financial crisis, a crisis provoked by excessive leverage by corporates as well as households. Section A: Company Strategy 3 April 2009 Page 46 of 54 Three Valleys Water Final Business Plan A 40% net debt to RAV gearing level has been the basis for our assumption for the allowed Weighted Average Cost of Capital (WACC) as well as the calculation for Corporation Tax within the Reservoir Model. We note that a 40% gearing level within the WACC provides a lower rate of return than the WACC at levels of 55% or 60% which are promoted by NERA for the industry. This reduction arises as a result of the lower levered beta required at lower levels of gearing which reduces the return on equity in the WACC calculation. We do not believe our proposal will lead to any outperformance of corporation tax. Companies have outperformed in the past when they have geared up subsequent to a price review. For clarity, we support Ofwat’s proposal in PR09 to claw back the tax benefits resulting from a company gearing up as a result of capital restructuring during the forthcoming price review period. We are prepared to commit to a voluntary abatement of K in these circumstances in order that no tax outperformance can be gained. We are requesting a relatively narrow amendment to Ofwat’s PR09 proposals and one that would affect very few water companies. Section A: Company Strategy 3 April 2009 Page 47 of 54 Three Valleys Water Final Business Plan Section A: Company Strategy 3 April 2009 Page 48 of 54 Three Valleys Water Final Business Plan A9 Board Endorsement Introduction This section details how as the Board of Three Valleys Water we have ensured our Final Business Plan (FBP) is of high quality, represents value for money for our customers, and that it provides an appropriate return on investment for our shareholders. The Board comprises executive and non-executive directors with a range of expert knowledge and experience from within and outside of the water industry. Among us, we also have strong local links and extensive involvement with community activities. We have had oversight of the process and methods used in formulating the elements of the Plan. We have both guided and critically challenged those responsible for developing the strategies and for their implementation. We have also consulted with our Reporter, Financial Auditor, Internal Audit and Quality Assurance Teams, and staff responsible for developing the various components of the Plan, to ensure the adequacy of: • the processes which have generated the figures so that they produce appropriate results • the assumptions and judgements which underlie the data • the resources that we will need to give effect to the Plan • the balance between the price which customers will be asked to pay and the risks of not properly carrying out our functions. Based on the activities described and reasons given below, we confirm we have applied sufficient systems of control to meet our obligations for the provision of Final Business Plan information to Ofwat. Involvement of the Board from SDS to FBP Our Strategic Direction Statement (SDS) set out our high level perspectives on the issues material to business plans in the period to 2035. These were informed by the outcome of stakeholder research about our customers’ and other stakeholders’ priorities. We have been informed about feedback from Ofwat and other stakeholders on the SDS, Draft Business Plan (DBP) and Draft Water Resources Management Plan (DWRMP). We have reviewed successive editions of the FBP and have considered how the FBP proposals advance the objectives in the SDS. We believe that this FBP takes into account all current and prospective material issues and is consistent with the overall long term strategy set out in the SDS. Where there are inconsistencies between our SDS and the DBP on the one hand and the FBP on the other, we have identified them and provided explanations. We have had extensive board discussions on the Plan during the past few months (as detailed below). These have focused on the key issues requiring review in the light of new data and analysis since the DBP was submitted and the implications for prices, in particular: • • the extent and probability of the supply-demand balance in the short and medium term, and the risks of not being able to maintain supplies in very dry periods the approach to and pace of metering in the light of new information on the supply demand balance and analysis of costs and benefits Section A: Company Strategy 3 April 2009 Page 49 of 54 Three Valleys Water Final Business Plan • • • • the opportunities for new generation metering technology and the pace at which the company should move towards it the pace of network and trunk mains renewal in order to have reasonable certainty of being able to maintain stable Serviceability as defined by Ofwat the extent of unavoidable price pressures questions relating to finance and financeability. In total, non-executive directors have spent have spent considerable time on the preparation of the Plan, as indicated by the processes described below, quite apart from the time spent by executive directors. We are satisfied that we have submitted an integrated plan. We have considered: the options for capital expenditure the interdependencies between planned activities and outputs expected wider benefits of policies and investments how the different options affect risk and the prices that customers pay We have taken into account the DWRMP, the DBP and water quality submission to the Drinking Water Inspectorate. We have paid particular attention to the effect of price increases on customers in the context of the current recession and have carefully considered the balance between the need for investment and the effect that higher costs would have on customers’ bills. Wherever possible, we have taken a prudent approach from the customer viewpoint. Process for completing the business plan The Final Business Plan has been developed as a formal project and the various steps are described below. We agreed the process in advance and made specific provision for our involvement throughout. Project team The Operations Director had Board level accountability for producing the Final Business Plan and led a Project Team that comprised a Project Manager, key members of the Regulation Team, and technical specialists including internal audit and quality assurance personnel. Project executive governance The project was supervised by the PR09 Project Group (PG) chaired by the Operations Director. This comprised senior managers of the company, including the Managing Director and other Executive Directors. It approved allocation of work to contributors and monitored and managed project outcomes, resources and project risks. The group was authorised to take actions needed to ensure that the objectives of the project were met. The Executive Management Committee, a subcommittee of the Board, oversaw the day to day progress of the project and received monthly reports from the PR09 PG. Project management The PR09 PG adopted sound project management practices. It reviewed the work of contributors and reached planning decisions on significant strategies, methodologies and the content of the FBP so that recommendations could be made to us. The PG meetings were programmed to be able to take into account the results of a number of ‘director surgeries’ at which non-executive directors had opportunity to review, explore and challenge contributors’ work. Section A: Company Strategy 3 April 2009 Page 50 of 54 Three Valleys Water Final Business Plan We insisted that particular attention was given to implementing a comprehensive system of quality control, building on the well established procedures for the June Return. The Internal Audit team was responsible for providing checks on whether the underlying data used for the FBP was reliable, accurate and complete. The Quality Assurance team was responsible for checking that the work was subject to quality procedures and that these were being complied with. A quality assurance process was designed specifically for developing the FBP. Plans and data have been prepared in accordance with this process that include: Internal audit and quality assurance • • • • documented procedures identification of risks controls to manage risk verification that procedures were being followed and controls applied • monitoring and remedial action for any non-compliance • internal Audit and Quality Assurance reporting to the Audit Committee • non-executive Board member challenge meetings. The majority of FBP contributors are also involved in the production of June Returns. They have therefore all had training to reinforce the Company’s expected standards for information provision and legal and regulatory requirements. The training also covered our ethics and whistle-blowing policies. This informed contributors about what to do should they have any concerns about regulatory information. The audit proposals were approved at the Audit Committee on 25 November 2008. The Head of Internal Audit was required to report the outcome of Internal Audit and Quality Assurance checks directly to the Audit Committee and Board. Section Lead Managers (SLMs) were appointed to be responsible for key elements of the Plan, to ensure the quality of our argument and that the business case was made in respect of each element. They challenged and reviewed outcomes from originating teams. Responsibility for completing tables and commentaries was allocated to contributors according to their roles and responsibilities. Originators Responsibility were responsible for presenting their work to the Reporter, Financial for outputs Auditors and the Internal Audit and QA teams. They were also and audit responsible for resolving any audit queries, for example by providing further evidence or information. For water quality, we set up an expert team to develop and review projects on the basis of the Company’s approach and methodology for risk assessment and drinking water safety plans. Verification of compliance SLMs were responsible for ensuring key elements of the FBP were produced on time and for reviewing the information produced to verify that: • it was produced in accordance with Ofwat’s guidance Section A: Company Strategy 3 April 2009 Page 51 of 54 Three Valleys Water Final Business Plan • • it was reliable, accurate and complete material assumptions and judgements made in preparation of the information were exposed in the table commentaries. There was a formal system of sign-off under which each SLM, or relevant senior manager of a contributor, was required to file a verification statement confirming this. Business plan production The Project Team was responsible for producing the draft document and completing data tables in the information capture system. Access was limited to a few individuals to retain control over the document and the information that was entered. The non-executive directors participated in a number of workshops and discussions on key aspects of the Plan outside of Board Meetings. They reviewed the DBP and provided comments, input and advice to the project group in formulating policy proposals for consideration by the full Board. In this way, the Board had the opportunity to identify strengths and weaknesses in the DBP and were instrumental in shaping preparations for the FBP. In particular, we were concerned that the DBP contained errors and the overall quality of some of the document sections did not satisfactorily convey the quality of the work carried out. Board guidance following the Draft Business Plan Key decisions on the strategy for the FBP such as metering, infrastructure investment and risk, were discussed with, and examined by us at each step. We critically evaluated and challenged proposals where we considered they were not adequately justified. We were particularly concerned that: • we should have enough water available to meet demand in a dry year • metering was carried out to maximise security of supply; and in an economical and effective manner • leakage reduction performance should be maintained • bulk supply imports reflected only a low risk of being curtailed by the originating company when they are in supply difficulties • the rate of mains renewals should be adequate to meet the defined target boundaries for ‘stable’ Serviceability. We approved and monitored action plans to ensure our concerns were resolved. Executive review and challenge Executive Directors reviewed the detailed work and projections made at PR09 PG meetings and at a series of workshops with our non-executive directors. They critically evaluated and challenged all strategies. They closely monitored the execution of the FBP programme. Executive Directors also reviewed the conclusions of all elements of work contributing to the FBP and required SLM’s to validate and justify their proposals. The Executive Directors meticulously examined the tables and draft commentaries regularly until they were satisfied all their concerns were resolved. On the basis of this work, the executive directors were able to advise the Board as a whole that the information Section A: Company Strategy 3 April 2009 Page 52 of 54 Three Valleys Water Final Business Plan meets the Company’s expected standards for information provision as well as legal and regulatory requirements. The key elements of the FBP strategy were discussed at Board meetings on 23 September and 2 December 2008. The Board scrutinised specific aspects of the Plan at a special Board meeting on 9th February 2009, dedicated to review the Final Business Plan, and challenged specific aspects of it. In particular, it reviewed the reliability and prudence of estimates of the supply/demand balance, the costbenefit cases for metering and leakage reduction, and the rate of mains renewals. We were concerned whether the FBP provides : FBP strategic review Document review the highest rate of metering justified by the cost-benefit approach to ensure that we have sufficient water to meet demand at all times a rate of mains renewal which should be around 1% to ensure stable serviceability continuing leakage reductions investment in above ground assets that ensures ‘stable’ Serviceability. To these ends, we agreed: • that a good wider benefits case was made for continuing the existing demand management strategy (although with a lower rate of metering for the time being) plus further leakage reductions • that 126km of mains re-laid each year would mean a continuing 95% probability of the burst rate remaining within defined limits for ‘stable’ Serviceability. • that re-laying 126 km of mains per year would have a 50% probability or achieving the reference level for bursts by 2015 compared to 60% for 148 km per year. Customers would not be able to distinguish any difference in the level of service in the time frame and the lower rate would reduce bills • that the margin of ‘headroom’ should be sufficient to protect customers from the twin risks of pollutants and bulk supplies being unilaterally suspended in dry conditions • that the approach taken to assess the performance and renewal strategy for our above ground assets was reliable. The Board has reviewed successive editions of the Plan and commentaries. It received a first draft of the FBP for review on 30 January 2009. Comments in workshops leading up to the Board Meeting on 9th February, which had the sole purpose of responding to the first draft, were taken into account. Subsequently, the Board received the second draft of the FBP in advance of the Board Meeting on the 12th March. Again, we critically evaluated and challenged the proposals before and at the meeting and a number of amendments were made. Section A: Company Strategy 3 April 2009 Page 53 of 54 Three Valleys Water Final Business Plan The Board received reports on internal audit procedures to seek to satisfy ourselves of the reliability, accuracy and completeness of the FBP. Board engagement with the Reporter and Auditor We have received reports from the Reporter, Financial Auditor and our Internal Audit and Quality Assurance teams. The Reporter and Financial Auditor attended the meetings on 9 February and 12 March to answer questions on their work in reviewing the FBP. They also attended the Audit Committee meeting on 4 March. The Audit Committee has received reports from the Reporter, Financial Auditor and our Internal Audit (IA) and Quality Assurance (QA) teams about their work on the FBP and the quality of the information provided to support the proposed strategy. The Reporter confirmed his overall view that the Plan was of ‘good quality’. The Head of Internal Audit presented her report and confirmed that overall the Plan was reliable, accurate and complete. Queries had been addressed by the contributors to their satisfaction and they had no reason to doubt that the remaining information required would be provided. Board endorsement of the FBP We approved the FBP as a whole at our meeting on 12 March 2009 subject to resolution of a small number of then outstanding matters. These matters were subsequently resolved to our satisfaction, at a Board sub-committee held on 1st April 2009 Directors’ statement In the light of and as evidenced by the above description of what we have done, each director confirms that: • So far as we are aware there is no audit information needed by the Company’s Auditor or the Reporter to prepare their respective reports on the FBP of which the Auditor, or as the case may be, the Reporter is unaware. • To the extent required by our duty to exercise due care, skill and diligence, we have made enquiries of our fellow directors, the Company’s Auditor and the Reporter so as to make ourselves aware of the information needed by the Auditor and Reporter for that purpose and to establish that the Auditor and Reporter are aware of such information. Chairman Managing Director Section A: Company Strategy 3 April 2009 Page 54 of 54 Model FBP2009-ICS Final Business Plan 2009 Table A1 Three Valleys Water plc Price limits, bills, water sales and supply/demand balance AMP4 2007-08 Line description 2008-09 AMP5 2010-11 2009-10 2011-12 2012-13 2013-14 2014-15 Units A 1 2 3 4 5 Price limits & infrastructure charge limit Proposed price limit "K" (including U) Water service indicative "K" Sewerage service indicative "K" Proposed infrastructure charge limit - water service Proposed infrastructure charge limit - sewerage service nr nr nr £ £ 6 RPI - year by year assumption % 3.87% 4.28% 3.00% B 7 8 9 Projected household bills - water service Typical unmeasured h'hold bill (base yr avg chg) - real terms Typical measured h'hold bill (base yr avg chg) - real terms Average h'hold bills - real terms £ £ £ 156.02 133.25 148.61 156.05 131.68 148.92 10 Average h'hold bills - nominal terms £ 148.61 C 11 12 13 Projected household bills - sewerage service Typical unmeasured h’hold bill (base yr avg chg) – real terms Typical measured h’hold bill (base yr avg chg) – real terms Average h'hold bills - real terms £ £ £ 14 Average h'hold bills - nominal terms £ D 15 16 17 18 19 20 Water sales & supply/demand balance Billed water delivered Ml/d Total volume of sewage collected Ml/d Total water available for use baseline (dry year annual average) Ml/d Distribution input (dry year annual average) Ml/d Total leakage Ml/d Total water savings achieved or assumed from company's water efficiency strategy Ml/d 0.0 1.19 0.0 -0.58 0.0 0.4 -0.4 -0.5 -1.0 -0.9 2.50% 2.50% 2.50% 2.50% 2.50% 156.72 132.10 149.47 178.37 145.49 168.08 178.45 144.17 167.43 177.91 143.17 166.05 176.46 141.57 163.77 174.77 140.47 161.55 155.28 160.54 185.05 188.94 192.07 194.17 196.32 735.21 731.23 721.95 718.98 718.60 718.70 717.57 716.47 980.37 900.80 141.78 0.10 988.94 900.82 141.00 0.10 1,037.72 890.58 140.00 0.40 1,035.98 888.58 183.00 0.00 1,034.97 889.29 181.00 0.00 1,033.96 890.69 179.00 0.00 1,032.95 891.04 177.00 0.00 1,031.94 891.75 175.00 0.00 276.81 12.9 276.81 Model FBP2009-ICS Final Business Plan 2009 Table A2 Three Valleys Water plc Water service - Current performance & planned outputs Level of performance 2002-03 2007-08 Line description Units A 1 2 3 4 5 6 7 8 9 Service performance DG2 properties at risk of receiving low pressure DG3 Supply interruptions (overall performance score) DG6 % billing contacts dealt with within 5 days DG7 % written complaints dealt with within 10 days DG8 % metered customer’s receiving bill based on a meter reading DG9 % calls abandoned DG9 % calls receiving engaged tone Security of supply index (dry year annual average planned levels of service) Security of supply index (critical index) nr nr % % % % % nr nr B 10 11 12 13 Quality & environmental compliance % distribution input covered by section 19 undertakings at water treatment works % % distribution input not affected by section 19 undertakings or temporary relaxations or % Authorised Departures 99.740% % of properties in water supply zones affected by section 19 undertakings in distribution%or Authorised Departures % mean zonal compliance with drinking water regulations % C 14 15 Serviceability to customers (maintaining asset systems fit for purpose) Below ground assets assessment - infrastructure pipelines Surface assets assessment (non-infrastructure) Text Text D 16 17 Carbon Accounting Carbon emissions' produced in providing the service in 2014-15 Other GHG emissions ( as CO2e) produced in providing the service in 2014-15 ktonnes/yr ktonnes/yr 242 0.17 98.2% 99.5% 98.9% 65 STABLE STABLE Level of Level of Level of performance performance performance by 2009-10 by 2014-15 by 2019-20 106 0.36 99.2% 99.6% 99.6% 9.2% 0.0% 100 99 250 0.17 99.8% 100.0% 99.8% 5.0% 0.0% 100 100 2.541% 97.459% 0.000% 99.98% 0.000% 100.000% 0.000% 99.96% MARGINAL STABLE STABLE STABLE 114.822 0 111.652 0 STABLE STABLE Model FBP2009-ICS Final Business Plan 2009 Table A4 Three Valleys Water plc Water service - Key activity projections Activity in Activity in AMP5 period AMP5 period Total planned activity in relating to relating to base service enhancements AMP5 period Line description Units A 1 2 3 Key activity projections - water resources Length of raw water aqueducts refurbished Work on dams & impounding reservoirs Capital investment in aqueducts, dams & impounding reservoirs km nr £m 0.0 0 0.003 0.0 1 1.080 0.0 1 1.083 B 4 5 6 Key activity projections - water treatment Number of refurbished or new treatment works Ml/day of refurbished or new treatment works Capital investment in refurbished or new treatment works nr Ml/d £m 9 734.90 32.893 7 403.00 15.909 C 7 8 9 10 11 12 13 14 15 Key activity projections - water distribution Length of mains renewed km 655.1 Length of mains relined km 0.0 Length of new mains km 5.4 Number of refurbished or new district meters & pressure control valves nr 435 Capital investment in underground water distribution activity (incl investment in meters reported £m in Block E of220.307 this table) Number of refurbished or new pumping stations nr 16 Capital investment in refurbished or new pumping stations £m 34.032 Number of refurbished or new service reservoirs nr 4 Capital investment in refurbished or new service reservoirs £m 12.148 D 16 17 18 Key activity projections - management & general Offices, labs, depots, workshops Capital investment in offices, labs, depots, workshops and vehicles Capital investment in instrumentation, control and automation (ICA), telemetry & computers m² £m £m E 19 20 21 22 Key activity projections - metering performance Number of household meters renewed Optional meters: households Selective meters: households Percentage of households metered (at the end of the period) nr nr nr % F 23 Total - water service Total capital investment in the water service £m 0.0 5.656 49.186 354.225 Profile of activity Total planned activity in AMP6 period S S S 0.0 0 0.040 16 1,137.90 48.802 P*3 P*3 P*3 13 764.25 42.694 0.0 0 147.6 0 75.330 6 13.139 0 0.499 655.1 0 153.0 435 295.637 22 47.171 4 12.647 S S S S R P*3 P*3 P*2 P*2 648.1 0 300.8 479 336.322 22 56.401 6 23.239 0.0 9.419 7.557 0.0 15.074 56.744 S P*4 P*2 1,200.0 17.122 40.458 48,041 50,000 87,750 50% R F R R 74,648 45,059 152,570 68% 122.934 477.158 516.276 Three Valleys Water Final Business Plan Table A4 – Key activity projections The figures entered for the Total Planned Activity in AMP5 Period are a combination of forecasts of expenditure and specific scheme appraisals from maintenance, supply/demand and service enhancement programmes etc. Regarding maintenance, non–infrastructure data was largely obtained from the capital maintenance planning and optimisation tool, CMPT. A cost breakdown of activity per site was obtained and together with the investments for the base service projects, a calculation of the cost per site for the regulatory categories water resources, water treatment, water distribution and management and general was made. The sum of the capital investment from lines 3, 6, 11, 13 , 15, 17 and 18 reported in line 23 is consistent with total investment proposed for AMP5 and AMP6 as given in Tables B3 : 5 (base infrastructure), B3 : 6 (base non-infrastructure), B4 : 3 (quality/ environmental/ SEMD enhancements), B5 : 2 (supply-demand balance) and B6 : 3 (enhanced service levels). Block A – Water resources Line 1 From our capital maintenance planning and optimisation process, there are no substantive maintenance non infrastructure base and enhancement activities planned on raw water aqueducts. As there are no substantive maintenance non infrastructure base or enhancement activities on raw water aqueducts, the profile is reflected as stable. Line 2 There are no substantive capital investment projects planned for dams and impounding reservoirs in AMP5 for base service levels. The enhancement activity reported in AMP5 relates to the regional resource studies associated with the proposed Abingdon Reservoir (new) and Grafham Reservoir (expansion) schemes. Line 3 There are no substantive capital investment projects planned for AMP5 for maintenance non infrastructure base activities on raw water aqueducts or dams and impounding reservoirs. The AMP5 enhancement investment relates to the Regional Resource Studies required for the Abingdon and Grafham schemes. The overall cost has been split equally across the five years in AMP5; As a result, the profile is reflected as stable. There are also minor costs associated with the provision of flood resilience equipment for raw water shaft/intake sites. AMP6 does not have any activity planned at this point in time. The investment does not match the figures reported in line 1 of table B3.6, as the source and intake pumping stations have been excluded from block A and reported in block C (Line 13) of table A4, to be consistent with clarification note DBP/068. Table A4 – Company strategy – water services key activity projections Page 1 of 7 3 April 2009 Three Valleys Water Final Business Plan Block B – Water treatment Line 4 Costs were obtained using the outputs from our capital maintenance planning and optimisation process for maintaining water treatment serviceability and also from our special base service disinfection upgrade and run to waste facilities projects. Membrane module replacement and GAC regeneration schemes are now included in the capital maintenance planning and optimisation process (CMPT). Therefore these are not listed as separate projects. The plumbosolvency control renewals project included in AMP5 in the Draft Business Plan was not considered for the Plan. The run to waste facilities scheme which was deferred to AMP6 in the final version of the Draft Business Plan on affordability grounds, has been included as a base service project in AMP5 for the Plan. Our contribution to the capital maintenance programme for Anglian Water’s Grafham Scheme is now included in Block C – Water distribution for consistency with the JR08. In AMP5 substantive capital expenditure is expected on 16 base and enhancement activities. All of the schemes identified under quality enhancements are included in the enhancement activity. There are seven quality/SEMD schemes planned totalling £15.9 million, of which two of these are an aggregation of sites under the single points of failure and the resilience to flooding projects. Work on Walton as part of the resilience to flooding project has also been singled out as it represents a substantive investment. There is an increase in activity until year 3 of AMP5 which results in the profile of activity being a peak (P*3) shape. Line 5 The total capacity of all the water treatment works with planned works to maintain serviceability is totalling 734.9 Ml/d. The total capacity of all the water treatment works with planned works to enhance service or quality is 403.0 Ml/d. The total capacity for the period is 1137.9 Ml/d taking into account water treatment plants that are subject to planned works that fall in both categories (Clay Lane, Egham and Walton will be the subject of both base service and enhancement activities). The profile of the activity will increase to a peak in year 3. There is no enhancement planned in AMP6 and a similar level of activity is expected on base service with a total capacity of sites subject to capital investment of 764.3 Ml/d. Line 6 The capital investment in water treatment works with planned works to maintain serviceability is £32.9 million. The capital investment in water treatment works with planned works to enhance service or quality is £15.9 million. For AMP 6, 13 water treatment investment projects over £500,000 are planned with an expected expenditure of £42.7 million. The sum of the capital investment in water treatment works in AMP5 on base service matches the total investment on non-infrastructure assets as given in line 3 of Table B3 : 6. Table A4 – Company strategy – water services key activity projections Page 2 of 7 3 April 2009 Three Valleys Water Final Business Plan Block C – Water distribution Line 7 To maintain stable serviceability of our infrastructure assets we will renew 630km of distribution mains throughout the period 2005-2010. See also B3, commentary for the business case. To mitigate against service risk deterioration of our trunk main assets we propose to renew 25km (approximately 1% of our mains). See also B3 for the business case. Using our forward looking models we have identified that we will need to renew a further 18km of trunk mains and 630km of distribution mains in AMP6 as set out in B3 commentary. No mains are proposed to be renewed for quality purposes during the AMP5 and AMP6 periods. Line 8 No mains are proposed to be relined during the AMP5 and AMP6 periods. Line 9 Activity in AMP5 period relating to base service This is the length of diversion mains required for the relocation of our tower at Takeley flowing proposed expansion of Stansted airport. Activity in AMP5 period relating to enhancements This is the sum of lengths of distribution mains and trunk mains required for all new developments. The figure also includes a new 3km main required for sustainability reduction. The distribution main length is based on actual length of mains laid for new developments in 2007/08 and on our housing forecast. This trunk main length is based on an assessment of reinforcement to our network required to accommodate new developments. This is a result of our modelling of the strategic network based on an assessment of proposed new developments. Total planned activity in AMP6 period The length of mains is based on the assessed additional distribution mains that we will be required to install to supply all new developments as well as the likely reinforcement of the network that will be required. This is based on actual length for new developments of 2007/08, on our housing forecast and on an assessment of the results of our strategic modelling. The allocation has been changed since the Draft Business Plan. The investment covering new distribution mains for new developments was previously allocated to base service as per the recommendation from our reporter. However the RAG 2.03 guidelines state that base service provision should only include expenditure required to maintain current levels of serviceability to existing customers, therefore these have now been allocated to enhancement. Table A4 – Company strategy – water services key activity projections Page 3 of 7 3 April 2009 Three Valleys Water Final Business Plan The investment relating to these new distribution mains do not appear in B3.5 as no line definition is applicable. Instead these are included in table 5.2 Block B line 11 (Water service - supply -demand balance expenditure projections and service output measures). Line 10 The current programme of capital works and maintenance for district meters and PRVs for AMP4 has been used for the AMP5 period. However, of our current stock of district meters 50% are now over 10 years old. Current replacement of PRVs is approximately 42/year on an asset stock of about 450. This equates to a 1 in 10 year replacement. New or refurbished district meters and PRVs total 435 in AMP5. For AMP6, it is assumed that the number of refurbished or new district meters and pressure control valves will increase by 10% in comparison with AMP5. Line 11 The expenditure total included in line 11 is in 2007/08 prices. The total expenditure for AMP5 includes £191.84 million for renewal of infrastructure assets and associated costs as explained in section 3.2 of B3, £14.25 million for renewal of meters. Enhancement of service relates to improvements works in our Roydon and Blackford zones (£9.66 million). New trunk mains and distribution mains associated with new developments are estimated at £33.83 million and new meters from the metering programme (Change of Hands and optional) is estimated at £33.59 million. Due to the proposed expansion of the Stansted airport, our tower at Takeley will need to be relocated. As part of this project a new 5.4 km main is required at a cost of £1.13 million. In addition £0.748 million of capital expenditure has been included for sustainability reductions, involving a new 3km main in the Stevenage zone. £3.5m have been allocated per AMP period to new PRVs, meters and network loggers as part of the leakage monitoring and detection project (included in distribution noninfrastructure in Table B3 : 6). Our contribution to the capital maintenance programme for Anglian Water’s Grafham Scheme is estimated at £9.74 million for AMP5 and AMP6. Some additional investment on water distribution non-infrastructure assets was obtained from our capital maintenance planning and optimisation tool, CMPT. These include kiosks and valves on distribution sites not covered by the above projects (£0.59 million). The total expenditure for AMP6 on infrastructure assets includes £194.47 million for main renewals and associated activities, £22.20 million for renewal of meters, £48.19 million for the metering programme and £65.78 million for mains associated with new developments. The additional investment on water distribution non-infrastructure assets obtained from our CMPT is £0.16 million for AMP6. Our contribution to the capital maintenance programme for Anglian Water’s Grafham Scheme remains unchanged at £9.74 million. Table A4 – Company strategy – water services key activity projections Page 4 of 7 3 April 2009 Three Valleys Water Final Business Plan Line 12 In AMP5 in order to maintain serviceability, substantive work is forecast to be carried out at 16 sites. These include source and intake pumping stations as well as boosters. There are 4 pumping stations with substantive enhancement work in AMP5. Walton under the Resilience to flooding project and Hadham Mill, Hart Lane and Ickenham, under the Standby Generation Phase 1 project Two other projects have been added to the AMP5 enhancement programme: • The NEP investigation schemes have been included in Block C – Water distribution for AMP5 as they relate to groundwater sources, although these projects do not fit into any table definition. • As part of the sustainability reduction scheme a capital expenditure has been allocated to a new booster and standby generation at Jacks Hill. The profile of the activity is shown to peak in year 3, according to the output from our capital maintenance process. Similar levels of activity are expected in AMP6, with 22 substantive projects: 21 base service site specific projects and one enhancement scheme (standby generation at Amersham). Line 13 The capital investment in the pumping stations with planned works to maintain serviceability is £34.0 million. The capital investment in the pumping stations with planned works to enhance service is £13.1 million. The profile of the activity shows a peak in year 3. AMP6 has a similar level of activity with £56.4 million of investment at 22 sites. . The sum of the capital investment for base service on pumping stations in AMP5 is greater than the total investment as given in line 4 of Table B3 : 6 as the expenditure on source and intake pumping station in included in line 1 in B3 : 6. Therefore the investment reported in line 4 of Table B3 : 6 only relates to booster pumping station. Line 14 In AMP5 in order to maintain serviceability, substantive works are forecast to be carried out at three reservoir sites (Bushey Heath, Windmill Hill, Takeley) and 1 aggregated project covering smaller identified works and reactive maintenance activity (reservoir inspection programme). In order to meet increasing demand in the key growth areas, it is anticipated that 2 new reservoirs will be required to serve new developments (at Parsons Green and Sundon). These investments have been spread out between AMP5 and AMP6. Another five base service projects (Bushey Heath, St. George’s Hill, Hart Lane, Harefield, reservoir inspection programme) are planned in AMP6 The profile of the activity is expected to peak in Year 2 of AMP5. Line 15 The capital investment in service reservoirs and water towers with planned works to maintain serviceability is £12.1 million for AMP5, of which the capital investment associated with the Table A4 – Company strategy – water services key activity projections Page 5 of 7 3 April 2009 Three Valleys Water Final Business Plan new service reservoirs mentioned in line 14 is £2.5 million for AMP5 (with the remaining £3.7 million invested in AMP6). Overall AMP6 shows a similar level of activity. The sum of the capital investment in service reservoirs for base service in AMP5 matches the total investment as given in line 5 of Table B3 : 6. BLOCK D – Management and general Line 16 The area reported is only for non-operational buildings which will undergo expenditure during AMP5. Any work carried out on operational sites have not been included as an area. There is no substantial activity planned for offices, depots and workshops in AMP5, the majority of work will be minor works which will affect all buildings. Our capital maintenance planning and optimisation process has highlighted that a 1,200m2 office building at Batchworth will require substantive investment in AMP6. Line 17 The base activity investment is £5.7 million arising from investment in company vehicles, laboratory equipment and minor works at office and depot sites. Base activities related to investment in security have also been included here as security is documented in the Regulatory Accounting Guideline (RAG) 2.03 for inclusion in the Management and General category. The investment on enhancement activities in AMP5 relates to physical security (SEMD) schemes and Resilience to flooding projects. Some environmental studies relating to the Natural Environment and Rural Communities (NERC) Act 2006 have been added to Block D – Management & General for AMP5 (enhancement), although these projects do not fit into any table definition. We have considered that these projects relate to Recreation/Conservation and as such can be considered as Management & General according to RAG 2.03. The base service expenditure activity is set to peak in year 4. AMP6 base service costs relate to investment in company vehicles, laboratory equipment and minor works at office and depot sites. Enhancement activities are mainly associated with security projects. Line 18 All telemetry, ICA and IT maintenance investments are included. Base activities relating to investment in security (electronic) have also been included here. Investments in preparing future business plans (PR14 and PR19) have been included in the AMP5 and AMP6 totals. AMP5 has a total of £49.2 million with IT investment making up approximately 50% of the total. All of the enhancement activity is associated with security enhancements under SEMD Table A4 – Company strategy – water services key activity projections Page 6 of 7 3 April 2009 Three Valleys Water Final Business Plan and the investment associated with this has been assessed at about £7.6 million. The activity is set to have a peak in year two, with similar levels of activity expected in AMP6. The total cost for the base and enhancement activity in AMP5 comprises the following projects: Table A4 : 1 Summary of M&G Activity (base + enhancement) M&G activity in AMP5 Cost/£ million IT 25.65 CMPT outputs – telemetry, and security 17.34 AMP6 Business Plan preparations 3.50 GIS 2.69 Security enhancements 7.56 Total for AMP5 56.74 Line 19 The number of meters renewed as part of ongoing reactive maintenance is calculated by the Meter Failure Model detailed in section B3. The annual figures rise steadily throughout AMP5 and AMP6 due to the increasing size of the meter stock. Line 20 The number of optional household meters decreases over the course of AMP5 and AMP6, as the percentage of unmeasured customers decreases with our metering programme. Line 21 The number of customers selectively metered relates to the number of meters installed as part of our ‘change of occupier’ policy Line 22 The percentage of households metered by the end of each AMP reflects the increase in the number of metered customers resulting from our compulsory strategy. By 2020, 68% of customers will be metered. Table A4 – Company strategy – water services key activity projections Page 7 of 7 3 April 2009 Model FBP2009-ICS Final Business Plan 2009 Table A6 Three Valleys Water plc Efficiency improvements AMP3 2004-05 Line description Units A 1 2 3 4 5 6 Operating expenditure outperformance since PR04 Water operating expenditure outperformance Water outperformance as a % of regulatory expectations Total adjusted water opex incentive revenue allowance Sewerage operating expenditure outperformance Sewerage outperformance as a % of regulatory expectations Total adjusted sewerage opex incentive revenue allowance £m % £m £m % £m 0.481 0.48% B 7 8 9 10 Capital expenditure outperformance since PR04 Water service capex outperformance Water service capex outperformance as % of regulatory expectations Sewerage service capex outperformance Sewerage service capex outperformance as a % of regulatory expectations £m % £m % 11.111 21.4% C 11 12 13 14 15 16 17 Water service - overall compounded efficiency improvements Operating expenditure (base service) Operating expenditure (enhancements) Capital maintenance expenditure – infrastructure Capital maintenance expenditure – non-infrastructure Capital enhancement expenditure – infrastructure Capital enhancement expenditure – non-infrastructure Capital enhancement expenditure - meters % % % % % % % AMP4 2005-06 1.879 1.73% 1.320 5.3% 2006-07 0.685 0.64% 0.528 1.3% 2007-08 0.000 0.00% -2.385 -3.7% 2008-09 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 0.000 0.00% 10.721 18.6% -0.835 -1.9% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.007 0.000 0.000 0.000 0.000 1.23% 1.23% 0.00% 0.00% 0.00% 0.00% 0.00% 2.44% 2.44% 0.00% 0.00% 0.00% 0.00% 0.00% 3.64% 3.64% 0.00% 0.00% 0.00% 0.00% 0.00% 4.83% 4.83% 0.00% 0.00% 0.00% 0.00% 0.00% 6.00% 6.00% 0.00% 0.00% 0.00% 0.00% 0.00% Model FBP2009-ICS Final Business Plan 2009 Table A7 Three Valleys Water plc Water service - Expenditure projections AMP4 2007-08 Line description 2008-09 AMP5 2010-11 2009-10 2011-12 2012-13 2013-14 2014-15 Units A 1 2 3 Base service levels (£/property served) Operating expenditure to maintain current services to consumers £/prop 87.75 92.37 92.59 Expenditure on pipelines, dams and aqueducts to maintain current services to consumers - "infrastructure" £/prop 25.99 29.49 28.90 Expenditure on surface assets (includes abstraction, treatment, pumping and service storage) to maintain current - "non-infrastructure" £/propservices to consumers 28.04 26.39 23.44 B 4 5 Enhanced service levels (£/property served) Additional operating expenditure for improving services to consumers Additional capital expenditure for improving services to consumers 0.00 0.00 C 6 7 91.35 30.76 24.86 90.51 30.54 24.63 89.51 30.45 26.09 88.15 30.30 27.93 86.48 30.23 21.54 0.00 0.00 0.00 0.55 0.00 1.35 0.01 1.34 0.01 1.24 0.01 0.99 Supply/demand balance (£/property served) Additional operating expenditure to continue to maintain and improve the balance between the water available£/prop and the demand from 0.00consumers0.38 Additional capital expenditure to continue to maintain and improve the balance between the water available and the demand from consumers 8.01 £/prop 10.58 0.63 7.40 0.80 5.99 1.00 7.13 1.23 9.27 1.49 9.25 1.78 10.98 D 8 9 Quality enhancements (£/property served) Additional operating expenditure to meet new environmental and water quality standards Additional capital expenditure to meet new environmental and water quality standards £/prop £/prop 0.00 15.13 0.16 3.09 0.21 6.12 0.67 4.82 0.71 6.56 0.77 9.80 0.92 10.88 1.01 6.29 E 10 11 Enhancements - large projects (£/property served) Additional operating expenditure for large projects Additional capital expenditure for large projects £/prop £/prop 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 F 12 13 Water service totals (£/property served) Total operating expenditure Total capital expenditure excluding grants and contributions £/prop £/prop 87.75 79.74 92.91 66.99 93.43 65.87 92.82 66.99 92.23 70.21 91.52 76.96 90.57 79.60 89.29 70.04 14 Average connected properties - water (excluding empty properties) 000 1,242.45 1,247.74 1,241.21 1,242.29 1,246.54 1,251.56 1,257.38 1,263.98 G 15 16 Water service totals (£m) Total operating expenditure Total capital expenditure excluding grants and contributions £m £m 109.020 99.079 115.932 83.582 115.968 81.755 115.314 83.216 114.969 87.523 114.545 96.317 113.883 100.090 112.863 88.524 17 Total capital grants, contributions and compensation for abstractions. £m 4.467 3.519 2.332 2.774 7.012 3.525 3.901 4.276 £/prop £/prop 0.00 0.00 Model FBP2009-ICS Final Business Plan 2009 Table A9 Three Valleys Water plc Financial projections AMP4 2007-08 2008-09 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 Line description Units A 1 2 3 4 5 6 7 8 9 10 Current cost profit & loss and financial indicators Turnover Current cost operating profit Net interest receivable less payable Net tax on profit on ordinary activities Dividends Regulatory capital value – year end Regulatory capital value - year average Current cost dividend cover Pre tax return on regulatory capital value Post tax return on regulatory capital value £m £m £m £m £m £m £m ratio % % 224.328 52.850 -11.446 -2.027 -30.879 748.055 0.000 1.632 0.00% 0.00% 226.808 40.359 -12.486 -10.609 -30.843 754.762 751.409 0.572 5.37% 3.79% 225.028 35.862 -11.642 -6.055 -31.144 755.310 755.036 0.858 3.43% 2.15% 251.777 66.646 -11.393 -19.132 -40.682 747.337 751.323 1.106 7.89% 6.06% 250.025 57.533 -10.963 -16.882 -31.755 743.062 745.199 1.206 7.72% 5.83% 248.799 55.988 -10.812 -16.511 -32.064 745.788 744.425 1.161 7.52% 5.87% 246.465 55.629 -11.132 -16.365 -32.377 753.219 749.504 1.136 7.42% 5.86% 244.470 55.234 -11.462 -16.012 -32.693 750.839 752.029 1.121 7.34% 5.87% B 11 12 13 14 15 16 17 18 Historic cost profit & loss and financial indicators Operating profit HC dividend cover Total net debt Gearing: D/RCV Cash interest cover (funds from operations; gross interest) Adjusted cash interest cover (funds from operation less capital charges; gross interest) Debt payback (FFO/debt) Debt payback (RCF/debt) £m ratio £m % ratio ratio % % 60.553 1.531 245.583 32.83% 7.107 2.224 34.65% 22.78% 49.198 0.853 322.766 42.76% 7.947 2.182 26.43% 6.28% 51.628 1.096 338.261 44.78% 8.555 1.410 25.57% 16.09% 78.727 1.190 322.340 43.13% 11.438 4.665 36.28% 25.07% 70.343 1.344 316.792 42.63% 11.049 3.995 34.20% 23.41% 69.087 1.308 315.845 42.35% 11.295 4.058 34.66% 24.45% 69.221 1.294 320.187 42.51% 10.872 3.962 33.76% 23.62% 68.288 1.254 316.337 42.13% 10.527 3.867 33.95% 23.49% Model FBP2009-ICS Final Business Plan 2009 Table A9PD Three Valleys Water plc Financial projections - Public domain AMP4 2007-08 Line description Units A 1 2 3 4 5 6 £m £m £m £m £m % Current cost profit & loss and financial indicators Turnover Operating costs Capital charges Operating profit Regulatory capital value-year end Pre tax return on regulatory capital value 224.328 -108 -69 53 748 7.07% AMP5 2010-11 252 -115 -77 67 747 7.89% 2014-15 244 -113 -76 55 751 7.34% Model FBP2009-ICS Final Business Plan 2009 Table A10 Three Valleys Water plc Water and sewerage services - Summary of justification of company investment proposa Net present Net present Contribution value of value of to annual costs arising benefits Capital average from arising from expenditure household investment investment proposed for Operating 2010-15 expenditure bill in 2014- proposals in proposals in 15 2010-15 2010-15 [AMP5] in 2014-15 £/year £m £m £m £m/year Line description A 1 2 3 4 5 Water Service The total plan for the water service 2010-2015 Investment proposals demonstrated to be cost-beneficial Investment proposals shown to be non-cost-beneficial Investment proposals not assessed Water service - Investment to maintain existing service Units 11.49 2.91 1.44 0.53 6.61 1,356.212 56.160 19.990 0.000 1,280.062 68,867.546 1,761.795 5.181 0.000 67,100.570 489.179 41.727 18.878 0.000 428.574 2.843 0.274 0.310 0.799 1.459 Three Valleys Water Final Business Plan Table A10 – Summary of justification of company investment proposals In table A10 we consider the results of our cost-benefit analysis (CBA). Details of the methodology are given in Sections C1 and C8. The outcomes from our CBA are described in more detail in Section C5. We have subdivided the programme into 102 projects for the purposes of the C5 database and for CBA. More than 80% (by number of projects) of the total capital programme has had CBA undertaken and the total programme is shown to be cost-beneficial. The results are given in the tables below where the ‘reward score’ is the NPV [benefits] minus NPV [costs]. Where the analysis shows that the project is not cost-beneficial the reward score is negative and is shown in red in the tables below. Brief justifications for projects not considered beneficial are given in the ‘comments’ column with a reference back to the appropriate section of the Business Plan. In the graph below we show, as required by the guidance, plots of NPV [costs] vs NPV [benefits]. This graph excludes for display purposes the four projects with greatest benefit: Distribution Mains, Egham, Clay Lane, Iver. Data points on the graph refer to numbers in the tables below. Table A10 – Summary of justification of company investment proposals 3 April 2009 Page 1 of 6 Three Valleys Water Final Business Plan Graph 1 - NPV [Benefit] vs NPV [Cost] £160 59 60 £140 X=Y £120 51 NPV [Cost] £m £100 £80 £60 £40 43 73 £20 8 £0 -£100 36 64 45 61653841 23 37 746 74 56 54 42 16 35 15 27 773 32 39 63 26 22 13 18 34 17 44 30 29 40 33 48 28 21 14 25 31 X=Y 10 20 52 9 66 55 24 68 75 70 58 69 62 71 50 £0 4 1 53 57 6 2 £100 49 12 5 19 72 11 £200 £300 £400 47 67 76 £500 £600 -£20 NPV [Benefit] £m Table A10 – Summary of justification of company investment proposals 5 November 2010 Page 2 of 6 Three Valleys Water Final Business Plan Line 1 Line 1 is the sum of lines 2 to 5 and shows that the overall programme is cost-beneficial. The 40 year NPV of the costs is significantly less than the NPV of the benefits indicating that our overall investment proposals are highly cost-beneficial. The capital expenditure in column 6 included the planned overlap programme for AMP6. Line 2 The investment proposals in this line are those associated with the following projects: Project name Ref. Reward score (£m) WLB (£m) WLC (£m) Comments 62 64 77.21 23.58 77.48 36.55 0.28 12.96 Beneficial Beneficial 66 47.76 48.91 1.15 Beneficial Quality DWI Chorleywood crypto removal Roydon manganese SEMD Single points of failure at critical sites Designated site additional requirements Laboratory equipment (LCMS-ToF) Site document storage Reservoir valve automation Combined operational security 67 447.67 451.89 4.22 Beneficial 68 69 72 73 24.05 0.18 392.51 109.36 24.86 0.51 397.48 134.04 0.81 0.34 4.97 24.68 Beneficial Beneficial Beneficial Beneficial Enhanced Service Levels Resilience to flooding Standby generation – phase 1 76 77 522.83 60.50 526.12 63.95 3.29 3.45 Beneficial Beneficial Line 3 The investment proposals demonstrated to be non cost-beneficial account for 3.8% of our proposed investment programme (by value). Brief summaries of why these are included in our plan are given in the table below with full justifications given in the main B sections of this plan. Project Name Ref. Reward score (£m) WLB (£m) WLC (£m) nitrate removal treatment at Kings Walden WTW 63 -2.07 0.64 2.71 Blackford manganese 65 -5.84 3.54 9.37 Emergency equipment 70 -0.32 0.00 0.32 New requirement under SEMD and following Pitt Review – see section B4 Produce inundation maps 71 -0.08 0.00 0.09 New requirement from DEFRA – see section B4 NEP investigation schemes 74 -6.15 0.66 6.82 NERC Act 2006 75 -0.34 0.33 0.68 Comments Quality DWI Likely to be a regulatory undertaking imposed by the DWI – see section B4 SEMD Environmental programme Table A10 – Summary of justification 2010 of company investment proposals Investigation phase required by EA as precursor to environmental programme in AMP6. See section B5 Required to comply with our requirements under biodiversity. See section B5 5 Page 3 of 6 November Three Valleys Water Final Business Plan Line 4 In this line we report the value for those investments resulting in a planned change to service which have not been assessed for their cost benefit. These projects are the following: Reward score (£m) WLB (£m) WLC (£m) Quality DWI Additional opex required to satisfy the requirements of the WFD priority substances. new opex arising from AMP4 Q (DWI) schemes SEMD Not assessed Not assessed Not assessed Opex only Not assessed Not assessed Not assessed Opex only new opex arising from AMP4 Q schemes Not assessed Not assessed Not assessed Opex only Project name Comments These have not been assessed because they are opex only resulting from enhancement expenditure in AMP4. By definition the NPV of the benefits have not been assessed and consequently the cell in column 5 has not been completed. Line 5 We have included in this line our expenditure to maintain our current service level in maintenance infrastructure, maintenance non-infrastructure and supply demand. This represents almost 89% of our investment. We have completed CBA for each of these investment areas and the results are shown below. Project Name Maintenance Infrastructure Trunk Mains Ref. Reward Score (£m) WLB (£m) WLC (£m) 1 160.86 177.41 16.54 Beneficial 373.35 652.48 279.13 Beneficial 0.00 Not Assessed Not Assessed Not Assessed Not Assessed Not Assessed Not Assessed Not Assessed 0.00 Not Assessed Not Assessed Not Assessed Not Assessed Not Assessed Not Assessed Not Assessed 0.00 Combined with Distribution mains 62.42 Compulsory works. See section B3.7 Distribution mains Communication pipes Reactive Comm. pipes renewals Reactive STs and SPs Water Quality Network asset management tools and models Diversions net of contributions GIS Pressure & DG2 60.88 1.93 9.12 2.95 8.11 4.00 Comments Compulsory works. See section B3.7 Required to maintain adequate serviceability to customers. Critical tools and functions to perform investment planning. Necessary works to meet large public capital works. See section B3.4 Critical tools and functions to perform investment planning. Required to maintain adequate serviceability to customers. Maintenance NonInfrastructure Allenby Road 2 104.87 107.92 3.05 Beneficial Bushey Heath 3 65.08 69.94 4.86 Beneficial Chertsey 4 Clay Lane 279.02 296.88 17.87 Beneficial 15545.98 15563.10 17.12 Beneficial Table A10 – Summary of justification 2010 of company investment proposals 5 Page 4 of 6 November Three Valleys Water Final Business Plan Egham Hadham Mill 5 Hart Lane 6 Iver Mill End 7 15275.62 15309.82 34.19 Beneficial 282.13 287.81 5.68 Beneficial 139.83 150.27 10.44 Beneficial 32092.29 32126.96 34.68 -1.00 6.59 7.59 Beneficial Required to maintain adequate serviceability to customers. Beneficial Walton 8 48.57 68.34 19.77 Adeyfield 9 25.85 26.86 1.01 Anthonys 10 -0.22 0.90 1.11 Arkley 11 259.55 261.61 2.06 Beneficial Required to maintain adequate serviceability to customers. Beneficial Batchworth 12 150.66 157.81 7.15 Beneficial Blackford 13 0.02 2.24 2.22 Bricket Wood 14 -0.09 1.42 1.51 Chalfont St Giles 15 -0.56 3.07 3.63 Eastbury 16 0.46 5.06 4.60 Great Missenden 17 -0.12 1.78 1.90 Hunton Bridge 18 20.86 22.98 2.13 Beneficial Required to maintain adequate serviceability to customers. Required to maintain adequate serviceability to customers. Beneficial Required to maintain adequate serviceability to customers. Beneficial Ickenham 19 235.99 237.60 1.61 Beneficial Kingshill 20 0.39 1.46 1.07 Kings Walden 21 -0.26 1.14 1.41 Netherwild 22 1.26 3.63 2.38 Beneficial Required to maintain adequate serviceability to customers. Beneficial North Mymms 23 41.80 51.33 9.54 Beneficial Oxhey Woods 24 3.71 4.53 0.82 Piccotts End 25 -0.24 1.26 1.49 Roydon 26 -0.62 2.17 2.79 Runley Wood 27 -0.19 3.41 3.60 Sacombe 28 -0.11 1.28 1.40 Shakespeare Road 29 0.72 2.39 1.67 Beneficial Required to maintain adequate serviceability to customers. Required to maintain adequate serviceability to customers. Required to maintain adequate serviceability to customers. Required to maintain adequate serviceability to customers. Beneficial Stonecross 30 5.43 7.46 2.03 Beneficial St Georges Hill 31 3.94 5.41 1.46 Beneficial The Grove 32 73.98 76.51 2.54 Beneficial Uttlesford Bridge 33 4.60 6.17 1.56 Beneficial Whitehall Operational estate – buildings and access Electrical 34 26.16 28.45 2.29 Beneficial 35 2.13 6.70 4.58 Beneficial 36 89.64 104.95 15.30 Reservoirs & towers 37 -4.53 3.45 7.98 Process – Civils 38 -0.68 8.47 9.15 Pipework & valves Civils – below ground (chambers, intake shafts, tunnels and boreholes M&E – process 39 38.40 41.48 3.09 Beneficial Required to maintain adequate serviceability to customers. Required to maintain adequate serviceability to customers. Beneficial 40 1.33 3.11 1.78 Beneficial 41 3.72 15.12 11.40 Beneficial M&E – other 42 1.96 6.78 4.81 M&E – high lift pumps 43 -5.64 27.55 33.19 M&E – drives 44 3.74 5.54 1.80 Beneficial Required to maintain adequate serviceability to customers. Beneficial M&E – low lift pumps 45 0.20 12.33 12.13 Beneficial Table A10 – Summary of justification 2010 of company investment proposals 5 Page 5 of 6 November Three Valleys Water Final Business Plan Disinfection upgrade 46 2.27 9.51 7.23 Beneficial St. George's Hill reservoir 47 429.41 432.54 3.13 Beneficial Windmill Hill reservoir Reservoir inspection programme (inc. cleaning & minor maintenance) Pump condition and efficiency assessments 48 42.37 43.97 1.61 Beneficial 49 142.70 148.03 5.33 Beneficial 50 0.36 0.10 -0.26 Beneficial Revenue meter replacement 51 -110.79 -0.36 110.43 Run to waste facilities 52 2.09 3.28 1.19 Grafham Not Assessed Not Assessed 8.21 Takeley Tower – Non Infra Not Assessed Not Assessed 2.44 Required to be able to accurately bill customers based on their usage. Beneficial CBA is part of Anglian Water submission. Not assessed to avoid double counting. (NPV over five years) All costs for Takeley tower will be compensated by contributions. (NPV over five years) Non operational (M&G) M&G – ICA 53 169.98 185.44 15.45 Beneficial M&G – Telemetry 54 38.90 44.53 5.62 M&G – Lab and office buildings 55 -0.34 0.64 0.97 Beneficial Required to maintain a safe working environment for staff. Beneficial M&G – Security 56 0.04 6.25 6.21 IT 'maintenance' 57 112.27 Not Assessed Not Assessed 127.43 Not Assessed Not Assessed 15.16 Not Assessed Not Assessed 0.12 Not Assessed 0.41 Not Assessed Not Assessed Not Assessed Not Assessed -96.39 55.48 151.87 Not Assessed Not Assessed Not Assessed IT 'Risk Resilience' AMP6/AMP7/AMP8 laboratory equipment Vehicles Leakage monitoring and detection infrastructure Supply-demand New opex arising from AMP4 schemes Metering Strategy – Continuation of CoH 58 59 Strategic studies – Regional Resource Studies 1.02 2.70 0.44 0.30 11.20 Beneficial Required to maintain business as usual to our customers (NPV over five years) Necessary works to prepare future Business Plan. (NPV over five years) Required to maintain accurate laboratory analysis. (NPV over five years) Beneficial Required to maintain adequate serviceability to customers. Opex only Required to meet our long term supply/demand balance security of supply index – see section B5 for details Opex only New development – Housing/industrial new mains 60 -71.03 72.71 143.74 We are legally required to provide customers with a connection to the water supply network. Capital Expenditure for sustainability reductions 61 -10.91 -0.30 10.61 See section B5 for details Table A10 – Summary of justification 2010 of company investment proposals 5 Page 6 of 6 November Three Valleys Water Final Business Plan Contents 1 1.1 1.2 1.3 1.4 2 3 3.1 3.2 3.3 3.4 3.5 4 Achievements to date compared with earlier plans ................................ 2 Introduction ............................................................................................... 2 Levels of service to the customer ............................................................. 2 The monitoring plans .............................................................................. 12 Corporate and social responsibility ......................................................... 18 Assessment of the post 2010 environment for the Company .............. 20 Managing the key risks and uncertainties ............................................. 20 Failure of assets resulting in a widespread loss of supply ...................... 20 Loss of our sources through pollution ..................................................... 20 Supply-demand balance ......................................................................... 21 Regulation............................................................................................... 22 Financial issues ...................................................................................... 22 Achieving the right balance for consumers and the environment....... 23 B1 – The Post 2010 Environment and the Longer Term Overview Page 1 of 24 3 April 2009 Three Valleys Water Final Business Plan B1 – The Post 2010 Environment and the Longer Term Overview 1 Achievements to date compared with earlier plans 1.1 Introduction In this section we set out our achievements in the period since the last price review and our progress against our monitoring plan. During the last three years we have had mixed results with our performance against certain DG indicators and in particular over the DG8 issue. We responded to this and changed a number of our processes to so that in this last year our performance has been stronger. We feel we are now are on track and confident there is an improving trend. We have been successful in other areas during AMP4 and are pleased to report improvements in operational reliability and performance of our assets. We have also introduced major changes in our network operations in order to meet new obligations arising from the Traffic Management Act. We have made significant progress in the area of corporate responsibility. Our decision making processes now take account of the wider effects and benefits of our operations including climate change, biodiversity and stakeholder preferences. The recent Ofwat / Consumer Council for Water led customer research, Understanding Customer Needs, indicates that 88% of customers are satisfied overall with the service they receive. This corroborates our own survey results of 91%. Although 62% of informed customers in the Ofwat survey expressed the view that the effect on their bill of the Draft Business Plan (BP) was unacceptable as the bills were too high already, the customers also concluded that value for money was unaffected by information regarding our plan. These outcomes suggest that we must do more both to inform customers about our work and investments and improve our performance in providing customer service and value. This section describes what we have achieved during AMP4 and our view of the challenges to be met after 2010. 1.2 Levels of service to the customer At the last price review in 2004, Ofwat made no specific allowances in our price limits for investment to improve levels of service. 1.2.1 Water availability (security of supply index) In 2004, we reported that water resources were unlikely to be adequate without intervention. We planned to accelerate metering through compulsory Change of Occupier and optional metering as well as metering new properties, so that 43% of household customers would be metered by 2010. Compulsory meter installations have been adversely affected by the current recession but this has been ameliorated by increasing numbers of installations from meter Optants. We have enhanced the promotion of the benefits of switching to measured charges and by fitting automatic meter read (AMR) equipment in all internal and ‘difficult to fit’ properties during 2008. We are also fitting AMR equipment in new housing developments of more than one property from 2009 and B1 – The Post 2010 Environment and the Longer Term Overview Page 2 of 24 3 April 2009 Three Valleys Water Final Business Plan are planning to carry out trials of Next generation Metering Technology (NGMT) in some developments during AMP5. We have started a seasonal tariff trial in Bishop’s Stortford to assess if this approach should play a part in managing demand in our longer term plans. We have implemented a number of capital schemes to increase our capacity to supply by 58 Ml/d at annual average (5.8%) and 34 Ml/d at peak period (2.8%). In 2007/08 we marginally surpassed our monitoring plan target for Water Available for Use at 994.7 Ml/d. We have also improved the availability and reliability of our operational assets during AMP4. Our outage assessment has reduced by 19 Ml/d at annual average (-2.0%) and 33 Ml/d at peak (-2.7%). These outcomes mean a significant improvement overall in the supply-demand balance such that we will achieve our SOSI target in 2008/09. Good progress has also been made with the supply enhancing capital schemes and, coupled with significant improvements in operational reliability that has reduced outage, we now forecast a surplus in supply through AMP5. This is a significant improvement compared to our forecast at PR04 and for our Strategic Direction Statement (SDS). By the end of 2007/08 we had achieved an 8 Ml/d reduction against our target of 10 Ml/d by 2010. We expect to meet our leakage target for 2008/09 and 2009/10. In common with other companies in our region we experienced a severe drought in 2006 and introduced a hosepipe ban during 2006/07 due to the threat of a third successive dry winter. In 2008 the Secretary of State designated our area as being water stressed. We published our Draft Water Resources Management Plan and new Drought Management Plan in 2008. We now estimate that the supply-demand balance will be in surplus during AMP5. We have therefore modified the metering strategy set out in the Draft Business Plan in a number of respects, in order to produce what we judge to be a better balance between affordability for customers and the need for investment in the next five years in the interests of customers and wider costs and benefits. We are proposing to continue with compulsory Change of Occupier metering for the time being at a rate consistent with current housing market conditions. 1.2.2 DG2: Pressure Progress on DG2 compared with the rest of the industry and our monitoring plan is shown over on Figure B1 : 1. Since 2002, we have made real progress in improving the pressure experienced by those customers we assess as being most at risk. Our performance has been consistently better than our monitoring plan target. At the end of 2007/08 only 106 properties were below the reference level compared to 242 at the end of 2002/03. For 2008/09 we are expecting to report around 150 properties on the register compared to the reference level of 250. In all years we achieved a performance rating of ‘good’ against Ofwat’s absolute standard and, in the last year, beat the industry average benchmark. We have improved performance by a variety of means. In some cases we have reviewed the way we operate our system and changed this by relocating boundary valves, or introducing stricter control on the operating criteria for pumps and control valves. In many cases the only solution to a DG2 failure is capital investment. There was no provision to address DG2 problems in our 2004 price determination but we have taken advantage of capital efficiency savings in the programme to make improvements. B1 – The Post 2010 Environment and the Longer Term Overview Page 3 of 24 3 April 2009 Three Valleys Water Final Business Plan Figure B1 : 1 DG2 Pressure of water mains TVW Industry Average Monitoring plan 0.08 % of properties below reference point 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2002/03 1.2.3 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 DG3: Unplanned interruptions to supply Our performance as illustrated on Figure B1 : 2 below has been affected by a small number of high impact events. Despite improvements since the departure from target in 2005/06 this performance measure remains a challenge. We are committed to meeting that challenge. Figure B1 : 2 DG3 Unplanned interruptions to supply TVW Industry Average Monitoring plan 1.6 1.4 Performance Score 1.2 1 0.8 0.6 0.4 0.2 0 2002/03 2003/04 2004/05 2005/06 2006/07 B1 – The Post 2010 Environment and the Longer Term Overview Page 4 of 24 2007/08 2008/09 3 April 2009 Three Valleys Water Final Business Plan During 2005/06 and 2006/07 there were two major mains bursts incidents that markedly affected our performance. In 2007/08 we improved our performance considerably by improving our speed of response when burst mains occur. In the base year our comparative performance was ahead of the industry average, whilst in absolute terms in 2007/08 we improved from our 2005/06 assessment back into the ‘above average’ category. We forecast that the number of properties on our register will be 2500 for 2009/10 compared to the reference level of 1640 properties. Our level of performance needs to be considered against the high burst rate that we experience. This is shown in Figure B1 : 2a below and suggests that with the second highest burst rate the risk of high impact events occurring is greater than most other companies. Figure B1 : 2a Industry comparison of burst rate per 1000km of mains Mains Bursts/1000km 2007-08 400 Bursts/1000km 350 300 250 200 150 100 Thames Three Valleys Yorkshire South Staffs Dwr Cymru Bristol Severn Trent North-umbrian Mid Kent Southern United Utilities South West South East Wessex Dee Valley Cambridge Anglian B&W Hants Tendring Hundred Ports-mouth Sutton & E Surrey 0 Folkstone & Dover 50 Ofwat associates improvement in DG3 performance with evidence of improvement in the serviceability of infrastructure assets. We want to improve our level of performance in future and note that this is also one of our customers’ priorities, as evidenced in our customer research. To do so we need to prevent bursts occurring in the first place by continuing with our mains renewal programme. In AMP4, the mains renewal programme has targeted renewal of distribution mains in the most vulnerable parts of our network where the record of failure in the past has been the highest. The programme is ahead of the monitoring plan at March 2008. For AMP5, we believe the mains renewal programme overall needs to be increased by maintaining the current rate of renewal of distribution mains of 126 km per year but increasing our trunk main renewals from 2 km to 5 km per year. In addition, we are planning to increase the replacement of communication pipes. We also continue to improve our efficiency in managing our network, speed of response and productivity of mains repairs when bursts do happen. B1 – The Post 2010 Environment and the Longer Term Overview Page 5 of 24 3 April 2009 Three Valleys Water Final Business Plan 1.2.4 DG6: Response to billing queries The table below shows that the number of billing queries has remained fairly consistent despite our metering base increasing by approximately 3% year on year since 2005/06 through our compulsory ‘Change of Occupier‘ metering programme. The results in figure B1 : 3 below show our performance deteriorated slightly after 2004/05 although our performance has been better than the industry average. In recent years we have maintained our performance and we are expecting to see an improvement in 2008/09 following the launch of our ‘customer experience’ programme that has made significant improvements to the morale and performance of our customer relations team. We have remained above our monitoring target since 2003/04. Table B1 : 1 DG6 Number of billing contacts ‘000s DG6 billing contacts 2004/5 2005/6 2006/7 2007/8 1013 1027 1135 1028 Figure B1 : 3 DG6 Response to billing queries TVW Industry Average Monitoring plan 101 % responded to within 5 days 100 99 98 97 96 2002/03 2003/04 2004/05 2005/06 2006/07 B1 – The Post 2010 Environment and the Longer Term Overview Page 6 of 24 2007/08 2008/09 3 April 2009 Three Valleys Water Final Business Plan 1.2.5 DG7: Response to written complaints We have consistently provided good performance for this measure and remained above our monitoring plan and the industry average since 2004/05. Table B1 : 2 DG7 Response to written complaints 2005/06 2006/07 2007/08 2008/09 indications 2014/15 DG7 – percent of written complaints answered within 10 working days 100.0 100.0 99.6 99.8 100.0 Number of written complaints 2717 3419 4763 5800 4350 Unit of measure We have seen a steady increase in the number of complaints. We attribute this increase to more stringent interpretation of correspondence, the significant rise in email communication and higher customer awareness of standards of service. In 2007/08, our performance in answering written complaints within 10 working days fell to 99.6% from 100% in 2005/06 and 2006/07. In June Return 07 we discussed our disappointment at this fall in performance and explained that we had identified a weakness in the handling of complaint letters in a satellite office. These problems have now been resolved and performance in 2008/09 is now higher than the level we achieved in 2002/03. Looking to the future, by 2014/15 we are seeking to reduce the number of complaints we receive by 25%. Figure B1 : 4 DG7 Response to written complaints TVW Industry Average Monitoring plan 101 % answered within 10 days 100 99 98 97 96 2002/03 2003/04 2004/05 2005/06 2006/07 B1 – The Post 2010 Environment and the Longer Term Overview Page 7 of 24 2007/08 2008/09 3 April 2009 Three Valleys Water Final Business Plan 1.2.6 DG8: Bills based on meter readings We discussed in the 2007 June Return that we had misreported DG8 performance in previous June Returns. Subsequent investigation identified that we had over-stated performance in the years 2002/03 to 2005/06 and we re-calculated our performance accordingly. Figure B1 : 5 below shows our performance using the revised figures for DG8. During 2007/08 we made strenuous efforts to improve our meter reading performance from the low service levels evident in our revised figures. For 2007/08 we achieved a performance level comparable to the industry average. In future, we wish to improve further the efficiency with which we read meters and bill our customers. In 2008/09 we have started fitting Automated Meter Reading (AMR) equipment on internal meters and we will be installing AMR on meters in new developments with more than one property from 2009/10. This will help us determine the optimum processes and equipment for the future to provide a high level of service to our customers. In 2008/09 we also introduced a new style of bill to provide extra information to customers about their charges and consumption patterns. During AMP5 we will be exploring with customers how Next Generation Metering Technology (NGMT) and improvements in our billing services can deliver further customer benefits. Figure B1 : 5 DG8 Bills for metered customers TVW Industry Average Monitoring plan 101 % bills based on actual reads 100 99 98 97 96 95 94 93 92 2002/03 2003/04 2004/05 2005/06 2006/07 B1 – The Post 2010 Environment and the Longer Term Overview Page 8 of 24 2007/08 2008/09 3 April 2009 Three Valleys Water Final Business Plan 1.2.7 DG9: Ease of telephone contact Table B1 : 3 DG9 Ease of telephone contact ‘000s DG9 telephone contacts 2004/05 2005/06 2006/07 2007/08 1148 1204 1337 1257 The number of telephone contacts has remained fairly consistent despite our growing metered customer base. This indicates an underlying improvement in efficiency in itself. The indicator of performance for telephone service performance changed in 2005/06. We now use the customer satisfaction performance score (scale 0 to 5) instead of the percentage of calls answered within thirty seconds to compare call handling satisfaction. Since the adoption of the performance score as DG9 best indicator, we have progressively improved our score and in 2008/09 we improved further to be better than the industry average. Much of this improvement has been achieved as a result of ‘customer experience’ initiative. This has improved the way customers’ calls are handled by taking more time to understand their needs. This has resulted in more queries being answered first time thereby improving customer satisfaction. Figure B1 : 6 DG9 caller handling satisfaction TVW Industry Average 4.7 4.6 AMP3 AMP4 Performance score 0-5 data data 4.5 4.4 4.3 AMP3 AMP4 data data 4.2 4.1 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 No data available for 2003/04 and 2004/05 B1 – The Post 2010 Environment and the Longer Term Overview Page 9 of 24 3 April 2009 Three Valleys Water Final Business Plan 1.2.8 Overall performance assessment In 2002/03 we were ranked 14th out of 23 companies, with a score of 270 compared to 282 for the highest performing company and 245 for the poorest. In the following years, we found it difficult to maintain this position and by 2006/07 we had slipped to 16th out of 22 companies. Whilst DG8 was a problem of our own making, our scores were also adversely affected by a major mains burst in one year, and by the need to introduce the hosepipe ban in another. More recently we have achieved improvements in customer service. Our research shows us that a growing proportion of our customers are satisfied or very satisfied with our service. We were pleased to see this reflected in our overall performance for 2007/08 where we were 6th best in the industry with a score of 279, compared to 287 for the best performer and 220 for the worst. We believe that the OPA rewards and penalties mechanism can at times lead to perverse outcomes, particularly with events such as the hosepipe ban in 2006/07. This was an appropriate precautionary measure to ensure sufficient water remained available for supply for following years and to protect our local water environment. Our Draft Water Resources Management Plan is predicated on the basis of a hosepipe ban being imposed once in every ten years so this is unavoidable unless additional system capacity is installed. Our customer survey work indicates that our customers are not willing to pay for this improvement in service. Accordingly, we should not suffer a penalty through the OPA mechanism because we have taken a responsible course of action to manage water resources. 1.2.9 Water quality compliance Over the five year period from 2002 we have maintained a high level of performance. Our mean zonal compliance rate has improved from 99.82% in 2002, rising to 99.98% in 2006. Our most recent performance scores were 99.97% in 2007 and 99.99% in 2008. The water we put into supply remains of a high quality. In 2000, we identified widespread bromate pollution of groundwater in our operational area and we have been working with The Environment Agency (EA) since in order to ensure ‘the polluter pays’ for the consequences of their actions. We gave evidence at the public inquiry in 2007 which considered the appeals by the “appropriate persons” designated by the EA as being responsible for the pollution and its remediation. We explained the operational and financial effects of the contamination for us and our customers and urged that steps to remediate the pollution should be undertaken urgently by the appropriate persons and at their cost. Nearly two years have elapsed since the conclusion of the public inquiry and, disappointingly, the Secretary of State is yet to reach a decision. In December 2005, the Buncefield Fuel Storage Depot Fire occurred in our operating area. The largest peacetime fire in history had significant operational effects. We have been working with the EA since to monitor for any pollution effects from the fire. In 2008/09 we have been planning to re-commission the groundwater source that we took out of supply at the time of the incident as a precaution. As well as responding to specific pollution events, we have continued to develop our understanding of wider pollutants in the catchment. We have now developed Water Safety Plans to assess and manage the risk of pollution at all our sources, so that we can preserve the quality of water we supply to our customers. This programme is compatible B1 – The Post 2010 Environment and the Longer Term Overview Page 10 of 24 3 April 2009 Three Valleys Water Final Business Plan with the objectives of Water Protection Zones under the Water Framework Directive. Emerging pollutants such as metaldehyde represent a particular challenge and we monitor such developments with substantial concern. 1.2.10 Leakage Our performance against Ofwat leakage targets is illustrated in Figure B1 : 7. For our Final Business Plan we have introduced improved methods for assessing the water balance and these are detailed in sections B5 and C4. This means that the reported values for leakage will change from 2010 although in practice the actual volumes of leakage and in particular the change in leakage over time are unchanged. It is not possible to accurately recalculate leakage for past years in a way that is consistent with the new methods of assessment but we are able to reliably assess changes in leakage over time. We have achieved our leakage targets in every year of the current AMP period. Since 2002/03 we have doubled the resources deployed on leakage detection and repairs and increased reactive renewals. This heavily affected opex where we already had the highest relative spend in the industry in 2002/03. In 2003/04 we made progress in the first half of the year through an increase in activity level and hence cost but were setback by a significant outbreak of leakage in the Autumn of 2003 caused by ground movements following the hot dry summer. This resulted in an increase of leakage of 7 Ml/d in 2004/05 compared to 2002/03. By 200506 we had recovered the situation and since that time we have continued to make further reductions in leakage whilst at the same time steadily improving the efficiency of our leakage operations. We expect to meet our leakage target in the last years of AMP4. The pattern of leakage change since 2002/03 is shown in Figure B1 : 7 below. When total leakage is at our target, we will be operating below the economic level. To reduce leakage further we will need to continue or even increase current activity and expenditure levels and make a step change in planned mains and communication pipe renewals as proposed in our plan for AMP5. Taking into account the wider benefits of continuing to reduce leakage which includes mitigating the effects of climate change and the views of our stakeholders, we believe this is the appropriate strategy, provided it is appropriately funded. Longer term we believe that our proposed increase in planned renewals can alleviate the need for such a high degree of reactive maintenance with its associated inconvenience to customers and public disruption. B1 – The Post 2010 Environment and the Longer Term Overview Page 11 of 24 3 April 2009 Three Valleys Water Final Business Plan Figure B1 : 7 Reduction in leakage for TVW compared to average industry Proportionate change in Industry total leakage Leakage reduction in TVW 2002 to 2015 TVW change in leakage Forecast further reductions in leakage Cumulative change in leakage since 2002 / Ml/d 10 7 5 1 0 -0.5 -0.5 -4 -3.5 -5 -7.6 -10.5 -9.5 -10 -12.5 -14.5 -15 -16.5 -16 -18.5 -20.5 -20 -22.5 -24.5 -25 1.3 The monitoring plans 1.3.1 Infrastructure maintenance 20 14 /1 5 20 13 /1 4 20 12 /1 3 20 11 /1 2 20 10 /1 1 20 09 /1 0 20 08 /9 20 07 /8 20 06 /7 20 05 /6 20 04 /5 20 03 /4 20 02 /3 -30 A key part of our Serviceability Action Plan was the recovery of our mains renewals programme after a slow start in 2005/06. By 2007/08 we had installed a total of 393 km and abandoned 400km against a phased Monitoring Plan renewed mains target of 378 km. In our view this means we have achieved ‘stable’ serviceability. During 2008/09 we continued to install mains at the required rate to remain ahead of our Monitoring Plan requirements. The mains renewals programme continues to be targeted at our worst performing district meter areas (DMAs), predominantly in North London. We are now beginning to see the benefits of reduced bursts and will continue to focus our efforts on maintaining ‘stable’ Serviceability. The particular difficulties of working in areas of North London with a greater proportion of traffic sensitive streets and more services in the highway means higher costs for mains renewals and this effect will continue to be seen in AMP5. In recent months we have re-focused our design review and value engineering process to ensure effective cost control in face of these challenges. Our Asset Delivery partners, Mace, continue to work closely with our contractors and internal stakeholders to maintain productivity and reduce unit costs through changes to working practices, scheme design and renewal techniques. Our contractors continue to experience difficulties in obtaining and retaining sufficient suitably qualified operatives to work in the South East and London. There is also evidence of pressure for manpower resources from Thames Water who are similarly trying to B1 – The Post 2010 Environment and the Longer Term Overview Page 12 of 24 3 April 2009 Three Valleys Water Final Business Plan implement a large mains renewal programme and meet their leakage target. We know they experience similar London and South East local factors as ourselves. The award of our new period contracts will give greater visibility of workload to our partner contractors until the end of AMP5 and beyond. It is expected that this will also increase stability of the second tier supply chain which will be helpful to all parties during the current recession conditions. 1.3.2 Non-infrastructure maintenance Mains Non-Infrastructure (MNI) cumulative expenditure was behind the Final determination at 31st March 2008 (-£10.2 million in 2002/03 prices). We accelerated our programme of work in 2008/09 and have out-performed the programme by March 2009 by completing 103% of our target mains renewals. We are forecasting to complete 110% of our AMP4 target for length of mains renewal by the end of the quinquennium. 1.3.3 Quality, environment and SEMD The AMP4 ‘Drinking Water Quality and other Obligations’ enhancement programme had a number of obligations that required completion in 2007/08. These were ‘Kensworth Lynch pesticides’; ‘Essendon bromate’; ‘Hatfield bromate’; ‘removal of single points of failure at Iver and Clay Lane’; ‘SEMD zone requirements’ and the ‘Egham emergency tunnel investigation’. Progress on these is described below. • We have achieved the compliance date of March 2008 agreed with the DWI for the Kensworth Lynch pesticides project. • A revised undertaking for the Essendon bromate project (North Mymms Undertaking) was agreed with the DWI in January 2008. This resulted from difficulties during the investigation phase of the project when the original solution was found not to be viable. The revised undertaking requires us to provide a solution to the bromate contamination of our Essendon source by March 2010. The solution agreed involves the development of a new source at Shenley, expansion of our sources at East Hyde and Wheathampstead and the use of interception pumping at our Hatfield source to allow the continued use of our Essendon source at a lower abstraction rate. We are on track to implement these solutions in the required timeframe. • The Hatfield Bromate project to construct a new borehole source to replace the output capacity lost as a result of pollution from Bromate was not completed in 2007/8 as we were delayed through third party issues with provision of power supplies. Nevertheless the project was successfully commissioned and the source put into supply on 21st June 2008. • The project to remove the single points of failure at Iver and Clay Lane consists of a number of process enhancements. These individual components were in addition to a number of activities to remove single points of failure at these sites planned for removal under the AMP4 and AMP5 MNI programmes. A number of these identified single points of failure have been completed with the remainder added to other MNI projects currently being carried out on the sites. These will be completed before March 2010. • The ‘SEMD zone requirements’ is a programme of measures to enhance the resilience of the Company’s distribution network to allow for major asset failure. B1 – The Post 2010 Environment and the Longer Term Overview Page 13 of 24 3 April 2009 Three Valleys Water Final Business Plan Progress with specific schemes in the programme is shown in the table below. This programme is on track for completion by the end of AMP4. SEMD Scheme status The Friars Wash to Boxted link main has been completed The Rowley Lane booster has been delayed by the necessity to micro-tunnel under the A1(M) and is now due for completion by March 2010 The Fortis Green trunk main has been completed The new booster at Stonebridge Park has been delayed due to continuing difficulties in land acquisition. The Harrow valves project is due for completion during 2009. The Egham to Iver link main has now been added to the scope of the MNI project to duplicate the contact tank at Iver. This project is now in construction and due for completion in December 2009. The Rye Hill trunk main and booster project was delayed by land acquisition and but is now largely complete (March 2009). The project to modify the Egham Low Lift PSV has been completed. The Egham Emergency Tunnel investigation was completed during March 2008 with the final costs received during April 2008. We do not propose to continue with this project for AMP5. Work on the National Environment Programme of investigations has progressed on all fronts. The status of projects as of 31/3/09 is described below. • We continue to work on six local driver schemes with two further Habitats Directive schemes being led by the Environment Agency (EA). • The EA confirmed in their letter of the 11th June 2007 that no sustainability reduction has been identified for the Lee Valley SPA. The EA continue to work on the South West London Waterbodies Special Protection Area (SPA). • The Mimram and Beane projects continue to be worked on in parallel. Groundwater and surface water monitoring has been installed to collect baseline environmental data prior to the trial drilling however trial boreholes and test pumping at a potential new location for abstraction has been delayed due to land purchase issues. On 29th August 2008 the EA notified us of their intention to reduce our abstraction licences at both Fulling Mill (Mimram catchment) and Whitehall (Beane catchment) but have not explained the rationale for the proposals. We are concerned that the proposals are inconsistent with the current project and there are insufficient environmental benefits compared to the costs that will be incurred ultimately by our customers. We will be working with the EA during 2009/10 to evaluate the consequences and cost benefit of their proposals. • A technical evaluation of options for improving lows in the Upper Gade was undertaken in 2007. The report suggested that the most significant cause of low flows through Hemel Hempsted was that the course of the river had in the past been diverted from its natural position to a more elevated location some distance away. The EA have not asked us to include further work on this scheme in AMP5. B1 – The Post 2010 Environment and the Longer Term Overview Page 14 of 24 3 April 2009 Three Valleys Water Final Business Plan • Investigations continued on the Lower Rib but heavy rainfall during 2007 limited the opportunity to collect data under low flow conditions. Monitoring continued through 2008 and signal testing at Thundridge and Wadesmill showed no noticeable effects on river flows. A report will be sent to the EA by March 2009. • Hughenden Valley groundwater level monitoring continued throughout 2007 in anticipation of the final closure of Thames Water’s Mill End Pumping Station (River Wye scheme). We are expecting to submit the final report for the project by the end of March 2009. • River Thames surface water intakes second year monitoring has been completed, with the trial of three passive wedge wire screens and two travelling screens at Egham. Further monitoring of fish entrainment at the other Three Valleys Water and Thames Water Utilities intakes was undertaken. The implementation of screening at our intakes will be included in the Final Business Plan. In November 2008 we received details of the National Environment Programme (NEP) studies and schemes the EA would like us to carry out in AMP5. The full programme of seventeen studies extends a number of existing projects to covers 30% of our abstraction licences and is expected to cost £7.4 million. Details are included in section B4 and we have asked the EA to provide a cost-benefit case to justify such an extensive programme. We are concerned that such a wide ranging programme fails to focus on known problems and that customers should not be expected to fund such a programme without a robust cost-benefit case. Nevertheless we will have considered the potential impact of these studies on our long term plans. Throughout AMP4 we have been closely monitoring progress on the implementation of the Water Framework Directive (WFD). We have contributed to a range of industry wide working groups and projects to consider the various steps in the process. We have responded to a series of information requests from the EA and Ofwat, notably data and assessment for classification of water bodies (Article 5), significant issues, water protection areas (Article 7) as well as the preliminary cost effectiveness assessment (pCEA) collated by Ofwat. We have also contributed to the water sector meetings in Thames, Southern and Anglian regions. The draft River Basin Management Plans were published on 22 December 2008 and we will respond in due course. We are concerned that the plans offer very little guidance on requirements beyond the first river basin plan cycle to 2015. Therefore we are unable to include the effect of longer term actions to meet WFD environmental and quality targets in our plans. 1.3.4 Supply-demand The AMP4 programme to maintain our supply-demand balance continues to progress well. We are on track to achieve the volumes identified in the Final Determination. The current status of the supply-demand schemes included in the Final Determination or replaced by other more cost effective schemes is shown in the table below. By 2007/08 we had achieved the target Water Available for Use in our monitoring plan: B1 – The Post 2010 Environment and the Longer Term Overview Page 15 of 24 3 April 2009 Three Valleys Water Final Business Plan Supply-demand scheme status • • • • • • • • • • • • • Bishops Stortford export project has been completed. Redricks Lane additional borehole and treatment upgrade – the boreholes on this project have now been completed and subject to the variation of the abstraction licence the required modifications to the treatment works will be completed in 2009. Springwell Booster upgrade has been completed. Iver optimisation is currently in the detailed design phase and will be complete by March 2010. The Baldock Road re-commissioning project has been completed. The project to re-commission the source at Bulstrode has been completed. Northmoor 3 a new borehole has been completed to replace one where the chalk matrix had collapsed. Stevenage Sources – the project to re-commission the Broomin Green source is on track with construction in progress for completion in April 2009. Maximising output to match the available licence at our Porthill source was completed during the year. Wastewater Recovery – three phases of the wastewater recovery project are now underway with volumetric savings already being achieved. The project is due for completion in late 2009. Novartis – the transfer of the licence to Hunton Bridge was completed as well as the upgrade of the treatment works to take the additional licence. A water safety plan (WSP) has been completed for the site as this is now necessary before re-commissioning but full operation has been delayed pending resolution of anomalously high levels of iron in water from the refurbished borehole. Lowering of the Digswell pump (drought scheme) has been completed and was proven in the 2006 drought. Debden Road – modifications to optimise use of the abstraction licence is currently in the construction phase and is due for completion by March 2010. We have continued to provide new mains and connections to serve new housing and other developments. The total number of new connections during 2007/08 was 7696. In 2008/09 we have seen the effect of the recession on the housing market and in turn the number of houses that have been built. We have been working with our local developers to monitor the situation and as a result of the downturn we have amended our forecasts. We have made good progress with the optional and ‘change of occupier’ metering programmes. During 2007/08 20,026 meters were installed for the purpose of determining customers’ bills. In 2008/09 we are forecasting a further 28,500 optant and change of occupier meters bringing the total measured households to 38%. Our current forecast for total optant and change of occupier meters installed in AMP 4 is 156,249 compared to 200,709 planned at PR04, a shortfall of 44,500. B1 – The Post 2010 Environment and the Longer Term Overview Page 16 of 24 3 April 2009 Three Valleys Water Final Business Plan The recession has affected the number of house sales. In 2008/09 the lower rate of house moves adversely affected the Change of Occupier metering programme. In an endeavour to meet our current metering forecast we have therefore implemented a higher profile communications campaign to remind customers of the benefits of opting for a meter. We have also decided to fit automatic meter reading equipment (AMR) on new internal meter installations in order to overcome meter reading access problems for ourselves and to minimise inconvenience to customers overall. The recession has also had an effect on our non-household customer base. This has caused in a reduction in billed consumption in 2008/09 as well as a virtual stop in nonhousehold unmeasured properties switching to metered charges. In 2008 we updated our Drought Management Plan and this is available on our website. We were funded at PR04 for a new water consumption monitor (WATCOM2) based on internal meters. To date we have recruited about 680 households to the monitor but as we had concerns over the robustness of the initial outcomes we suspended further recruitment pending a review of the way forward. We implemented a programme to enable a direct comparison between WATCOM1 and WATCOM2 consumption samples. This work has involved: • refreshing occupancy rates • completing internal plumbing checks • measurement of supply pipe leakage on WATCOM 1 properties • investigation of socio-economic impacts and • benchmarking recruitment techniques to established best practise • reviewing data handling and analysis. During 2008 we have been working with consultants Tynemarch to evaluate the issues. We also took advantage of new technology in 2008 and purchased 100 ‘Leakfrog’ meters to measure the supply pipe leakage of our WATCOM1 sample. Over 700 properties within the WATCOM1 sample were measured to produce a reliable estimate of supply pipe leakage. In October 2008 we shared the outcome of our investigations with our Reporter and Ofwat. The outcome was that the values of consumption from our WATCOM1 sample had been substantially improved and such that these would be sufficiently robust for regulatory reporting during AMP5. We also propose to continue with improvements to our new consumption study WATCOM2 during AMP5 with a view to producing reliable and representative results. We will report the outputs from WATCOM2 in our June Return for comparison with WATCOM1 results. We have been working in conjunction with other water companies in the south east and the EA to explore options for optimising a regional supply strategy to take advantage of any synergies between plans. The outcome of the modelling suggests that in light of our supply-demand surplus during AMP5 the cross-border supplies we have with Thames and South-East Water are unaffected by the overall least cost solution. We have been supportive of this overall least cost approach. However it should be recognised that the modelling does not match the economic appraisal methodology required by the Water B1 – The Post 2010 Environment and the Longer Term Overview Page 17 of 24 3 April 2009 Three Valleys Water Final Business Plan Resource Planning Guidelines in that it only considers supply side options for managing the supply-demand gap and is unable to consider the relative risks of supply compared to demand options. Nevertheless the outcomes are a valuable benchmark that has, and will, continue to inform our plans. In light of the WRSE programme we are continuing discussions with Thames Water and Anglian Water regarding the strategic regional schemes in North Oxfordshire and at Grafham, although progress has been slower than expected and neither company has accepted our offer of a contribution to their studies programme. We have also begun a study with consultants MWH into the prospects for additional resources in the Essex Confined Aquifer. This is expected to be completed during 2009/10. On 30 April 2008, we published our Draft Water Resources Management Plan (DWRMP) for stakeholder consultation. The consultation period was open until 28 August 2008 and we received thirty-eight responses to our plan. We have taken account of the feedback we have received in preparation of our Final Business Plan and have amended a number of our methodologies accordingly. In particular we have amended our economic appraisal of our supply-demand balance to reflect an ‘optant meter only’ baseline and to determine the least cost of maintaining supply-demand. The outcome of these changes confirms we do not need to continue metering, reducing leakage or enhanced water efficiency measures during AMP5. However taking account of wider benefits means we are proposing to continue our current compulsory ‘Change of Occupier‘ metering programme during AMP5 as well as continuing to reduce leakage by 2 Ml/d per year until 2020. We sent our Statement of Response to the representations made to the Secretary of State on 29th January 2009 together with the amendments made to our DWRMP. We will amend our DWRMP to take account of Direction from the Secretary of State in due course and publish our Final Water Resources Management Plan; this is expected during the summer of 2009. 1.4 Corporate and social responsibility We have wide responsibilities to our stakeholders; our owners, our people, our customers, our neighbours, the community, our regulators, our contractors, our suppliers, those who use our land for recreation, and environmental organisations. These stakeholders are affected by and need to influence the decisions we make. Our regulators include Ofwat, the Environment Agency, the Drinking Water Inspectorate and English Nature. We work closely with them to ensure that they are aware of issues affecting the business, including the local environment, social and economic factors. We share and receive good practices with the water industry’s trade association, Water UK. We have representatives on a range of expert groups and take every opportunity to promote our views both within the industry, via Water UK and UKWIR and on third party groups such as the EA’s Regional Environmental Protection Committee and the Confederation of British Industry (CBI). We are in contact with our fifty local MPs and local authorities about key issues, such as our five-yearly business plan and issues in their areas. We also work with a range of planning authorities. Our operating area is influenced by three Regional Plans, South-East, London and East of England and we have contributed to the development of each in particular to assess the effect of growth on public water supplies and the new sustainable communities. Both the M1 corridor and Milton Keynes and South Bedfordshire communities affect the growth in our area. We also work with our twenty-six local authorities and have contributed to their Local Development Frameworks (LDF). Under the LDF’s a number of water cycle studies have been set up to investigate B1 – The Post 2010 Environment and the Longer Term Overview Page 18 of 24 3 April 2009 Three Valleys Water Final Business Plan the effect of new communities and we have been pleased to contribute to a number of these including Harlow North, Stevenage and North Luton. Finally we have been pleased to develop a closer working relationship with housing developers in our area by responding to strategic enquires regarding the availability and sustainability of water resources and supplies at an early stage of proposals. We have explored innovative mechanisms for sharing risk and the cost of infrastructure provision for multiple developments linked to regional infrastructure research projects led by Exeter and Cranfield Universities. We will develop these proposals further during AMP5. One of our challenges is to understand the varied needs of our stakeholders so that we can work in a way that balances their expectations. With every project we aim to identify the different stakeholders that may be affected and seek to engage them. This could take the form of a letter informing them of plans to work in their neighbourhood and inviting comment, or could extend to seeking their advice on issues such as developing an environmental management plan for a lake. Acknowledging and fulfilling our obligations to our stakeholders enables us to implement more efficient and effective projects. We report progress under four themes: our business, our people, our community and our environment. We recognise that it is the interrelationship between these themes which supports a balanced approach to corporate responsibility and we strive to recognise and integrate issues whenever possible. Our main performance management tool within the business is the ‘Balanced Scorecard’. This records our core goals, objectives and targets and is regularly reviewed to ensure it is consistent with the risk and challenges we face. Performance against the objectives and targets is monitored monthly so that we can be sure we are addressing and balancing the needs of our various stakeholders. We communicate regularly with our stakeholders to ensure that we identify and respond to their individual needs. We welcome opportunities to work with some of the more diverse stakeholders, while maintaining regular contact with local councils, Government and regulatory stakeholders. We conduct regular customer surveys and include an annual Tracking Survey to assess trends in our customers’ views. For our business plan and water resources plans we have conducted a series of focus groups where we have worked closely with local authorities and businesses to ensure their views are taken into account. For our customers we produce information leaflets in a variety of formats (which are also available on our internet site). In addition to customer contacts we are in regular contact with the Consumer Council for Water. We consult our staff regularly about our plans through joint negotiating consultative committee meetings, team meetings and briefings, staff surveys and management conferences. We also arrange regular meetings and briefings with local authority environmental health officers and health authority representatives and update them about forthcoming issues that may affect them. We sponsored and attended the annual conference of the Hertfordshire Emergency Services Major Incident Committee. We continued to work with the Environment Agency in the aftermath of the Buncefield oil depot fire (December 2005) in order to reinstate the Bow Bridge treatment works which was taken out of supply at the time as a precaution. We are expecting to re-commission the plant in 2009/10. B1 – The Post 2010 Environment and the Longer Term Overview Page 19 of 24 3 April 2009 Three Valleys Water Final Business Plan We maintain regular contact with environmental organisations, including local EA officers, Wraysbury Lakes Liaison Group, Friends of Stockers Lake, Hertfordshire and Middlesex Wildlife Trust, the Hawk and Owl Trust, Chilterns Chalk Streams Society, the Ver Valley Society and other local river groups. Working with these organisations provides us with valuable information about the sites for inclusion in our site management plans and enables us to balance the sometimes conflicting needs of interest groups. In 2008 we agreed with RSPB that they should manage two of our emergency bankside storage sites at Silverwings and Heron Lake to ensure we have the optimum balance of environmental protection without undermining operational effectiveness. 2 Assessment of the post 2010 environment for the Company Our assessment of the post 2010 environment is set out in Section A3. 3 Managing the key risks and uncertainties In writing this section we have assumed that our future requirements included in this Plan are funded. 3.1 Failure of assets resulting in a widespread loss of supply This is one of our most significant risks that could result in major loss of service to our customers. Significant effort in effective planning in the connectivity of our assets, the location and performance of our assets ensures this risk is managed to a remote likelihood. Climate change provides an emerging threat to the management of this risk. Our Business Plan includes measures in line with the recommendations of the Pitt review in order to protect these assets which we have identified as being vulnerable to flooding. 3.2 Loss of our sources through pollution Within our area of supply, society has historically tolerated the pollution of water catchment from urban and agricultural pollutants. Close to 60% of our water is sourced from groundwater which is at risk from society’s historical abuse of our environment. We will work with the Environment Agency to ensure the threat to our sources in minimised and to encourage them to use their full armoury of enforcement powers to ensure the ‘polluter pays”. We believe these should be used in an equitable manner, rather than current practice which appears to favour action over transient but visible pollution events rather than chronic pollution of groundwater that is difficult to deal with. Long term pollution of our source at Ickenham is an example of the EA’s reluctance to take action to ensure that the polluter pays and remediates. Over the past three AMP periods, major investments have been made into new treatment processes to deal with emerging pollutants such as pesticides, VOCs, cryptosporidium and nitrate. New threats are emerging for which treatment is included in the Quality Programme for this AMP period. These cover: B1 – The Post 2010 Environment and the Longer Term Overview Page 20 of 24 3 April 2009 Three Valleys Water Final Business Plan • tetrachlorethene • manganese • perfluorooctane sulphonate (PFOS) • nitrate • cryptosporidium. However emerging pollutants such as metaldhyde are difficult to treat and therefore more emphasis needs to be applied to reduce the risk of pollution at source. The Government, the EA and the water industry have supported the principle of integrated catchment management but further actions are needed to work with potential polluters to minimise the risk. In our plan for AMP5 we propose to enhance our activities in the catchment to pursue this objective. 3.3 Supply-demand balance We anticipate that pressure will continue to be felt by the Company to ensure sufficient supply of water to meet demand. We expect demand for water in ten to fifteen years to rise. We make it clear in our Strategic Direction Statement that our approach to managing supply-demand balance is heavily weighted to the initiation of demand side measures, although this itself is more risky since it requires actual reductions in the consumption of our customers. Our planned metering programme in AMP5, which includes the use of AMR in internal metered and new properties, is expected to benefit the level of overall demand for water. However, a key risk is that demand management measures may be ineffective at controlling demand in the long term. During AMP5 we will be investigating options for enhancing our metering programme at AMP6 and in particular the use of smart technology in order to maximise the effect on demand whilst providing enhanced service to customers. We are also exploring the potential future role of seasonal tariffs through pilot trials as, in the long term, it may be necessary to implement enhanced demand management incentives. In the meantime we are monitoring the use of other smart meter initiatives and innovative tariff solutions in the UK and around the world. Notwithstanding the risk of demand increases we believe the continuation of our compulsory ‘change of occupier’ metering programme is essential as we anticipate a significant growth of new houses and with it an increase in the population that we will supply. In the next 25 years we anticipate a 25% increase in new connections. We will review the success or otherwise of our demand management approach very closely, since the lead-time for a supply-side solution to a demand supply deficit could be considerable. In light of the risk over the long term effectiveness of demand management measures we propose to maintain our study programme for alternative long term regional resource development and continue working with other water companies to promote new regional storage schemes. B1 – The Post 2010 Environment and the Longer Term Overview Page 21 of 24 3 April 2009 Three Valleys Water Final Business Plan 3.4 Regulation Our perspective since privatisation is that, despite Ofwat’s measures during the past five years or so to increase the level of transparency there has been a steady strengthening of regulation and asymmetry of regulatory risk. Our concern relates to a number of areas. • increased number and detail of measured outputs and targets • recent changes to the pre-setting methodology, for example: changes to the funding of allowed taxation due to actual / notional levels of gearing menu regulation and the persistent lack of clear worked examples • proposed removal of all notified items which will increase the risks for companies where legitimate costs have been incurred • continuous growth of reporting requirements, both in terms of volume of material to be reported and the reduction in the level of materiality and permissible margin for error • growing public expectation of regulatory confrontation and punishment as opposed to partnership and preventative action • we are also concerned to ensure that any proposals by the EA to change licenses are considered with a full appreciation of the real costs to customers to replace supplies or reduce demand as the costs may be disproportionate to the benefits. We will continue to work with our environmental regulators to ensure such clarity is obtained; • proposed water efficiency targets which are not cost effective and not cost-beneficial. Ofwat have also suggested the additional activity required to meet the targets will not be funded in prices. We are of the view that our annual regulatory return has consistently reported both the level of activity and costs we have carried out to discharge our duty to promote the efficient use of water with our customers. Therefore, the pressure being applied to companies to carry out a substantial additional programme of measures without recognition of the additional costs in prices is not consistent with an objective regulatory assessment. Nevertheless we appreciate the emerging pragmatism in general at Ofwat to ensure plans and investments are appropriate, affordable, consistent, what stakeholders want, costbeneficial taking wider benefits into account and offer value for money for customers. We will continue to work with Ofwat to ensure our Final Business Plan meets these criteria. 3.5 Financial issues Our financial projections are sensitive to a number of risks. • Cost shocks – we have identified and allowed for increases in operating costs in the plan that we can reasonably anticipate, such as known increases in pension costs, abstraction charges and the cost of obtaining water from Grafham. There remain significant cost uncertainties which could threaten our ability to finance the plan if allowance is not made in price limits. • Income shocks – these relate principally to bad debt risk, higher than expected uptake of free meter options, higher volume savings than anticipated from B1 – The Post 2010 Environment and the Longer Term Overview Page 22 of 24 3 April 2009 Three Valleys Water Final Business Plan selectively metered customers, lower commercial demand for water than anticipated. • Financing costs – interest rates available in 2008 may not be available to us beyond 2010 when we will need to finance the programme of outputs. Investor perceptions of target financial ratios may change by 2010 and beyond. • Local factors – our projects are highly sensitive to Ofwat’s decisions on efficiency targets and the need to allow for the cost of the impact of operating in and near London. If there is further higher comparative economic development in the South East this risk will increase. • Taxation – the change proposed by Ofwat to the funding of taxation in price limits could result in the company being unable to finance its functions. • FRED29 – the adoption of FRED29 will increase substantially the amount of corporation tax payable by the Company, well beyond the levels expected to be allowed under Ofwat’s current approach to setting of allowed tax. 4 Achieving the right balance for consumers and the environment Our overall strategic intent is to: • continue to listen to our customers, understand their circumstances and exceed their expectations of us by enhancing the ‘customer experience’ • balance the supply of and demand for water in the medium and long term through managing demand, continuing to optimise the use of existing resources and developing new regional resource schemes in the longer term, a “twin track approach” • ensure that our assets are durable, strong, serviceable and resilient to both social and environmental pressures. Throughout 2007 we consulted extensively with customers and other stakeholders to understand their priorities. In focus groups, in face-to face interviews, independently moderated, and in more quantitative research, customers and stakeholders informed us of their expectations and priorities. There are five clear priorities. • Affordability – ensure water supplies remain affordable. Listening to the needs of our customers and meeting or exceeding their expectation. • Meeting demand – enough water should be available to our customers by normal means in all but extreme circumstances. • Right quality – water should be of the right technical and aesthetic quality. • The environment – we should have care and consideration for the environment in all we do. • Minimising disruption – there should be minimal disruption to supply in the course of our normal operations. B1 – The Post 2010 Environment and the Longer Term Overview Page 23 of 24 3 April 2009 Three Valleys Water Final Business Plan We believe that there will be pressure to increase water bills in future for the following reasons. • We see a continuing need for investment in the water supply system. This is required principally for maintaining and improving the water supply infrastructure. But we will also need to extend our ability to supply water, and do so under more unpredictable conditions. Any capital investment increases water bills because we borrow to fund investment. The cost of servicing our borrowing is met from water charges. • Price limits are set to allow a return on the value of the company’s assets. These are currently valued at around £700 million but their true replacement value is nearer £4 billion. As assets are renewed at their replacement cost, the asset value will rise. This means that the discount will shrink over time, causing water prices to rise. Any increases in the price of water must be seen in the broader context of rising incomes and rising regional wealth. Our local circumstances in this regard are particular: in our supply region there will be more customers needing more water. Many of those customers will be better off than they are today; but some will not. Our Plan provides sustainable solutions that address the economic, environmental and social consequences of our operations. B1 – The Post 2010 Environment and the Longer Term Overview Page 24 of 24 3 April 2009 Three Valleys Water Final Business Plan Contents Introduction.............................................................................................................2 1 Overall approach to assessing the scope for improvements in efficiency for the AMP5 period ......................................................................................... 2 1.1 1.2 2 Water service efficiency improvements ......................................................... 5 2.1 2.2 3 General commentary ....................................................................................2 Catch-up efficiency .......................................................................................3 Operating expenditure scope for future efficiency........................................5 Capital maintenance and capital enhancement expenditure scope for future efficiency.......................................................................................................6 Bottom up efficiency assessment .................................................................. 6 3.1 3.2 3.3 3.4 3.5 Shared services re-organsiation...................................................................6 Avoidable contacts & complaints..................................................................7 Head office relocation...................................................................................7 Procurement savings....................................................................................7 Capital maintenance efficiency.....................................................................8 Appendix – Special factors…………………………………………………………9 Tables and Tables Commentaries B2 – Improving Efficiency 3 April 2009 Page 1 of 29 Three Valleys Water Final Business Plan B2 Improving Efficiency Introduction In assessing relative efficiency Ofwat use cross-sectional econometric models that break operating expenditure for a single year into a number of smaller cost areas for analysis. The econometric models cover water distribution, water resources and treatment, water power and water business activities. Ofwat combine the results of the four water models, together with any adjustments for atypical costs, company special factors, cross subsidies and pension costs to determine how we have performed against other companies. Ofwat’s 2007/08 relative efficiency assessment1 concluded that we are classified as a Band D (upper) company for operating expenditure efficiency, 20th out of 21 companies. We do not agree with this assessment having carried out our own comparative efficiency assessment. We used time series analysis techniques developed by consultants Reckon LLP in their report: Application of Time Series Analysis to Relative Efficiency Assessment, produced for UK Water Industry Research (UKWIR). Time-series panel data models use data for all companies over a number of years. This approach gives a richer set of evidence that can provide more accurate econometric models. Our analysis shows that we are an efficiently operated business taking into account the significant challenges of operating in the South-East of England, north London and the Home Counties, north and west of the capital. Ofwat’s published assessment has not made sufficient allowance for these factors, so underestimates our relative efficiency. The appendix to this section explains how our circumstances are different and proposes values for adjustments we wish Ofwat to make to its published assessment for this price review. Based on our assessment of our relative efficiency position, band B; we propose operating expenditure catch-up efficiency targets of 1.23% per annum in real terms. On frontier shift efficiency, the evidence shows that rising input prices are likely to cancel out prospective productivity improvements in both opex and capital expenditure (Capex). We propose RPI +0.0%. The last section of this chapter considers operating expenditure efficiency bottom-up to show how we plan to achieve the targets we have set. We confirm that in order to meet our proposed efficiency targets there will not be a reduction in levels of service to our customers. 1 Overall approach to assessing the scope for improvements in efficiency for the AMP5 period 1.1 General commentary Our Plan proposes efficiency targets based on two elements. Firstly, we have analysed our present level of efficiency in comparison to other water companies. Secondly, we have assessed the scope for future efficiency in the water industry relative to the whole economy. Our outline assessment of local cost drivers to be taken into account in making relative efficiency assessments is summarised in the Appendix to section B2. 1 RD 21/07 Relative efficiency assessment 2006-07, Ofwat, 12 Dec 2007. B2 – Improving Efficiency 3 April 2009 Page 2 of 29 Three Valleys Water Final Business Plan 1.2 Catch-up efficiency We have used the UKWIR / Reckon LLP modelling tool to analyse our water operating expenditure. We have used the dataset produced by UKWIR and added operating cost data up to and including the financial year 2007/08 from industry data sharing of June Return information. The results of this analysis are presented below. B2 – Improving Efficiency 3 April 2009 Page 3 of 29 Three Valleys Water Final Business Plan Table B2 : 1 Catch-up efficiency assessments using 2007/08 opex Description Unit 2 Assessed value Calculation explanation TVW actual base opex £m 92.12 Less atypical costs £m 0.70 Adjusted actual base opex £m 91.42 Calc. 92.12 – 0.70 = 91.42 Modelled forecast base opex £m 72.80 Taken from UKWIR model forecast Add assessment of special factors £m 17.96 Special factor assessment outlined in Appendix to B2 Adjusted modelled forecast base opex £m 90.76 Calc. 72.80 + 17.96 = 90.76 Adjustment to residuals % 10.0 Taken from guidance TVW efficiency gap relative to models % -0.65 Calc. ((90.76 – 91.42) / 91.42 = -0.72%) x (1 – 10%) = - 0.65% Leading comparator expenditure relative to models % 12.78 Calc. (14.20% x (1 – 10%)) = 12.78% % 13.43 Calc. (12.78% - - 0.65 = 13.43% Band B Total efficiency gap to leading comparator Assessment of efficiency band 2007/08 opex from Table 21 of our June Return Taken from Table 21 commentary of our June Return Band B (i.e. between 5% and 15% from leader) Middle of band B % -10.0 Proportion of efficiency gap to close in AMP5 % 60.0 Taken from guidance Total catch – up efficiency % -6.0 Calc. - 10.0% x 60.0% = - 6.0% Annualised compounded catch – up efficiency % -1.23 Per annum on a compounded basis (see Table B2.2) 2 The total base opex for 2007/08 for TVW was £109 million, as reported in Table 21 of our June Return. The current operating cost models used by Ofwat for water resources and treatment, water distribution, power and business activities do not model total base opex. Taken together then models account for £92.1 million of base opex for 2007/08. B2 – Improving Efficiency 3 April 2009 Page 4 of 29 Three Valleys Water Final Business Plan 2 Water service efficiency improvements 2.1 Operating expenditure scope for future efficiency Using the report The Rate of Frontier Shift Affecting Water Industry Costs by First Economics for Water UK we derived our estimate of the scope for future productivity gains, and hence, efficiency. The report examines the rate of ‘frontier shift’ in both opex and capital unit costs. Examination of opex ‘frontier shift’ is based on four approaches. • Recent industry cost data on frontier companies’ expenditure trends. • Regulatory precedent regarding frontier shift assumptions used by regulators in periodic reviews in other industries. • Component analysis using a bottom up calculation of the rates of input price inflation and productivity improvement in the water sector. • Top-down benchmarking against trends in unit costs exhibited by, or expected of, companies carrying out similar activities. We have also taken into account the evidence in Reckon LLP’s report, published by Ofwat. We summarise the evidence on base operating expenditure frontier shift in Table B2 : 2. Table B2 : 2 Insights into the rate of frontier shift affecting base opex Implied rate of frontier shift Type of evidence Rationale Recent industry cost data RPI + 0.2% The companies Ofwat uses to define the efficiency frontier have, on average, seen costs increase slightly in real terms since PR04 even after stripping out the effects of rising power costs Regulatory precedent RPI + 0.0% to 0.75% The CAA, Competition Commission, Ofgem and ORR have all used zero / near zero or positive frontier shift assumptions in recent periodic reviews. Component analysis RPI + 0.1% Frontier companies should be able to improve productivity by around 1.45% per annum, but their achievements will be cancelled out by rising input prices. PR09/28 RPI + 0.0% Based on Reckon LLP’s report Top-down benchmarking RPI +0.6% to 0.7% To the extent that activities contained within opex have service sector characteristics, it is reasonable to expect frontier shift to mirror the above RPI trend in costs experienced by service sector firms generally. Source: First Economics First Economics conclude that frontier shift at, or slightly above, RPI is supported by this evidence. In an update paper Frontier Shift: An Update Prepared for Water UK First Economics present updated evidence showing forecasted cost increases and decreases for opex input price inflation (excluding electricity purchase costs). This paper concludes that AMP5 opex price inflation will average RPI +2.1% following a fall in 2009/10. This forecast includes costs for local council rates, bad debt and Environment Agency charges. As we have allowed for these costs within our base opex projection, (please see commentary to Table B3 : 3) or in the case of bad debt propose that this be treated as a notified item, we have adjusted the First Economics conclusions for these items so B2 – Improving Efficiency 3 April 2009 Page 5 of 29 Three Valleys Water Final Business Plan propose opex frontier shift of 0.0% in real terms in our Plan. This is also consistent with the rate of improvement expected in the Ofwat/Reckon LLP report. 2.2 Capital maintenance and capital enhancement expenditure scope for future efficiency Examination of capital unit cost ‘frontier shift’ is based on six approaches. Capital unit cost frontier shift results are summarised in Table B2 : 3. Table B2 : 3 Insights into the rate of frontier shift affecting capital unit costs Implied rate of frontier shift Type of evidence Rationale 1. Regulatory precedent RPI + 0.0% to 2.4% Regulators have expressed a range of different views on the above RPI input cost pressures that will affect infrastructure projects over the next five years. 2. Component analysis RPI + 1.35% Productivity growth in line with the construction industry more than cancelled out by input price inflation well above RPI. 3. Top down benchmarking RPI +1.2% The underlying UK inflation rate after stripping out the containing effect of falling goods prices. 4. Historical COPI & infrastructure output price inflation RPI +1.4% to 1.9% Ten year averages for COPI and its infrastructure subindex 5. PR09/28 RPI- 0.5% Based on Reckon LLP’s report 6. Forecast COPI Up to RPI +3.5% Independent forecasters’ predictions for COPI Source: First Economics First Economics conclude that there is more uncertainty around future capex input price inflation than with opex. The common theme however is that capex unit costs will increase faster than RPI measured inflation. The report concludes that it would be reasonable to project increases in unit costs of RPI + 1% to RPI + 2% in business plans. Meanwhile, Reckon LLP’s report for Ofwat concludes that frontier shift should be RPI -0.5%. We have settled at the mid- to lower end of the range of estimates indicated by the evidence, so for capital expenditure frontier shift efficiency we propose RPI + 0%. 3 Bottom up efficiency assessment This section summarises prospective actions for the coming years to allow us to make progress against the opex efficiency targets we propose, whilst maintaining and improving customer service. We also describe how we plan to improve efficiency in capital maintenance activity. 3.1 Shared services re-organsiation We are carrying out a programme of re-organisation to contribute to a shared services business model across the Veolia Water UK group of companies. Under this approach, Three Valleys will purchase certain head-office and other services from a service B2 – Improving Efficiency 3 April 2009 Page 6 of 29 Three Valleys Water Final Business Plan company, run at cost, within the Veolia Water UK group. Other Veolia companies will purchase the business services they require from the same service company. Our reorganisation is in its early stages and will progress in phases over the coming years. Initially the shared service model will improve the quality of business services but that will in itself improve efficiency by avoiding duplication of activities, reducing mistakes and avoiding re-work. It will improve the efficiency with which we utilise skills and improve our work planning and execution. The second phase of the shared services re-organisation will align more closely the work of field based customer service technicians with the customer-facing contact centre to improve accountability and the end to end process of resolving issues to our customers’ satisfaction. As we improve the ways in which we work we expect to be able to reduce manpower and project savings of £1m per annum to 2014/15. 3.2 Avoidable contacts & complaints We set out in this business plan to reduce avoidable contacts by 25% by 2015 and to reduce telephone and written complaints by 25% over the same period. The activities we need to complete to achieve this are described in section B6 of this plan. With fewer contacts to manage and fewer complaints to handle, we anticipate that we will be able to reduce manpower in our contact centre and complaints handling functions. This will result in operating cost savings growing to £0.12m per annum by 2014/15 3.3 Head office relocation We are relocating our headquarters to a new office building in May 2009, closing our offices at Hatfield and Bushey. We have already produced efficiencies of £0.11m in site maintenance costs for next year and budgeted in 2009/10 for savings of £0.4m to reflect reduced manpower requirements and lower head office administrative costs. These savings are already included in our base opex projection in Table B3.3. We anticipate that we will realise further savings from our relocation as we re-organise and find better ways of working. We project additional savings growing to £1.25m by 2014/15 which we will be able to lock in for customers when base opex is reset at the 2014 price review. We further describe our head office relocation and how it will benefit our customers in the commentary accompanying Table B3.3. 3.4 Procurement savings Table B2 : 4 Principal drivers for opex efficiency in AMP5 Shared services & reorganisation Head office relocation Avoided contacts & complaints Procurement savings Total savings Percent of projected opex 2010/11 2011/12 2012/13 2013/14 2014/15 1.00 1.00 1.00 1.00 1.00 0.40 0.83 1.25 1.25 1.25 0.04 0.06 0.08 0.10 0.12 1.10 2.82 2.4% 1.10 3.53 3.0% 1.10 4.15 3.6% 1.10 4.15 3.6% 1.10 4.15 3.6% The table reflects the efficiencies we currently anticipate. In aggregate these are lower than the efficiency target we have proposed which means that we will need to identify further efficiencies later in the price control period. We are well incentivised by the price B2 – Improving Efficiency 3 April 2009 Page 7 of 29 Three Valleys Water Final Business Plan limits to identify these opportunities, but it is too soon to be able to give detailed information on these at this time. 3.5 Capital maintenance efficiency We expect that our capital maintenance efficiency will continue to improve as we deliver our capital maintenance investment programme during AMP5. Our delivery partner Mace who joined us in December 2005 have been heavily involved in the development of this business plan and are well established to ensure capital maintenance investment can continue as smoothly as possible at the end of AMP4 and the start of AMP5. Unlike AMP4 we will not be carrying out significant organisational restructuring in the delivery and management of our capital maintenance programme. This will minimise discontinuity in our investment and this will improve our efficiency. Our infrastructure maintenance programme will continue to be delivered by more than one contractor which will allow us to achieve a degree of efficiency in the way in which work is delivered across regions by contractors. We expect to be able to deliver an improvement in infrastructure capital maintenance efficiency. The extent of the efficiency we achieve will depend on ensuring an appropriate balance in work between contractors. We will continue to deliver non-infrastructure capital maintenance as efficiently as possible by taking advantage of optimal programmes of work and procurement support. B2 – Improving Efficiency 3 April 2009 Page 8 of 29 Three Valleys Water Final Business Plan Appendix – Special factors Overview On 15 May 2008, Ofwat issued special factor guidance to the industry. This guidance demonstrates that Ofwat recognises that there are factors specific to each company that cannot be incorporated in their econometric models that typically lead to higher operating costs. In order to interpret the results of their economic models Ofwat need to take account of these factors. This paper sets out the research and evidence prepared by Three Valleys Water (TVW) to demonstrate that materially higher operating expenditure is incurred as a result of four special factors. Table B2 : 5 Special factors and their cost Net monetary impact £m 1.518 Percent of total service modelled opex 1.6% High network activity 5.588 6.1% Regional employment and pensions 6.611 7.2% Karstic ground water sources 4.242 4.6% Total 17.959 19.5% Special factor High demand for water Note: Total water service modelled opex for TVW in 2007/08 was £92.1 million Ofwat have stated that they will consider applying a materiality threshold for total claims allowed of 10% of total service modelled opex. We do not agree that special factors should be capped - special factors should be as large as is justified by evidence, even if this is higher than 10%. Our special factors amount to 19.5% of 2007/08 total service modelled opex. 1. High demand for water Our response to Ofwat’s feedback We have considered Ofwat’s feedback carefully. It is true that we intend to revise our reporting of leakage in the next AMP and this will reduce our estimates of unmeasured per capita consumption. Our June Return commentaries to Table 10 show that if the change had been introduced last year, it would have changed our assessment of the extra water we deliver to unmeasured customers by 11 litres per head per day, so that we would be delivering 16 litres per head per day more than the leading comparators. The position with measured customers would be unchanged at 20 litres extra per head per day. This would reduce the value of this factor from £1.518m to £1.031m. This is still more than 1% of modelled opex, which is above Ofwat’s 1% threshold. We have considered Ofwat’s view that we should compare ourselves to the industry average rather than the leading comparators. For this special factor we note that Yorkshire and Wessex, the leading comparators have demand close to the industry average so it would not change the outcome materially. However we have concluded that if we are to be assessed for efficiency against the leading comparators, then surely it is reasonable to evaluate special factors against the leaders too. We do not agree that we have overvalued the production cost of water. Our figure, 5.44p/m3 relates to the average incremental cost of water, excluding power, as reported in B2 – Improving Efficiency 3 April 2009 Page 9 of 29 Three Valleys Water Final Business Plan our June Returns. It is less than our most expensive source of water, Grafham, which is the source we would wish to reduce take from first, if our customers’ demand were lower. We ask Ofwat to re-consider this special factor in light of our response and the evidence in the section below. 1a. What type of claim is your special factor? This special factor claim is an operating circumstances issue. Socio-economic and geographical circumstances cause our customers to have much higher per capita demand for water. As a consequence we incur additional opex producing additional water to meet high demand. 1b. What is different about TVW that causes it to experience materially higher costs? June Return data shows that our household customers have the highest demand for water in the industry, whether measured or unmeasured. We incur additional operating costs to produce the higher volume of water required by our customers. Figure B2 : 1 Measured per capita consumption, litres per head per day 2007/08 180 litres per head per day 170 160 150 140 130 120 B2 – Improving Efficiency Three Valleys B&W Hants Thames South East Mid Kent Anglian Folkstone & Dover Sutton & E Surrey Southern Wessex Yorkshire Ports-mouth South West Cambridge N'umbrian Only Bristol South Staffs Dwr Cymru Severn Trent United Utilities Dee Valley 100 Tendring Hundred 110 3 April 2009 Page 10 of 29 Three Valleys Water Final Business Plan Figure B2 : 2 Unmeasured per capita consumption, litres per head per day 2007/08 180 litres per head per day 170 160 150 140 130 120 Three Valleys Mid Kent South East Sutton & E Surrey Ports-mouth Folkstone & Dover Southern Thames Bristol Anglian Dwr Cymru B&W Hants Dee Valley South West Yorkshire Wessex South Staffs N'umbrian Only Severn Trent United Utilities Cambridge 100 Tendring Hundred 110 Figure B2 : 3 Average per capita consumption, litres per head per day 2007/08 180 170 litres per head per day 160 150 140 130 120 Three Valleys South East Mid Kent Ports-mouth Sutton & E Surrey B&W Hants Thames Southern Folkstone & Dover Anglian Dwr Cymru Bristol Wessex Yorkshire South Staffs N'umbrian Only South West United Utilities Dee Valley Severn Trent Cambridge 100 Tendring Hundred 110 There are a number of reasons why the behaviour of our customers is different. The two most important factors are that our customers are on average more affluent than in other parts of the country (both in absolute terms but also in terms of income relative to bill size) and that owing to our location in the southeast, average temperatures are higher in our area. Tynemarch’s 10 August 2007 report Leakage Methodology Review: Variation in Per Capita Consumption Estimates shows how variations in per capita consumption are explained by socio-economic factors. The report demonstrates that higher water use is strongly correlated with better off households and that summer temperatures are found to B2 – Improving Efficiency 3 April 2009 Page 11 of 29 Three Valleys Water Final Business Plan be strongly correlated with higher water use. Additional contributory factors which explain our position relative to the rest of the industry include the characteristics of local housing stock with an absence of terraced housing with small or no gardens. Our customers also have fast draining soils leading to significant leisure and garden watering demand. We have a statutory duty to supply water for domestic purposes so we have no choice but to produce the water that satisfies legitimate customer demand arising from local circumstances. Further, since the factors influencing high demand are socio-economic and geographic in nature they are outside management control. 2a. What is the net monetary impact of the costs? In aggregate, the net additional opex costs of meeting higher measured and unmeasured household demand is £1.518 million. 2b. How have you derived the cost of the claim? We calculate from June Return data, that we delivered 27 litres per person per day more water to our unmeasured customers than the opex leading comparator companies Yorkshire and Wessex Water. There are 2,144,190 unmeasured household customers in our area so we delivered 21,471,663m3 more water than if our unmeasured customers had the same uPCC as those supplied by the leading comparators. If we had rebased our leakage calculation, we would have still delivered 16 litres per person per day more than the leading comparators. Our cost of production is £0.0544p/m3 which is our average variable water resources and treatment opex per cubic metre delivered, excluding power and abstraction charges. We have excluded power because the power econometric model uses distribution input as an explanatory factor so accounts for high demand whilst abstraction charges are outside the efficiency models. Multiplying our unit production cost by the additional volume delivered allows us to calculate the additional cost of meeting higher unmeasured demand, £1.168 million In 2007/08. We deliver 20 litres per person per day more water to our measured customers than Yorkshire and Wessex Water. In 2007/08 there were 900,800 measured household customers so we delivered 6,435,997m3 more water that year. Using the same unit cost, £0.0544p/m3 as before, the additional cost of meeting higher measured demand is £0.350 million. The total cost is £1.168 million plus £0.350 million, equals £1.518 million as shown in the table below. Table B2 : 6 Customers, their water consumption and cost Type of customers Unmeasured customers Measured customers Number of customers Additional volume delivered l/head/day Cost of production p/m3 Additional cost £m 2,144,190 27 £0.0544 1.168 900,800 20 £0.0544 0.350 Total 1.518 Post Ofwat feedback Unmeasured customers Measured customers 2,144,190 16 £0.0544 0.681 900,800 20 £0.0544 0.350 Total 1.031 B2 – Improving Efficiency 3 April 2009 Page 12 of 29 Three Valleys Water Final Business Plan 2c. What are you doing to minimise the financial impact? Our activities to reduce the financial impact are centred on reducing demand, and reducing our production costs. In AMP4 we are installing more meters on change of occupier than any other company in the industry to address high unmeasured demand. However, our efforts in respect of change of occupier metering are heavily reliant on an active housing market. The current economic climate is making it difficult to install the level of meters on change of occupier that we anticipated at the start of AMP4 and in turn will hamper our progress in addressing high unmeasured demand. We are therefore, actively promoting optional metering, and promoting continuation of change of occupier metering into AMP5, even though we are in resources surplus. We also operate a programme of activities to educate, inform and incentivise our customers towards more careful water use. Our activities in this area have been described in successive June Returns over many years. • Our award-winning Environment Centre, visited by 15,000 schoolchildren each year to learn about the water cycle and the importance of careful water use. • Our promotion of water saving devices including water-butts and cistern devices. • We offer free and subsidised supply pipe leak repairs and replacements to progress all known supply pipe leaks to conclusion, reducing water delivered. • Publicity campaigns, both our own and in partnership with other water companies. • We are investigating how innovative tariffs may induce measured customers to reduce demand further and will commence a seasonal tariff trial in April. We reduce our production costs by operating our system to increase production from our cheapest sources and reduce our take from expensive sources, particularly the imported supplies from Anglian and Thames Water, the costs of which are around 80% higher than our own sources. The volume of water imported has declined in recent years, from 67 Ml/d in 2002/03 to 32 Ml/d in 2007/08. We also re-negotiated the terms of the Anglian imported supply three years ago to reduce our expenses and made improvements to our network to reduce our take from Thames Water at Hampstead. B2 – Improving Efficiency 3 April 2009 Page 13 of 29 Three Valleys Water Final Business Plan 2. High network activity Our response to Ofwat’s feedback Our Draft Business Plan projected that we would hold leakage steady between 2010 and 2015. It also erroneously included within projected base opex £2m per year of leakage detection and repair opex that we incur today to reduce leakage. In other words, it included the expenditure but not the output. Since then we have reviewed our objectives for leakage and resolved to continue with leakage reduction at the same pace as today that is to reduce by 2 Ml/d per year. We understand why, on the evidence of stable leakage projections in the Draft Business Plan, Ofwat did not allow this special factor in its recent assessment. Now that we have changed our objectives for leakage, we wish Ofwat to re-consider our case for this special factor. We have also appended a report prepared for us by Birmingham University that shows the differences between London Clay soil and other soil types and how this increases mains bursts. We have also considered how our case might change in light of the new distribution cost model. Our assessment of the new model is that it helps explain the higher costs per connection of operating networks in urban areas, but it does not take account of differences in activity rates between companies. The difference in activity rates is the main basis of our case since we are one of few companies in this AMP who need to carry out more activity to reduce our leakage to meet a falling target, and more reactive maintenance to deal with the higher rates of bursts we experience. Our letter of 12 October 2007 proposed our preferred alternative model which reflects activity rates better. It used the rate of mains bursts as the explanatory variable and produced a sound statistical relationship. It had the benefit of being aligned to our experience and understanding of our distribution costs, which are dominated by the costs of reactive maintenance and active leakage control. Whilst we know that you have not selected our proposed model as the one you use for regulatory purposes, it provides evidence that supports our case for this special factor 1a. What type of claim is your special factor? This special factor relates to our operating circumstances and the effects of London Clay soil. Our network activity rate is very high because our mains burst rate is the second highest in England and Wales. Higher network activity rates lead directly to higher water distribution operating costs. As we are one of few companies who are reducing leakage in this price control period, we carry out more leakage detection and repair activities than most other companies and incur the additional costs of doing so. 1b. What is different about TVW that causes it to experience materially higher costs? Three Valleys is different because we have the second highest mains burst rate in the industry because our mains are laid in an outcrop of London Clay soil in the most densely populated parts of our supply area. Inevitably the high burst rate we experience impacts adversely on consequential damage claims by customers. London Clay soil has chemical and electrical properties that make it highly corrosive to the iron pipes which make up 80% of our network. This soil is also highly susceptible to movement, shrinking when the soil dries out in fine weather and expanding when it becomes re-saturated after wet weather. This ground movement places enormous stress on brittle iron pipes causing the weakest pipes to fail, leading to a high number of burst mains. This is demonstrated by June Return evidence comparing the numbers of burst B2 – Improving Efficiency 3 April 2009 Page 14 of 29 Three Valleys Water Final Business Plan water mains per 1000km across the industry in 2007/08. Our mains burst rate is the second highest in the industry. Figure B2 : 4 Mains burst rate per 1000km – 2007/08 400 350 300 250 200 150 100 Sutton & E Surrey Folkstone & Dover Ports-mouth Tendring Hundred B&W Hants Anglian Cambridge Dee Valley Wessex South East South West United Utilities Southern Mid Kent Severn Trent North-umbrian Bristol Dwr Cymru South Staffs Yorkshire Thames 0 Three Valleys 50 Source: June Return 2007/08 The costs of dealing with London Clay soil also manifest themselves in the volume and extent of reactive maintenance we undertake. The graph below is derived from 2007/08 June Return data. It shows that reactive maintenance opex (infrastructure) in £ per metre of mains length is the second highest in the industry. Our expenditure in these activities is significantly ahead of the leading comparator companies such as Yorkshire and Wessex Water. Had our expenditure per metre been equal to the industry average our reported opex would have been significantly less. B2 – Improving Efficiency 3 April 2009 Page 15 of 29 Three Valleys Water Final Business Plan Figure B2 : 5 Reactive maintenance opex (infrastructure), £ per metre 2007/08 £/m 3.00 2.50 2.00 1.50 1.00 Wessex Anglian Dee Valley United Utilities Yorkshire Mid Kent Folkstone & Dover Bristol B&W Hants South East Severn Trent Dwr Cymru Ports-mouth Tendring Hundred Sutton & E Surrey North-umbrian Industry Average Southern South West South Staffs Cambridge Thames 0.00 Three Valleys 0.50 Source: June Return 2007/08 It is no coincidence that we and Thames Water have significantly higher expenditure than other water companies. We both operate in the most expensive part of the country for procuring labour, materials and contractors and both have a water distribution network laid in aggressive and corrosive London Clay soil where our population density is greatest. Our assessment of labour costs is included in our regional employment special factor. As well as having higher than average network input costs, we also have higher than average network activity costs. In particular we have very high activity rates for leakage detection and repair in order to meet our leakage target of reducing leakage by 10 Ml/d over the AMP4 period. We are one of the companies that are reducing its leakage in this price control period when most other companies are holding leakage steady. During the process of assessing our relative efficiency we benchmarked ourselves against four companies that Ofwat has identified as being amongst the most efficient in the industry - Yorkshire, Wessex, Southern and South Staffs. When benchmarking network costs, it is readily apparent that these four companies, along with eight other companies, are not required to reduce leakage during the AMP4 period. B2 – Improving Efficiency 3 April 2009 Page 16 of 29 Three Valleys Water Final Business Plan Figure B2 : 6 AMP4 leakage target reductions 6% % of 2007-08 Distribution Input 5% 4% 3% 2% 1% 0% Severn Trent Sutton & E Surrey Tendring Hundred South Staffs South East Ports-mouth Bristol Cambridge B&W Hants Yorkshire Wessex Southern South West Folkstone & Dover Anglian United Utilities Mid Kent Essex & Suffolk Three Valleys Dee Valley Dwr Cymru Thames -2% N'umbrian Only -1% . 2a. What is the net monetary impact of the costs? The aggregate net monetary impact of our operating circumstances is £5.588 million This comprises: Table B2 : 7 Monetary impact of London Clay Type of additional cost Higher mains bursts activity rate Higher leakage activity rate Consequential damage claims Principle driver London Clay soil 2.377 AMP4 leakage target 2.457 London Clay soil 0.754 Total 2b. Additional cost £m 5.588 How have you derived the cost of the claim? We calculate from June Return comparisons that if we experienced the same burst rate as the industry average in 2007/08 we would have repaired 1,536 fewer bursts. This would have caused us to incur direct opex costs £2.377 million lower (at an average unit repair cost in 2007/08 of £1,547). We calculate that if we were holding leakage steady rather than reducing it, we would have incurred £2.457 million less opex in 2007/08. Our calculations are based on our economic level of leakage analysis. We have calculated what leakage detection and repair activity rates would be required to hold leakage steady taking into account the natural rate of rise of leakage on our network. We compared this result to our actual activity rates necessary to be on track with our target to reduce leakage by 10 Ml/d by 2010. The difference in activity rates equates to £2.457 million operating expenditure. B2 – Improving Efficiency 3 April 2009 Page 17 of 29 Three Valleys Water Final Business Plan We calculate from June Return data the total number of burst mains and the total cost of consequential damages using an average consequential damage claim value. This total consequential damage cost is then adjusted to reflect an average consequential claim percentage of 3.5% of total bursts. The 3.5% consequential claim percentage equates to £0.754 million operating expenditure. Over the first three years of AMP4 we have incurred insurance claim costs of £1.797 million per year. Our combined general liability insurance costs have averaged £1.056 million per year over the same period. 2c. What are you doing to minimise the financial impact? We are reducing the impact of mains bursts by investing to renew 126km of distribution mains per year. By targeting mains renewal investment at the pipes most likely to fail we will over time, reduce the mains burst rate. We are ahead of our monitoring plan for mains length renewed in this period and have brought mains burst rates back within the ‘leakage adjusted’ stable serviceability bands agreed with Ofwat’s capital maintenance team. The mains bursts that have been avoided as a result of this investment have directly reduced the financial impact by avoiding direct repair opex plus consequential costs such as claims where mains bursts have resulted in flooding of customers’ property. We propose in our business plan to maintain the rate of mains renewals at 126m/year which will reduce further the number of mains bursts. B2 – Improving Efficiency 3 April 2009 Page 18 of 29 Three Valleys Water Final Business Plan 3. High regional employment costs Our response to Ofwat’s feedback We are pleased that Ofwat has made an adjustment for regional wage differentials but consider that this undervalues the full extent of our exposure. The main reason for this is that the adjustment seems only to relate to direct employment costs from Table 21 of our June Return. This fails to allow for our other employees working in customer service, scientific services or head office functions. In the evidence in the section below we discuss the extent to which employment costs are higher for these employees and how this cannot be avoided, by for example outsourcing functions to cheaper wage rate areas. Ofwat’s assessment also does not include the effects of higher local wage rates on the costs of bought in services. Further, we believe Ofwat should compare to the wage rates in the comparative efficiency leader’s area of operations, not to the average. This would correct the current position where we only achieve adjustment for wages relative to the industry average, yet for efficiency targets are asked to catch up to the leader who is located in one the cheapest wage cost areas of the country. Finally, Ofwat’s feedback makes no mention of the issue of regional life expectancies and the influence on pension scheme costs. We would ask Ofwat to reconsider whether it has reflected Three Valleys’ exposure to regional wages premium fully, whether it is appropriate to benchmark to the average rather than the leader, the effect of regional wages on bought in services, and to consider our case for adjustment based on regional variation in life expectancy and pensions costs. 1a. What type of claim is your special factor? This special factor relates to our operating circumstances. Our geographical location means we are exposed to high wage rates in our local labour market which leads to higher costs. Furthermore, life expectancy is greater in the south east and this means that pension scheme liabilities are higher. We must therefore make higher contributions to meet those liabilities. Both of these factors serve to raise our employment costs relative to water companies that operate in lower wage rate areas and where life expectancies are lower. 1b. What is different about TVW that causes it to experience materially higher costs? Labour costs in the south east of England and Greater London are the highest in the country. This is evidenced in the 2007 Annual Survey of Hours and Earnings published by the Office for National Statistics. The survey is compiled at local authority area level. We have taken the local authority area in which each company’s head office is located to quantify wage differentials across water companies. Our analysis shows that wage rates for those working in our area are the second highest in the industry. Wage rates are 19.7% greater for us, located in the Welwyn Hatfield local authority area compared to the average across all companies. The premium on wages is even higher relative to the leading comparators, Yorkshire and Wessex Water where wage rates are below average. B2 – Improving Efficiency 3 April 2009 Page 19 of 29 Three Valleys Water Final Business Plan Figure B2 : 7 Weekly gross pay compared to average Mean Pay 40% 30% 19.7% 20% 10% 0% -10% Tendring Hundered Bournemouth Dee Valley Southern Water South Staffs Water Northumbrian Water Yorkshire Water South West Water Folkestone & Dover Wessex Water Welsh Water Severn Trent Anglian Water Mid Kent South East Water Portsmouth Water Bristol Water United Utilities Cambrige Water Thames Water Sutton & East Surrey -30% Three Valleys Water -20% Source: Annual Survey of Hours and Earnings, Office for National Statistics, 2007 The data illustrated in the graph is shown in the table below: B2 – Improving Efficiency 3 April 2009 Page 20 of 29 Three Valleys Water Final Business Plan Table B2 : 8 Gross weekly pay by water company Gross weekly pay £ per week, 2007 Mean weekly pay (£) Variation to average (%) n/a 434.9 n/a Sutton & East Surrey Reigate & Banstead 590.4 35.7% Three Valleys Water Welwyn & Hatfield 522.4 19.7% Thames Water Reading 499.5 14.8% Cambridge Water Cambridge 484.6 11.4% United Utilities Warrington 482.8 11.0% Bristol Water Bristol 468.6 7.7% Portsmouth Water Hampshire 455.3 4.7% South East Water Maidstone 448.6 3.1% Mid Kent Water Maidstone 448.6 3.1% Anglian Water Huntingdonshire 433.8 -0.3% Company Local authority area Average of all Companies Severn Trent Birmingham 433.0 -0.4% Welsh Water Cardiff 427.2 -2.1% Wessex Water Bath 426.8 -1.9% Folkestone & Dover Ashford 413.3 -5.0% South West Water Exeter 409.7 -5.8% Yorkshire Water Bradford 394.6 -9.3% Northumbrian Water Durham 392.6 -9.7% South Staffs Walsall 392.2 -9.8% Southern Water Worthing 386.3 -11.2% Dee Valley Wrexham 382.3 -12.1% Bournemouth & WH Bournemouth 365.2 -16.0% Tendring Hundred Tendring 341.1 -21.6% Source: Annual Survey of Hours and Earnings, Office for National Statistics, 2007 Three Valleys is also different because life expectancy at age 65 is greater in our region than in other parts of the country. This has a bearing on employer pension contributions because actuaries now have to reflect local life expectancy differentials in their valuations of pension schemes. In the past actuaries have relied on national statistics of life expectancies. The structure providing pension benefits for current and former employees of TVW is typical of most of the water industry in England and Wales. It breaks down into three broad categories of membership, listed below. • Those eligible for defined benefits who joined the schemes designed preprivatisation (the former Water Companies Association Scheme) which, in our case was closed to new members in 1995. • Those eligible for defined benefits that entered the scheme post 1995 and enjoy a more modern benefit structure. These schemes were closed to new membership in 2005. • Defined contribution schemes which have been offered to all new employees post 2005 and which were available between 1995 and 2005 by choice of employees who preferred the greater flexibility of contribution options. B2 – Improving Efficiency 3 April 2009 Page 21 of 29 Three Valleys Water Final Business Plan In the past the two categories of defined benefit schemes were subject to actuarial assumptions which were broadly similar across England and Wales. The future is different because better data is available to actuaries and the Pensions Regulator has directed that geographically specific assumptions be adopted. These geographical assumptions, over which trustees and employers have no discretion, have significant adverse financial consequences on an ongoing basis but they also indicate a legacy issue of past under funding for above average life expectancy areas. Defined benefit schemes have been the subject of extreme scrutiny in recent years. This was due to funding deficits mainly resulting from increasing life expectancy assumptions promoted by actuaries and also from falling asset valuations in the early 2000s. Life expectancy assumptions have been refined more recently to reflect the relevant levels of pay of each member category, the mix of managerial, skilled and unskilled members and, crucially, the residential location of the members. Some of this complexity will have a neutral effect on inter-company comparisons because the mix of employees across the industry is likely to be very similar. However, the location of employees is causing significant drift in cost due to the differing life expectancies being applied. It is essential to adjust efficiency comparisons to allow for this new factor. To illustrate the scale of difference, the following table has been extracted from the National Statistics Office, Health Statistics for winter 2007. Table B2 : 9 Life expectancy at age 65 by region Region Male Years Female Years Male % Diff. from avg Female % Diff. from avg North East 16.2 18.8 - 5.5 - 5.5 North West 16.3 19.1 - 5.0 - 4.0 Yorkshire & Humberside 16.8 19.6 - 2.0 - 1.5 East Midlands 17.1 19.7 - 0.3 - 1.0 West Midlands 16.8 19.7 - 2.0 - 1.0 East England 17.6 20.3 2.6 2.0 London 17.5 20.3 2.0 2.0 South East 17.9 20.5 4.4 3.0 South West 17.9 20.8 4.4 4.5 Wales 16.8 19.5 - 1.9 - 1.8 England & Wales 17.2 19.9 - - Source: Health Statistics for winter, Office for National Statistics, 2007 2a. What is the net monetary impact of the costs? The net monetary impact is £6.611 million, summarised below. If we were not exposed to the 19.7% wages premium in our area for employees that must live and work locally, and if life expectancy were the same as the national average, our operating expenditure would be £6.611 million lower. B2 – Improving Efficiency 3 April 2009 Page 22 of 29 Three Valleys Water Final Business Plan Table B2 : 10 Additional human costs for TVW Percent of total opex 2007/08 opex £m (119.7%) Additional cost £m Direct employment 100% 11.507 1.894 Hired and contracted 85% 14.588 2.401 Employment cost Customer services 50% 7.666 1.262 Scientific services 60% 2.383 0.392 n/a n/a 0.662 36.144 6.611 Pension costs (additional cost 3.4%) Total Source: Three Valleys Water, 2008 and June Return 2008 Note: Numbers may not add exactly due to rounding 2b. How have you derived the cost of the claim? To derive the additional costs of high regional wages we have applied the 19.7% premium to employment costs reported in our 2007/08 June Return. In 2007/08, direct employment costs were £11.507 million. The 19.7% regional employment premium represents expenditure to Three Valleys of £1.894 million per annum. High local salaries also affect the cost of bought in goods and services. We estimate that 85% of our hired and contracted costs are made up of labour costs. When we apply the 19.7% regional employment premium to 85% of our 2007/08 hired and contracted costs of £14.588 million, we calculate expenditure to Three Valleys of £2.401 million. Customer services are also a labour intensive activity. In valuing our claim we have only allowed for those activities which require labour to be recruited locally. For example, we have included the labour costs for meter reading because meter readers need to live and work where the meters are. They must be recruited locally. However we have excluded labour costs for the contact centre, contact services and chargeable control which are activities that could be carried out elsewhere in the UK for example. In total we calculate that 50% of our customer services staff needs to live and work locally. Applying the 19.7% regional employment premium to 50% of our 2007/08 customer services costs of £7.666 million, represents expenditure to Three Valleys of £1.262 million. Finally, we have estimated that 60% of our scientific services costs consist of essential local labour, for example water quality samplers who need to be local to the area where they are taking samples. Applying the 19.7% regional employment premium to 60% of our 2007/08 scientific services costs of £2.383 million represents expenditure to Three Valleys of £0.392 million. Turning to pensions, we derived a composite figure for Three Valleys Water based on the locations of the four head offices of the former constituent companies and weighted 80/20 to reflect male/female pension costs. This analysis indicates a 3.4% additional pension cost for TVW based on life expectancies compared with the average for England and Wales. In terms of setting price limits in 2009 it would seem appropriate to allow the actual ongoing funding costs as derived from the latest actuarial valuations (31 December 2007). For assessing comparative efficiency it is necessary to normalise costs of funding pensions across all companies. This might necessitate a comparative adjustment of pension costs in excess of 8% if, for instance, the frontier was being set by a northern company and the company compared was TVW. B2 – Improving Efficiency 3 April 2009 Page 23 of 29 Three Valleys Water Final Business Plan Based on the contribution rates of the Company’s two final salary schemes (Veolia UK Pension Plan and Veolia Water Supply Companies’ Pension Plan) additional pension costs of 3.4% amount to £0.662 million Relative to a leading comparator company, Yorkshire Water where life expectancies at 65 are below average, the additional pension costs amount to £1.03 million. 2c. What are you doing to minimise the financial impact? We have acted to limit our exposure to high wage rates in our area. We have located part of our call centre operations in Folkestone to take advantage of lower local wage rates. We have also allocated some non-customer facing work to India to reduce costs. We have only included in our claim the cost premium on those jobs which are essential to be filled locally in the area of supply and not those that could be carried out in lower cost locations elsewhere in the UK or world. As a result of this internal challenge we reduced the value of our claim by about £1.7 million. The main action we have taken to minimise the financial impact of changing actuarial assumptions on contribution rates, is to close defined benefit pension schemes to new members. B2 – Improving Efficiency 3 April 2009 Page 24 of 29 Three Valleys Water Final Business Plan 4. Karstic groundwater Our response to Ofwat’s feedback We are encouraged by that fact that Ofwat recognise our karstic ground water special factor. We have valued this special factor by modifying the econometric model which seems to us to be the most appropriate method given that this special factor claim is an econometric modelling issue. We are disappointed that Ofwat have only allowed 50% of our claim. We ask Ofwat to re-consider this special factor in light of our response and the evidence in the section below. 1a. What type of claim is your special factor? This special factor claim is an econometric modelling issue. The Ofwat water resources and treatment model simply uses the percentage of distribution input accounted for by borehole sources as an explanatory variable on the basis that groundwater is generally of a higher quality and less treatment intensive that surface water. This model fails to recognise that certain groundwater sources are more similar in characteristic to surface water sources than typical ground water sources. In our case, for efficiency modelling purposes, the percentage of water we source from boreholes used in the efficiency models should be adjusted from 61.1% reported in the June Return to 39.2%. This adjustment is necessary to exclude karstic water which has very different characteristics to ordinary borehole water. We believe that no other water company has the same extent of karstic ground water sources. 1b. What is different about TVW that causes it to experience materially higher costs? Our water sources are around 40% surface water and 60% groundwater. However, 36% of our groundwater is different to conventional borehole water because it is derived from karstic borehole sources. This raw water has characteristics similar to surface water rather than chalk or greensand sources and requires complex treatment resulting in materially higher costs. Karstic sources are aquifers in which groundwater flow is concentrated along fractures, fissures, conduits, and other interconnected openings in the rocks. These are formed when slightly acidic water dissolves rocks, most notably limestone and dolomite, and to a lesser degree, gypsum, anhydrite, and halite. For the processes of karst to be active, water must circulate dynamically through soluble rocks, exposing the rock to interaction with water and enabling transport of solutes. The water must be unsaturated with the chemical constituents of the rock, enabling dissolution to occur. About one third of our groundwater sources are affected by this special combination of circumstances. Karstic sources are different from ordinary borehole water because they suffer high and extremely variable levels of turbidity. Turbidity is a measure of the cloudiness of water and is used to indicate water quality and filtration effectiveness. High turbidity levels are associated with higher levels of micro-organisms such as cryptosporidium that require complex treatments. The table shows that our karstic groundwater sources show higher maximum levels of turbidity than even our surface water sources which are themselves prone to elevated and variable turbidities being run-of-river Thames sources. Maximum B2 – Improving Efficiency 3 April 2009 Page 25 of 29 Three Valleys Water Final Business Plan turbidity amongst our karstic sources is about four times higher than our other groundwater sources. Table B2 : 11 Turbidity of water sources Type of source Turbidity data (NTU) Maximum Average Samples Groundwater 28.2 0.43 5,408 Karstic 102.0 1.23 570 Surface 90.0 4.63 509 Source: Three Valleys Water, 2008 Total distribution input from karstic sources was 184.41 Ml/d during 2007/08 as tabulated below. From this we calculate that t39.2% of our distribution input was from non-karstic sources and 21.9% from karstic sources. The five water treatment works that treat karstic water are listed below and have level W3 or W4 treatment complexity. Table B2 : 12 Total distribution input from karstic sources Water treatment works Batchworth Treatment complexity W3 No. sources 2 Distribution input (Ml/d) 21.15 Chalfont St. Giles W3 1 3.23 Mill End W3 2 25.96 Clay Lane W4 8 114.06 North Mymms W4 4 20.00 17 184.41 Total Source: Three Valleys Water, 2008 With the full support of the Drinking Water Inspectorate (DWI) we have mitigated the risk of turbidity and cryptosporidium contamination associated with karstic sources by investing in membrane ultra-filtration treatments. However these treatment processes require high levels of operational and capital maintenance such as periodic replacement of membrane filter cartridges and filter washing. We use more electrical power to draw water through the membranes. At karstic sites our treatment processes require frequent manual adjustments to accommodate variations in turbidity, which increases the requirement for technician input. Finally, owing to elevated cryptosporidium risk we carry out additional sampling compared to companies with lower crypto risk. Laboratory procedures for cryptosporidium monitoring are the most onerous and expensive since sample tests must be carried out to standards consistent with the Police and Criminal Evidence Act. Appendix A provides further information on contamination and treatment processes for a surface water source, a typical groundwater borehole and a karstic groundwater borehole. The information is taken from Drinking Water Safety Plans produced by site for the DWI. 2a. What is the net monetary impact of the costs? The net monetary impact on the econometric model outcome is £4.242 million. 2b. How have you derived the cost of the claim? We valued this special factor by running the water resources and treatment opex model using 61.1% as the percentage of borehole water for Three Valleys. We compared the results from the model with a second modelling run using 39.2% as the percentage of B2 – Improving Efficiency 3 April 2009 Page 26 of 29 Three Valleys Water Final Business Plan borehole water. The difference in modelled costs is £4.242 million. This is shown in the table below: Table B2 : 13 Cost of water treatment Percent of groundwater variable Total modelled opex £m Alternative approach adjusting percent of groundwater for karstic sources 39.2 19.755 Ofwat’s current approach 61.1 15.513 Water resources and treatment opex model Difference between approaches 2c. 4.242 What are you doing to minimise the financial impact? Our karstic sources account for about one-fifth of our total distribution input. Since we operate in a water stressed area there are no alternative water resources of sufficient size that could be used in preference to the karstic sources. Whilst our karstic sources are more costly to operate than non-karstic borehole sources, for the reasons described, they are still cheaper than the next significant water resource available, which would be for example to use our full entitlement to supplies from Grafham. Therefore, our use of karstic sources is consistent with minimising costs to our customers whilst fulfilling our duty to supply. The process of karst is driven by the special geology and hydrology in parts of our area, whilst elevated and variable turbidity are driven by rainfall. These are factors outside management control. To meet our customers’ demand for water we operate these plant diligently, consistent with our water safety plans using treatment processes supported by the DWI. We should not be penalised in efficiency comparisons when we are operating our assets with great skill to optimise economy and customer satisfaction, in far more challenging circumstances than those faced by other comparator water companies. B2 – Improving Efficiency 3 April 2009 Page 27 of 29 Three Valleys Water Final Business Plan Appendix A – Drinking water safety plans Below is a contamination and treatment process matrix for a surface water source, a groundwater borehole and a karstic groundwater borehole. The information is taken from Drinking Water Safety Plans produced by site for the DWI. The data shows how a karstic groundwater borehole source (North Mymms) is very similar in operational terms to a surface water source (Iver), opposed to a groundwater borehole source (Grove). Cryptosporidium Glyphosate Nitrate Nitrite Iron Pesticides Turbidity All Other Parameters Dechlorination Parameter Colour Contact Tank A G R A G G R A R G Orthophosphoric Acid Dosing R R R R A G G R R R G Super Chlorination R R R R A A A R R R G GAC Filtration R R R R A A R R R R G Intermediate Ozone Pre Ozonation R Biological Clarification Blending (Thames Supply) Aluminium Abstraction Strainers Figure B2 : 8 Surface water: Iver A A G A A G G A A A G A A G A A G G A A A G G A G G A G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G Mercury Nitrate Nitrite Iron Manganese Pesticides Turbidity All Other Parameters De-chlorination Colour Orthophosphoric Acid Dosing Bromate R A R R G G A R G A R R G Membrane filtration Biological R A R R R G A R R A R R G GAC Benzo (a) Pyrene A G Super Chlorination Aluminium A G Blending Amobarbital Clarification (Mymms source) Ammonium Abstraction (all sources) Parameter Figure B2 : 9 Karstic groundwater borehole: North Mymms A G R G R G G G G G G G A R G A G R G G G G G G G G G A R G G G R G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G G B2 – Improving Efficiency 3 April 2009 Page 28 of 29 Three Valleys Water Final Business Plan Dechlorination Super Chlorination All Other Paramters Contact Tank Nitrate Orthophosphori c Acid Dosing Biological Abstraction Parameter Figure B2 : 10 Typical groundwater borehole: The Grove R A G A A G G A G G A G G A G B2 – Improving Efficiency 3 April 2009 Page 29 of 29 Model FBP2009-ICS Final Business Plan 2009 Table B2.1a Three Valleys Water plc Operating expenditure outperformance in AMP4 AMP3 2004-05 Line description AMP4 2005-06 2006-07 2007-08 2008-09 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 Units A 1 2 3 4 5 6 7 8 9 Water service operating expenditure outperformance Water operating expenditure final determination assumptions in PR04 or £m a subsequent 100.392 interim determination. 108.738 107.409 Water quality obligations logged up £m 0.260 0.000 0.000 Water supply demand costs logged up £m 0.000 0.000 0.000 Water service level obligations logged up £m 0.000 0.000 0.000 Water capital maintenance logged up £m 0.000 0.000 0.000 Other water costs logged up £m 0.000 0.000 0.000 Shortfalls in meeting outputs £m 0.000 0.000 0.000 Merger savings £m 0.000 0.000 0.000 Revised regulatory expectations £m 100.652 108.738 107.409 10 11 12 13 14 15 16 17 18 19 Actual reported water operating expenditure Pension adjustment to reported water operating expenditure Other adjustments to reported water operating expenditure Revised actual water operating expenditure Actual outperformance opex Outperformance as a % of regulatory expectations Incremental outperformance year by year Assumed standard water opex incentive revenue allowance Additional Water Opex Incentive Revenue Allowance Total adjusted water opex incentive revenue allowance £m £m £m £m £m % £m £m £m £m 100.171 0.000 0.000 100.171 0.481 0.48% 0.481 97.136 2.161 7.562 106.859 1.879 1.73% 1.398 108.598 0.000 -1.875 106.723 0.685 0.64% 0.000 105.933 0.000 0.000 0.000 0.000 0.000 0.000 0.000 105.933 104.977 0.000 0.000 0.000 0.000 0.000 0.000 0.000 104.977 109.020 0.000 -0.700 108.320 0.000 0.00% 0.000 116.195 0.000 -0.589 115.606 0.000 0.00% 0.000 103.952 0.000 0.000 0.000 0.000 0.000 0.000 0.000 103.952 1.398 0.000 1.007 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Three Valleys Water Final Business Plan Table B2 : 1a improvements – Outperformance and efficiency Water service operating expenditure outperformance in AMP4 Line 2 – Water quality obligations logged up This line describes operating costs relating to the Iver Gasless project, Hughenden Stream and River Mimram that were not included in the PR99 determination. In the Final Determination 2004 Ofwat agreed to log up the expenditure associated with the Iver Gasless project and investigations on the Hughenden Stream following the switch off by Thames Water of its Mill End source, High Wycombe as part of the River Wye ALF. Work on the River Mimram comprised investigation and monitoring planned for the relocation of Fulling Mill. This work is linked to the partial relocation of Whitehall to the Lower Beane and investigations into a replacement source for Essendon that was contaminated with bromates. The total value of operating costs being logged up is £0.235 million at 2004/05 prices, £0.260 million at 2007/08 prices. Line 10 – Actual reported operating expenditure The data disclosed is as reported in table 21, line 22 of June Returns for 2004/05 to 2007/08, restated to 2007/08 prices using the appropriate average RPI. The figure for 2008/09 is our forecast for total opex taken from Table B3 : 3 of this Plan. Line 11 – Pension adjustment to reported water operating expenditure The figure of £2.161 million shown on this line in 2005/06 represents an adjustment arising from the adoption of FRS17 for pensions (inflated to 2007/08 prices). Line 12 – Other adjustments to reported operating expenditure The figures reported are the net adjustments arising from atypical items arising in any one year. They are as disclosed in the relevant table 21 June Return commentaries in each of the years 2005/06 to 2007/08 and in the commentary to Table B3 : 3 of this business plan for 2008/09: Table B2 : 1a – Operating expenditure out-performance in AMP4 1 of 2 3 April 2009 Three Valleys Water Final Business Plan Table B2 : 1a : 1 Adjustments to reported operating expenditure – atypical items (2007/08 prices) 2005/06 £m 2005/06 Accounting for carbon regeneration Provision release, contractor & S74 fines 2006/07 Head office relocation Changes to compliance scope Direct costs associated with hosepipe ban Bromate enquiry Buncefield incident Non-executive directors’ pension costs 2006/07 £m 2008/09 £m 2.161 5.401 -0.417 -0.208 -0.104 -0.104 -0.104 -0.937 2007/08 Finalisation of prior year bulk water account Unfilled vacancies Production and supply costs avoided Head office relocation Buncefield incident – loss of production site DG8 performance recovery DG8 investigation 2008/09 One-off headquarters relocation costs B2 : 1a, L12 – Other adjustments to reported operating expenditure 2007/08 £m 0.300 0.300 0.500 -0.100 -0.200 -0.900 -0.600 -0.589 7.562 -1.875 -0.700 -0.589 Line 16 We calculate this line as the difference between the outperformance achieved in a year (line 14) and that achieved in the base year 2004/05, constrained so that incremental outperformance cannot be negative. Line 17 In 2010/11 this line is the sum of I06 , I07 , I08 and I09 from line 16. Line 19 We have calculated this line as the sum of line 18 and 17, multiplied by (1- the effective tax rate), which we have taken to be 28% for the purposes of this table. Table B2 : 1a – Operating expenditure out-performance in AMP4 2 of 2 3 April 2009 Model FBP2009-ICS Final Business Plan 2009 Table B2.1b Three Valleys Water plc Capital expenditure outperformance in AMP4 AMP3 2004-05 Line description AMP4 2005-06 2006-07 2007-08 2008-09 2009-10 Units B 1 2 3 4 5 6 7 8 9 10 11 Water service capital expenditure outperformance Water net capex final determination assumptions in PR04 or a subsequent £m interim determination. 44.961 54.342 Water quality obligations logged up £m -5.360 -0.059 Supply demand costs logged up £m 11.720 0.990 Service level obligations logged up £m 0.000 0.000 Capital maintenance logged up £m 0.720 0.000 Other costs logged up £m 0.000 0.000 Shortfalls in meeting outputs £m 0.000 -3.737 Merger savings £m 0.000 0.000 Rephasing of programmes £m 0.000 -26.707 Reallocation of final determination £m 0.000 0.000 Revised regulatory expectations £m 52.041 24.829 12 13 14 Actual/forecast reported net water service capital expenditure Actual outperformance – water service capex Outperformance as a % of regulatory expectations £m £m % 40.930 11.111 21.35% 23.509 1.320 5.32% 65.211 -0.059 -0.032 0.000 0.000 0.000 -3.732 0.000 -19.635 0.000 41.754 49.732 -0.058 -2.706 0.000 0.000 0.000 3.674 0.000 13.759 0.000 64.401 40.636 -0.056 -3.285 0.000 0.000 0.000 2.206 0.000 18.004 0.000 57.505 34.760 -0.057 -5.827 0.000 0.000 0.000 2.264 0.000 13.904 0.000 45.044 41.226 0.528 1.26% 66.786 -2.385 -3.70% 46.784 10.721 18.64% 45.879 -0.835 -1.85% Three Valleys Water Final Business Plan Table B2.1b Improvements Outperformance and Efficiency Line 1: water net capex final determination assumptions in PR04 or a subsequent interim determination The data disclosed on this line is sourced from the Ofwat Information Capture System. There have been no interim determinations have been since the PR04 Determination. Line 2: Water quality obligations logged down/up AMP3 The figure shown on this line represents the value of AMP3 projects logged down/up in 2004/5. This figure is taken from the PR04 Business Plan, inflated to 2007-08 prices. Log down Lead communication pipes Crescent Road cryptosporidium S19 rehabilitation schemes Log up River Bean ALF Net log down/up £m -2.448 -2.158 -0.888 £m 0.134 -5.136 Lead communication pipes There was no expenditure incurred on the replacement of lead communication pipes for quality reasons, following the DWI’s recommendation for orthophosphate dosing. Crescent Road cryptosporidium Our risk assessment concluded that there was no longer a significant risk of cryptosporidium oocysts in the raw water abstracted at this site. Section 19 rehabilitation schemes All distribution main renovation work was completed and the revised statement of intent was signed off by the DWI. River Bean ALF The Environment Agency’s AMP4 Scoping Plan for the River Beane (3TV9100101) May 2003 Section 3.3.2 and 4.1.1 states that “implementation phase is on hold until AMP3 Investigation Study on the Mimram is completed.” AMP4 Table : B2.1b Outperformance and Efficiency Improvements Page 1 of 4 3 April 2009 Three Valleys Water Final Business Plan The amounts logged up or down in this line are as contained in table C5.1 and relate to ALF schemes for the Lee Valley SPA and SW bodies, that are no longer required. Table : B2.1b Outperformance and Efficiency Improvements Page 2 of 4 3 April 2009 Three Valleys Water Final Business Plan Line 3: Supply/demand costs logged up AMP3 The figure shown on this line represents the value of AMP3 projects logged down/up in 2004/5. This figure is taken from the PR04 Business Plan, inflated to 2007-08 prices. Log up Iver 3rd clarifier Reinstatement of Springwell and Stockers sources Iver – Egham Trunk Main Metering 2004-05 Log up £m 6.138 1.348 0.114 4.120 11.720 The 2004-05 expenditure for Iver Clarifier, reinstatement of Springwell and Stocker Sources and Iver to Egham Trunk Main relates to the completion of schemes commenced in 2002-03 to address the supply/demand deficit in the area and agreed by Ofwat for logging up. Metering The actual and forecast volume of meter installations, as well as the location mix of these meters was significantly different to Ofwat’s assumptions at PR99. The level of metering, actual and forecast, was below the levels assumed by Ofwat in the PR99 determination, however the location mix of meters was more weighted towards external installations when compared to the location mix assumed by Ofwat in the PR99 determination. We calculate a log up of £4.1m due to different meter locations. AMP4 Log down The 2008-09 entries reflect expenditure allowed for in FD04 that are no longer required for reservoir studies, and for the effects of the recession on metering. Our long term Water Resource Plan at PR04 anticipated that we would need to participate in a large regional water resource development in the future as very few options for water resource development in our own area are available. Our supply/demand investment plan at PR04 allowed for the possibility that we would be required to make a significant financial contribution to buy-in to past investment, technical studies and investigations and then in the case of Abingdon, a public inquiry to develop options for us to participate in an increase in capacity at Grafham (Anglian Water) or new capacity from Abingdon Reservoir (Thames Water). The timing of these schemes has slipped back and we have not been required to make a financial contribution to Anglian or Thames, nor have our neighbouring companies been willing to accept a contribution in AMP4. We will continue to have a long term need to participate in technical studies and investigations for these schemes as they develop and we have allowed for capital costs of £1.05m in AMP5. The logging down is therefore related to the timing of the investment rather than a removal of need for it. Table : B2.1b Outperformance and Efficiency Improvements Page 3 of 4 3 April 2009 Three Valleys Water Final Business Plan For metering, the deteriorating situation in the housing market has meant that we have not been able to install as many meters on change of occupier as determined at PR04. The amount in this line is the aggregate of the amounts reported in the C5.1 tables Line 4: Service Level Obligations Logged Up There are no projects to log up or down in this category. Line 5: Capital Maintenance costs logged up AMP3 The figure shown on this line represents the value of AMP3 projects logged up in 2004/5. This figure is taken from the PR04 Business Plan, inflated to 2007-08 prices. The scheme to remove bulk gas storage at Iver WTW was agreed by OFWAT by letter, dated 1 April 2003. Log up Iver Gasless £m 0.720 Line 7: Shortfalls in meeting outputs The amounts for shortfalls reflect those schemes where we have completed the outputs later than anticipated in the 2004 determination. The individual schemes making up the total reported in this line are set out in the part C5.1 tables. Line 12: Actual/Forecasted Reported Net Water Capital Expenditure The figures reported in Line 12 are lifted from the respective June Return Reports for 2004-05 to 2007-08, inflated to 2007-08 prices. The figures reported in 2008-09 and 2009-10 are taken from our Final Business Plan forecasts of expenditure net of contributions and infrastructure renewals expenditure. Table : B2.1b Outperformance and Efficiency Improvements Page 4 of 4 3 April 2009 Model FBP2009-ICS Final Business Plan 2009 Table B2.2 Three Valleys Water plc Water service efficiency improvements Assessment AMP5 AMP4 2008-09 Line description 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 AMP6 2015-16 2016-17 2017-18 2018-19 2019-20 Units A 1 2 3 4 Operating expenditure efficiency (base) Assessment of relative efficiency Text Assessment of scope for catch-up (base)/assumed profile year on year % Assumed continuing level of efficiency improvements/assumed profile year on year (base) % Overall compounded assumed improvement profile (base) % B 5 6 7 8 9 Operating expenditure efficiency (enhancement) Factor for the scope for enhancement catch up relative to that for base opex Assessment of scope for catch-up (enhancements)/assumed profile year on year Factor to assume for continuing level of efficiency compared to base (enhancements) Assumed continuing level of efficiency improvements, p.a. (enhancements) Overall compounded assumed improvement profile (enhancements) C 10 11 Capital maintenance expenditure efficiency (infra) Assumed continuing level of efficiency improvements p.a./ assumed profile year on year% Overall compounded assumed improvement profile % D 12 13 B 6.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.23% 0.00% 1.23% 1.23% 0.00% 2.44% 1.23% 0.00% 3.64% 1.23% 0.00% 4.83% 1.23% 0.00% 6.00% 0.00% 0.00% 1.23% 1.23% 1.23% 1.23% 1.23% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.23% 0.00% 2.44% 0.00% 3.64% 0.00% 4.83% 0.00% 6.00% 0.00% 6.00% 0.00% 6.00% 0.00% 6.00% 0.00% 6.00% 0.00% 6.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Capital maintenance expenditure efficiency (non-infra) Assumed continuing level of efficiency improvements p.a./assumed profile year on year % Overall compounded assumed improvement profile % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% E 14 15 16 Capital enhancement expenditure efficiency (infra) Factor to assume for continuing level of efficiency compared to base nr Assumed continuing level of efficiency improvements p.a./assumed profile year on year.% Overall compounded assumed improvement profile % 1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% F 17 18 19 Capital enhancement expenditure efficiency (non-infra) Factor to assume for continuing level of efficiency compared to base nr Assumed continuing level of efficiency improvements p.a/. assumed profile year on year.% Overall compounded assumed improvement profile % 1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% G 20 21 Efficiency - capex meters Assumed continuing level of efficiency improvements p.a/. assumed profile year on year.% Overall compounded assumed improvement profile % 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% nr % nr % % 1 6.00% 1 0.00% Three Valleys Water Final Business Plan Table B2 : 2 – Key components – water service efficiency improvements Water service efficiency improvement Line 1 Our assessment of base operating expenditure efficiency shows that we are in band B; explanation is available in section B2. Line 2 Based on the above assessment, we have calculated there is a small element of catch up efficiency in regards to operating expenditure. This amounts to 1.23% per annum, totalling 6.0% in the AMP period. Line 3 In the commentary to B2 we have assessed the minimum level of base efficiency improvement as zero. Line 4 This is a calculated line Line 5 We have assumed the same element of catch up efficiency for enhancement operating expenditure as for base operating expenditure. We have therefore put a factor of 1 for the scope for enhancement catch up relative to that for base opex. Line 6 This amounts to 1.23% per annum, totalling 6.0% in AMP period, due to the factor of 1 entered in line 5. Line 7 We have assumed the same minimum level of enhanced opex efficiency as for base opex efficiency. We have therefore put a factor of 1 for minimum level of enhanced opex efficiency compared to base. Line 8 The minimum level of efficiency is zero, due to the factor of 1 entered in line 7. Line 9 This is a calculated line Line 10-27 We have assessed in Section B2.2 that capital efficiency both for maintenance and enhancement as Band A in line with our assessment in 2007. There is therefore no scope for catch up efficiency. Line 28-30 We have identified no efficiency for Capex meters. B2 : 2 – Water service efficiency improvements Page 1 of 1 3 April 2009 Three Valleys Water Final Business Plan Contents 1 Overview of the plan to maintain service and serviceability ........................ 4 1.1 1.2 1.3 1.4 1.5 1.6 1.7 2 Introduction...............................................................................................................................4 Performance and achievements in AMP4................................................................................4 Key issues for AMP5 and beyond ............................................................................................6 Maintenance plan for infrastructure assets ..............................................................................7 Maintenance plan for non-infrastructure assets .......................................................................9 Maintenance plan for information management.....................................................................12 Summary programme of costs and outputs ...........................................................................14 Our approach to asset management............................................................. 16 2.1 2.2 2.3 2.4 2.5 3 Introduction.............................................................................................................................16 An integrated approach to asset management ......................................................................17 The importance of data and systems .....................................................................................23 Engaging stakeholders...........................................................................................................24 Making the future ‘business as usual’ ....................................................................................28 Our plan for infrastructure assets: an overview .......................................... 30 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 4 Introduction.............................................................................................................................30 Historical analysis...................................................................................................................30 3.2.1 Bursts .............................................................................................................................30 3.2.2 DG3 unplanned interruptions .........................................................................................31 3.2.3 DG2 inadequate pressure ..............................................................................................33 3.2.4 Mean zonal compliance (iron) ........................................................................................33 3.2.5 Serviceability and intervention analysis .........................................................................34 Strategic systems and processes ..........................................................................................35 3.3.1 System architecture........................................................................................................36 3.3.2 Performance measurement............................................................................................39 3.3.3 Condition measurement .................................................................................................39 Cost data ................................................................................................................................40 The planning process .............................................................................................................41 Objectives for AMP5...............................................................................................................44 Overview of the plan for AMP5 and beyond...........................................................................45 Summary ................................................................................................................................46 Our plan for infrastructure assets: the cost of doing business ................. 48 4.1 4.2 4.3 Introduction.............................................................................................................................48 Methodology...........................................................................................................................48 Results....................................................................................................................................48 4.3.1 Maintaining critical asset information systems ...............................................................48 4.3.2 Network asset management tools and models ..............................................................48 4.3.3 Maintaining levels of service ..........................................................................................49 4.3.4 Third party works and diversions....................................................................................50 4.4 Summary ................................................................................................................................51 5 Our plan for infrastructure assets – trunk mains......................................... 52 5.1 5.2 Introduction.............................................................................................................................52 Methodology...........................................................................................................................53 5.2.1 Data ................................................................................................................................53 5.2.2 Deterioration modelling ..................................................................................................56 5.2.3 Model construction and calibration.................................................................................57 5.2.4 Validation........................................................................................................................59 5.2.5 Risk framework...............................................................................................................60 5.2.6 Investment planning .......................................................................................................64 5.2.7 Cost benefit analysis ......................................................................................................66 5.2.8 Trunk main assessments and essential maintenance ...................................................66 5.3 Results....................................................................................................................................67 5.4 AMP5 programming ...............................................................................................................70 5.5 Summary ................................................................................................................................71 6 Our plan for infrastructure assets: distribution mains................................ 72 6.1 Introduction.............................................................................................................................72 B3 – Maintaining Service and Serviceability Page 1 of 218 3 April 2009 Three Valleys Water Final Business Plan 6.2 6.3 6.4 6.5 6.6 7 Methodology...........................................................................................................................73 6.2.1 Pipe attribute and condition data....................................................................................73 6.2.2 Performance measurement............................................................................................75 6.2.3 Performance measurement – water quality ...................................................................75 6.2.4 Performance measurement – leakage ...........................................................................77 6.2.5 Forward looking analysis................................................................................................81 Targeting mains renewal ........................................................................................................89 Results....................................................................................................................................89 6.4.1 Impact on serviceability ..................................................................................................89 6.4.2 The impact on customers ...............................................................................................93 6.4.3 Cost benefit analysis ......................................................................................................94 Programme costs and changes to the Draft Business Plan...................................................95 Summary ................................................................................................................................98 Our plan for infrastructure assets: service pipes and fittings.................... 99 7.1 7.2 Introduction.............................................................................................................................99 Communication pipes.............................................................................................................99 7.2.2 Results..........................................................................................................................104 7.2.3 Reactive replacement of communication pipes............................................................105 7.3 Stop-tap replacement ...........................................................................................................106 7.4 Supply pipes .........................................................................................................................108 7.5 Summary ..............................................................................................................................109 8 Our plan for non-infrastructure assets: overview...................................... 110 8.1 8.2 8.3 8.4 8.5 8.6 9 Introduction...........................................................................................................................110 Historical analysis.................................................................................................................111 8.2.1 Serviceability ................................................................................................................111 8.2.2 Costs and activity .........................................................................................................114 8.2.3 Benefits to customers...................................................................................................117 Processes.............................................................................................................................118 Systems................................................................................................................................123 Objective for AMP5 ..............................................................................................................126 Overview of the Plan for AMP5 and beyond ........................................................................127 Our plan for non-infrastructure assets: business support activities – the cost of doing business................................................................................. 132 9.1 9.2 9.3 Introduction and scope .........................................................................................................132 Methodology.........................................................................................................................132 Results..................................................................................................................................133 9.3.1 Reservoir monitoring and inspection............................................................................133 9.3.2 Pump condition and efficiency monitoring....................................................................135 9.3.3 Vehicles ........................................................................................................................138 9.3.4 Preparation for PR14....................................................................................................139 9.3.5 Laboratory equipment ..................................................................................................140 9.3.6 Leakage monitoring and detection infrastructure .........................................................142 9.4 Summary – the cost of doing business ................................................................................143 10 Our plan for non-infrastructure assets: base maintenance of our operational assets ........................................................................................ 144 10.1 Introduction and scope .........................................................................................................144 10.2 Methodology.........................................................................................................................144 10.2.1 Data ..............................................................................................................................144 10.2.2 Analysis ........................................................................................................................149 10.3 Results..................................................................................................................................156 10.3.1 Comparison with historic investment............................................................................156 10.3.2 Plans for investment.....................................................................................................157 10.3.3 Changes since the Draft Business Plan.......................................................................161 10.3.4 Effect on operating costs (opex)...................................................................................163 10.3.5 Effect on non-infrastructure serviceability ....................................................................164 10.3.6 Effect on carbon emissions ..........................................................................................165 10.3.7 Sensitivity of results......................................................................................................165 10.3.8 Level of confidence ......................................................................................................165 10.3.9 Effect of climate change on maintenance ....................................................................166 B3 – Maintaining Service and Serviceability Page 2 of 218 3 April 2009 Three Valleys Water Final Business Plan 10.4 11 Summary – base maintenance of our operational assets....................................................168 Our plan for non-infrastructure assets: specific programmes of work and specific asset renewals ........................................................................ 172 11.1 Introduction and scope .........................................................................................................172 11.2 Methodology.........................................................................................................................172 11.3 Results..................................................................................................................................173 11.3.1 Revenue meters ...........................................................................................................173 11.3.2 Disinfection upgrade.....................................................................................................178 11.3.3 Run to waste.................................................................................................................182 11.3.4 St. George’s Hill Reservoir ...........................................................................................184 11.3.5 Windmill Hill Reservoir .................................................................................................185 11.4 Summary – plan for specific programmes of work and specific asset renewals..................187 12 Our plan for non-infrastructure assets: information technology assets 188 12.1 Introduction...........................................................................................................................188 12.2 Approach ..............................................................................................................................188 12.3 Analysis ................................................................................................................................189 12.3.1 Validation of asset database (CMDB) ..........................................................................189 12.3.2 IT hardware assets: identifying optimum replacement period.....................................190 12.3.3 IT software assets: identifying optimum replacement period ......................................190 12.3.4 Business applications...................................................................................................191 12.4 Operations ............................................................................................................................191 12.4.1 Job management systems ...........................................................................................191 12.4.2 Geographical information systems (GIS) .....................................................................193 12.4.3 Asset management information system .......................................................................194 12.5 Customer services................................................................................................................194 12.5.1 Billing systems..............................................................................................................195 12.5.2 Electronic document management system (EDMS) ....................................................197 12.6 Finance.................................................................................................................................197 12.6.1 Oracle finance system..................................................................................................197 12.7 IT operations software..........................................................................................................198 12.7.1 Results and conclusions...............................................................................................199 12.8 Cost benefit analysis ............................................................................................................203 Appendix 1: Our asset management policy and strategy Appendix 2: Asset management assessment – route map Tables and Tables Commentaries B3 – Maintaining Service and Serviceability Page 3 of 218 3 April 2009 Three Valleys Water Final Business Plan B3 – Maintaining Service and Serviceability 1 Overview of the plan to maintain service and serviceability 1.1 Introduction We supply water to more than three million people in north and west London and the Home Counties. We provide this service using ‘operational’ and ‘non-operational’ assets. Our operational assets are those that directly provide the water supply and water services. They range from boreholes, pumps, treatment works and reservoirs (non-infrastructure assets), to large and small pipes (infrastructure assets), that take the water we have treated into homes and businesses. Our non-operational assets provide essential support to our day to day business activities. A major portion of these are our information technology (IT) assets. The prime purpose of maintaining our assets is to ensure that we continue to provide a high quality service for our customers. This needs to be managed economically and efficiently and with an acceptable balance of risk for our customers and our business. Our assets must be maintained and kept in a stable, serviceable condition at all times. This has been the focus of close regulatory monitoring since PR04. Our approach to developing our plan for capital maintenance has built on the strong foundations of our work at PR04 when we followed the guidelines of the capital maintenance planning common framework (CMPCF) for the first time. We have enhanced the strength of our PR04 approach for mains infrastructure assets and considerably improved our approach at PR09 for non-infrastructure assets, communication pipes and IT assets in order to prepare a robust plan for maintenance of our assets over the coming years. We were actively involved in the development of the Asset Management Planning Assessment Process (AMPAP) and used it extensively during development of our infrastructure and non-infrastructure plans. To help guide the reader through B3 we have included as Appendix 2, a route map showing where to find the key components of AMPAP as set out in the Ofwat Company guidance for this part of the Final Business Plan. 1.2 Performance and achievements in AMP4 After many years of seeking to improve from having one of the lowest mains renewal rates in the industry, we started a much larger distribution mains renewal programme in AMP4. We stepped up from 65km per annum in AMP3 to 126km per annum in AMP4. We had a slow start in 2005/06 due to finalising new arrangements to outsource implementation of our capital programme. Since then we have accelerated the programme and in the first three years of AMP4 we have replaced 410km of distribution mains against our Monitoring Plan target of 391km. As we write this Plan near the end of year four of the AMP4 programme, we remain ahead of the Monitoring Plan. We increased the rate of renewal in AMP4 to mitigate the upward trend in bursts that was evident in 2003/04 when price limits were set. Our aim was to restore serviceability from ‘marginal’ in 2003/04 to ‘stable’ by 2008/09. The evolution of bursts is shown in the figure below. B3 – Maintaining Service and Serviceability Page 4 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 1 Evolution of bursts and trends Figure B3 : 1 shows that we have mitigated the upward trend in bursts evident at PR04 (the two red lines) and have been making good progress towards our PR04 target since then (the two blue lines), although there is inevitably some volatility from year to year as climatic conditions vary. While the total number of bursts is Ofwat’s lead indicator for the assessment of infrastructure serviceability, three other indicators are also used: DG2, pressure; DG3, unplanned interruptions of less than 12 hours and iron in the network. We had achieved a generally good improvement by 2007/08 for all of these indicators and were therefore convinced that we had restored ‘stable’ serviceability. But Ofwat assessed us as ‘marginal’ in 2007/08. In 2008/09 we have continued to improve performance for all three indicators. For bursts we were continuing to make good progress up to the end of December 2008. But January 2009 was the coldest in England and Wales since 1997 and our area recorded the lowest minimum temperature of -12.3 degree centigrade on 7 January at Buntingford, Hertfordshire. These exceptional weather conditions led to a sharp increase in burst mains. January 2009 had the highest number recorded since before 2000/01 with more than twice the previous two Januarys. We understand Ofwat will take account of these abnormal circumstances and our previous good progress when assessing serviceability for 2008/09. We remain confident that this can be a ‘stable’ assessment. We have continued our intensive active leakage control programme in AMP4. It has enabled us to meet our leakage reduction target of 2 Ml/d per annum. But it has led to an increase in the number of burst mains we report. Ofwat has agreed that this should be taken into account when assessing infrastructure serviceability. Our leakage reduction programme has also generated a relatively high reactive replacement programme for communication pipes and stopcocks, which will continue while we are reducing leakage. For non-infrastructure operational assets our objective in AMP4 has been to maintain serviceability of our treatment works, booster stations, service reservoirs and towers using a risk-based approach in prioritising investments. Serviceability is assessed against four water quality indicators: coliforms at treatment works; turbidity at treatment works; coliforms at reservoirs and towers and enforcement actions by the Drinking Water Inspectorate (DWI). Our performance against these indicators has remained ‘stable’ throughout AMP4. Although we have recently seen a slight upward trend in coliforms at treatment works, we do not believe it reflects asset deterioration and will report on it in the 2009 June Return. We monitor the performance of our mechanical and electrical assets and where gaps between required and actual performance levels are identified we fill them. This work is prioritised by using a risk assessment based on probability and consequence of failure. The condition of our civil structures is monitored by physical inspection, where appropriate, and where remedial work has been identified we have prioritised it based on the likelihood B3 – Maintaining Service and Serviceability Page 5 of 218 3 April 2009 Three Valleys Water Final Business Plan and implications of failure. This approach has resulted in ‘stable’ serviceability and customer service over the period with few service interruptions or water quality issues arising from asset failure. Around 60% of our MNI expenditure in AMP4 has been on base maintenance of our operational assets. Base maintenance of our IT assets has absorbed another 13%. We have spent 5% on the specific programmes of work to replace our failed domestic meters and to upgrade our disinfection plant from ‘marginal’ by installing full disinfection with ultraviolet (UV) treatment. We have invested significantly in three specific asset renewals,: an additional contact tank at our principal treatment works at Iver; the conversion of an office building into a modern laboratory at Staines and the fit-out of our new office building at Hatfield. These investments have used 13% of MNI. Expenditure on business support activities such as vehicles, security, essential equipment for leakage detection and our reservoir inspection programme has utilised the remaining 9%. 1.3 Key issues for AMP5 and beyond A key issue for AMP5 for our infrastructure assets is the inter-relationship between the rate at which we renew distribution mains and the assessment of serviceability by Ofwat. It was not until after PR04 that Ofwat published details of the process for the assessment of serviceability. We have been concerned throughout AMP4 that this process is not sufficiently predictable, transparent or consistent. Despite holding several meetings with Ofwat to discuss this issue in detail, we have still remained very worried about the degree of judgement exercised in coming to the assessment. For example, it is not clear how the variation in bursts between an adverse year and a benign year is taken into account as climatic conditions vary. Uncertainty about this process and the threat of a ‘shortfall’ adjustment at PR09 led us to conclude that we seem to be carrying an additional regulatory risk. Our proposal in the Draft Business Plan to increase the rate of renewal to 148km per annum was heavily influenced by our concerns about this issue. At the time we decided that we needed greater certainty of returning to the lowest historic level of bursts than at PR04. A further issue is that in the process of preparing the Final Business Plan we have discovered that our Draft Business Plan understated the future cost of our distribution mains renewal programme. This came to light in late 2008 during the assessment of new tenders received after the Draft Business Plan was produced. Unit costs prepared in conjunction with the initial Cost Base Submission in April 2008 using data collected in 2007, were based on some AMP4 actual outturn costs and a number of schemes where initial target costs was the only other data available at the time. These unit costs were then used for the Draft Business Plan programme. Since the Draft Business Plan we have re-analysed unit cost data for schemes now completed in AMP4 and with final payment certificates. This shows that the Draft Business Plan unit costs were understated on average by around 20%. This change in unit costs has similarly been factored into an updated set of standard costs for the Cost Base exercise which are detailed in section C2. In formulating our unit costs for the Final Business Plan programme, we have also considered those factors not captured in these unit costs that will make the future different for our AMP5 programme. These factors include the traffic management act, new waste regulations and changes in risk factors as we move into B3 – Maintaining Service and Serviceability Page 6 of 218 3 April 2009 Three Valleys Water Final Business Plan somewhat more urbanised areas than in AMP4. This has an additional 11% effect on our Final Business Plan costs. Whilst updating our Plan, we have taken the opportunity to review and revise the mix and techniques for work we expect to undertake in AMP5 based on the latest information from schemes completed in AMP4. A key issue for our trunk mains is that if we were to do nothing in AMP5 the risk as measured through service interruptions and escalating costs would increase by 11%. We believe we need to address this deterioration in risk by increasing trunk main renewals in AMP5. For non-infrastructure assets the key issue is that we have inevitably had to increase expenditure in AMP5 and subsequent periods. • Many of our operational assets are now beyond the point of optimum renewal and should be replaced. Plant availability and our plant ‘at risk’ trends show this clearly. • Pumps installed and renewed in the 1990s are now coming up for renewal. • A number of water treatment assets installed for the drinking water compliance programmes in earlier regulatory periods are now starting to come up for replacement. • Domestic meters installed since the 1990s on new properties and for meter Optants are coming to the end of their life and starting to fail in increasing numbers. • It is becoming increasingly difficult and uneconomic to continue with a ‘patch and repair’ approach for very old reservoirs. They need to be replaced. • Our contribution to the cost of maintaining Anglian Water’s Grafham treatment works is increasing. Like us, they are seeing the impacts of earlier drinking water quality programmes. • A number of our corporate IT systems are becoming obsolete and do not have the modern functionality that we need to provide the improved customer service we and our customers expect. 1.4 Maintenance plan for infrastructure assets Our infrastructure assets consist of approximately 14,500km of mains delivering water to 1.26 million properties. Twenty-four per cent of our mains are more than 60 years old and made from cast iron with lead joints. A further 40% were laid after the Second World War using spun iron. This was a stronger material but being thinner-walled, has been less resistant to corrosion. These older ferrous pipes give us the most concern as they can corrode externally and internally. The oldest cast iron mains are also vulnerable to brittle fracture through ground movement. Around 1850km of these older ferrous pipes are laid in London Clay in the northern and western London suburban areas. London Clay is chemically aggressive to ferrous pipes. It also causes pipes to move and fracture as it shrinks and swells when conditions vary from dry to wet. Research by Birmingham University has identified London Clay as one of the most hostile environments for ferrous pipes. We have learnt a lot about our ferrous pipes from the B3 – Maintaining Service and Serviceability Page 7 of 218 3 April 2009 Three Valleys Water Final Business Plan detailed analysis of more than 4400 pipe samples in our workshop at Bushey and have developed statistical deterioration models to predict future failures of individual pipes. This corrosion of our pipes has led to many of them being in very poor condition which manifests in the high number of bursts we experience. Our overall rate of bursts continues to be the second highest in the UK water industry, as illustrated in the figure below. Figure B3 : 2 Mains bursts across the industry in 2007/08 400 350 Bursts/1000km 300 250 200 150 100 Thames Three Valleys Yorkshire South Staffs Dwr Cymru Bristol Severn Trent North-umbrian Mid Kent Southern United Utilities South West South East Wessex Dee Valley Cambridge Anglian B&W Hants Ports-mouth Folkstone & Dover Sutton & E Surrey 0 Tendring Hundred 50 Burst frequency is the key indicator used by Ofwat, to determine whether companies have maintained serviceability stable over the period. If they do not then there is the potential threat of regulatory penalties being imposed upon them. Irrespective of the rate of renewals the number of bursts that can occur in any one year is volatile because it is also dependant upon the weather. There is also a simple intuitive relationship between the rate of renewal and the certainty of meeting the target number of bursts used by Ofwat to assess serviceability: the greater the renewal activity, the more certain the target will be met. For our Draft Business Plan we judged that we needed to be more certain that we would meet the target than in AMP4 and so proposed to renew our distribution mains at the rate of 148km/yr. Choice of the future renewal rate is a difficult judgement to make and one which has taken up considerable time in the Board’s deliberations for the Final Business Plan. We have an ageing network located in aggressive soils which can only deteriorate further as time passes. However, our modelling shows that the rate of 148km/yr has a small increase in certainty for a relatively large increase in costs. In reality, customers are unlikely to see any material benefit in service in the short term unless there is a further, significant increase in renewal activity. We believe that regulators and companies have common aims as far as their regulatory regime and value to customers is concerned, so we have concluded that it would be appropriate to continue to plan on the same level of certainty as AMP4 and therefore to modify our plans to continue renewals at a rate of 126km/yr through AMP5. B3 – Maintaining Service and Serviceability Page 8 of 218 3 April 2009 Three Valleys Water Final Business Plan This is also a common sense approach. We have barely three years of data arising from the higher rate of activity started in this AMP period, which is insignificant in the context of influencing the underlying serviceability of a network that has some mains that are over 100 years old. We think that by the end of this period and before the start of the next at PR14 we will have compelling evidence to decide on the need for further increases in activity in the future. The short term benefit of adopting this approach is that that there will be less pressure on customer bills. Around 15% of our mains are designated as trunk mains and are usually greater than 300mm in diameter. These pipes tend to have thicker pipe walls, are laid deeper and have fewer fittings and connections. As a result they fail less frequently than local distribution mains but when they do fail, the consequences and impacts can be large and widespread. Localised flooding of properties is also a particular risk for these assets in some critical locations. We have completed extensive surveys of the trunk mains network to assess their condition and performance. Even after review, this work shows that we need to increase the rate of trunk main renewal to 25km in the next five years in order to prevent the risk of customer service failure rising in the future. This programme will be targeted to renew specific sections of the network that have been seen to be problematical. The increase in renewal will reduce the likelihood of major bursts which would otherwise disrupt supplies to large numbers of customers and commercial businesses. Communication pipes are the small diameter pipes that connect our water mains to customers’ properties. Around 34% of these pipes are lead, 29% are galvanised iron and 37% are plastic. The oldest materials are lead and galvanised iron. Lead pipes are not normally subject to corrosion and are generally in a reasonably serviceable condition. Galvanised iron pipes corrode significantly over the course of their life and the corrosion product is often displaced when we make a repair or install a new stopcock or meter box. If this displacement happens it often has a direct effect on customers, either through loss of pressure or by creating problems with internal plumbing fittings. It also has an adverse effect on our meter assets. Wholesale renewal is not economic so we therefore plan to follow a common sense approach and take the opportunity to undertake planned replacement of galvanised iron communication pipes with our distribution mains renewals schemes. Similarly replacing communication pipes in traffic sensitive streets in conjunction with mains renewals schemes will reduce future disruption to these critical parts of the transport infrastructure. We expect to replace just over 2000 communication pipes each year through this programme. In addition to the above planned maintenance activities we expect to experience current levels of reactive renewals of communication pipes and stopcocks as we continue with our leakage strategy to reduce leakage by 2 Ml/d per annum in AMP5. To support our day to day operations and ensure effective asset management as part of our ‘business as usual’ we will continue to record, update and use infrastructure data in our GIS, undertake pipe sampling and analysis in our workshop and utilise asset management and hydraulic models to support decision making. The costs for these items are included in our plan as business support activities. 1.5 Maintenance plan for non-infrastructure assets Our operational non-infrastructure assets consist of 98 treatment works, 95 treated water service reservoirs, 52 treated water towers and 325 pumping stations. In total we have more than 37,000 assets that require periodic renewal. Around 40% of our raw water is B3 – Maintaining Service and Serviceability Page 9 of 218 3 April 2009 Three Valleys Water Final Business Plan abstracted from the River Thames in the southern part of our area and treated in four of our largest treatment works at Iver, Egham, Chertsey and Walton. Once treated, a significant proportion of this flow is pumped north and east through our pumping station, strategic reservoir and trunk main network. The remaining 60% of our raw water is abstracted from wells and boreholes throughout the region. These installations range from tiny boreholes abstracting fractions of a megalitre per day (Ml/d) through to our largest groundwater treatment plant at Clay Lane, treating up to 160 Ml/d. Our treatment processes range from the simplest form of disinfection using only a low dose of chlorine, otherwise known as marginal chlorination, through to highly sophisticated treatment processes using complex membrane technologies. Many of these treatment processes have been installed for compliance with drinking water regulations since 1989 and have both extended the scope of our assets and made them more complex. In particular, 37% of our output is treated at works with membrane filtration to guard against cryptosporidium. This is the highest proportion in the industry. Our non-operational assets also consist of those supporting elements required to operate the water business on a daily basis. The principal asset is our IT equipment, but also included is our vehicle fleet, our offices and depots and our laboratory. We have improved considerably our understanding of our non-infrastructure assets in the AMP4 period. This has come about as we have upgraded our asset information systems and our organisational structure in order to apply greater focus on capital maintenance planning. Early in 2008 we completed a new survey of our non-infrastructure operational assets and assessed their condition. This was extremely useful in validating the data and filling gaps in our asset information system. The condition assessments proved very useful in helping us understand future investment needs for our buildings and large civil structures. Changes in legislation, particularly over the past 20 years, have driven significant enhancements in treatment processes. Whereas traditional processes involved large civil structures, the recent requirements to remove pesticides, nitrates and cryptosporidium and to reduce plumbosolvency, have required more complex processes using more mechanical and electronic equipment. Many of these assets have shorter lives and will need to be renewed for the first time during the next 15 years. One area of particular concern is our ageing pump stock. Many of these assets were installed or replaced in the 1990s to meet new regulatory standards for DG2, pressure, and DG3, interruptions. We predict that we will need to begin an increasing programme of replacement in AMP5 and subsequent periods. Our key objective for AMP5 and the future is to maintain ‘stable’ serviceability of our noninfrastructure assets. Serviceability of these assets is measured using numbers of coliforms at treatment works, service reservoirs and water towers; turbidity at treatment works and enforcement actions. Because of their direct effect on water quality, these assets must normally be replaced on a planned basis rather than by reaction to a failure. For the majority of our non-infrastructure operational assets we have adopted a single forward-looking and risk-based approach to identifying future base maintenance proposals. Together with experts in the asset management field, we have developed a capital maintenance planning tool (CMPT) which identifies our future capital maintenance requirements from the bottom-up for 37,000 renewable items of our electrical and B3 – Maintaining Service and Serviceability Page 10 of 218 3 April 2009 Three Valleys Water Final Business Plan mechanical assets, civil structures, buildings, ICA equipment, process units, valves, tunnels and boreholes. We have worked with the rest of the industry, through the UKWIR WIDER and deterioration modelling projects to improve our understanding of how these assets deteriorate and we have continued to collect failure data for our own assets to validate the findings. This has been used to assess the probability of failure for all our asset classes. The service consequences of asset failure have been assessed at all levels – not only considering the potential failure to supply but also the implications on water quality, the environment (including carbon), health and safety and financial performance. We will have to increase our capital maintenance expenditure on non-infrastructure operational assets in AMP5. The expenditure allowed in the final determination at PR04 is already low compared to other companies – as shown in Figure B3 : 3 below. The predicted increase will take us to current industry average levels of expenditure. Figure B3 : 3 Comparison of TVW PR04 MNI final determination with other companies on a per property basis 35 £/property/annum 30 25 20 15 10 Wessex Dee Valley South West Sutton & East Surrey B&WH THWS Mid Kent Anglian Southern FDWS Thames Yorkshire UU Northumbrian South East Bristol TVW Welsh South Staffs Cambridge Portsmouth 0 Severn Trent 5 We recognise that our MNI programme of £156 million represents a sizeable increase over the PR04 final determination of £123 million. However, we have not arrived at this figure lightly. Our initial analysis, based on a comprehensive bottom-up approach, identified a larger capital programme than this. Our approach identifies an optimum renewal strategy based on a balance of cost and risk. We recognise that this is a new approach to capital maintenance planning and, while fundamentally sound, is dependent on a thorough understanding of risk costs and deterioration modelling. We have consequently examined the detailed outputs of our modelling using our engineering judgement and identified areas where we believe the modelling needs careful interpretation. B3 – Maintaining Service and Serviceability Page 11 of 218 3 April 2009 Three Valleys Water Final Business Plan This particularly applies to our large civil assets (reservoirs, buildings, process structures) and our pumping stock. Balancing cost and risk in these areas has advanced replacements ahead of their asset life projections. We have looked carefully at the programme to balance risk with the need to ensure that the modelling is realistic. As a result, we have delayed some elements of activity for a few years, which has the benefit of limiting increases in customer bills at PR09. We have also delayed the replacement of three of our reservoirs (at St. George’s Hill, Hart Lane and Bushey Heath) until early in AMP6 and have also revised the programme for completion of our disinfection upgrades (started in AMP4) into the first two years of AMP6. These remain essential investments and we need to agree an overlap programme with Ofwat for the disinfection upgrades and the St. George’s Hill reservoir replacement at PR09. We have also re-profiled a sizeable portion of our pump replacement programme into AMP6 and will monitor the situation closely and manage the risk during AMP5 to confirm the scope and scale of the programme at PR14. These changes have reduced the Draft Business Plan programme by £5.5 million, but this has been offset by a £1.5 million increase in costs at Grafham advised by Anglian Water Services. 1.6 Maintenance plan for information management Our infrastructure technology (IT) is a crucial but diverse collection of hardware and software and services used to create, process, store, transmit and display information. It is a critical facilitator for a successful, customer focused organisation. IT enables business processes to flow and decision making to take place; it promotes organisational efficiency and enables an increase in collaboration, communication and development of business models. The MEAV of our IT assets is £38.2 million. Our detailed assessment shows we need a programme of £25.6 million in AMP5. In AMP4 we adopted a break-fix approach to replacing our IT hardware assets. This was in part driven by the knowledge that we were moving into new offices towards the end of this period. As we come towards the end of AMP4, this approach needs to change as the consequences have been noticeable through the deterioration of IT infrastructure components. Our infrastructure is tending to fail more often and is causing system outages which can in turn affect the service we provide. To avoid this in the future, the replacement policy in maintaining IT hardware assets will have an average asset life of 7.5 years. In formulating our plan we have taken account of hardware assets that are being renewed in conjunction with our move to the new offices and this leads to an AMP5 programme of £5.1 million for hardware assets. The largest investment element of the IT maintenance programme in AMP5 is £18.8 million for the replacement, upgrading and development of software applications. Of this, £15.4 million is for the maintenance of large corporate applications and £3.4 million for maintenance of standard operating systems and desktop applications. The software maintenance strategy for the large corporate applications has been specifically tailored to each product and an individual business case has been prepared. In AMP5 we plan to replace the Billing Application, Electronic Document Management System, Job Management Application, Job Scheduling Application and Field Information System. These ageing systems need to be replaced because of increasing obsolescence and the increasing risk of failure. Also, in most cases they do not have the modern B3 – Maintaining Service and Serviceability Page 12 of 218 3 April 2009 Three Valleys Water Final Business Plan functionality that we need if we are to improve our efficiency and meet customer expectations. Our Oracle Application, Geographical Information System and the Asset Management Information System, will all need to be upgraded in line with supplier recommendations. Full details of the maintenance plan for Information Management are given in Section B3.12. B3 – Maintaining Service and Serviceability Page 13 of 218 3 April 2009 Three Valleys Water Final Business Plan 1.7 Summary programme of costs and outputs The table below summarises the costs for our infrastructure maintenance programme subdivided into key cost areas and shows the changes against the PR04 final determination in 2007/08 prices. Table B3 : 1 Summary of infrastructure renewal expenditure Activity Distribution mains renewals AMP4 FD £100,340,000 CP renewals - Cost AMP5 Cost AMP6 £119,985,000 £119,985,000 630km £5,082,000 £6,010,000 12,600 25km Trunk main renewals £10,687,000 £19,017,000 £19,195,000 Reactive maintenance £38,568,000 £38,520,000 £38,520,000 Business support activities £12,636,000 £8,111,000 £7,313,000 £162,411,000 £190,715,000 £191,023,000 Total AMP5 input - The table below shows how our maintenance plan for infrastructure asset has changed between the Draft Business Plan and the Final Business Plan. Table B3 : 2 Change of infrastructure renewal expenditure and outputs between the Draft Business Plan and the Final Business Plan Activity Draft Business Plan Final Business Plan Cost Input Cost Input £118,028,000 740km £119,985,000 630km £7,282,000 12,550 £5,082,000 12,600 Trunk main renewals £20,000,000 25km £19,330,000 25km Reactive maintenance £39,000,000 - £38,520,000 - Business support activities £10,886,000 - £8,111,000 - Total £195,196,000 - £190,715,000 - Distribution mains renewals CP renewals Other than for trunk mains, this infrastructure maintenance programme is a continuation of AMP4 activities and does not seek an uplift in activity. The performance of our infrastructure assets has a real and direct impact on customer service and the environment in which our customers live and work. It is essential that we continue with our maintenance programme to ensure these assets continue to perform at current levels and, where practical and economically viable, are also improved. The table below summarises the costs for our non-infrastructure maintenance programme sub-divided into key cost areas and shows the change against the current AMP4 programme in 2007/08 prices. B3 – Maintaining Service and Serviceability Page 14 of 218 3 April 2009 Three Valleys Water Final Business Plan Table B3 : 3 Summary of proposed MNI expenditure FD Cost AMP4 (£m) Actual Cost AMP4 (£m) Cost AMP5 (£m) Cost AMP6 (£m) Base maintenance of operational assets 81.0 95.8 123.3 Base maintenance of IT assets 18.2 25.7 15.7 Base maintenance of business support activities 11.8 14.4 14.9 Specific programmes of work 7.1 18.9 34.1 Activity Specific asset renewals Total 123.0 17.4 1.8 4.4 135.5 156.5 192.5 Our proposed MNI spend in AMP4 is higher than the Final Determination of £123 million at PR04. This extra investment is necessary and is further evidence of the need for increased MNI expenditure in AMP5. Much of this additional investment is the result of assets installed in previous periods now starting to need first time renewal. Replacement of these assets – metering equipment, pumping plant and reservoir renewals – associated with past drinking water quality programmes, is essential if we are to maintain serviceability, provide a high level of service for our customers and maintain risk levels. The table below shows how our maintenance plan for non-infrastructure assets has changed between the Draft Business Plan and the Final Business Plan. Table B3 : 4 The change in MNI expenditure between the Draft Business Plan and the Final Business Plan Activity Cost DBP (£m) Cost FBP (£m) Base maintenance of operational assets 91.4 95.8 Base maintenance of IT assets 32.0 25.7 Specific programmes of work 14.6 14.4 Specific asset renewals 16.3 18.9 Base maintenance of business support activities 5.7 1.8 Total 160.0 156.5 B3 – Maintaining Service and Serviceability Page 15 of 218 3 April 2009 Three Valleys Water Final Business Plan 2 Our approach to asset management 2.1 Introduction We have adopted sound and mature practices in asset management planning for all asset groups in line with the Capital Maintenance Planning Common Framework (CMPCF) established and used for the first time by the industry for PR04. We have been committed to following the principles of asset management for identification and planning of investment for many years. Our organisational structure and processes provide a firm foundation for our approach which is based on both the use of analytical tools and the application of practical common sense. Our approach at PR04 was recognised as being towards the leading edge within the industry – particularly for infrastructure. But we recognised the need to continuously improve our approach for PR09. We have strengthened our PR04 approach for mains infrastructure assets and enhanced our planning methodology and analysis tools in a number of other key areas, particularly for non-infrastructure assets and communication pipes so that they can be utilised both for PR09 plans and for ‘business as usual’ in AMP5. Our approach to planning for the provision of continuing base service incorporates the key principles of being forward-thinking: • utilising a modelling approach rather than expert judgement wherever possible • risk-based • using the probability and service consequences of asset failure • cost effective • using whole life costs including the cost of carbon. We have utilised the best available data on assets and taken account of asset degradation over time. Our proposed programmes have been closely linked to service impacts and, wherever possible, are based on optimised interventions and take account of other enhancement investments required in AMP5. We have struck an appropriate balance between certainty of outcome, risk to customers and our business, and the impact on prices. Capital maintenance planning in the Final Business Plan uses a 25-year planning horizon and is generally consistent with the Strategic Direction Statement (SDS) we published in November 2007. In the SDS we said that: “The key to reliable supply is maintenance. We will continue to maintain our assets, but in a different way and by setting different priorities. We will continue to repair, renew and replace our surface assets according to more environmentally sensitive principles. We aim to increase maintenance of our underground assets in line with cost effective and cost benefit principles.” B3 – Maintaining Service and Serviceability Page 16 of 218 3 April 2009 Three Valleys Water Final Business Plan 2.2 An integrated approach to asset management We have a long-standing commitment to the use of asset management principles and planning to produce our plans. This dates back at least 15 years to the creation in 1992 of a pipe analysis team. It was established to collate robust pipe asset data from underground samples and enabled the creation of predictive tools. In 1999 asset management specialists from across the company were brought together in a single team because it was recognised that “Implementing effective and efficient asset management procedures is critical to improving the quality of life of our customers. It also enables us to have the lowest whole life cost in the water industry. Our new asset management organisation will be the keystone for establishing assets that enable our operating companies to implement reliable, high quality, cost-effective services for their customers”. This approach to asset management was developed further in 2002 with the separation of asset management and asset delivery. This followed on from a project to identify best practice asset management in other industries and to apply them here. The separation of activities was aimed at ensuring that asset delivery achieved excellence in project implementation, with schemes implemented to the lowest possible cost within agreed timescales; and that asset management concentrated on ensuring we invested in the right assets at the right time whilst optimising operating and maintenance costs. We also established our core asset management process – shown below – which links individual asset management activities over the whole life cycle. Our organisational structure is built around this continuous process which has since become deeply embedded in our day to day approach to asset management. Figure B3 : 4 Our asset management process The asset management process being followed is both asset-centric and cyclical. It is represented diagrammatically in Figure B3 : 4 above. The cycle is broadly applied to all B3 – Maintaining Service and Serviceability Page 17 of 218 3 April 2009 Three Valleys Water Final Business Plan our operational asset groups. We describe in detail later in Section 3 (for infrastructure) and Section 8 (for non-infrastructure) how we adapt the principles of this approach to the sub-services. While the assets are in service (box 1) their performance is assessed on a regular, and wherever practical, continuous basis (box 2). Targets for asset performance are established and applied (box 3) and the gaps between desired and actual performance are assessed (box 4). These gaps are identified as issues and are progressed on the basis of their priority (box 6). An initial assessment of the most appropriate solution is made based on an economic appraisal of the various options for solving or mitigating the problem (boxes 7, 8 and 9). Solutions to be implemented through a ‘no-investment’ route are implemented within the operational teams (boxes 11 and 13). Options requiring capital investment follow a well-established route and are subject to our project management system (PMS) (boxes 10, 12 and 14). Once the solution has been implemented the assets are returned to service and the cycle begins again. Throughout this quinquennium we have improved our asset management approach and the models and tools to support our decision making process – particularly for above ground assets. As an example of our commitment to continuously develop our approach to asset management, in the past eight years we have had a programme to develop our asset management information system for non-infrastructure assets. Prior to PR04 we made a decision to use the Ellipse proprietary system (formerly known as MIMS), as our asset management information system. For PR04 we updated and identified information from our PR99 asset inventory (held in spreadsheets) and on our production maintenance system (Frontline), into a new asset inventory using Ellipse. Since PR04 we have continued with our planned development of AMIS. We have done this by implementing the work planning and scheduling functionality of Ellipse and replacing Frontline. This enables effective management of our planned and reactive maintenance activities and provides good data and information for asset management planning. More recently we have moved into the final phase of implementation of our AMIS strategy, which is to deploy Ellipse onto field devices so that work planning and scheduling and exchange of information and data is provided and controlled electronically. A major step forward has been the development of a capital maintenance planning tool (CMPT) for above ground assets which uses capital expenditure (capex), operating expenditure (opex) and risk costs to determine an optimum renewal frequency at renewable plant item level (the level at which an asset is renewed rather than repaired). This is a significant step forward in capital maintenance planning for us and it recently received the Institute of Engineering and Technology 2008 Award for Innovation in Asset Management. We have placed particular emphasis on improving our understanding of our communication pipes through the collection of much better quality data. We have also continued with our research and development programme. It gives us new models for trunk mains and communication pipes and aids understanding of the natural rate of the rise in leakage. In 2005 we brought operations and asset management together into one organisation under the Operations Director. The concept is that asset management is responsible for ensuring the assets are capable and operations ensures the assets are ready and available. B3 – Maintaining Service and Serviceability Page 18 of 218 3 April 2009 Three Valleys Water Final Business Plan Asset managers are no longer isolated from day-to-day practicalities. They now work with experienced field staff and are very close to operational staff. We have also employed Mace from January 2006 to manage asset delivery and this has led to a significant improvement in the handling of capital investment projects. Our Reporter has noted that this is particularly evident for mains renewals which has been a critical activity for us in AMP4 and will continue to be so. We have recently renewed the arrangements with our Mace. They will continue to manage the implementation of a major part of our capital investment programme during AMP5 and will provide continuity between AMP4 and AMP5. They have also been actively involved in developing cost estimates and implementation plans for the Plan. Our staff have annual reviews and personal development plans. Where appropriate, we are beginning to use the Institute of Asset Management’s competency framework for asset managers in these development plans. We have a development programme for our technical graduates, including placements in each of our asset management departments. All of our senior asset managers have defined key accountabilities. In terms of leadership, policy and strategy, our Board is engaged in the process of asset management planning through the work of a number of executive committees. • The Executive Management Committee. This meets monthly and reviews company performance, considers specific issues and recommends policy to the Board. • The Risk Management Committee. This meets bi-monthly and oversees the management and mitigation of strategic risks. • The Capex Committee. This meets monthly and reviews investment performance and approves capital projects for inclusion in the annual capital investment programme). The Operations Director and Head of Asset Management take an active part in the work of these committees and engage with both executive and non-executive directors. The main Board and Audit Committee have overall responsibility to ensure governance of these committees. The Operations Director, who has Board responsibility for asset management and has been the project director for this Plan, provides regular monthly reports containing sections dealing with asset management to the Executive Management Committee and the on a quarterly basis to the Board. Our asset management policy was approved by our Board in April 2008. The current asset management policy and the strategy that underpins it are included as Appendix 1. The figure below shows how this is organised with three departments (shaded in blue) responsible for ensuring that the operational assets are ready and available to supply, treat and deliver water to customers. The asset management departments (shaded in pink) work alongside the operational teams and have responsibility for making sure the operational assets are capable of performing the functions required to supply, treat and deliver water to customers. B3 – Maintaining Service and Serviceability Page 19 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 5 Our asset management organisation Managing Director Operations Director Head of Network and Leakage Performance Head of Asset Management Head of Production and Supply Head of Production Asset Performance Head of Strategic Planning Head of Customer Operations Head of Network Maintenance Asset Management are responsible for both maintenance and enhancement investment planning for operational assets. The figure below shows the principal activities undertaken in asset management by department. Figure B3 : 6 Asset management organisation responsibilities Head of Asset Management Strategic Planning •25 year Water Resource Plan •Drought Management Plan •Catchment modelling •Groundwater Protection •Low Flow River schemes •Environmental Monitoring •Water Balance •Water Use Studies •Strategic Studies •Water Efficiency •SOSI Management •EA Liaison Network and Leakage Performance Asset Plan Development Input to PR09 (CFCMP) Leakage Strategy Leakage Monitoring Leakage Reporting Pipe Laboratory Asset Renewal Strategy Capex Scheme Initiation Asset Assessments Network Asset Standards Network Analysis Operations Technical Support Production Asset Performance Asset Plan Development Input to PR09 (CFCMP) Maintenance Strategy Planned Maintenance Mgt Reservoir & Tower Inspections Tunnel Inspections Asset Renewal Strategy Capex Scheme Initiation Asset Assessments Production Asset Standards Operations Technical Support Infrastructure investment planning is carried out by the Network and Leakage Performance Department within Asset Management. This team is responsible for establishing investment needs for infrastructure assets and scoping and initial preparation of infrastructure projects for implementation. It has overall responsibility for meeting the leakage target and is accountable for the leakage strategy, systems maintenance, leak detection and operational and regulatory reporting. The team also has responsibility for ensuring adequate pressure (as measured through DG2) and for pressure management to control leakage. This means there is no conflict between these business requirements. The department plays an active role in the Distribution Operation and Maintenance Strategy (DOMS) Steering Group and project manages the capital element of this work. It is structured to support our short, medium and B3 – Maintaining Service and Serviceability Page 20 of 218 3 April 2009 Three Valleys Water Final Business Plan long term planning needs with close functional links between strategic and operational departments. Investment planning on the above ground assets is carried out by the Production Asset Performance Department within Asset Management. It is responsible for providing above ground assets that are of agreed condition and serviceability at optimum cost and which are always capable of producing and delivering water to customers. Through monitoring, analysis, inspection and expert interpretation of production asset data and performance measures, the team identifies solutions and improvements that ensure production assets are capable of achieving an acceptable service for customers. It is responsible for the inspection of assets, investigation of operational problems, identification of solutions, option costs and the prioritisation of investment needs. It sets engineering and technical standards for use in design and initiates and defines projects for the capital investment programme. Once a project has passed to our implementation partner, the team leads the project implementation teams as overall ‘sponsor’ to the project, participating in value management and value engineering workshops and reviewing and if necessary challenging proposed project changes. Once a project has been implemented the team is involved in the post-project appraisals and tracks the benefits achieved. Strategic planning is particularly focused on development and implementation of the 30year water resource management plan and long term asset management studies from source to tap. It is also focused on management of our water resource assets and works closely with the Production Asset Performance Team. Our short, medium and long term asset management planning processes are fully documented and describe the basic approaches and associated ‘responsibilities’ for capital maintenance (infrastructure and non-infrastructure, including both operational and management and general assets) and enhancement (supply-demand, quality and SEMD). These policies and all other Company policies are renewed and updated on a regular basis and are accessible to all staff via our intranet. We adopted a risk and data based approach for PR04 closely following the UKWIR CMPCF approach using tools and methodologies developed beforehand, including the determination of the economic cost of capital maintenance to establish our investment requirements for AMP4. The approach adopted is embedded into our standard process for determining investment projects. Our policies for asset management continue to closely map the requirements of the CMPCF. The table below maps how our approach fits with the structure of the CMPCF. B3 – Maintaining Service and Serviceability Page 21 of 218 3 April 2009 Three Valleys Water Final Business Plan Table B3 : 5 Asset management – CMPCF process High level Sub level Historical analysis Expenditure review Non-infrastructure Asset Management Information System (AMIS) asset hierarchy clearly defined Unit costs by asset type and renewable item collected Infrastructure Unit costs by asset type collected Monthly expenditure review carried out Unit cost drivers updated Unit costs regularly updated and trends examined Forward looking analysis Service and Asset Performance review Monitoring levels of service through regular review of asset performance for reliability, assets ‘at risk’ and serviceability Preparation Risk-based approach used for initial prioritisation. Overall planning objective to maintain level of risk – as derived from customer surveys. Levels of service monitored. Sub service categories defined and data acquisition available for each sub service Cost effective approach adopted for business as usual Intervention activity recorded in corporate systems Management reporting through balanced score card Ongoing benefits measurement for bursts and leakage Management reporting through balanced score card Cost effective approach adopted for business as usual Intervention activity recorded in corporate systems Service and cost forecasting Comprehensive FMECA approach used together with assessment of asset criticality for all operational asset types. Approach validated using historical trends. Above ground asset failure probabilities based on deterioration models obtained through own experience and from UKWIR’s ‘WIDER’ project. Validation through own engineering experience. Criticality assessment allows asset failure to be converted into cost of failure Intervention analysis Capital maintenance planning tool (CMPT) approach provides optimised asset replacement and refurbishment based on whole life costs for all operational asset types Approach considers cost of risk and focuses analysis on assets which have the highest total business impact Deterioration models developed and used for distribution mains, trunk mains and communication pipes Consequence modelling developed for each sub service Unit cost models developed for each sub service Risk models developed for each sub service Optimiser model developed for distribution mains for PR09 Active Leakage Control (ALC) cost curves developed for renewal and linked to Economic Levels of Leakage (ELL) Communication pipe intervention strategy developed and linked to mains renewal strategy for PR09 Effect of renewal on risk and serviceability developed. Uncertainty analysis introduced into decision making process B3 – Maintaining Service and Serviceability Page 22 of 218 3 April 2009 Three Valleys Water Final Business Plan 2.3 The importance of data and systems The collection, storage and analysis of high quality data is central to the implementation of our capital maintenance planning process. The information required is, wherever possible, collected during the day-to-day course of operational activity. We have a number of information management systems in place that make this collection, storage and analysis as effective and efficient as possible. This includes a comprehensive suite of systems for managing, monitoring and recording activity on the operational assets. Reports and analysis can be produced across several systems to study a wide range of performance issues. More information on our systems and how we use these to manage across the asset base is included in the detailed sections that follow. Accurate cost data is essential for effective asset management planning. It comes from a variety of sources. Wherever possible, these costs are sourced from actual outturn costs, either as a result of a previous project or from the cost reports produced from analysis of current operating expenditure. The figure below identifies these sources, which can originate from across the business. Figure B3 : 7 Intervention costs process map B3 – Maintaining Service and Serviceability Page 23 of 218 3 April 2009 Three Valleys Water Final Business Plan Capital costs are assembled separately for the above and below ground projects (boxes 1 to 13) and are generally based on the outturn costs from previous projects. Operational costs (boxes 14 to 21) are generally taken from our financial systems and are based on cost curves that are updated using actual current labour and material costs. Failure costs (boxes 22 to 29) come from a variety of sources depending on the particular failure. Unit costs are used in ‘business as usual’ as a planning tool for future capital investment. Initial assessments of likely solutions to statements of need raised to the issues register will generally use these. Once assessed, validated and prioritised, the issues are then scoped into a solution and unit cost models are used to derive forecast expenditure profiles. Forecast opex costs are generally derived from first principles at this stage. The business case detailing costs and benefits is then presented and justified to our Capex Committee which decides whether the investment proposal can proceed to the next stage. The stages are: • initiation of the project, including the initial business case • updating of the business case and approval to move into detailed design • firm costs after detailed design and approval to implement. tender, business case reconfirmed and Following final approval, the anticipated forecast expenditure is subsequently reviewed and refined as part of the detailed engineering design process. These estimates are revised through the ‘project justification’ system with decision gateways at the end of outline design and at the end of the detailed design/contract award stage. Construction costs are fed back into the unit cost system to ensure it is kept up to date. 2.4 Engaging stakeholders In preparation for the PR09 submission we identified that it was essential to align our investment programme to customers’ requirements, priorities and also willingness to pay (WTP). We conducted a detailed household customer study the results of which were fed directly into our business planning processes. We appointed ICF International (ICF) to undertake the research using a specialist team led by Dr Scott Reid. The ICF team comprised two leading experts in the field of stated preference surveys: Professors Ian Bateman and Ricardo Scarpa. Accent Market Research undertook the qualitative research, piloting, survey implementation, data collection and data entry roles for the project on behalf of ICF. The aim of the work was to assess our customers’ preferences for different levels of service across different sectors of the business through a customer survey. This was designed to assess household customers’ priorities measured by their reaction to possible changes in water bills as a consequence of changes in service levels. The study involved using stated preference techniques aimed at measuring customers’ WTP for different levels of service using a choice experiment (CE) design. Apart from its technical merits, which were well-suited to the task, there is widespread institutional support for adopting a CE approach following endorsement in 2006 by the then Ofwat Director of Network Regulation, Melinda Acutt (Establishing the benefits of water and wastewater improvements NERA seminar, May 2006). Our customer research project is described in detail in Section C1 Consumers Views and in the final report PR09 Cost Benefit Analysis Customer Preferences & Willingness to Pay which is available upon request. Professor Ken Willis of Newcastle University, an acknowledged expert in this field, has endorsed our work for both the Draft Business Plan and this Plan. B3 – Maintaining Service and Serviceability Page 24 of 218 3 April 2009 Three Valleys Water Final Business Plan Since the draft plan eight stakeholders have collaborated on a joint research project seeking consumers' views of each company's draft plan. The research sought to explore customers’ views on our plans but did not go into great detail about specific aspects. It was undertaken in the second half of 2008. Two specific results are of relevance for capital maintenance. First, only 20% of the 250 customers surveyed felt our plans for maintenance of water pipes, treatment works and reservoirs were poor value for money. Secondly, the mean value for money score (on a scale of 1-5) for maintenance of water pipes, treatment works and reservoirs was 3.36, showing that people are generally more in favour of our proposals than against. Twice a year we also conduct an independent telephone survey with a random sample of 500 customers to find out what they think about the service we provide. This is in addition to the quarterly survey Ofwat conducts to compare the service of all UK water companies (in which we were placed in 11th position overall for 2008). The most recent survey showed a high level of customer satisfaction with our service. We have also consulted with a wider group of key stakeholders, including local authority representatives, large industrial and commercial customers and special interest groups, through three facilitated PR09 focus groups held at Cheshunt, Elstree and Windsor in September and October 2007. One of our routine health and local authority water quality liaison meetings was also devoted to consultation with the health professionals on the PR09 process and water quality issues in September 2007. We have initiated and hosted quadripartite meetings involving DWI, the EA and CCW to establish the overarching issues and the means of engagement with these stakeholders. Subsequent meetings and exchanges have taken place. Our Managing Director has met a number of local MPs during 2007 and 2008. Our Strategic Direction Statement, published in December 2007, reflected the outcome of our customer research and stakeholder engagement through five strategic objectives. For each of these we have, where appropriate, identified the key issues and principal activities as set out in the summary of our SDS with a direct link to our asset maintenance plan: • we will make sufficient tap water available to our customers, in all but unusual circumstances (i.e. drought) • we will supply good quality tap water that meets the high technical standards set for drinking water in the UK • we will care for the environment as part of our day-to-day business • we will minimise disruption to the water supply and the inconvenience of planned works • our tap water will remain affordable for our customers. We received formal feedback on our SDS from the CCW, DWI, EA and Natural England as well as from local MPs and local authorities. In 2008 we met with Penny Boys, an Ofwat non-executive director. We have also undertaken four stakeholder feedback sessions in Uttlesford Bridge, Harrow, Woking and Hatfield and two facilitated deliberative workshops in London following submission of our Draft Water Resources Management Plan. After submission of the Draft Business Plan we received formal written feedback from CCW, the EA and Natural England. The EA was pleased that we had identified maintenance as a key aspect for action within PR09. CCW supported proposals to B3 – Maintaining Service and Serviceability Page 25 of 218 3 April 2009 Three Valleys Water Final Business Plan increase infrastructure renewals to address the causes of disruption to customers (bursts, discolouration, poor pressure). English Nature did not specifically refer to capital maintenance but, along with CCW and the EA was concerned about our proposals regarding leakage reduction. These concerns have been addressed in this Plan and we plan to continue to reduce leakage by 2 Ml/d per annum in AMP5. This is described in detail in sections B5 and C4. Since the submission of the draft plan we have also held a further quadripartite meeting with CCW, the EA and the DWI to ensure there is good understanding of our respective positions. We have interpreted the results from our customer research and stakeholder engagement, and taken account of historical and current trends in levels of service to determine the following overarching asset management planning objectives. • We will maintain our assets to provide a stable service for our customers and to keep or restore performance against the individual serviceability indicators established by Ofwat to the long term historic levels. • At least, to maintain the current level of customer service and supply risk attributable to the performance of our assets. • To have, wherever practical and affordable, optimal levels of combined direct, indirect and risk costs. • To reduce our negative environmental effect and carbon footprint wherever practicable through effective and economic asset replacement. • We propose a cost effective capital maintenance programme validated by cost benefit analysis (CBA). In order to develop our approach to CBA we selected ICS Consulting to help develop our CBA methodology, incorporating the output from our WTP research and information on social and environmental costs and benefits. They provided supporting software to assist in the calculation of our cost benefit values so that we could ensure our approach was applied consistently across the majority of our investment programme. The scope of our work has included: • CBA with explicit reference to customers’ views and values • the application of discounting within the forecasting of whole life costs used on the cost side of the cost-benefit analysis • allowing trade-offs and sensitivity analysis via the application of constraints and targets in the development of scenarios and their consequent portfolios. Four elements are required to support the use of CBA. • Priorities – an understanding of the value delivered by improvements in service risk against each of the output performance measures (see below). This value is made up of customers’ stated preferences (WTP); estimates of social/environmental damage and/or private costs avoided; with care taken to ensure no double counting across these. • Targets – service and serviceability targets required to be delivered by the investment portfolio, expressed in terms of the output performance measures of the asset base and some supplementary measures, such as burst numbers. B3 – Maintaining Service and Serviceability Page 26 of 218 3 April 2009 Three Valleys Water Final Business Plan • Valuation – method for the valuation of each potential investment solution that allows comparison on a consistent basis. The valuation is in terms of its effect on the output performance measures via their links to WTP, socio-environmental damage and/or private costs as relevant. • Constraints – those that can be applied to the portfolio to ensure it meets the business’ requirements. They include total capital cost, functional split, investment types and asset types. These elements are captured using solution valuation workbooks that assess the individual consequences on an investment in terms of a set of measures that describe the output performance of the asset base. These are called output performance measures (OPMs). OPMs can be described as a point where the performance of the asset base impacts on the success of the business. They are at a level where customers can express a value for those relevant to them (i.e. the service-related OPMs), enabling customers’ preferences to be used alongside business drivers. Several OPMs have a bearing on socio-environmental damage. The following table lists the sixteen OPMs we have used for the Plan. Table B3 : 6 Output performance measures OPM ref OPM description 1 Water quality (biological and chemical) 2 Water quality (aesthetic) 3 Water pressure 4 Supply interruptions 5 Security of supply resources 6 Leakage 7 Sludge disposal 8 Extra regulatory reporting 9 Prosecution 10 Personal injury 11 Customer contacts 12 Carbon equivalent emissions 13 Staff productivity 14 Transport disruption 15 Avoided costs to business 16 Water saved These OPMs were selected to ensure that we had a sufficient number to allow CBA to be applied across our entire capital programme. We intend to adopt investment optimisation as an ongoing business planning tool in AMP5 and beyond and so developed the OPMs accordingly. We now have a set of OPMs that capture our key business drivers. Each of our proposed AMP5 investment solutions – including capital maintenance – was evaluated against these OPMs. Full details of our approach to CBA are described in section C8 and our approach has been positively endorsed by Professor Ken Willis of Newcastle University. The results for capital maintenance are described in the detailed sections for infrastructure and non-infrastructure assets that follow. B3 – Maintaining Service and Serviceability Page 27 of 218 3 April 2009 Three Valleys Water Final Business Plan The Board has been closely involved in ensuring the views of stakeholders were taken into account in the production of the Plan. It was fully involved in the SDS, developing and articulating the Company’s strategic objectives, and in the Draft Business Plan which also embraced the Draft Water Resources Management Plan (DWRMP). This set out the Board’s high level perspectives on the issues material to price limits that will arise, or are likely to arise in the period 2010-15 or beyond. In reaching its strategic decisions the Board was informed by the outcome of stakeholder research. It was aware of customers’ and other stakeholders’ priorities and feedback from Ofwat and other stakeholders on the Draft Business Plan and DWRMP. Board members have reviewed several drafts of the Plan and considered how the proposals advance the objectives in the SDS and incorporate changes in our strategy since the Draft Business Plan to balance need with wider benefits and affordability. The Board has concluded that the Plan takes into account all current and prospective material issues and is consistent with the long term strategy set out in the SDS. The Draft Business Plan was discussed at Board meetings on 8 April and 26 June 2008, and also at special Board meetings held on 5 June and 24 July 2008. The non-executive directors reviewed the Draft Business Plan and provided their comments, input and advice. The Plan strategy was discussed at Board meetings on 23 September, 2 December 2008 and non-executive Board members have scrutinised specific aspects of the Plan through its Audit and Risk Committees and at specially convened workshops in February to review the first edition of the Plan. The Board received reports on internal audit procedures and satisfied themselves of the reliability, accuracy and completeness of the Plan at its Audit Committee on 4 March 2009. It approved the Plan at its meeting on 12 March 2009. The executive directors and non-executive directors have reviewed successive drafts of the Plan, commentaries and tables. The Board has satisfied itself that it has submitted an integrated plan. It has considered the options for capital expenditure, the interdependencies between planned activities and outputs expected; wider benefits of policies and investments; how the different options affect risk and the prices customers pay. It has also taken into account how its Plan aligns with the DWRMP, the Draft Business Plan and water quality submission to the DWI. Throughout this process the Board considered options for future expenditure levels and the likely impact on customer bills. These ranged from distribution main renewals, communication pipe renewals, trunk main renewals, base non-infrastructure (NI) maintenance for operational and non-operational assets, specific NI programmes of work and specific NI asset renewals. In particular the Board have spent much time deliberating about the appropriate balance of risk, cost and certainty for future distribution mains renewals. They remain worried that the rate of distribution mains renewal should be increasing but are prepared to wait until PR14 when much more data will be available from the current rate of renewal. Their decision was heavily influenced by the need to constrain pressure on customer bills. 2.5 Making the future ‘business as usual’ We have adopted sound asset management planning for all asset groups in line with the Capital Maintenance Planning Common Framework (CMPCF). We have been committed to following the principles of asset management for identification and planning of investment for many years. Our organisational structure and processes provide firm foundations for our approach, which is based on both the use of analytical tools and practical common sense. B3 – Maintaining Service and Serviceability Page 28 of 218 3 April 2009 Three Valleys Water Final Business Plan During AMP4 we have developed a new capital maintenance planning tool for noninfrastructure assets and enhanced our approach in areas such as communication pipes and IT assets. We will be deploying these tools as part of our ‘business as usual’ in AMP5 so that at PR14 we can utilise them with even more certainty about the future investment requirements for our assets. We need to place a particular focus on improving our meter data so that we have the option to move from a reactive replacement policy to a proactive policy if it can be proven to be cost effective and/or cost beneficial. We recognise the need for continuous improvement and monitoring and will continue to embed the core principles of asset management planning set out in the Asset Management Planning Assessment Process, which was developed for the water industry during AMP4.Our development plans for asset management are included in our asset management strategy included as part of Appendix 1. B3 – Maintaining Service and Serviceability Page 29 of 218 3 April 2009 Three Valleys Water Final Business Plan 3 3.1 Our plan for infrastructure assets: an overview Introduction Our infrastructure assets comprise approximately 14,500km of strategic (trunk) mains and distribution mains connecting treatment facilities and production sites with storage reservoirs and towers, or supplying treated water directly to 1.26 million properties connected to the system. Our objective for AMP5 and beyond for these operational assets is to maintain our current high standards of service to our customers in terms of low supply interruptions, achieving target pressures and providing high quality water at all times – in the most cost effective way. To do this we will continue to mitigate the historical trend of high bursts by investing in the network at affordable levels while minimising the effect on customers and at acceptable risk to ourselves. This section sets out how we aim to achieve our objectives and compares this with historical performance and expenditure. Analysis is carried out at the asset group level for trunk mains, distribution mains and service pipes. The systems, data, methodologies and processes we use to determine future maintenance requirements are explained, as is how they are used to assess needs for AMP5 based on the objectives for the period. The results provide a programme and cost of the necessary work with assessments on future serviceability of the asset and service to our customers. In order to assist the reader to navigate our maintenance plan for infrastructure assets, we have included a route map at appendix 2 showing where out Plan addresses the Ofwat guidelines based on the AMPAP. 3.2 Historical analysis Pressure, interruptions to supply, bursts and mean zonal compliance for iron are the indicators Ofwat uses to inform its judgement on the status of serviceability of companies’ water infrastructure assets In this section we examine our historical performance using serviceability indicators against reference levels and expenditure. 3.2.1 Bursts These are the predominant indicator for infrastructure assets. Failure of our pipe network and the intervention needed to restore supplies has a direct bearing on our performance, especially relating to the other serviceability indicators. Customers are affected by failures in the system through interruptions to their supply, lower pressures when we need to isolate bursts for repairs and possible water quality issues whenever the system changes. Customers see water escaping from pipes as waste and during periods of freezing temperatures, a hazard to safety. From our stakeholder engagement we know that our customers require us to negate any environmental impacts from our activities and maintain our assets to provide a stable service. By ensuring that we have a controlled and stable burst rate these customer wishes can be achieved. Figure B3 : 8 below shows the trend in total bursts and the upper ‘stable’ serviceability band that Ofwat currently uses to assess serviceability. These bands include an allowance of 288 bursts estimated as resulting from our work to reduce leakage by 2 Ml/d over AMP4. After a gradual reduction in bursts from the late nineties following extensive pressure management in North London, we experienced a sharp increase in the autumn of B3 – Maintaining Service and Serviceability Page 30 of 218 3 April 2009 Three Valleys Water Final Business Plan 2003. This was due to the long drought in the summer and relatively wet autumn causing ground movement and stress loadings on our pipes. Bursts have gradually decreased so that they consistently fall at or below the upper stable boundary level. Figure B3 : 8 Historic and current burst levels against reference level Bursts Upper Stable Control Limit with leakage allowance Reference Level with leakage allowance 6000 5000 Number 4000 3000 2000 1000 3.2.2 07-08 06-07 05-06 04-05 03-04 02-03 01-02 00-01 99-00 98-99 97-98 96-97 95-96 94-95 93-94 92-93 91-92 90-91 0 DG3 unplanned interruptions This is an important measure of serviceability as it shows how bursts and interventions are directly impacting on customers. For serviceability Ofwat uses DG3 unplanned interruptions > 12 hours. In order to supplement the benefit of mains renewals on the number of bursts, we implemented a DG3 action plan to ensure our response to burst mains was as effective as possible. This is now complete and has resulted in greatly improved processes and an increased focus on getting to the root cause of extended DG3 interruptions to ensure continuous improvement. Figure B3 : 9 and Figure B3 : 10 illustrate the progress that has been made. Figure B3 : 9 depicts DG3 interruptions > 12 hours and shows that in 2007/08 our performance had returned to within the ‘stable’ serviceability band we understand Ofwat uses for its assessment. DG3 performance in 2005/06 and 2006/07 was distorted by two exceptional events at Chalfont and Hunton Bridge where single pipe failures led to properties being without water for extended periods. Lessons have been learnt from these two exceptional events and changes to the way we respond to events of this nature have been put in place. The affect these two events had on DG3 >12 hours numbers is seen in Figure B3 : 9. In order to illustrate further our positive progress with DG3 unplanned interruptions, Figure B3 : 10 shows year on year comparisons of equivalent properties for DG3> six hours. B3 – Maintaining Service and Serviceability Page 31 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 9 DG3 (>12 hour) historic and current performance DG3>12 hrs Reference Level Upper Stable Control Limit DG3>12 hrs excluding exceptional events (not serviceability related) % of properties 0.60 0.40 0.20 07-08 06-07 05-06 04-05 03-04 02-03 01-02 00-01 99-00 98-99 97-98 96-97 95-96 94-95 93-94 92-93 91-92 90-91 0.00 Figure B3 : 10 DG3 all interruptions (>six hours) historic and current performance 2008-09 2007-08 2006-07 2005-06 6,000 5,000 Properties 4,000 3,000 2,000 1,000 0 Apr May Jun Jul Aug Sep B3 – Maintaining Service and Serviceability Page 32 of 218 Oct Nov Dec Jan Feb Mar 3 April 2009 Three Valleys Water Final Business Plan 3.2.3 DG2 inadequate pressure We have been successful in reducing the number of properties receiving low pressure. This has been achieved mainly through minor changes and reinforcements to the network to remove pressure constraints and allow operational changes to be made. In some cases small discrete booster stations needed to be installed. Where capital works are planned we evaluate the network to see if benefits can be derived to pressure through greater control or increased capacity of the network. The graph below illustrates that DG2 has been well within the ‘stable’ serviceability band since 1999/2000 and is now below the reference level. Figure B3 : 11 DG2 pressure historic and current performance DG2 Reference Level Upper Stable Boundary % properties below reference level 0.70 0.60 0.50 0.40 0.30 0.20 0.10 3.2.4 07-08 06-07 05-06 04-05 03-04 02-03 01-02 00-01 99-00 98-99 97-98 96-97 95-96 94-95 93-94 92-93 91-92 90-91 0.00 Mean zonal compliance (iron) The mean zonal compliance for iron has been very low for some time and within the ‘stable’ serviceability band since 2001/02. The graph below illustrates this and shows that performance in 2006/07 and 2007/08 was below the reference level. B3 – Maintaining Service and Serviceability Page 33 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 12 Mean zonal compliance – iron: historic and current performance Iron compliance Reference Level Upper Stable Boundary 1.00 0.90 0.80 % failures 0.70 0.60 0.50 0.40 0.30 0.20 0.10 3.2.5 07-08 06-07 05-06 04-05 03-04 02-03 01-02 00-01 99-00 98-99 97-98 96-97 95-96 0.00 Serviceability and intervention analysis In Figure B3 : 13 we have re-created the historical analysis for infrastructure that was undertaken on behalf of Ofwat by Mott MacDonald at PR04. Our analysis covers the 10 years from 1997/98 to 2007/08 and is in a consistent price base of 2007/08 prices using COPI for investment costs and RPI for opex costs. Figure B3 : 13 Historical analysis of serviceability and expenditure – water infrastructure Mains Renewed IRE R&P Maintenance Mains Relined Mains Bursts DG2 Pressure DG3 Interruptions>12 hours Fe Mean Zonal compliance Total Leakage Ratio of average to actuals 2.50 2.00 1.50 1.00 0.50 B3 – Maintaining Service and Serviceability Page 34 of 218 07-08 06-07 05-06 04-05 03-04 02-03 01-02 00-01 99-00 98-99 97-98 0.00 3 April 2009 Three Valleys Water Final Business Plan The following factors can all be ascertained from the graph. • The amount of mains renewed has increased but significant change is only apparent in the final two years of the decade considered. It is probably too early to see the real effects of the increase agreed at PR04. Prior to 2005/06 a significant proportion of mains renewed were associated with the Section 19 rehabilitation programme which led to early renewal of some mains. • Mains relined ended with the Section 19 rehabilitation programme in 2004/05 but a real downward trend in iron at customers’ taps can be seen in the graph showing the benefits of undertaking this work. • DG3 unplanned interruptions >12 hours shows an upward trend although this is heavily influenced by the two large exceptional events in 2005/06 and 2006/07 previously described. More recent evidence not shown on this graph suggests this indicator is now returning to historic low levels. • DG2 low pressure has remained at very low levels throughout the decade and the improvements in recent years are barely discernible. • Infrastructure renewals expenditure (IRE) has increased, particularly in the final two years of the decade, reflecting the additional expenditure agreed at PR04. • Mains bursts held at historically low levels around 1998-2002 following extensive pressure management in the North London area at the end of the nineties. We experienced a significant increase in 2003/04 following the drought and this largely reflects the trend seen at PR04 which led to a ‘Marginal’ serviceability assessment. There are indications in the final two years that the upward trend is now being mitigated. The total number of bursts is also influenced by the intensive leakage control activity. It was agreed in 2006/07 that the effect of this activity on bursts should be taken into account when assessing infrastructure serviceability. • Reactive and planned maintenance (R&P) charged to opex shows a steady and continuous increase reflecting the extra effort that has had to be applied to reduce leakage in order to meet the annual regulatory targets. • Total leakage shows a reducing trend consistent with the reducing annual leakage targets. We have continued to achieve these targets throughout the AMP4 period. While some trends are apparent from this analysis over the past decade it is a relatively small ‘snapshot’ for such long-lived assets. There is also a discontinuity between AMP3 and AMP4 as a result of cessation of the rehabilitation programme and the increase in IRE agreed at PR04. 3.3 Strategic systems and processes A key part of meeting our objectives is the collection and analysis of data for the measurement of asset performance, the determination of targets and identification of performance gaps. Using this data we can prioritise activity using risk based criteria and identify solutions across asset groups to ensure cost effective implementation of the capital programme. Reliance is placed on accurate and up to date data from core sources with the Geographical Information System (GIS), telemetry, financial, works management and operational leakage systems providing the base information. Although governance of these systems resides with the relevant department, Asset Management is an important B3 – Maintaining Service and Serviceability Page 35 of 218 3 April 2009 Three Valleys Water Final Business Plan user of the data and takes the responsibility for defining data needs and checking the accuracy and completeness of the data stored. The asset management tools developed for analysis and decision making augment the corporate data systems. Data Information for infrastructure assets is stored and extracted at pipe level and in the following hierarchy: six resource zones which are self-selecting areas with few but important transfers between them; 33 hydraulic demand zones (HDZ) which are characterised by having discrete supply and storage arrangements with strategic inter zone transfers and district meter areas (DMA) which are hydraulically discrete areas containing, typically, 2000 properties and whose primary role is to closely monitor performance, detect leakage and allow repair activity to be targeted. Figure B3 : 14 Operational structure for infrastructure assets We also have 70 Water Supply Zones (not shown in Figure B3 : 14). These are areas with similar water quality and supply a maximum of 100,000 people. The DMAs are the building blocks to construct these zones. 3.3.1 System architecture Set out in Figure B3 : 15 are the data systems that are used within – and linked to – the analysis process. They are described in more detail below. • Network asset inventory and attributes (1): Obtained from the Geographic Information System (GIS) and contains all spatial and attribute data for the network. Our GIS is linked to our Field Information System (FIS) and Leakage Reporting Systems and used extensively for other analyses. • Field Information System (2): provides a direct link between the gangs in the field and job activity and GIS. B3 – Maintaining Service and Serviceability Page 36 of 218 3 April 2009 Three Valleys Water Final Business Plan • Customer services (3): provides data from Hi Affinity (our customer database and billing system), metering, customer contacts, billing and consumption details • Leakage reporting and analysis (4): provides the link between the field systems measuring flows in the DMAs and the leakage database (LMARS) and activity on the network from the works management system • Works Management Information System (WMIS) (5): schedules work and contains a history of all jobs on the network, including bursts. • Financial reporting (6/7): provides data on costs linked directly with the works management information system. • Performance measurement and assessment (8): uses the hydraulic models as a basis for assessment using field data on pressure, water quality sampling and criticality analysis using software. We have a database of more than 4400 ferrous pipe samples containing test results on the internal and external condition of our iron water mains. • Condition assessment and forecasting (9): takes sample data and bespoke condition assessment data, including leakage performance functions at DMA level, to feed into investment modelling • Economic model (10): investment modelling using spatial data on performance, condition, work activity and cost for investment decisions. While actively participating in research initiatives to improve the understanding of our assets through UKWIR and other club projects, it has been important to develop systems and processes that improve the planning and decision making pertaining to our own assets and which can be used on a continuous basis. We have worked to share this knowledge with other water companies. For example, we were a data partner for the recent UKWIR deterioration modelling project. B3 – Maintaining Service and Serviceability Page 37 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 15 Operational systems used as part of infrastructure asset management High Affinity Inventory Project Accounting Financial Reporting (6) Quality of Service (QOS) Contractor Payment system (7) Customer Services (3) Insight – Street Work Notice QOS GIS Etonlog lite Jobwise Scheduling WMIS lite Work Management Information System (WMIS) Field Information System (2) Work Management Information system (5) Valves Geographical Information System (GIS) Leakage Management Reporter system (LMARS) Etonlog Three Valleys Leakage Reporter ( TVLR) Radio Communication (RADCOM) Address Network Asset Inventory & Attribute (1) Leakage Reporting and Analysis (4) Sample Manager Water Quality Hydraulic Models Pressure Reporter DOMS Analysis Economic Model including Uncertainty Analysis and Scenarios Optimisation (10) Performance Modelling OptiCritical Performance Measurement & Assessment (8) Legend: Pipe Sample Database Deterioration Modelling Trunk Main Surveys Leakage Functions Condition Assessment & Forecast (9) Optimise Infrastructure Capital Maintenance Programme Process Direct Data Terminator B3 – Maintaining Service and Serviceability Page 38 of 218 3 April 2009 Three Valleys Water Final Business Plan 3.3.2 Performance measurement We monitor the performance of the network in real time through extensive district meter logger coverage which is used for targeting our leakage effort as well as reporting on leakage. We have approximately 250 pressure managed areas covering 60% of our DMAs with logged data and approximately 220 level of service pressure loggers. All of these are regularly monitored and action taken if pressures vary from those expected or required, whether through operational intervention or capital investment. We have 33 hydraulic models – one for each of our zones – and these are updated on a rolling four-year basis. Regularly updating these models provides us with valuable data on anomalies in the network. For example, pressure issues not identified through the fixed logger system. It also allows us to regularly update the GIS. From modelling data and information from our customer operations and customer services departments we produce pressure maps in the GIS which identify areas at risk. This is especially useful when planning new developments. The hydraulic models are used extensively for capital investment and operational support. Regular use increases the confidence in the models. Our in-house modelling team has been used on operational standby and the use of models has helped us to improve our DG3 performance through quick analysis of a problem and the determination of solutions, such as rezoning. Studies in relation to our distribution and maintenance strategy (DOMS) have highlighted zones where we are at a higher risk of a water quality event due to an intervention. This information is also highlighted on our GIS so our people and contractors can assess risk on a daily basis. 3.3.3 Condition measurement In the early nineties we recognised that measurement and assessment of the condition of our network assets – especially the corrosion effects on our ferrous pipes – was going to feature heavily in future investment strategies. A pipe laboratory was set up on our site in Bushey which has since been used extensively to record condition related data – including the speed of corrosion – and the remaining life measurements of pipes across the network. More than 4400 samples taken randomly and from rehabilitation programmes and other network interventions have been analysed and stored on a database with photographs and are spatially linked to the GIS. We not only use this data to calculate speed of corrosion curves for our failure models (explained in greater detail in section 6.2) but also as a useful tool to aid daily operations with information on tuberculation levels, age and material of pipes in the location etc. The data collected has enabled us to carry out research studies with organisations such as the University of Birmingham (research on the clay soils in the area and measuring their effect on our pipe system)1. The photograph below shows a heavily graphitised pipe that would typically be encountered throughout our network. There appeared to be no structural issues on the surface, but once the corrosion was removed we can see that the pipe has failed and a burst would occur if an external force is exerted on it. 1 Physiochemical Changes in London Clay Adjacent to Cast Iron Pipes: University of Birmingham, IAEG2006. B3 – Maintaining Service and Serviceability Page 39 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 16 Pipe sample with corrosion products removed Our trunk main assets are examined in the workshop following failure and, where possible, large sections that have been cut out are returned for assessment of the mode of failure (corrosion, joint failure, etc). Fibre optic surveys which can look into the pipe when under pressure are used to augment the information gathered on the network. These are useful to determine the likely impact on water quality when an intervention is needed on the network. We are about to undertake research into the use of inline water quality monitoring which will again add to the intelligence we are obtaining about our network assets. Laser measurement of pipe surfaces enables us to get a three-dimensional picture of the condition of our galvanised communication pipes after corrosion has been removed. It measures the thickness of the pipe wall remaining across the entire pipe surface (not available through mechanical measuring devices) and has been used to help formulate our communication pipe strategy. 3.4 Cost data Data on costs is collected from a number of different sources and used across sub services and asset groups for different areas of the planning process, such as whole life cost modelling, or calculating the economic level of leakage. The main direct cost drivers used for the infrastructure assets are: • main laying unit costs • repair and maintenance unit costs, for mains and service pipes • insurance costs • external relations/ call centre costs • cost of water lost • reactive intervention costs associated with interruptions • reactive intervention costs associated with water quality failure events. B3 – Maintaining Service and Serviceability Page 40 of 218 3 April 2009 Three Valleys Water Final Business Plan Costs for planned renewal of the infrastructure system are obtained from our outturn costs in AMP4 which are updated to reflect future costs that are not fully reflected in the outturn costs (e.g. the traffic management act, waste regulations, changes in risk). In order to accurately estimate the costs for our programme of work – and determine sensitivities around scope, location and technique – we use the output from our investment models in the form of groups of pipes which give the location of each renewal scheme, the diameter of each pipe, length of each pipe, surface type and environment (rural, semi-urban, urban). For each group we also calculate the number of transfers of service pipes required (a key driver on cost) and the communication pipes which are to be renewed with the specific renewal scheme. Estimates of the proportions associated with the different techniques (pipe bursting, new lay or directional drilling, are also produced. We estimate costs for our trunk main assets from detailed design estimates carried out for specific schemes and using the up to date framework rates we have. We extend these detailed estimating studies to derive unit costs to be used on the small proportion of the trunk main replacement programme not yet developed in detail. These unit costs are used for calculating modern equivalent asset values for larger diameter pipes in the Asset Inventory (Section C3). The reactive capex and opex unit costs for infrastructure assets are based on our outturn costs for the base year 2007/08. Costs are collected via business objects reports which pick up values against activity codes as they are posted to relevant activity codes within Oracle (finance package). These costs are differentiated between contractors. Volumes of work are taken from business objects reports which interrogate the data held within the job management system and are assigned to activity codes. The unit cost is calculated by dividing the total value of costs incurred in the period by the number of jobs completed. This provides an aggregated unit cost for the period by activity code. The main indirect costs are the environmental and social costs (co-produced with Jacobs Environmental Consulting). These are consistent with those used in the supply-demand appraisal for the Draft Water Resources Management Plan. They cover the embedded and operational effects translated into a value both prior to – and after – renewal of the asset with current technology. Carbon costs are calculated using the DEFRA methodology for the calculation of the shadow price of carbon. Traffic disruption and carbon costs comprise the environmental and social costs used in our optimisation modelling. These are applied to all cost drivers – such as mains renewal, mains repair (bursts), communication pipe repair and reactive and pro-active renewal of communication pipes (as part of mains renewal schemes). When evaluating the cost of risk we have first derived models identifying the consequence costs for main bursts in terms of supply interruption, water discolouration, poor pressure and reputation. This enables us to value a set of operational performance measures (OPMs) – explained in Sections 2.4 of this document and C8 – for a range of potential risks and quantify the service effects on customers. These risks are consistently applied across the business in the investment optimisation process. 3.5 The planning process We take account of the conflicting interests of stakeholders when assessing the risk posed by deterioration of our assets. The shorter term objectives of affordability for customers, operational needs, costs and our reputation in the community, are considered against the B3 – Maintaining Service and Serviceability Page 41 of 218 3 April 2009 Three Valleys Water Final Business Plan need to maintain the asset for future generations. These conditions focus our analysis at asset group level and determine the degree of assessment needed for future planning. We manage corporate risks at the highest level through our risk management process. There are 15 corporate risks, three of which have a direct bearing on infrastructure assets: • failure to meet the Ofwat target on serviceability (including poor pressure, water quality failures and supply interruptions that affect customers) • widespread loss of supply (large groups of customers without water for extended periods of time) • failure to meet the leakage target (environmental and supply-demand drivers). These risks are evaluated yearly through workshops to identify potential hazards and current controls. Action plans are set up where controls are deemed inadequate for a target risk agreed by our risk management committee. These plans include asset analysis, with risks being managed using operational controls as well as capital investment to reduce the likelihood of an event occurring. Asset groups are divided into those where risk is based on high consequence but low probability (trunk mains) and at the other end, by those with high probability of failure but low consequence (service pipes and stop taps) Risks driven by high consequence demand a proactive condition-based strategy, whereas risks associated with our service pipe assets are dealt with by a history-based reactive strategy where the pipes are operated to failure. We also consider the economics and pragmatism of each strategy. For example, our communication pipe replacement policy, when linked with mains renewal, is to replace galvanised iron pipes. This is because of the limits of repairing the pipe when it is in a corroded state. We replace all communication pipes when we are renewing the distribution system in traffic-sensitive streets. B3 – Maintaining Service and Serviceability Page 42 of 218 3 April 2009 Three Valleys Water Final Business Plan Table B3 : 7 Influence of risk profile on analysis, by asset type Asset group Trunk mains Low probability (4% bursts on 15% of pipes), high consequence Serviceability not easily quantified – risk used to set objectives Consequence • • • • • • Distribution mains Medium to high consequence, high probability. Understanding whole network failure and links to serviceability • Service pipes Low consequence, low to high probability • • • • • • • Analysis level Widespread loss of supply Flooding Consequential damage costs Traffic disruption Water quality Serviceability through DG3 measure • • Failure to meet burst serviceability Leakage Water quality Local interruptions Local disruption & flooding • • Individual properties Pedestrian hazard Leakage • • • • • • Risk profiling per trunk main Detailed condition assessments of pipe sections Detailed hydraulic performance & consequence analysis of pipe sections Value engineered designs & cost estimates Detailed construction plan Sample measurement of condition Likelihood/ consequence modelling at pipe level Sophisticated risk evaluation at DMA/company level including uncertainty in analysis. The direct link is made between serviceability and risk Historical and economic analysis of operate to fail strategy with links to distribution renewal modelling Analysis to determine cost beneficial or cost effective approach to support strategy with deterioration data. By linking assets to measures of the consequences of failure and serviceability – such as the number of customers they supply and the overall performance of the system – an investment strategy is formulated which has a direct bearing on customer service. Where this cannot easily be done the risk profile is used to select investment choices. The planning process therefore incorporates measurement of the condition and performance of our assets and the link to the customer. Planning objectives are set with stakeholders and company risk in mind and a balanced programme devised which meets objectives with the right balance of risk and affordability. Schemes are planned and the benefits measured through site-specific studies or trend analysis and reported through the risk process. Information systems are updated and changes to the strategy made if required. Figure B3 : 17 sets out the planning process we adopt. B3 – Maintaining Service and Serviceability Page 43 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 17 Infrastructure assets – long term planning process diagram Data assessment Forward looking assessment Risk and objective setting Hydraulic analysis Customer views Leakage analysis Risk strategy Work analysis Serviceability requirements Economic appraisal Definition of programme (business plan) Reactive strategy Delivery Reactive maintenance Performance analysis Renewal of trunk and distribution mains Planning objectives Asset inventory analysis Performance assessment and criticality modelling Economic assessment Overall condition assessment Unit cost data Programme delivery Maintenance of levels of service DG2/DG3 Pipe condition assessment Burst prediction modelling Risk mitigation measures Programme of work at zone level Long term asset planning for infrastructure assets extends over 40 years, defined in five-year cycles with a yearly check and review for the short term expenditure programme within any AMP period. We develop the business cases in more detail according to the risk-based strategies for each asset group in further sections of our Plan. 3.6 Objectives for AMP5 These are the objectives for our infrastructure assets during the AMP5 period and beyond. • Maintain our current high levels of performance in terms of DG3 (>12 hrs), DG2 pressure and mean zone compliance for iron in response to our customers’ expectations. • Maintain the condition of our network so that maximum yearly burst levels on our distribution and trunk main system are within an upper bound level (below which the assets are considered stable), at between 80-90% certainty and reduce average burst levels to the reference level agreed with Ofwat. • Maintain the condition of our network to limit the natural rate of the rise of leakage in the distribution system and reduce the impact of environmental changes on susceptible pipes. • Manage, operate and maintain our assets so that there is no deterioration in risk to customers or our business in terms of interruptions, water quality failure, flooding and traffic disruption as a result of large trunk main failures. B3 – Maintaining Service and Serviceability Page 44 of 218 3 April 2009 Three Valleys Water Final Business Plan • 3.7 Ensure capital programmes are undertaken at least overall cost to achieve the desired objectives and maximise benefits. Overview of the plan for AMP5 and beyond Our overarching objective for AMP5 for our infrastructure assets is to carry on providing a high level of service to our customers and maintain ‘stable’ serviceability by continuing our steady progress in reducing bursts towards historic low levels. Burst frequency is the key indicator used by Ofwat, to determine whether companies have maintained serviceability stable over the period. If they do not then there is the potential threat of regulatory penalties being imposed upon them. Irrespective of the rate of renewals the number of bursts that can occur in any one year is volatile because it is also dependant upon the weather. There is also a simple intuitive relationship between the rate of renewal and the certainty of meeting the target number of bursts used by Ofwat to assess Serviceability: the greater the renewal activity, the more certain the target will be met. In our Draft Business Plan we judged that we needed to be more certain that we would meet the target than in AMP4 and so proposed to renew our mains at the rate of 148km/yr. The choice of renewal rate is a difficult judgement to make and one which has taken up considerable time in the Board’s deliberations for the Final Business Plan. We have an ageing network located in aggressive soils which can only deteriorate further as time passes. However, our modelling shows that the rate of 148km/yr has a small increase in certainty for a relatively large increase in costs. In reality, customers are unlikely to see any material benefit in service unless there is a further, significant increase in renewal activity. We believe that regulators and companies have common aims as far as their regulatory regime and value to customers is concerned, so we have concluded that it would be appropriate to continue to plan on the same level of certainty as AMP4 and therefore modify our plans to continue renewals at a rate of 126km/yr through AMP5. This is a common sense approach. We have barely three years of data arising from the higher rate of activity started in this AMP period, which is insignificant in the context of influencing the underlying serviceability of a network that has some mains that are over 100 years old. We think that by PR14 we will have sufficient data to decide on the need for further increases in activity in the future. The short term benefit of our plan is that there will be less pressure on customer bills at this price review. Since we plan to continue reducing leakage at the same rate in AMP5, the burst reference level of 3800 that we propose for AMP5 includes the same burst allowance for a leakage reduction of 2 Ml/d per annum as was agreed with Ofwat in 2006/07. We calculate that 30% of risk in terms of likelihood of failure, coupled with the consequences of widespread interruptions, damage to utilities and highways, traffic disruption, flooding and escalating costs, is on 8% – or 185kms – of our trunk main assets. If we were to do nothing our trunk main assets would deteriorate to the extent that this risk increases by about 11%. In order to mitigate this risk we plan to maintain the overall condition of our trunk mains by renewing 25km at 11 locations, reducing the likelihood of failure on these critical assets. We have extended considerably our data sets for communication pipe assets since PR04 and have used deterioration modelling to examine the maintenance needs for AMP5 and beyond. Despite the poor condition of many of these assets – especially galvanised iron – there is not a compelling case for wholesale renewal. Instead, we will continue with our find and fix programme, mainly driven by our leakage control measures. B3 – Maintaining Service and Serviceability Page 45 of 218 3 April 2009 Three Valleys Water Final Business Plan In many cases our galvanised iron communication pipes cannot be repaired effectively and repeat repairs with disturbance to customers results. We propose to follow a common sense approach and take the opportunity to replace galvanised communication pipes as part of our distribution mains renewals schemes. Similarly, replacing communication pipes in trafficsensitive streets in conjunction with mains renewals schemes will reduce future disruption to critical parts of the transport infrastructure. We expect to replace around 12,600 communication pipes through this programme in AMP5. In addition to the above planned maintenance activities we expect to experience current levels of reactive renewals of communication pipes and stopcocks as we continue with our leakage strategy to reduce leakage by 2 Ml/d per annum in AMP5. To support our day to day operations and ensure effective asset management as part of our ‘business as usual’ strategy we will continue to record and update infrastructure data in our GIS, undertake pipe sampling and analysis and utilise asset management and hydraulic models to support decision making. The costs for these items are included in our plan as business support activities. 3.8 Summary Asset groups: trunk mains, distribution mains, service pipes The problem Planning objective • High levels of bursts on distribution • Maintaining the current high standard of mains causing interruptions to service (DG3, DG2, zone compliance) supply and increasing occurrences to our customers from the network. of poor water quality, leakage and • Maintain the current balance of risk affecting serviceability. between us and our customers. • Widespread loss of supply affecting • Reducing the burst rate to the reference customers, with flooding and level by 2015 at 50% certainty. disruption to transport links when • Carry out a balanced strategy of prostrategic pipes fail. active and reactive maintenance as • Large numbers of service pipes and appropriate for each asset type. fittings reaching the end of their life. Data and analysis • GIS pipe attribute information, works management (failure information), hydraulic and criticality models, condition data from pipe samples and trunk main assessments, improved communication pipe data and unit costs used to build forward looking investment models optimised to achieve the serviceability requirements. • Burst prediction modelling improved from PR04 using increased data set, new calibration and incorporating uncertainty into the analysis. Criticality modelling is now used to measure customer impact . • Cost benefit analysis using operational performance measures used to validate the cost effective approach to meeting planning objectives. The solution • Renew 25km of poor condition high risk trunk mains segments in AMP 5. • Continuation of the current AMP4 distribution main renewal rate of 126km/yr to meet a reference level of 3800 bursts by 2015. • Continuation of the current AMP4 reactive maintenance strategy for communication B3 – Maintaining Service and Serviceability Page 46 of 218 3 April 2009 Three Valleys Water Final Business Plan pipes, stop-taps, and supply pipes. Limited pro-active renewal of communication pipes as part of the mains renewal programme. Cost and cost identification • Costs based on framework contractual rates, value engineered detailed design studies where appropriate and unit rates. Trunk main renewal £19,017,000 Distribution main renewal £119,985,000 Service pipe replacement £43,602,000 Business support including data systems £8,111,000 Cost benefit analysis • Cost benefit analysis has been carried for the renewal of trunk mains and distribution mains, with both activities producing a net benefit. Cost benefit has not been assessed for reactive maintenance. How has this project changed since the Draft Business Plan? • We have reduced distribution main renewals from 148km/yr to 126km/yr in order to achieve a reference level of 3800 bursts by the end of AMP5. The scope of trunk main renewal and reactive maintenance has not changed since the Draft Business Plan. Business support scope has reduced due to the removal of some network maintenance items. B3 – Maintaining Service and Serviceability Page 47 of 218 3 April 2009 Three Valleys Water Final Business Plan 4 Our plan for infrastructure assets: the cost of doing business 4.1 Introduction We have to incur expenditure within infrastructure capital maintenance which cannot be related directly to the above asset groups but is absolutely essential to support the ongoing running of the business. The activities comprise diversionary work resulting from new developments and transportation improvement schemes, minor works to the network to maintain pressure targets and water quality, the ‘business as usual’ asset management function and the maintenance of data in the geographical information system. This section sets out the business requirements for these activities. 4.2 Methodology We assess the business requirements for these activities by establishing the need and solutions available to us. In many cases we are already carrying out the activities highlighted and have therefore current costs and outputs to compare. The activities comprise: • maintaining critical asset information systems • asset management tools and models • maintaining levels of service • third party works and diversions. 4.3 Results 4.3.1 Maintaining critical asset information systems The GIS is the most important database used to store information on infrastructure assets. Inaccurate and out of date information will lead to unnecessary operational incidents; abortive costs and delays to the investment programme. Regular updating and validating is required to maintain the accuracy of the information. A dedicated team is currently employed to update the GIS with information obtained from the field and elsewhere to inform studies and designs for new assets. We do not plan to change current practice or the level of maintenance and therefore propose to maintain existing levels of expenditure (£2.69 million over five years). 4.3.2 Network asset management tools and models The asset management process requires the collection of condition and performance data; assessment of targets against strategic objectives; assessment of performance gaps and identification of solutions and priorities for capital expenditure. To do this we need to maintain our current activities in gathering and analysing data on the condition and performance of our network as follows. B3 – Maintaining Service and Serviceability Page 48 of 218 3 April 2009 Three Valleys Water Final Business Plan • Hydraulic modelling – ongoing maintenance and upgrades on a one in four-year rolling schedule of our 33 hydraulic zone models. Data provided from modelling is vital to support engineering decisions, assess the impact of new developments, provide off-line analysis for network configuration changes, and to react to operational emergencies; thereby reducing customer disruption. Historical levels of expenditure are proposed (£250,000 per annum). • Pipe workshop – we have a pipe laboratory that obtains data from pipe assets and exhumed pipe sections from across the network. The team of two in the pipe laboratory also use diagnostic equipment and provide support for other areas of our business, such as metering, water quality investigations etc. We plan for the historical levels of expenditure for this service to continue in AMP5 (£120,000 per annum). • Data collection and analysis – activities to support the Asset Management investment decision process, including construction of modelling tools for targeting infrastructure expenditure at the right assets (£200,000 per annum). 4.3.3 Maintaining levels of service The two areas we concentrate on in this activity are maintaining pressure targets (namely DG2) and ensuring through investigation and analysis that our water quality standards are maintained. 4.3.3.a. Pressure We currently spend approximately £250,000 per year to ensure that properties at risk of receiving pressure below the DG2 threshold remains at low levels. The work includes investigations, fixed logger maintenance, small reinforcements and connections to improve water circulation. This expenditure will be continued in AMP5. 4.3.3.b. Water quality To meet the objectives of our distribution, operations and maintenance strategy (DOMS) and to maintain the current high compliance standards in water quality, we need to carry out the following activities on the network: • Ongoing sampling and investigation into the internal condition of our network and its effect on water quality – including Poly Aromatic Hydrocarbons (PAH), equivalent to 2 FTE (£72,000 per annum). • Improved isolation and flushing facilities for our strategic interconnection points with bordering companies, see Table B3 : 8; information from survey work and detailed discussions with Thames Water. • Purchase and maintenance of 20 inline water quality monitors sufficient to cover 5000 properties for routine observation and investigation (£140,000 total). Table B3 : 8 Activity relating to strategic interconnections with other companies Activity Improve security on isolation Replace valves Post and plating Scope of work Install TVW Wizkey and remove TWUL Wizkey valves – 37 instances Locate hidden valves, replace seized valves, chambers and covers – four instances 34 sites Total B3 – Maintaining Service and Serviceability Page 49 of 218 Cost (£k) 74 12 17 103 3 April 2009 Three Valleys Water Final Business Plan 4.3.4 Third party works and diversions A number of strategic transportation projects are planned for the period 2010-2015. These projects will affect our infrastructure and require major diversions and relocation of plant. Table B3 : 9 sets out the capital works needed with cost estimates and contributions. Noninfrastructure items are listed in the table but are only included here for clarity. Table B3 : 9 Development diversionary work Scheme Stansted Works description Cost estimate Demolish and replace Takely water tower outside new runway boundary £2,600,000 Construct new pipeline from trunk main system £1,300,000 Construct new pump station to supply water to the tower £180,000 M1 widening J10-13 17 separate diversions totalling 2.7km of sizes ranging from 300mm to 700mm diameter £2,700,000 Crossrail From the information available, the work will be carried out within existing railway easements – except for the stations. The effect on our plant is minimal. Nil M25 Widening From the information available, the work will be carried out within the existing road boundaries with limited bridge works. The effect on our plant is minimal. Nil Minor works Miscellaneous diversion schemes £1,110,000 B3 – Maintaining Service and Serviceability Page 50 of 218 TVW contribution BAA are to pay for all works pertaining to this scheme £518,000 estimated deferment of renewal £200,000 @ 18% from historical expenditure data 3 April 2009 Three Valleys Water Final Business Plan 4.4 Summary Business support activities The problem Planning objective • We need to continuously improve • Maintaining the current high our Asset Management systems standard of service (DG3, DG2, and data to ensure investment is zone compliance) to our targeted to the right asset at the customers from the network. right time. • Maintaining and improving the use of asset information systems. • There are miscellaneous activities that cannot be categorised into the major asset groups but are essential to maintaining serviceability of the asset. Data and analysis • Established Common Framework asset management tools, hydraulic models, DOMS studies supported by specific investigations. The solution • Continue to maintain our suite of all mains hydraulic models for design, performance and criticality measurement. Collect and provide analysis of data on the condition and likely deterioration of assets so trends can be identified and strategies set. • Continue to maintain the information in our GIS and therefore provide the most up to date and accurate location and attribute data for use across our business. • Continue to invest in ensuring our customers receive the right pressures through minor modifications to the network. • Continue to investigate causes of poor water quality and put right small anomalies that are found. • Continue to respond to developers and their needs for diversions. Cost and cost identification • Historical outputs used to estimate costs. These costs are expected to continue through AMP5. Asset Management data and tools £2,850,000 Geographical Information System £2,690,000 Maintaining levels of service £1,853,000 Third party works and diversions £718,000 (net of contributions) Cost benefit analysis • Cost benefit analysis has not been done on this programme of work, but it contributes to the overall programme, which is cost beneficial. It should be seen as providing the necessary support to ensure expenditure on the principal asset groups is at least cost and with the right balance of risk. How has this project changed since the Draft Business Plan? • The scope of this work has reduced as we are no longer seeking funding for an extensive maintenance programme of isolating valves or water quality related expenditure for washouts. B3 – Maintaining Service and Serviceability Page 51 of 218 3 April 2009 Three Valleys Water Final Business Plan 5 5.1 Our plan for infrastructure assets – trunk mains Introduction Our trunk main assets comprise approximately 2300km of our total distribution network and provide the interconnectivity between treatment facilities, strategic storage and the local distribution system. Size varies from the smaller more rural pipelines to large strategic pipelines of 1000mm diameter transferring bulk flows of water to dense urban conurbations. Failure of these trunk mains causes widespread disruption to customers and the general public through interruptions to supply, traffic disruption and flooding. The cost to the company in managing and clearing up after these bursts is significant. Figure B3 : 18 depicts the damage and impact a trunk main burst can have on the surrounding environment. This particular burst occurred on a pipe section we plan to renew in AMP5 Figure B3 : 18 Trunk mains burst on high risk pipeline Our planning objective is to ensure deterioration of our trunk mains does not affect our customers or our business to any greater degree than currently experienced and current overall risk levels do not increase. A large proportion of our pipes are ferrous, more than 70 years old and situated in the aggressive London Clays where field tests show sections with little or no remaining life in terms of wall thickness after corrosion. Some plastic pipes are becoming increasingly brittle with age and are now failing with increased frequency. Because of the size, cost and complexities of trunk main renewals, they need careful proactive risk-based planning to achieve the most cost effective solutions. This section sets out how we determine the risk associated with trunk mains in delivering our service requirements and we explain how this risk will change in the future. We know the risks associated with failure of our most critical trunk mains and here we set out the process of further evaluation so that we increase our confidence in the analysis and can prioritise the work activity. A detailed plan for AMP5 and future work load for AMP6 is given. The scope of our work includes the requirements for large scale renewal of critical trunk B3 – Maintaining Service and Serviceability Page 52 of 218 3 April 2009 Three Valleys Water Final Business Plan mains, incidental maintenance work and our ongoing programme of field testing and trunk main evaluation to ensure continued improvement in our knowledge of these key assets and their impact on customers and other stakeholders. 5.2 Methodology The method we use to determine future plans for the trunk main asset group is summarised as follows. • The planning objective – select the planning objective to keep risk levels stable as measured by consequence of failure and future deterioration. • Data gathering – using company data systems, augmented by site specific studies, to build a profile of the condition and performance of the trunk main asset at pipe segment level. • Deterioration modelling – forward looking analysis through the construction, calibration, validation and use of statistical modelling to determine the future deterioration of the asset which will increase levels of risk carried by the Company. • The risk framework – quantify risk for each segment of trunk main. • Investment planning – select critical trunk mains for further condition-based investigation. A programme of work of detailed designs is produced, including value engineering and cost estimates. • Cost benefit analysis – to validate the approach and ensure value to customers is assessed. The following section sets out our method in more detail. 5.2.1 Data Trunk mains are a sub-set of the overall infrastructure base where mains are deemed either ‘trunk’ or ‘strategic’ and generally defined as those principal mains that are upstream of district meter areas. They represent 15% of the total asset base. Data on the condition and performance of our trunk main assets is collected using attribute data contained in the GIS, job management data, soil mapping, hydraulic performance and criticality modelling. Serviceability data is set in terms of failure, asset deterioration, water quality, supply interruptions and condition. The failure data and soils data have been joined spatially to the asset data. To support and validate the desktop corporate data, approximately 200km of trunk mains were assessed in the field in AMP4 through visual inspection, taking coupons for testing and using non-destructive testing (NDT). The mains were selected on risk-based criteria and not on condition alone. It is important that we improve our understanding of trunk mains which – regardless of their burst history – would cause widespread interruptions in supply as well as have a severe impact on transport links if they failed. The information obtained from this field work includes confirmation of the age of pipes by comparing actual dimensions with materials and standards, establishing the original pipe wall thickness and pit depths. This helps in compiling remaining life estimates; identifying hydraulically critical sections and determining the preferred renovation technique. B3 – Maintaining Service and Serviceability Page 53 of 218 3 April 2009 Three Valleys Water Final Business Plan The assessments included detailed observation of all fittings, such as isolation and control valves and the chambers they are housed in. In many cases our high risk mains are in a condition where renewal is not necessary. However, some valves and other appurtenances are in need of maintenance in order for them to fulfil their proper function and mitigate any risk should the pipeline fail. Where we have identified valves that are buried or which are inoperable – but are not critical – these are flagged in our GIS to notify field staff. We are currently planning works to address the problems identified in our surveys. The age and material distribution of the trunk main assets is given below in Figure B3 : 19. From 1980 onwards the predominant material was ductile iron with smaller lengths of PVC and other newer plastic materials. Figure B3 : 19 Distribution of trunk main material and year of installation Cast Iron Cast Iron / Spun Iron Ductile Iron MDPE/HPPE Steel PVC Asbestos Cement Spun Iron Concrete 900 800 Length (km) 700 600 500 400 300 200 100 0 pre-1900 1900-19 1920-39 1940-59 1960-79 1980-99 2000+ Year Laid About 60% (1400km) of our trunk mains are made from cast iron or spun iron. Approximately 900km of this material is more than 50 years old and 400km more 70 years. About 220km of this older cast iron stock lies in highly aggressive clay soils, mainly in the London area, as shown below in Figure B3 : 20. B3 – Maintaining Service and Serviceability Page 54 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 20 Soil types associated with ferrous trunk mains Ferrous trunk mains: proportion by length of material and soil type Ductile Iron (>=1990): All Ground 17% Ductile Iron (<1990): All Ground 12% Steel: All Ground 4% Cast Iron/Spun Iron: All Ground (excl. Very Highly & Highly Aggressive) 31% Cast Iron/Spun Iron: Very Highly & Highly Aggressive Ground 7% Cast Iron: Highly Aggressive Ground 10% Cast Iron: All Ground (excl. Very Highly & Highly Aggressive) 19% Our research with the University of Birmingham concludes that the London Clays in which our pipes are situated provide a very non-homogeneous and aggressively corrosive environment. The large soil movements caused by swelling and shrinkage of the clays exert forces on the pipes that contribute to failure of any corroded sections. Freezing temperatures cause contraction of the pipes which, if constrained through forces associated with the clay surround, cause stresses that will also cause failure of the pipe2. Both corrosion and induced stresses caused by pipe movement increase as the pipe ages in the ground. Results from the UKWIR national mains failure database indicate the majority of failures in large diameter cast iron water pipes are attributed to combined corrosion and longitudinal fracture. Steel and ductile iron pipes exhibit increased ductility, and are less likely to fail by fracture in service. The exposure of our old cast iron/spun iron cohorts of trunk mains to these highly aggressive soils in the London area means that rates of corrosion and subsequent weakening of the pipe wall will be a significant factor in determining the need for renewal of trunk main sections. Another important cohort is the PVC pipelines laid in the 1970s, which are becoming increasingly brittle and failing with rising frequency. The behaviour of this material is independent of the corrosion characteristics of the soil but it is still susceptible to soil movement and changes to external and internal forces. Although this cohort represents only 37km in length throughout the company, some highly critical mains are affected. We are currently replacing a section of PVC in our southern region at a cost of £2.6 million due to a recent increase in bursts which have caused extensive flooding of property and large scale interruptions in supply. Fortunately, we had the ability to rezone to reduce the length of time of these interruptions. 2 UKWIR Report on Managing Seasonal variations in Leakage, 2005. B3 – Maintaining Service and Serviceability Page 55 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 21 Failure of PVC trunk main through longitudinal splitting 5.2.2 Deterioration modelling To understand the nature of all our trunk main assets we have developed a forward-looking modelling approach which builds on the previous risk-based methods used to prioritise trunk main renewal. This is used to characterise our whole trunk main asset stock and determine priorities for the more detailed assessments needed before investment in schemes can begin. This model includes deterioration and the probability of failure over time for each trunk main segment, enabling the risk of future service failure to be predicted. The key principles employed for this analysis are compatible with the CMPCF and are based on actual network asset condition and performance. The modelling process falls into Category 1b as defined by Capital Maintenance Planning Common Framework: Review of Current Practice, UKWIR report 05/R6/05/14. Service modelling with repairable failure modes is achieved through a comprehensive risk-based framework. Internal and external consequences of failure are assessed; interventions are then selected to maintain a level risk profile. Pipe lengths are assigned to a category according to cohorts of material and ground conditions (low to very highly aggressive soils). Within each specific cohort, all pipes are assumed to behave on average in the same manner. The approach used is the same in principle for all material types and is applied on a cohort by cohort basis, allowing for different modes and rates of deterioration. An economic assessment then allows the modelling of different strategies in terms of a fail and fix approach or the proactive renewal of mains. The output from the model consists of predicted failures with annual costs for repair on failure, and options for proactive renewal. The risk framework (described later) utilises the output from the failure model and combines this with a number of indicators for the consequences of a section of trunk main failing to produce a measure of risk associated with that main. The failure model developed for trunk mains adopts the same core principles as those for communication pipe modelling. Such techniques are transferable across assets that exhibit B3 – Maintaining Service and Serviceability Page 56 of 218 3 April 2009 Three Valleys Water Final Business Plan similar modes of failure, although the specifics of the implementation differ significantly by asset type. 5.2.3 Model construction and calibration In order to develop and apply a general mathematical model, we make a number of assumptions, which as far as practicable represent the physical behaviour of the assets. Key parameters affecting deterioration – what the pipe is made of and how aggressive the soil is – have been combined to form pipe ‘classes’. Within each of these, all pipes are considered to behave on average in the same manner. At any particular time during the period for which failure records are available, there are various aspects that describe the deterioration behaviour of a set of assets. • Failure at commissioning, due to deterioration, is zero. • Deterioration develops over time and for each class tends to follow a smooth continuous ‘S’ type of curve, which can be generally described as follows: o it has zero slope at time of commissioning o it takes a number of years before the onset of any significant number of failures due to deterioration o after the onset of failure, there tends to be a gradual increase in the trend. In effect, the rate of increase in probability of failure becomes approximately constant o as the pipe reaches a ‘very old age’ the majority of pipes in the same class have failed and the rate of change in probability of failure slackens off, leaving a small residual remaining in a serviceable state for a notable period of time. In order to achieve the optimum fit of the deterioration curve to the observed data, some of the constraints above are occasionally relaxed. For example, in Figure B3 : 23 below, the deterioration curve has been de-constrained so that it does not have to start exactly at 100% at zero years. This has allowed a much better fit of the function during the majority of the life of the asset group. We have chosen to model this type of deterioration curve using a Weibull distribution plot, which is often used for Reliability Modelling. It has been applied here on a specially modified basis. Weibull has been typically applied to ‘non-repairable failure’ modes, i.e. only to component disposal on failure. In this implementation however, the analysis has been developed to take account of pipe repair. The key assumption is that while the repair patch may be more durable than the original pipe, the original parts have the same probability of failing as another pipe of the same material and age in the same ground conditions. A further modification to the Weibull model is necessary to take account of the fact that it is not the whole asset that has failed – only a part. For each class of pipes, an ‘effective repair length’ has been determined. This is not related to the physical repair, but is a mechanism to allow the model to operate on partial asset failure. The values used for this length are determined during the calibration process and effectively split each pipe into a number of ‘pseudo assets’ for the analysis. B3 – Maintaining Service and Serviceability Page 57 of 218 3 April 2009 Three Valleys Water Final Business Plan Within the modelling process the following factors are considered. • The three-parameter Weibull distribution provides enough flexibility to adequately model the deterioration behaviour of all types of assets. • Optimisation using a numerical analysis technique (i.e. the method of least squares) is a valid optimisation technique. • The inclusion of feedback is essential; this occurs in a number of modes: o when a pipe fails and is repaired, the repaired pipe is treated as having the same probability of failure as it did previously. o when a pipe is renewed, it is treated as a new asset with a commissioning date in the year of renewal. o all renewed pipes take account of the probable changes of the replacement pipe material. The calibration of the Weibull distribution is assessed using an optimisation procedure,which has been developed to determine the most likely set of deterioration curves for each respective categorisation of material and soil risk. The Weibull parameters are calibrated to achieve an optimum comparison (method of least squares) between the modelled failure rate and the number of recorded failures, for each birth year. Figure B3 : 22 and Figure B3 : 23 below, provide examples of output from the calibration process. Figure B3 : 22 shows the very good correlation between the cumulative recorded failure and the cumulative modelled failure by year during the 17-year test period for cast iron/spun iron in ‘very highly aggressive’ and highly aggressive soil. Figure B3 : 22 Validation of test results Calibration (1) Cumulative Recorded Failures : Modelled Failures by Date Recorded Modelled 350 Cumulative Failues per Annum 300 250 200 150 100 50 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Figure B3 : 23 shows the resulting three-parameter Weibull cumulative distribution function for cast iron/spun iron in ‘very highly aggressive’ and ‘highly aggressive’ soil. It can be seen B3 – Maintaining Service and Serviceability Page 58 of 218 3 April 2009 Three Valleys Water Final Business Plan that the half life of cast iron/spun iron pipes in ‘very highly aggressive’ and ‘highly aggressive’ soil is only 33 years. This means that 50% of all cast iron/spun iron aged 33 years or more in this type of soil, has already failed at least once. This combination of material and soil type makes up 31% of our trunk main asset stock. Figure B3 : 23 Weibull cumulative probability distribution for cast iron / spun iron pipes in very highly and highly aggressive soil Weibull Cumulative Probability Distribution 100% 90% 80% Reliability (%) 70% 60% 50% 40% 30% 20% 10% 0% 0 20 40 60 80 100 120 140 160 180 200 Age (Years) 5.2.4 Validation The probability of asset failure resulting from the Weibull model has been validated against the results from 182 physical assessments (NDTs and coupons) obtained from the 200km of physical assessments. As would be expected for this type of modelling, there is a wide variation, but there is broad agreement between the model and the assessed asset life, i.e. assets predicted to have higher burst rates have generally been found to have shorter remaining lives. This physical assessment data has also been used to develop an additional indicator for ferrous mains to take better account of mains with short remaining lives but little or no burst history. Effectively, this indicator imposes lower reliability thresholds on the Weibull curves for ferrous mains. We do not use remaining life calculations in the modelling process as the frequency of sampling itself and the variability of corrosion across any particular pipeline length, means there is uncertainty in the output. The remaining life concept also does not include the PVC cohort of mains laid in the 1970s which although small in overall length, are now failing with increasing frequency. We do use any data obtained from non-destructive testing to compare against the modelling results and to validate our decisions to renew. Remaining life is calculated using an empirical relationship between the depth of corrosion in the pipe wall and its residual tensile strength. We use this to predict pipe failure under theoretical combined internal pressure and external diametrical deflection loadings. B3 – Maintaining Service and Serviceability Page 59 of 218 3 April 2009 Three Valleys Water Final Business Plan Our detailed assessments show a large variability of condition across the trunk main network. We have sections of trunk mains with extensive corrosion either across the pipe wall or via severe localised pitting. Our cohort of old (>70 years) cast iron or spun iron pipes laid in the highly aggressive London Clays exhibit greater degrees of corrosion than other cohorts. The extent of corrosion varies greatly across individual pipelines and confirms the research carried out for us by The University of Birmingham which shows that the corrosion is non-homogeneous and aggressive in the London Clays. To illustrate this variability in corrosion, one of the trunk mains we aim to renovate in AMP5 (reference IV18: Kenton Road to Uxbridge Road) has the wall corrosion characteristics described in Table B3 : 10. Table B3 : 10 Corrosion characteristics of a cast iron main in London Clay IV18 – Kenton Road to Uxbridge Road (400mm) Distance from Surface / soil Age / minimum end of main type remaining life 660m Urban 72 years old / 0 roadway type years remaining life 1-2 / London clay 733m Urban roadway type 3-4 / London clay 77 years old / >90 years remaining life 2670m Urban roadway type 3-4 / London Clay 67 years old / <2 years remaining life External appearance Comments Main is drop cast iron, with very poor external appearance. Significant corrosion is evident, including very deep pitting and graphitisation. Main is vertically cast iron, with average external appearance and no visible signs of corrosion Main is vertically cast iron, with very poor external appearance. In some places full wall graphitisation has occurred leaving no original material. The large variability in remaining wall thickness along the pipe, with full wall graphitisation in parts, confirms the need to validate our desk-top results making use of field sampling as much as possible. 5.2.5 Risk framework Our risk analysis process utilises the output from the failure model and combines this with a number of indicators of the consequences of a section of trunk main failing, to produce a measure of risk associated with that main. Risk is calculated at trunk main section level, but then assessed for the whole trunk main in a prioritisation model that enables different weightings to be applied, depending upon our view of the risk. The consequence of failure of a trunk main has been defined according to a number of input factors relating to network criticality and topographic features. B3 – Maintaining Service and Serviceability Page 60 of 218 3 April 2009 Three Valleys Water Final Business Plan The network criticality inputs are provided as output from the software ‘Opticritical‘ and our 33 all mains hydraulic models, and are assigned to the relevant trunk main segment. Opticritical is a software tool used to analyse and understand the impact of pipe bursts on the distribution system. It works by simulating each individual pipe failure and modelling the effect on the rest of the network. The outputs include: customers supplied, system pressures, system velocities and discolouration. The tool can be used for system planning, maintenance, and incident management. Opticritical works by isolating each pipe within our network and using EPAnet to model the effect of its failure on the rest of the network. EPAnet uses our Infoworks models to perform multiple iteration simulation of the hydraulic behaviour within the network. Opticritical calculates interruption to supply by summing the number of properties that receive a water pressure of less than 3m head when each main bursts. For discolouration Opticritical sums the number of customers that receive a reversal of flow of at least +/-1ms-1 to -/+1ms-1. Where models have been run as part of the detailed trunk main assessment, these more accurate results have been incorporated. The diameter of the mains is considered to be a key indicator of the consequence of failure as this will directly influence the potential for direct damage due to a burst, flooding, water loss and repair time. In addition to the calculated inputs, mains can be manually flagged as ‘strategic’. This designation is to indicate if there is something known about the main that cannot be modelled, such as an inaccessible location or a steep slope that would make a repair difficult and take a long time. Or it may be because something specific could cause a spontaneous failure, such as the main being in the slip-plane of an embankment. These flags are not used in relation to operational assessment of either the likelihood or consequence of failure – that is already factored into the model. Each of the risk indices receives a weighting according to the risk presented. The mechanism for prioritising trunk mains for investment is to combine the weighted risk indices and the likelihood of failure for each segment to produce an overall risk score. The weightings used are shown below in Table B3 : 11. Table B3 : 11 Weighting factors in the strategic risk model Topographic Network NRSWA roads (5m) 0.5 Number of valves to isolate pipe 1.0 Other roads (5m) 0.5 Customers off supply 2.0 Railways (10m) 0.5 Number of customers at risk of discoloration 2.0 Under building 0.5 Near building (5m) 0.5 Other Diameter 0.5 TM assessed and deemed strategic 4.0 Burst history 1.0 B3 – Maintaining Service and Serviceability Page 61 of 218 3 April 2009 Three Valleys Water Final Business Plan These weightings reflect the importance placed by our customers (through the Willingness to Pay survey) on receiving good quality water with minimal disruption to their supplies. We have also taken into account the effect of trunk main failure on disruption to strategic transport links and the flooding of properties. The strategic risk model is prioritised on risk. the priority order is on the maximum risk value for any section within each trunk main. This risk is the product of the consequence score and the probability of a burst in any year from the deterioration model. This enables the comparison between the total risk for all of the mains at 2010 and at 2015 – the only thing that is changing from 2010 to 2015 is the probability of a burst. Table B3 : 12 below, shows the risk exposure through failure and consequence of failure for 40 of our most critical mains. The maximum value of risk for each segment is calculated and given in the ’max risk’ column. Each trunk main is ranked in ascending order with increasing ‘max risk’ values. The total risk of the trunk main is also calculated and using the ranking the cumulative risk of all pipes is given in the ‘cumulative total risk-2010’ column. As the pipe deteriorates this risk score increases and the new value is given in the ‘cumulative total risk- 2015’ column. If we replace all critical sections of a trunk main we use the approximation that the risk reduces to non-critical levels, although in effect there is some marginal risk on high consequence mains. This risk reduction score is given in the ‘risk reduction’ column and is used to assess the extent of the programme needed to remain at current risk levels. Where we have detailed trunk main assessments and scheme designs, actual lengths for renewal are given in the ‘actual length to be renewed’ column and can be compared with overall trunk main lengths in the ‘length’ column. Based on the detailed information a program of work has been established, see section 5.3, and this is given in the last column ‘program’. During the next five years we estimate that if we do nothing our assets will deteriorate to the extent that the risk to our customers and business increases by about 11% (the difference between cumulative total risk 2010 and 2015). We targeted 200km of our high-risk pipelines, identified at PR04, for detailed assessments. Improved data from deterioration modelling and consequence modelling since PR04 has led to the risk priorities on many of our mains being changed. Risk modelling provides us with a very good indication of the likely failure rate of mains cohorts and the likely consequences of failing to establish a long term view of how these assets are performing. B3 – Maintaining Service and Serviceability Page 62 of 218 3 April 2009 Three Valleys Water Final Business Plan Table B3 : 12 Output from trunk main strategic risk model, indicating top-40 highest priority mains 2010 Rank Trunk main Length (m) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 B019 R023 B025 HA27 B052 HA38 SW13 E009 TMW H14 B001 B049 TME G06 B065 E025 SW39 HH19 TME F01 IV10A TME F02 B029 TME/W C12 B009 IV18 B055 TMW H07 R036 B040 SW52 R015 TME G03 SW49 B088 R004B B041 B018 74 B044 R011 B094 B046 5,313 2,074 2,612 1,073 6,237 3,609 7,076 1,852 6,508 3,689 3,839 1,909 2,330 1,403 2,878 6,157 20,783 384 11,009 4,510 2,310 5,162 2,994 5,549 3,452 2,382 4,374 1,857 7,922 8,609 1,479 7,580 2,417 1,402 3,193 3,135 8,122 9,391 1,204 7,154 Max risk Cumulative total risk 0.55 0.46 0.45 0.43 0.42 0.39 0.36 0.32 0.30 0.30 0.30 0.28 0.27 0.27 0.27 0.26 0.68 0.24 0.24 0.24 0.23 0.22 0.22 0.21 0.21 0.19 0.18 0.17 0.17 0.16 0.16 0.16 0.16 0.16 0.16 0.16 0.15 0.15 0.15 0.14 140.12 137.69 137.05 135.43 134.56 133.12 132.69 131.73 131.15 131.15 129.60 129.11 128.55 128.18 127.38 126.89 125.36 119.23 118.98 118.35 116.50 115.90 114.08 112.92 110.48 109.43 108.89 108.47 108.29 107.65 106.05 105.86 104.61 104.02 103.82 103.24 102.95 101.81 101.23 100.94 2015 Actual length to be renewed (m) B3 – Maintaining Service and Serviceability Page 63 of 218 4,900 2,243 429 6,101 1,444 2,830 502 1,673 4,857 1,300 2,376 1280 Cumulative total risk Risk reduction 154.20 151.73 151.08 148.95 147.90 146.23 145.64 144.37 143.64 143.64 142.07 141.57 140.86 140.39 139.36 138.68 136.78 129.05 128.73 128.09 126.20 125.36 123.56 122.38 119.91 118.84 118.30 117.87 117.67 117.02 115.37 115.13 113.84 113.24 113.04 112.45 112.16 110.98 110.39 109.99 2.47 0.65 2.13 1.05 1.67 0.59 1.27 0.73 N/A 1.57 0.50 0.71 0.46 1.03 0.68 1.90 7.73 0.32 0.64 1.89 0.84 1.79 1.18 2.47 1.07 0.54 0.43 0.21 0.64 1.65 0.24 1.29 0.60 0.20 0.59 0.29 1.18 0.59 0.40 0.82 Program AMP5 AMP5 AMP5 AMP5 AMP5 AMP5 AMP6 AMP5 AMP6 AMP6 AMP6 AMP6 AMP6 AMP5 AMP6 AMP6 AMP6 AMP6 AMP6 AMP5 AMP5 AMP5 3 April 2009 Three Valleys Water Final Business Plan 5.2.6 Investment planning We have explained the variability in estimating corrosion and the uncertainty inherent in the failure models of our most susceptible cohort of mains. To improve the confidence in our analysis we carry out detailed assessments before deciding to renew. Further assessment helps to reveal that although risk exposure may be high for a particular trunk main, renewal may not be the most cost effective intervention. The main may be in good condition – despite a history of bursts – and so continuing to repair it, on an infrequent basis, may offer the best value for money for customers in the short and long term. Instead of choosing renewal as an intervention, other mitigation measures can be introduced, such as new valves or improved access arrangements. So we select the trunk mains for which further assessment will be made from the strategic risk model. We collect further field and modelling data as outlined in Section 5.2.1, using the process illustrated in Figure B3 : 24. The information obtained from the detailed assessments is used to improve the data in the strategic risk model. We also identify those trunk mains where further investigation is needed and mains which are recommended for renovation. These form a programme of work for a given period. By utilising this investment planning process we can remain flexible, to some degree. We can also ensure resources are used effectively and the impact of any investment plan on risk across this asset group can be assessed. It allows us to adopt a least cost programme of work and to identify individual schemes that we can start immediately in 2010. B3 – Maintaining Service and Serviceability Page 64 of 218 3 April 2009 Three Valleys Water Final Business Plan Figure B3 : 24 Strategic risk model process for trunk mains Trunk Main Asset Ground Investigations Soil Mapping Resistivity Survey Soil Acidity Pipe Condition Assessment Pipe Sampling Non-Destructive Internal Inspection Data Gathering Burst History GIS Data Review Trunk Main Asset Site Survey Topography Mains Loaction Drainage / Groundwater Establish Trunk Main Sections Select Investigative Options Valves Accessability Operability Condition Asset Performance Networks Modelling Review Options W ater Quality Sampling Leakage Sahara Aerial Survey Sounding method Anecdotal Evidence Interviews PINs Trunk Main Investigation W ater Quality Review Archive Generate Assessment Database Likelihood W ater Quality Burst History Structural Testing Soil Classification Hydraulic Details Leakage Anecdotal Consequence Consequence Population affected Incident duration Hydraulic consequence Flooding consequence Service failure Determine Risk Matrix Determine Risk / Consequence Grade Grade 1 No W ork Required Grade 2 No W ork Required Grade 3 Further Investigation Grade 4 Renovation Grade 5 Renovation Determine Investment Strategy Output Investment Plan and D & C Propsals Asset Management B3 – Maintaining Service and Serviceability Page 65 of 218 MACE 3 April 2009 Three Valleys Water Final Business Plan 5.2.7 Cost benefit analysis A cost benefit analysis is carried out for each trunk main identified from the risk process. The following cost drivers are used in the analysis. • direct costs – capital and repair costs • direct costs – damage costs, including insurance; road repair • direct costs – call centre and other operational costs to manage the event • indirect costs – environmental and social costs (carbon) • indirect costs – traffic disruption • indirect costs – customer willingness to pay for reductions in discolouration events • interruptions to supply. This cost benefit analysis is used to validate the risk approach to ensure we are targeting the trunk mains which give the greatest benefit while balancing risk. The results from the analysis are presented in Section C8, and indicate that the trunk main renewal programme produces a net benefit of £160 million. 5.2.8 Trunk main assessments and essential maintenance We carried out about 200km of detailed assessments covering 50 individual trunk mains between 2006 and 2008. This covered about 10% of the trunk main asset base. We intend to carry out a further 200km during AMP5 to support the investment process for future years. Essential valve maintenance comprises repair or renewal of critical valves, access improvements, concrete aprons, protection structures and identification markers and is scoped from the surveys. Overall work is estimated to be similar to that obtained from the AMP4 survey work and is being addressed in our current capital programme. We will also gather valve maintenance information from a further 200km of trunk main walking and carry out the necessary works that will be identified. This essential maintenance and survey work for AMP5 is based on current activity and the cost is listed below in Table B3 : 13. Table B3 : 13 Essential maintenance activities arising from trunk main surveys and trunk main walking Activity from trunk main surveys (scope identified from AMP4 surveys and extended for AMP5 - approximate quantities) Survey length (200km detailed assessments, 200km walking survey) Number of trunk mains surveyed Number of critical valves buried or inoperable to be located and replaced as necessary Number of chambers to be refurbished to afford safe access Location and post and plating Other Design and supervision at 15% Quantity 400km 100 600 310 2340 300 Total cost B3 – Maintaining Service and Serviceability Page 66 of 218 Cost (£k) 346 162 480 134 162 1284 3 April 2009 Three Valleys Water Final Business Plan 5.3 Results Our planning objective is to ensure that deterioration of our trunk main assets do not affect our customers or our business to any greater degree than currently experienced and that risk levels do not deteriorate but remain level with an acceptable degree of certainty. The results of our analysis show that 40 individual trunk mains totalling 180km carry about 30% of our risk when measured as the product of the consequences of failure against the probability of failure in any one year. This risk level will rise in relative terms by 11% through increased likelihood of bursts. We know continued deterioration of some of our pipelines means these pipes cannot be effectively repaired as they have, or will soon, reach the end of their life. To reduce the failure rates and mitigate this risk we need to replace critical sections of trunk mains. Table B3 : 14 Details of trunk main renewal schemes required to maintain current level of risk below, lists pipeline sections which are top priority for renewal to maintain stable risk levels. This programme will ensure our trunk main assets are in a serviceable condition to meet the needs of customers and society as a whole. The table summarises the test results obtained from investigations, the consequences that arise through failure of these mains; the renewal length when compared to the overall length of the main, and the cost estimates associated with renewal. When renewed, the trunk mains identified will give us a total risk score that is equivalent to our current position in terms of impact on customers and other stakeholders due to failures associated with assets as a whole. This requires renewal of certain sections of 11 of our mains with the highest risk, totalling 25km. Detailed condition and survey based assessments have been carried out for six of these mains, coupled with scheme specific cost estimates. Of the remaining five, we have detailed condition assessments of two and the others are currently scheduled for investigation. The programming of the schemes will need to be closely co-ordinated with the relevant highway authorities before finalisation. B3 – Maintaining Service and Serviceability Page 67 of 218 3 April 2009 Three Valleys Water Final Business Plan Table B3 : 14 Details of trunk main renewal schemes required to maintain current level of risk Ref New Barnet Reservoir to Brunswick Park Bunns Lane to Colindale Avenue 2 400 Overall length (km) 5.313 4 400 2.612 Theobald Street to Brook Road Netherwild PS to Holywell PS 6 300/450 6.237 Currently awaiting test results. This main has failed 7 times recently. 17 600 6.157 1,067 Kenton Road to Uxbridge Road 23 400 2.994 When this main fails, severe flooding results. Much of southern St. Albans is without water almost immediately, with the remainder coming off supply soon afterwards. In the event of failure this main causes widespread flooding and loss of supply in the Harrow area. A section of the main is currently isolated in order to mitigate the severity of further incidents. 1.7 IV18 2.4 2,064 B001 Whitchurch Lane to Montrose Avenue Fortis Green to Whetstone 11 400 3.7 Sections of this main are in very poor condition, with NDT tests giving a residual life of less than 5 years. This main is in very poor condition, with sections of the main having a residual life (Shown by NDT) of 0 years. Sections have severe graphitisation, and the main fails regularly. Sections of main has a low residual life below 5 years, with frequent bursts. This section of main causes major flooding and traffic disruption when it fails. Many properties are also without water. 0.5 389 Detailed condition assessment and survey based costing carried out. 22 500 5.162 Sections of this main are in very poor condition, with NDT tests giving a residual life of less than 5 years. 1.3 1,289 Sunninghill Reservoir to Blackhills Reservoir Brentwood Road and Stondon Road Epping lane to Mount Road 30 400 8.535 Modelled as high risk main, with multiple bursts in recent history. As such condition assessment works are currently underway. This main is at the end of TVW network. As such in the event of a failure, it is not possible to supply water from another source. This results in widespread no-waters and low pressures in the event of a failure. Widespread loss of supply including a hospital and racecourse. Recent bursts have caused severe flooding to customer premises. 1.3 1,078 5 225 1.073 Awaiting results of condition assessment. 0.4 182 7 300 3.609 Awaiting results of condition assessment. 1.4 548 Awaiting results of condition assessment. Spencer Close to Park Green 8 225/300 7.076 Modelled as high risk main. As such condition assessment works are currently underway. Modelled as very high risk main. As such condition assessment works are currently underway. Modelled a very high risk main. As such condition assessment works are currently underway. Detailed condition assessment carried out for this main, costing accounts for local factors. Detailed condition assessment carried out for this main, costing accounts for local factors. Awaiting results of condition assessment. Awaiting results of condition assessment. 2.8 1,152 Awaiting results of condition assessment. Total 25.0 15,846 B019 B025 B052 HH19 B009 TMEG03 HA27 HA38 SW13 Trunk main name Risk rank Diameter (mm) Test results Consequence Sections of this main are in very poor condition, with NDT tests giving a residual life of less than 5 years. PVC main, hence NDT testing not used. However this main has failed 15 times in the last 5 years and 6 in the last 2 years. This main is at the end of TVW network. As such in the event of a failure, it is not possible to rezone. This results in widespread nowaters and low pressures in the event of a failure. Main fails regularly, resulting in widespread flooding, loss of supply due to loss of suction to Wakemans hill booster and up to 2244 properties have no water. Junior school regularly flooded when main fails. Severe flooding and traffic disruption in the event of failure. 4.9 2,982 2.2 1,355 6.1 3,740 Detailed survey based costing carried out. Detailed condition assessment and survey based costing carried out. Detailed condition assessment and survey based costing carried out. B3 – Maintaining Service and Serviceability 2010 Length to be renewed (km) Cost (£k) 5 Page 68 of 218 Comments Detailed condition assessment and survey based costing carried out. Detailed survey based costing carried out. November Three Valleys Water Final Business Plan We have also taken the view for the Final Business Plan that trunk main TME F01, although ranked as our most critical main in terms of risk, needs a more detailed condition assessment. Based on current evidence it would require significant investment in AMP5 and would therefore place additional pressure on customer bills. After careful consideration we think we can accept the risk in AMP5 whilst we undertake the more detailed condition assessment that can inform the optimal renewal strategy for this main at PR14. The short term benefit is that there will be less pressure on customer bills at this price review. There is a large degree of inherent variability in the pricing of renewal works for large diameter pipes. Location and pipe-specific factors mean estimates based purely on unit costs will carry a large degree of uncertainty. For this reason, we always seek to obtain detailed, scheme-specific pricing estimates before seeking to renew particularly large mains. Using the same mechanism for the ranking of trunk mains, a provisional programme for AMP6 has also been identified. This indicates that a total of a further 11 trunk mains will need to be renewed during AMP6 in order to keep the risk level stable. This will be subject to the findings of detailed condition assessments. This represents an AMP6 programme of approximately £19 million, including TME F01 at an estimated £6.7 million Figure B3 : 25 below, shows the risk profile that would occur if we do not renew sections of the trunk mains. It also indicates the investment needed during the next two AMP periods to keep risk levels stable through burst reduction on our most critical trunk mains. AMP5 and AMP6 work programmes are shown to be similar in terms of cost and length renewed. It also demonstrates that deferment at this stage will mean a greater number of schemes being needed in AMP6. Figure B3 : 25 Trunk main risk profile with associated investment and risk reduction Post Investment Risk Unmitigated Risk Investment 100 180 90 Unmitigated Risk 160 Mitigated Risk 80 140 70 120 60 100 50 80 60 40 Investment 30 40 20 20 10 0 2010 2015 B3 – Maintaining Service and Serviceability Page 69 of 218 0 2020 Investment (£M) Risk Level 200 5 November 2010 Three Valleys Water Final Business Plan The cost benefit analysis carried out on the selected trunk mains for AMP5 show that in overall terms the schemes are cost beneficial for the programme of work but that there is great variability between schemes. The selected schemes therefore strike the right balance between risk, benefits and an even programme of work between AMP5 and AMP6. 5.4 AMP5 programming The trunk mains renovation programme for AMP5 has been arrived at taking into account the following: • reduction in risk associated with operational serviceability • compliance when exercising powers of land entry • resource levelling • deployment density in local authority areas. The programme is indicative and subject to change dependent upon contractor selection and the effect on planned distribution mains renewals or local authority constraints not known at this time. Figure B3 : 26 Program of works for trunk mains renewals (Gant chart) During AMP4 we have laid 22km of trunk main size pipelines, including a substantial proportion in the highly urbanised area of north London. We have confidence that our experience gained in AMP4 will allow us to continue to produce effective and well managed renewal schemes in the future. Our new framework agreements for infrastructure renewals incorporate trunk mains, so wherever possible, the two streams of work – laying distribution and trunk mains – will be coordinated to best facilitate delivery and minimise disruption to customers. B3 – Maintaining Service and Serviceability Page 70 of 218 5 November 2010 Three Valleys Water Final Business Plan 5.5 Summary Asset group: trunk mains The problem Planning objective • High consequences of widespread • Maintaining the current high loss of supply affecting customers standard of service to our with flooding, and disruption to customers. transport links when strategic • Maintain the existing balance of pipes fail. risk between us and our customers. • Critical pipes in very poor condition • 30% of risk carried on 18% of • Carry out pro-active maintenance pipes. Risk increasing by 11% over strategy. the AMP5 period due to deterioration. Data and analysis • GIS, works management (failure information), hydraulic and criticality models and unit costs used to build a strategic risk model for each trunk main segment. Each trunk main segment is categorised with risk and deterioration profile. • Critical trunk mains are subject to detailed condition assessments and detailed design. • Pro-active risk and condition based plan of specific trunk main renewal projects set out for AMP5/AMP6 to avoid lumpy investment. The solution • Renew 25km of poor condition high risk trunk mains segments in AMP5 to improve the risk profile of 11 trunk mains, plus essential valve maintenance on other critical mains. • Ongoing trunk main assessments of 50 critical mains to support future proactive renewal strategy. Cost and cost identification • Costs are based on detailed and value engineered design using contractor framework rates or unit costs. Costs for critical valve maintenance and AMP5 assessments based on actual expenditure. Identified high risk trunk mains in poor condition with £11,597,000 detailed designs and costs to support the case. Length = 17.8km Trunk mains identified from Strategic risk model with £4,249,000 unit costs. Length = 7.2km Trunk main assessments for AMP5 (200km) £1,887,000 Essential maintenance £1,284,000 Cost benefit analysis • Overall the programme is cost beneficial, though with great variability between individual schemes. How has this project changed since the Draft Business Plan? • Scope and cost has not changed significantly but we have provided more design detail on individual trunk main projects with costs. B3 – Maintaining Service and Serviceability Page 71 of 218 5 November 2010 Three Valleys Water Final Business Plan 6 6.1 Our plan for infrastructure assets: distribution mains Introduction We have approximately 12,200km of distribution mains. They carry water from the strategic network to our property base and are generally less than, or equal to, 300mm diameter and usually within district meter areas. Approximately 96% of mains bursts occur on these local distribution pipelines and we have the second highest burst rate in the industry. Our planning objective is to maintain our high standards of service for customers and stable serviceability of the network through controlling and reducing bursts levels to the reference level, all at the best value to our customers. Our customers will benefit from our interventions on the network; having fewer interruptions to their supplies and from fewer discolouration events – all directly linked to mains failure. A more robust network will reduce water waste through leakage. Our direct customers and other stakeholders tell us that maintaining a stable infrastructure and avoiding environmental damage should be high on our priorities for AMP5. We will achieve our planning objective by continuing with the increased renewal programme identified at PR04 that was deemed necessary to mitigate the trend of the historically high burst rate. In this section we set out what we need to renew during the planning period to maintain bursts at reference levels using the most cost effective solutions, with the focus on AMP5 and AMP6. Cost benefit analysis has been used to validate our solutions and to arrive at a greater understanding of how options, set out to meet the planning objective, impact on direct and indirect costs and costs to the environment. We explain the risk-based forward looking approach adopted and how we use ‘business as usual’ data sources and tools to determine the optimum level of renewal and which pipes should be renewed. We adopt an analytical method using deterministic and stochastic approaches for the distribution mains asset retrieving data from our corporate sources, as well as bespoke pipe sampling. The asset observations are based on attribute data from the GIS, work management systems, leakage reporting systems, customer contact information, water quality sampling, criticality modelling and intervention cost data. We use this analytical approach to identify where groups of our poorest condition and high risk pipes are located and when we need to renew them so as to offer best value to customers. This information is passed to our design team who construct schemes by further evaluating the condition through burst records, soil and material analysis and hydraulic performance to set out well planned and effective mains renewal schemes that cause least disruption to local people and road users. The end result is district meter areas that are substantially improved in terms of serviceability and where we would not plan to return for a number of years. All these elements are explained in this section. The impact of renewals on the reduction of distribution mains leakage, while not directly influencing our mains renewal programme, is included following studies undertaken in DMA’s where significant lengths of pipes have been renewed. We include this analysis to highlight the improvements that can be made to ensure a more robust network for the future through careful planning and targeting of renewal schemes. Detailed analysis is also included on the B3 – Maintaining Service and Serviceability Page 72 of 218 5 November 2010 Three Valleys Water Final Business Plan spread of bursts that occur over different cohorts of pipes and how this influences our targeting of schemes. Uncertainty in achieving the benefits to serviceability is included. This is estimated both from the uncertainty in the data used and the short term effects of changes to the pipe environment. In general, we adopt a view of achieving our objectives with a 50% certainty over the long term, while recognising that in the very short term this certainty may be lower if adverse climatic events affect our network. 6.2 Methodology The method we use to determine our investment plan for the period is as follows: • planning objective – maintain the current high standard of service provided by the distribution mains asset through control and reduction of the burst level to the reference level, at the best value to our customers • data gathering – obtain pipe attribute and condition data • performance measurement – assess serviceability (pressure, interruptions, bursts, leakage and water quality) • forward looking analysis – relate serviceability to the probability of asset failure during the planning horizon. The steps include deterioration model construction, calibration, validation and linking to the investment process • targeting mains renewal – using the analysis to form a well planned top-down programme of work targeting groups of pipes most likely to fail at DMA level and transforming these into practicable bottom-up schemes. 6.2.1 Pipe attribute and condition data As with trunk mains, the condition and performance of our distribution mains is collected using attribute data contained in the GIS, job management data, hydraulic performance and criticality modelling and soil mapping. This provides the basis for analysis of the asset stock and serviceability data in terms of failure, asset deterioration, water quality, supply interruptions and condition. To support the data from our corporate systems we also have detailed pipe assessments from some 4400 samples. A significant proportion of our distribution mains were laid before the Second World War (26%) and made of cast iron using bedding material and surround from the excavated soil. A further 40% were laid post-war using spun iron up until the early 1960s. This was a more ductile material, utilising a thinner wall than its more rigid predecessor. Later, more modern pipe materials were used including ductile iron, PVC and more recently, polyethylene. Figure B3 : 27 below, shows in more detail the pipe material and age categories. B3 – Maintaining Service and Serviceability Page 73 of 218 5 November 2010 Three Valleys Water Final Business Plan Figure B3 : 27 Age and material profile of distribution mains CI Cast Iron/Spun Iron Ductile Iron HPPE/MDPE 60-79 80-99 PVC Other 6000 5000 Length (km) 4000 3000 2000 1000 0 0-19 20-39 40-59 >100 Age (years) Our ferrous pipes (75%) are susceptible to corrosion, tuberculation and fracture through thermal expansion/contraction and ground movement. Approximately 15% (1,850km) of these ferrous assets are in the highly aggressive London Clays, mainly in the urban areas of north London, see Figure B3 : 28.below. Figure B3 : 28 Distribution mains, proportion by length of material and soil type Old Cast Iron: Very Highly & Highly Aggressive ground, 1% Other: all ground, 2% PVC: all ground, 8% MDPE / HPPE: all ground, 16% New Cast Iron: Very Highly & Highly Aggressive ground, 6% Spun Iron: Very Highly & Highly Aggressive ground, 7% Ductile Iron: Very Highly & Highly Aggressive ground, 1% Ferrous: all ground (excl. very highly & highly aggressive), 60% B3 – Maintaining Service and Serviceability Page 74 of 218 5 November 2010 Three Valleys Water Final Business Plan The London Clays exhibit non homogeneous and aggressive corrosive properties. Corrosion will vary along pipelines laid in this ground even though they are from the same cohort of age and material and subject to the same pressures. The clay material is also susceptible to swelling and shrinkage, causing large soil movements which in turn impose stress onto the buried pipelines. Another important failure mechanism is thermal movement of the pipe caused though changes in the temperature of the surrounding soil and water in the pipe. Contraction and expansion due to extremes in temperature is restrained by the clay soils historically used as backfill. This causes stresses to build in the pipe and failure to occur at rigid joints and points where the pipe is weakened through corrosion. When it is extremely cold leakage increases as a consequence of this phenomenon. This why bursts in the north London conurbation are about 80% higher than in other parts of our distribution area. The impact of this is magnified due to the high density of population affected and disruption to traffic. The combination of combined corrosion effects, ground movement and thermal contraction and expansion means that these pipes are susceptible to changes in the environment, whether through significant drops in water and ground temperature during the winter, or from prolonged hot and dry periods followed by wetter autumns – as was experienced in 2003. But not all pipe failures give rise to large amounts of water escaping with subsequent flooding and interruptions to customers’ supplies. Burst incidents that generate DG3 events average about 50 per year compared to total burst numbers of about 4000 in a normal year. Burst sizes vary from those with actual pipe breaks – usually through ring fracture caused by ground movement on a weakened pipe – to weeps at joints and ferrules also caused through corrosion and movement. Failures of newer plastic material are few and are mainly at the joints – although like the trunk mains, our small amount of PVC pipelines laid in the 1970s are becoming more brittle and have a greater propensity for bursting. We have extensive data on the amounts of water lost through pipe bursts and these vary greatly in size but on average we expect losses of about 2-3m3/hr per burst. 6.2.2 Performance measurement Distribution mains performance is assessed using the serviceability criteria of bursts, water quality, pressure and DG3 interruptions (>12 hrs). We also use leakage as a sub-threshold measure for condition. We discussed at the start of the section our serviceability position in terms of DG3, DG2 and established that in general these indicators are more operationally or capacity based and not solely dependent on condition. Providing good water quality to our customers from our pipe system and ensuring we are not wasting water through leakage is, however, directly related to the condition of the network. 6.2.3 Performance measurement – water quality Ensuring good water quality from the network necessarily means reducing interventions (bursts and repairs) in zones that have higher sediment in the pipe or tuberculation or bio film on the pipe wall. In order to assess the performance of our network in terms of water quality we carried out extensive analysis of our different zones and worked closely with the UKWIR team in developing a ‘tool for the forward looking approach and D2I discolouration’ This information was also used in our distribution operation and maintenance strategy (DOMS) assessment of the network. B3 – Maintaining Service and Serviceability Page 75 of 218 5 November 2010 Three Valleys Water Final Business Plan Although compliance sampling is used to assess performance of this serviceability measure we have extended our data acquisition to determine appropriate water quality indicators for network performance. These can be used to benchmark zones and identify underlying trends. The indicators were chosen as being effective in illustrating network performance and were split into two groups. They are shown below in Table B3 : 15. Table B3 : 15 Water quality indicators for zone classification Aesthetic measures Taste and odour measures Customers’ contacts – discolouration/brown Taste/smell Turbidity Total chlorine Iron as Fe Free chlorine Manganese as Mn Both sets of indicators have an element of customer contact data to compliment the data from our water quality archive. A comparative assessment of all of our 70 water supply zones has been made. This is primarily used to classify those zones with similar water sources and with numbers of properties not exceeding 100,000. They map directly to our hydraulic demand zones and DMAs. This was done to attempt to establish any trends, determine present performance and provide a comparative ranking of these zones. B3 – Maintaining Service and Serviceability Page 76 of 218 5 November 2010 Three Valleys Water Final Business Plan Table B3 : 16 Water quality zones: ranking of worst 25 zones Rank Zone name Zone 2002 2003 2004 2005 2006 2002-06 1 Rickmasworth/Ickenham 47 10.0 11.0 11.0 12.0 12.0 11.2 2 Harlow 24 10.0 12.0 12.0 10.0 11.0 11.0 3 Epping/Ongar 25 11.0 12.0 11.0 11.0 10.0 11.0 4 Northwood/Ruislip 48 8.0 12.0 11.0 11.0 11.0 10.6 5 Uxbridge/Heathrow 59 8.0 11.0 10.0 10.0 11.0 10.0 6 Barnet 50 9.0 12.0 9.0 11.0 8.0 9.8 7 Hatfield/Potters Bar 23 9.0 11.0 11.0 9.0 9.0 9.8 8 Ashford/Staines 65 9.0 9.0 10.0 9.0 11.0 9.6 9 Pinnr/Stanmore 52 8.0 10.0 11.0 10.0 9.0 9.6 10 Chorleywood/Gerards Cross 45 7.0 12.0 9.0 10.0 9.0 9.4 11 Bagshot/Sunninghill 64 8.0 10.0 10.0 9.0 10.0 9.4 12 Hillingdon/Hayes 60 6.0 8.0 11.0 11.0 10.0 9.2 13 Pirbright/Send 69 8.0 11.0 9.0 10.0 8.0 9.2 14 Borehamwood/Bushey 49 9.0 11.0 9.0 9.0 8.0 9.2 15 East Barnet 51 8.0 11.0 8.0 9.0 9.0 9.0 16 Greenford/Northolt 61 6.0 10.0 8.0 10.0 10.0 8.8 17 Southall/Feltham 63 7.0 9.0 9.0 9.0 10.0 8.8 18 Sawbridgeworth 22 11.0 11.0 7.0 6.0 8.0 8.6 19 Hemel/Kings Langley 39 8.0 8.0 11.0 6.0 10.0 8.6 20 Finchley 54 8.0 9.0 9.0 9.0 8.0 8.6 21 Standon 10 10.0 10.0 6.0 8.0 8.0 8.4 22 Barkway/Therfield 2 7.0 12.0 6.0 8.0 8.0 8.2 23 Hadham/Stansted Airport 17 8.0 8.0 10.0 7.0 8.0 8.2 24 Uttlesford Dunmow 19 7.0 9.0 9.0 8.0 8.0 8.2 25 Hemel Hempstead 38 10.0 6.0 6.0 9.0 10.0 8.2 This ranking does not represent absolute performance. All the Company’s WSZs have excellent compliance, but it provides an illustration of relative operational risk. It is used as an operational tool with the information stored on our GIS. We use this data to assess the impact on water quality in terms of direct costs associated with customer contact and flushing operations when bursts occur in the zones identified as receiving comparatively poor water quality when compared to other zones. The information feeds into our whole life cost analysis used to optimise future investment. The red/amber/green rating shown in Table B3 : 16 above, is based on aggregated risk scoring carried out for the distribution and operational maintenance strategy. zones 24 and 25 (supplied by Roydon Treatment Works) and 47 (supplied by Blackford Treatment Works) are our most at risk zones in terms of the possibility of water quality events occurring through intervention. A detailed systematic cleaning programme for each of these zones after treatment has been installed to prevent manganese from entering the network, has been drawn up with cost estimates provided and is included in Section B4: Quality Enhancements. 6.2.4 Performance measurement – leakage The level of leakage is a key indicator of the condition and performance of the network. Although important across all infrastructure assets, its impact is considered in this section as the affect of active leakage control on the primary serviceability measure – number of bursts – which has been significant during the past few years. This is because our reduction in B3 – Maintaining Service and Serviceability Page 77 of 218 5 November 2010 Three Valleys Water Final Business Plan leakage has increased our active leakage control measures and this has led to an increase in total bursts. In order to quantify the effect of leak detection on serviceability we needed to understand the natural rate of rise (NRR) of leakage for our network and have worked with the consultant RPS Water to derive NRR functions across the network using our company-specific data. The methodology used has been based on the best practice guidelines3 developed by RPS Water as part of a UKWIR research and development project. NRR also forms the basis of the Economic Level of Leakage (ELL) calculation. The methodology has been applied to data for the years 2006-08 for a representative sample of DMAs taken from each of our three resource zones, in batches of DMAs by cohorts defined by mains material. The sample size was sufficiently large to reflect the variability of the DMA network and operating characteristics. A total sample of 380 DMAs was selected, representing 46% of the 826 operational DMAs across our region. We now have a set of NRR functions which allows us to determine economic levels of leakage using total cost measures. In order to calibrate the model we calculated average losses for individual types of failure (mains burst, communication pipe leaks, other) using our leakage data. This gives us proportions and values of mains bursts expected from a leak detection campaign. It is used to assess the improvement in the condition of the network through a reduction in NRR and to establish whether benefits can be seen in absolute leakage levels for district meter areas following a mains renewal campaign. Using our DMA and works management data we have studied the impact of renewal on leakage levels and bursts for completed mains renewal schemes in AMP4. 6.2.4.1 Impact of renewal on bursts To determine the effect of renewals on failure rates we monitor bursts at the local level in DMAs and overall at company level. At the local level we have analysed 12 DMAs where we have completed renewal schemes totalling about 67km. They were selected because they had at least one year pre- and post-renewal burst and leakage activity data available. The results show that if we target renewals at our worst performing pipes in a DMA as schemes, instead of individual pipes, we get a reduction in overall repair activity (on all pipes, including service pipes) for the whole DMA. Figure B3 : 29 below, plots leakage activity in DMAs preand post-renewal. 3 UKWIR, Natural Rate of Rise in Leakage, 2005. B3 – Maintaining Service and Serviceability Page 78 of 218 5 November 2010 Three Valleys Water Final Business Plan Figure B3 : 29 Comparison of all leakage activity in DMAs pre- and post-renewal DMA no change Post renewal all jobs rate (jobs/year/km) 14 12 10 8 6 4 2 0 0 2 4 6 8 10 12 14 Pre renewal all jobs rate (jobs/year/km) In 75% of cases subsequent repair activity in the DMA is reduced following renewal. Lower intervention rates on all pipes in a DMA will mean less disruption to the network, leading to a more ‘stable’ network. In terms of bursts on mains, Figure B3 : 30 below, shows a marked reduction in the total burst rate in the DMAs where renewal took place. Figure B3 : 30 Pre- and post-renewal burst rates within partially renewed DMAs DMA No change Post-renewal burst rate (burst/km/yr) 2.50 2.00 1.50 1.00 0.50 0.00 0.00 0.50 1.00 1.50 2.00 2.50 Pre-renewal busrt rate (burst/km/yr) B3 – Maintaining Service and Serviceability Page 79 of 218 5 November 2010 Three Valleys Water Final Business Plan Analysis of bursts in the network at a higher level is shown in Table B3 : 17 below. It indicates that 68% of bursts that occurred in 2007/08 occurred on pipes that never burst between 2002 and 2007. The bursts occurred on 329km which represents only 2.7 % of all the pipes in the group that have never burst over that period. At the other end of the scale 3% of all bursts that occurred in 2007/08 occurred on pipes that had burst four times between 2002 and 2007. These bursts occurred on 39.8km, equating to 40.8% of all pipes that experienced four or more bursts in the period. Our knowledge of the mechanisms of failure and the variability of corrosion rates across London Clays, together with the impact of environmental changes on failure rates, means we need to use a statistical approach. We combine this with historical burst analysis to determine renewals targeting and to recognise the medium to long term impact of renewals on stabilising the network. Table B3 : 17 Proportions of mains with bursts occurring in 2007/08 against burst history Historic period: 1 April 2002 – 31 March 2007 Distribution mains with at least a burst in period 1 April 2007 – 31 March 2008 Percent bursts (compared to total in period) Length of mains (in km) Percent length to the group (group of pipes) with the same number of bursts experienced in April 2002 – March 2007 With no past bursts 66.8% 329.2 2.7% With 1 past burst 18.7% 118.4 6.9% With 2 past bursts 6.8% 61.0 13.3% With 3 past bursts 3.5% 37.0 20.5% With 4 past bursts 1.2% 20.4 25.8% With more than 4 past bursts 3.0% 39.8 40.8% 6.2.4.2 Impact of renewals on leakage To determine the effect of renewals on leakage we examined a number of DMAs which had had at least 20% of their pipework renewed. These have sufficient pre-renewal data in terms of bursts, leakage activity, minimum night flows etc to compare against similar post-renewal data. Figure B3 : 31 indicates that in general there is minimal benefit to leakage from partially renewing DMAs. However, other data supported by work carried out by WRc shows that with increasing proportions of mains renewed in a DMA there are greater leakage benefits. B3 – Maintaining Service and Serviceability Page 80 of 218 5 November 2010 Three Valleys Water Final Business Plan Figure B3 : 31 Leakage levels pre- and post-renewal DMA No Change Post renewal NFTL level (l/prop/hr) 25 20 Increase 15 10 Decrease 5 0 0 5 10 15 20 25 Pre renewal NFTL level (l/prop/hr) 6.2.5 Forward looking analysis The risk-based approach adopted at PR04 used models and methodologies we developed using comprehensive data sets in accordance with the CMPCF. This approach provided an assessment of the likelihood of an asset failure and the likely consequences. As required in the CMPCF, trade-offs between capital and operational expenditure were demonstrated. This was achieved by determining the economic level of capital maintenance using an investment model. This ‘investment model’ was recognised by Ofwat at the time as ‘the most explicit attempt by any company to quantify on a whole life cost basis the sensitivity to investment strategy’. Since then we have improved our method of analysis, not only to include better data but also to include a measure of uncertainty within the modelling process. Consequence of failure – and therefore risk at pipe level – is now evaluated using the iterative hydraulic modelling software ‘Opticritical’. This also allows us to reinforce our cost benefit analysis by monetising the risk associated with interruptions and discolouration events. Also, we can now assess risk and the effect of interventions on serviceability for different levels of certainty. This modelling process falls into Category 1b as defined by Capital Maintenance Planning Common Framework: Review of Current Practice, UKWIR report 05/R6/05/14. Our analytical approach is based on five steps: • data acquisition • failure and performance modelling (including that for communication pipes) • grouping and scheme building • investment modelling B3 – Maintaining Service and Serviceability Page 81 of 218 5 November 2010 Three Valleys Water Final Business Plan • optimised plan and outputs. The principal function of the water infrastructure investment model is to allow groups of pipes to be replaced 40 years into the future and to quantify the consequences on capex, opex, bursts, interruptions and discolouration events. The uncertainty in key inputs and outputs is quantified using Monte Carlo analysis and the investment is optimised using genetic algorithms. The purpose is to use statistical models and historical data to provide a high level strategy for capital maintenance planning of our water infrastructure. It establishes the optimum long term replacement strategy and overall costs. As a statistical model it is also used to inform the process of developing individual mains replacement schemes, which are created in a bottom-up approach using engineering skills and taking account of local circumstances. Figure B3 : 32 below, sets out the five steps we use. . B3 – Maintaining Service and Serviceability Page 82 of 218 5 November 2010 Three Valleys Water Final Business Plan Figure B3 : 32 Maintenance Infrastructure investment planning process B3 – Maintaining Service and Serviceability 2010 5 Page 83 of 218 November Three Valleys Water Final Business Plan Three Valleys Water MI Investment Planning Process (1) Data Acquisition Distribution Mains Failure Models: Survival analysis with Monte Carlo simulation Communication Pipes Failure Models Weibull functions GIS / WMIS Phyical and Historical Data Hydraulic Models Pipe Sample Database OPM Valuation & Performance Models OptiCritical TVLR / LMARS Leakage analysis: Natural Rate of Rise functions (2) Condition and Performance Modelling Communication Pipe results Scheme Building: (6km groups) Distribution Mains results (3) Grouping and Scheme Building (4) Investment Modelling and (5) Optimisation Investment Model Scenarios Building: Intervention option: Select Objective Set constraints Target level of uncertainty Replacement year for each pipe group Serviceability/cost impact Optimiser : GA with Monte Carlo simulation Willingness to pay survey Outputs from other investment drivers Opex, Capex and environmental & social costs at asset level Optimised MI Plan : Km to be replaced CPs to be replaced Forecast serviceability (bursts/ interruptions/discolouration) Outputs fed into Investment Optimiser Optimised investment input into Business Plan & C5 project database B3 MAINTAINING SERVICE AND SERVICEABILITY Page Page 84 of of 218 5 November 2010 Three Valleys Water Final Business Plan 6.2.5.1 Step 1: data acquisition Data is obtained from the systems described in Section 3.3 6.2.5.2 Step 2: condition and performance modelling The burst model is a statistical model we developed and use in normal business to forecast bursts on individual pipes over a given period. It was successfully used at PR04 and is now updated with more recent information. The model was validated by WS Atkins at PR04 as ‘fit for purpose’ and is based on recognised statistical practice. We have improved it since PR04 using more up to date data and a new calibration. The model uses data observed for each pipe and includes explanatory variables, such as corrosion rates (from pipe samples), soil movement and pipe characteristics such as age and burst history. It works on a Microsoft SQL Server platform and the results are transferred into GIS to spatially locate pipes that have high predicted burst rates. The burst model is based on survival analysis of distribution mains. It uses the Cox semiparametric proportional hazard model. This particular statistical model has the capacity to include all the explanatory variables into a single analysis and the ability to consider data in a given time window without reliance on whole life information on the pipe, i.e. it can accept censored data. There are four principal stages to the burst modelling process: • data preparation • calibration • validation • forecasting. We have two deterioration models for our distribution pipes that describe 98% of the asset stock. • Ferrous pipes (cast iron, spun iron and ductile iron) with explanatory variables length, diameter, age, ground movement and corrosion speed and burst history. • Plastic pipes (HDP, HPPE, MDPE, MOPVC, PVC and uPVC) with explanatory variables: length, diameter, age, ground movement and burst history. The ferrous model was calibrated from 1989-02 and validated during 2003-06. The plastic model was calibrated from 1990-02 and validated during 2003-06. In the validation phase we compare the number of bursts that occurred over the period to the number calculated by the burst model during the same time-scale using the same pipe lengths. Table B3 : 18 below, shows the comparison of the cumulative number of bursts in 2003-06 that occurred and the predicted number. For ferrous mains the model fit improves during the period but still under reports by about 8%. For plastic mains the model fit varies more, reportedly by between 12-17%. B3 – Maintaining Service and Serviceability Page 85 of 218 5 November 2010 Three Valleys Water Final Business Plan Table B3 : 18 Comparison of cumulative predicted and actual mains burst rates 2003 2004 2005 2006 Ferrous Actual Predicted Model fit 4,585 3,347 73.0% 7,779 6,770 87.0% 11,158 10,275 92.1% 14,863 13,863 93.3% Plastic Actual Predicted Model fit 399 291 72.9% 680 588 86.4% 1,012 891 88.0% 1,452 1,200 82.7% Total Actual Predicted Model fit 4,984 3,638 73.0% 8,459 7,358 87.0% 12,170 11,166 91.7% 16,315 15,063 92.3% Interruptions and discolouration events are calculated by combining results from the burst model at pipe level with the number of properties attached to each pipe from Opticritical network models. The results are multiplied by a calibration factor. Opticritical is described in more detail in Section 5.2.5 (trunk main risk framework). Opticritical calculates interruptions to supply by summing the number of properties that receive a water pressure of less than 3m head when each main bursts. For discolouration Opticritical totals the number of customers that receive a reversal of flow of at least +/-1ms-1 to -/+1ms-1. For this discolouration to happen the failure must occur in one of our highest risk zones, identified through our DOMS zone performance and numbers of properties affected. This is indexed using a calibration factor based on historical customer contact data. In the model the group values are then summed and the appropriate costs applied. The costs associated with leakage reduction resulting from pipe renewal are estimated using formulae to calculate the expected Natural Rate of Rise (NRR) without renewal, and the improvement given from the length of mains renewed. This gives an expected water saving and a saving on leakage detection and repair costs. These are calculated and included in the investment model as a benefit from the overall mains replacement strategy. 6.2.5.3 Step 3: grouping and scheme building Groups of pipes are formed to mimic the scheme selection process that is carried out when capital investment schemes are undertaken as it is not feasible to generate detailed schemes for all these pipes. Pipes are grouped locally (by DMA) and include 70% of the pipes most prone to burst in the DMA and 30% random ‘infill’ to account for the practicalities of formulating pipe replacement schemes for implementation. For modelling purposes, the infill pipes are randomly selected in a zone. That is why, in some cases, they are not located between pipes selected due to risk. We select infill pipes so that we can estimate the likely size, cost, future burst savings and impacts on risk and serviceability of the whole package of work. Although the infill pipes that will be renewed are selected later during the design of the scheme, it is vital to model and account for them at the investment planning stage. This ensures that the burst forecasting and investment optimisation are genuinely reflective of what can be achieved in practice. The pipe groups are referenced and their characteristics calculated: number of bursts in each year; number of interruptions; discolouration events and cost of replacement. Uncertainty in B3 – Maintaining Service and Serviceability 2010 Page 86 of 218 5 November Three Valleys Water Final Business Plan some of these characteristics is also assessed. Provision is made to exclude pre-determined mains replacement schemes from the grouping process (to account for schemes already in the capital investment programme, for example). Figure B3 : 33 below, shows the output of the burst model for one of our DMAs and illustrates the practical approach needed to group pipes and recognise the need for an ‘infill’ quantity. Figure B3 : 33 Burst model output – mains selected 6.2.5.4 Step 4: investment model The groups and their characteristics are passed to the investment model developed since PR04 to combine, analyse and optimise the multiple inputs and effects of mains repair and renewal, along with associated communication pipe data and the characteristics of a generic replacement pipe. Cost data, both private and benefit costs for performance measures and other effects of bursts – such as call centre costs – are input into the investment model. Where uncertainty in these values was considered important and quantifiable it has been included. The investment model then calculates the costs and serviceability for a particular investment strategy. The length of pipe replaced per year in each quinquennium is selected and the pipe groups to be replaced are chosen from a ranked list. An optimiser is used to determine the length replaced per year to give the optimal investment strategy for given constraints and objectives. 6.2.5.5 Uncertainty Uncertainty has been quantified around all key inputs to the investment model, including costs and performance models. These uncertainties have been established now and into the future using historic data and analysis. Sensitivity analysis identified those uncertainties B3 – Maintaining Service and Serviceability 2010 Page 87 of 218 5 November Three Valleys Water Final Business Plan which have most impact on output values and effort was concentrated on improving understanding in these areas. Sophisticated statistical techniques have been used in some instances to determine the correct distributions that best represent the uncertainty. The uncertainty analysis is included to provide transparency about the risks carried by the company and by customers rather than relying on mean values, as with past investment analyses. Uncertainty analysis is about trying to quantify those things which may impact on costs or performance which vary, or which are not currently known or understood. It is probable that not all uncertainties have been included. However, those effects which have been identified as significant and those which have historically been significant have been included. Past climatic variation has been assessed but there may be an extreme year or effects due to climate change that leads to annual bursts lying outside the range predicted. Uncertainty analysis is an ongoing area of development in investment planning. It is included in distribution mains analysis to inform decision making and help understand the true risk carried. We will continue to develop and improve our understanding of uncertainty and its implications into AMP5. 6.2.5.6 Step 5: investment optimisation There are many possible combinations of objectives and constraints and the inclusion of uncertainty allows each to be set for various levels of confidence. Scenario planning is used to select between minimising private cost NPV (cost efficient) or cost benefit NPV (cost beneficial) and constraints on serviceability and investment. The groups and their characteristics are analysed in the investment model, along with associated data from the communication pipe model (see Section 7.2 of this document) and the characteristics of a generic replacement pipe. Cost data, both private and benefit costs for performance measures and other effects of bursts – such as call centre costs – are input into the investment model. Where uncertainty in these values was considered important or quantifiable it has been included. The investment model takes all these inputs and calculates the resultant burst, cost and serviceability of a particular investment strategy. Each pipe group can be replaced in any of the 40 years – or not at all. An optimiser is used to determine the replacement year to provide the optimal investment strategy for given constraints and objectives. The optimiser will find the optimal solution for the scenario it has been presented with. This includes achieving an objective and any necessary constraints. Objective: The investment model is set-up to include both private and benefit costs and thus the optimiser can be asked to minimise private cost NPV (to give the lowest whole-life cost solution) or to minimise the overall NPV, including quantified benefits of replacement on customers and the environment (to give the whole-life cost beneficial solution). Only a single objective can be set for each optimisation. Constraints: These can be placed on serviceability (e.g. maintain a constant number of bursts year on year) and on investment (e.g. maximum difference in replacement length from one year to the next – to account for the practicalities of implementation). Multiple constraints can be set for each optimisation. Both the objective and the constraints can contain uncertainty. Thus the required percentile can be selected, not just the mean value. For example, to be 80% certain of reaching a burst B3 – Maintaining Service and Serviceability 2010 Page 88 of 218 5 November Three Valleys Water Final Business Plan target the constraint on bursts would be set as the 80th percentile of the cell containing the burst value. There are uncertainties with predicting the effects of both short term environment changes and long term burst forecasts. We capture this in the modelling output, mainly through differences in the probability of bursts for each pipe associated with the cohort parameters of that pipe and its burst history. It does not account for short term variations in the weather and the environment but sets certainty limits for the long term behaviour of the network. Several scenarios are selected and optimised to explore the marginal costs and benefits of different mains renewal strategies. With our planned objectives of maintaining service and serviceability at least cost, the investment model is optimised for each scenario and the outputs for each year from 2010-50 calculated; namely groups and length replaced, resultant costs and forecast serviceability. 6.3 Targeting mains renewal The modelling process identifies those pipes or groups of pipes with the highest probability of failure. Pipes are not selected using only their historical burst rate as this can bias selection to short lengths of pipe with historical bursts. Instead, by using the grouping method and ranking these, cohorts of pipes with the highest probability of bursting are selected in given zones. In effect, it measures km/burst and helps target renewal to the right areas. This modelling is carried out for all distribution pipes and gives overall costs and areas for which to target renewal, so providing good value to customers. From the modelling process our scheme designers are provided with a GIS shape file of the mains selected on the grounds of high burst probability. The information supplied includes pipe attributes (size, material, year laid etc.), burst forecasts from the burst model and the year the pipe group is selected for renewal. Using more detailed information on burst history, soil parameters, pipe material and age, we construct renewal schemes that encompass the pipes selected. We include link or ‘infill’ pipes of the same material, age and soil surround so that these will not fail when their neighbouring pipes are renewed. We then carry out a detailed hydraulic analysis of the scheme using our all mains hydraulic models to make sure we are rationalising the network for the 21st Century and not just accepting a like for like renewal. We seek the views of our operational staff so that valve access arrangements and local supply issues are addressed. By using models and the process described above, we can at any stage identify areas of renewal interest and discuss our programme with relevant Highway Authorities and customer focus groups. This open communication with interested parties is helping us to implement our proposals more effectively. 6.4 Results 6.4.1 Impact on serviceability The Ofwat reference level is set at 3746 bursts for AMP5 and continues for AMP6. It includes the leakage allowance agreed with Ofwat in 2007 as we continue to drive leakage down by 2 Ml/d per annum in each quinquennia. We can achieve the reference level for bursts in AMP5 by renewing at different rates and with different certainties. Figure B3 : 34 below, illustrates B3 – Maintaining Service and Serviceability 2010 Page 89 of 218 5 November Three Valleys Water Final Business Plan the relationship between our renewal rate and the time taken to meet the burst target at 50 % certainty. Figure B3 : 34 Time taken to reach reference level with different renewal rates No. of years to meet the bursts target Minimum renewal rate to ever meet the burst target 14 12 10 Years 8 6 4 2 0 0 50 100 150 200 250 300 Renewal rate ( km/year) Renewal rates greater than 107km/yr will reduce burst rate levels from the current position. Below this level bursts are estimated to rise as the mains deteriorate. The graph shows that although greater renewal rates reduce the time taken to meet the reference level, there is a reduced benefit as we renew pipes which are in a better condition. Using the investment modelling process, we calculate that we need to renew at a rate of 126km/yr to achieve the reference level between 2014 and 2015 at 50% certainty. (Objective: minimise NPV. Constraints: achieve burst target with 50% certainty by 2015, same renewal rate each year. Result: 148km/yr replacement, and replacement pipe groups identified for each year.) We compared this rate against a number of other options reflecting current and past renewal rates and with two other options giving an increase in activity. All the options are: • an increased renewal rate at 148km/yr as included in the Draft Business Plan • current renewal rate as for AMP4 with no uplift at 126km/yr • renewal rate carried out in AMP3 at 65km/yr • renewal rate of 1.25% of the network at 176km/yr chosen to assess the sensitivity of substantial uplifts in expenditure. These options were run through the investment model to select pipes for renewal and show resulting serviceability, costs and their uncertainties. As the renewal rate is set, the investment model simply calculates the consequences of selected renewals. This provides transparency as to the effects of the renewal rate decision and identifies the pipe groups to be replaced. B3 – Maintaining Service and Serviceability 2010 Page 90 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 35 below, sets out the average burst profile for the different options over the AMP5 and AMP6 periods. The do nothing option is also included to show absolute changes in bursts saved for each option. Figure B3 : 35 Number of bursts for different renewal scenarios Historical 126km p.a. for 40 years Upper Do nothing 148km p.a. for 40 years Lower 65km p.a. for 40 years 176km p.a. for 40 years Target Number of Bursts 5000 4000 3000 2000 1000 19 18 20 17 20 16 20 15 20 14 20 13 20 12 20 11 20 10 20 09 20 07 08 20 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 20 98 19 19 19 97 0 Using the AMP3 rate of 65km/yr, bursts steadily rise. By continuing with our current renewal rate of 126km/yr we reduce bursts to below 4000 for a number of years, but the rate of bursts gradually increases again at around 2030. This long-tem behaviour is shown in Figure B3 : 36 below. Renewing at 126km/yr will however meet a reference level of 3800 (including the leakage allowance) by the end of AMP5. This is the level we have used for our planning objective. B3 – Maintaining Service and Serviceability 2010 Page 91 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 36 Long term impact on bursts Historical 148km p.a. for 40 years Lower 126km p.a. for 40 years Upper Ofwat Target 9000 8000 Number of Burst 7000 6000 5000 4688 4000 3000 2713 2000 1000 2049 2047 2045 2043 2041 2039 2037 2035 2033 2031 2029 2027 2025 2023 2021 2019 2017 2015 2013 2011 2009 2007 2005 2003 2001 1999 1997 0 The certainty of achieving burst levels within the stable bands in the medium and long term for the 126km/yr option is shown in Figure B3 : 37. The short term uncertainty is best illustrated by the events of 2003 when we experienced a long hot and dry summer followed by a relatively wet autumn when bursts increased significantly. It was followed by a reduction in bursts the following year. This level of uncertainty will prevail until substantial proportions of the network are renewed and our pipe assets become less susceptible to environmental changes. The graph shows we can never be 100% certain of being within the control limits for stable serviceability during the next AMP period, especially over the next few years. However, with reducing burst levels this variability also drops, so that by 2030 – with a further 20% of our mains – renewed, we will be 63% sure of being below the current reference level. With sustained investment at 126km/yr the expected bursts rate heads downwards to a minimum at around the year 2030. The rate then proceeds to rise steadily, suggesting that 126km/yr may not be a sustainable rate of renewal in the long-term. However, we have barely three years of data arising from the higher rate of activity started in this AMP period, which is insignificant in the context of influencing the underlying serviceability of a network that has some mains that are over 100 years old. We think that by PR14 we will have sufficient data to judge with more certainty about the need for further increases in activity in the future. The short term benefit of this approach is that there will be less pressure on customer bills at this price review. B3 – Maintaining Service and Serviceability 2010 Page 92 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 37 Uncertainty levels for bursts forecast based on 126km renewed per annum 4% Upper Mean (50%) Lower 99% Target Historical 63% 6000 99% Annual Bursts (Nr) 5000 63% 4000 Target 3746 Mean (50%) 4% 3000 2000 1000 0 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Each group of mains has a serviceability impact in terms of interruptions (>6hrs), water quality and poor pressure. The selection and targeting of mains which are in the poorest condition maintains our current very good performance in these areas. A reduction in bursts necessarily means less intervention on the network and the reduced likelihood of an event happening. Both renewal rate options ensure that we do not increase the risk to serviceability of the network. We continue to monitor the effects on leakage through a maintenance campaign but early results show that by targeting bursts, zones are also improved in terms of leakage levels and leakage repair activity. 6.4.2 The impact on customers Bursts have a direct link to the service we provide to our customers. Reducing bursts rates through improving the network reduces the need for intervention on the network and the risk of interruptions and the possibility of water quality failures, mainly through discolouration. A more robust network reduces the likelihood of burst outbreaks caused through extremes in weather and changes to the pipe environment. While we can respond quickly to these outbreaks by putting in place special measures, delays are inevitable and affect our level of service. Customers and other stakeholders regard the reduction of negative environmental effects as something that should be a high priority. Bursts, especially in winter, lead to increases in leakage – independent of leakage levels prior to the outbreak. The durations that our customers are without water or have lower pressure are minimised mainly through our operational response. However, a small number of interruptions occur that last more than six hours (DG3>6hrs). Through our analysis, we estimate that our current levels of DG3>6hrs will increase by about 20% during the next two AMP periods if we adopt a fail and fix policy. By renewing mains in the poorest condition at current rates (126km/yr) interruptions that last a long time are kept at current low levels, as illustrated in Figure B3 : 38 below. B3 – Maintaining Service and Serviceability 2010 Page 93 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 38 Impact of mains renewal on interruptions to supply Do Nothing 126km pa 2.5 Normalised DG3 >6 hours 2 1.5 1 0.5 6.4.3 48 44 42 46 20 20 20 20 40 36 34 32 38 20 20 20 20 20 28 26 24 22 20 18 30 20 20 20 20 20 20 20 14 12 16 20 20 20 20 10 0 Cost benefit analysis We have evaluated the total costs associated with maintaining and repairing our network for both the 126km/yr and 148km/yr renewal scenarios. The cost profiles are calculated from the modelling process using different scenarios. These calculate burst rates, reactive repair costs, environmental and social costs associated with planned renewal schemes; reactive repairs and repair or replacement of communication pipes and stop taps as part of a leakage campaign. The costs and cost drivers used in the investment modelling process are consistent with those used in the CBA valuation tool to establish the cost benefit of the programme as a whole. Full details of the cost benefit analysis and the valuation tool are presented in Section C8. To reflect customer priorities, the CBA valuation tool also includes customer willingness to pay values against interruptions to supply, water saved and discolouration. The results from the CBA valuation tool indicate that mains renewal schemes are heavily cost beneficial. This equates with the strong customer preference not to have unplanned interruptions to supply. For example, the 40-year NPV calculation for a constant level of mains renewal of 126km/yr shows a net outcome of £373 million benefit. The cost data utilised by the investment model is shown below in Table B3 : 19. Table B3 : 19 Mains investment model cost data Activity Value used Mains renewal Unit costs used for each environment, diameter and technique identified from pipe selection process CP renewal Unit costs used for pipes identified for each renewal group Mains repair Unit cost from operational finance system (£1304) Stop tap repair As part of leakage detection (£313) B3 – Maintaining Service and Serviceability 2010 Page 94 of 218 5 November Three Valleys Water Final Business Plan Cost of water saved Marginal cost of water (RZ1-5 £151.94/Ml, RZ6 £59.56/Ml) Insurance/ consequential damage Based on number of bursts and premiums increasing as bursts increase Detection costs ALC cost curves used in economic level of leakage calculation Public relations costs £8/km of renewal £167.50/burst Output performance measures DG3 (£4.47-£110.01/property depending on duration) Environmental and social costs Unit costs for mains laying and mains repair, including traffic disruption and carbon Water quality aesthetic (£49.60/property) Figure B3 : 39 below shows the cumulative NPV of the different renewal scenarios during a 40-year planning horizon for direct internal and external costs only. It does not include customers’ willingness to pay to avoid deterioration in their service. The curves depict the economic cost of capital maintenance to achieve the reference level burst target. Figure B3 : 39 Cumulative NPV for 126km/yr and 148km/yr renewals 126 km pa 148 km pa 1,000,000 900,000 Cumulative NPV (£k) 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 6.5 46 44 42 40 38 36 34 48 20 20 20 20 20 20 20 30 28 26 24 22 20 18 16 14 12 32 20 20 20 20 20 20 20 20 20 20 20 20 20 10 0 Programme costs and changes to the Draft Business Plan In the process of preparing the Final Business Plan we have discovered that our Draft Business Plan understated the future cost of our distribution mains renewal programme. This came to light in late 2008 during the assessment of new tenders received after the Draft Business Plan was produced. Unit costs prepared in conjunction with the initial Cost Base Submission in April 2008 using data collected in 2007, were based on some AMP4 actual outturn costs and a number of schemes where initial target costs was the only other data available at the time. These unit costs were then used for the Draft Business Plan programme. Since the Draft Business Plan we have re-analysed unit cost data for schemes now completed in AMP4 and with final B3 – Maintaining Service and Serviceability 2010 Page 95 of 218 5 November Three Valleys Water Final Business Plan payment certificates. This shows that the Draft Business Plan unit costs were understated on average by around 20%. This is explained in more detail in section C2. In establishing our unit costs for costing the Final Business Plan distribution mains renewal programme, we have also considered those factors not captured in the updated outturn unit costs that will make the future different for our AMP5 programme. The proportion of urban work in the future programme is increasing so the historic pricing levels have been reviewed in respect of:• the risk of the AMP4 programme outturns being under-costed, • their relative applicability to the AMP5 programme, • recent legislative changes that will impact on future costs. Our programme management team and cost consultant have held a risk review workshop to consider the above issues in order to quantify how these are likely to impact on the AMP5 mains renewal programme costs relative to the actual costs for the AMP4 programme. These risks can be grouped as follows:(a) Final Business Plan unit costs (based on AMP4 historic data) where:o o o o the final account data not yet available, year 1 of the AMP4 programme (2005-06) resulted in contractor losses that are not included in the outturn costs, the local waste disposal sites are becoming more distant from our area and as such causing costs to increase the communication pipes renewal costs were from the early part of the programme and known to be loss making for the contractor (b) Final Business Plan unit costs (applicability to greater proportion in an urban environment leading to changes to technique types deployed that have not been fully captured within the current unit costs) where there will be:o o o o o an increase in project management, commercial management, and additional costs incurred for our customer service technicians, additional highway restrictions in urban areas, future costs that are impacted by neighbouring utility organisations undertaking larger work programmes in our region, a greater proportion that is in an urban environment leading to increased costs because of a higher service density, and working hour restrictions. The impact of these issues is not fully factored into the current AMP4 data set. Impacts on contractors ability to achieve open cut and urban programme and because the current supply chain has extensive background in ‘no dig techniques’ and less experience in ‘open cut’ in an urban environment. Furthermore, when we consider the current ratio of Urban/Suburban to open cut we find that for every 1% of Urban/Suburban work, 0.516% would be open cut. This is a greater proportion than is currently calculated from our analysis of completed schemes in AMP4, and as such shows that a risk exists in the choice of technique moving forward into AMP5 B3 – Maintaining Service and Serviceability 2010 Page 96 of 218 5 November Three Valleys Water Final Business Plan (c) Final Business Plan unit costs (the impact of recent changes to legislation that have not been fully captured in cost terms within the current data set):o o additional requirements of the Waste Management Act requiring more professional resource to execute the requirements that has recently come into effect, additional requirements of the Traffic Management Act that has recently been introduced and more vigorously imposed by local authorities, These factors that make the future different have an overall additional effect of 11% on our Final Business Plan mains renewal programme costs. The main cost drivers of mains renewal are location and environment – especially the degree of urbanisation, variation in road type and location (whether in the road or pavement); the property density, seen as the number of service transfers and the technique adopted for renewal. We use our predictive tools to produce a programme of work defined by the location, whether in urban, sub-urban or rural environments and the diameter and length of each pipe in scheme groups. We combine this scheme information with unit costs for categories of environment, technique and diameter and produce a cost estimate of our programme of work for AMP5. It includes all transfers of service, but not communication pipe renewal, as part of the renewal scheme. Numbers and costs for this work are set out in Section 7. For our Draft Business Plan we estimated that a renewal rate of 148km/yr would cost £118 million. Following the change in renewal length from 148km/year to 126km/year, correction of the understatement of unit costs in the Draft Business Plan, updating of the mix and technique for the Final Business Plan and additional factors to reflect a different future, the overall estimate for AMP5 is £120 million. This gives an average unit cost of £190/m which we understand benchmarks favourably with unit costs for other water companies in our region. This evolution is summarised below in Table B3 : 20. Table B3 : 20 Evolution of Mains renewal programme costs from Draft Business Plan to Final Business Plan Draft Business Plan (148km/yr) Draft Business Plan (126km/yr) Final Business Plan – revision of unit costs by +19.37% (126km/yr) Final Business Plan – revision of mix and technique (126km/yr) Final Business Plan – inclusion of ‘future is different’ factors (126km/yr) Final Business Plan (126km/yr) £118.0 million £100.5 million £119.9 million £108.1 million £120.0 million £120.0 million B3 – Maintaining Service and Serviceability 2010 Page 97 of 218 5 November Three Valleys Water Final Business Plan 6.6 Summary Asset group: distribution mains The problem • Pipe cohorts, a high proportion of which are in highly aggressive London Clays are susceptible to changes in the environment. This leads to increasingly unacceptable levels of bursts therefore interrupting supplies to customers, increasing the probability of poor water quality and leakage. Planning objective • Maintaining the current high standard of service (DG3, DG2, zone compliance) to our customers from the network. • Maintaining serviceability in terms of bursts by reducing burst numbers to the reference level by 2015 at 50% certainty. • Providing subsidiary benefits through some reduction in NRR for leakage. Data and analysis • GIS pipe attribute information, works management (failure information), hydraulic and criticality models, condition data from 4400 pipe samples and unit costs used to build a forward looking investment model optimised to achieve the serviceability requirements. • Burst prediction modelling improved from PR04 using increased data set, new calibration and incorporating uncertainty into the analysis. • Customer impact is measured using Opticritical software on all mains hydraulic models supported by actual DG3 and water quality performance. • Cost benefit analysis using operational performance measures used to validate the cost effective approach to meeting serviceability targets. • Benefits realisation studies are carried out through leakage and burst activity investigations using before and after renewal surveys to check against strategy adopted. The solution • Continuation of the current AMP4 rate of renewal of 126km/yr to meet a reference level of 3800 bursts by 2015. • Renewal concentrated on groups of poor condition pipes developed into well planned schemes with 60% in the urban areas of North London. Cost and cost identification • The investment modelling process identifies the main cost drivers of where (DMA and environment), when (AMP period) and likely diameter to be renewed. Distribution mains renewal @126km/yr £119,985,000 Cost benefit analysis • Overall the programme is cost beneficial when taking account of direct and indirect costs and customer willingness to pay. How has this project changed since the Draft Business Plan? • We have reduced the scope from 148km/yr to 126km/yr to take account of affordability and benefits for customers and an acceptable balance of risk between them and our ability to deliver our planning objectives. B3 – Maintaining Service and Serviceability 2010 Page 98 of 218 5 November Three Valleys Water Final Business Plan 7 Our plan for infrastructure assets: service pipes and fittings 7.1 Introduction Service pipes comprise our communication pipes and customer’s supply pipes. The installation incorporates our stopcock. We take account of our responsibilities and supply pipe policy in this section. Maintenance of these assets is carried out either through planned programmes of work, such as renewal with the distribution system or through reactive activity associated with leakage detection and repair. This represents a considerable proportion of our overall expenditure on maintenance. This section sets out the extent to which we have improved our understanding of communication pipe assets since PR04. Comprehensive data sets for our communication pipes have been assembled and these have significantly improved our knowledge of this asset. By combining these with observed failures for the past seven years, a forward-looking risk-based approach has been developed. Our reactive replacement of stop taps arises from leakage activity and the detection of leaks on or around the stop tap and boundary box. Analysis is made on future expenditure based on current practise and our expectation of future activity. 7.2 Communication pipes 7.2.1 Methodology – condition and performance Since PR04, we have developed and improved our data collection procedures, together with testing, analysis, condition and performance modelling of the distribution network to incorporate communication pipes into our application of the CMPCF for infrastructure assets. During the past three years we have undertaken a major project, to collate and analyse our property record information. Table B3 : 21 below, shows the asset stock as now estimated. Table B3 : 21 Communication pipe asset stock by material Material No. of assets % of stock Lead 289,469 34% Galvanised iron 240,132 29% Copper 63,908 8% Black polyethylene 131,317 15% MDPE 123,065 14% Total 847,891 This total can be compared with the 1.26 million customers supplied by the network. It is an improved evaluation of the asset stock. The result is a significant reduction from the number of communication pipes that were thought to be in service at PR04 (1,041,872). B3 – Maintaining Service and Serviceability 2010 Page 99 of 218 5 November Three Valleys Water Final Business Plan This reduction is principally due to the more accurate characterisation of the number of shared supplies, as detailed in Section C3 Asset Inventory. Reactive repair and maintenance data was obtained from our WMIS job management system covering the period 2000-07. This identified all the failures that occurred and whether each one resulted in the pipe being repaired or replaced. A methodology has been derived to characterise communication pipes and to model their deterioration and service failure, on a top-down, bottom-up basis. The approach used is the same in principle for all material types and is applied on a class-by-class basis, allowing for different modes and rates of deterioration. We have ensured that the key principles employed for this analysis are compatible with the CMPCF, and most likely fall into Category 1b as defined by the Capital Maintenance Planning Common Framework: Review of Current Practice, UKWIR report 05/R6/05/14. The approach assesses service risk, based upon an analysis of asset data, in conjunction with recorded failure data. To achieve this goal, a mathematical model has been set up to replicate the likelihood of current failure events and to forecast future levels up to the year 2050. The approach takes into account the effects of intervention (i.e. repair or replacement) on successive assets and their behaviour. The failure model developed for communication pipes is based on the same core analytical engine as the failure model developed for trunk mains. The implementation of each is tailored to the specific nature and available data of the asset type. Both models have been developed in collaboration with the consultant Faber Maunsell. We use the model to look at different strategies in terms of the ratio of repair to replacement of failing assets and the proactive renewal of pipes in conjunction with distribution mains. The output from the model consists of predicted failures with sets of annual costs for repair and replacement on failure, together with options for proactive renewal in conjunction with distribution mains. At any particular time during the period for which failure records are available, various aspects describe the deterioration behaviour of a set of communication pipes. • Failure at commissioning, due to deterioration, is zero. • Deterioration develops over time and for each class tends to follow a smooth continuous ‘S’ type of curve, which can be generally described as follows: o it has zero slope at the time of commissioning o it takes a number of years before the onset of any significant number of failures due to deterioration o after the onset of failure, there tends to be a gradual increase in the trend. in effect, the rate of increase in probability of failure becomes approximately constant o as the pipe reaches ‘very old age’ the majority of pipes in the same class have failed, and the rate of change in probability of failure slackens off, leaving a small residual remaining in a serviceable state for a notable period of time. In order to achieve the optimum fit of the deterioration curve to the observed data, some of the constraints above are occasionally relaxed. For example, the deterioration curve for MDPE in Figure B3 : 42 has been de-constrained such that it does not have to start exactly B3 – Maintaining Service and Serviceability 2010 Page 100 of 218 5 November Three Valleys Water Final Business Plan at 100% at zero years. This has allowed a much better fit of the function over the majority of the life of the asset group. This type of deterioration curve can be modelled using a Weibull distribution plot, which is often used for reliability modelling. It has been applied here in a specially modified basis. Weibull has been typically applied to ‘non-repairable’ failure modes, i.e. only to component replacement. In this implementation however, the analysis has been developed to take account of both pipe repair and replacement. When a pipe is ‘repaired’ it remains in the asset stock with the same future chance of failure as its peers. An accounting procedure has been formulated to allow for the inclusion of this repairable failure mode. When a communication pipe is ‘replaced’ due to failure, allowance needs to be made for a new pipe being commissioned in the year of failure and the material used. For example, say that three lead pipes installed in 1925 fail in 2000. The 1925 commissioned asset stock is automatically reduced by this amount by the Weibull distribution. These 75-year-old pipes are replaced during 2000 and the base asset stock numbers commissioned in that year must be increased by three. We also take account of the change in materials. In this example the 1925 lead pipe will be replaced in 2000 by MDPE. This how each asset is always accounted for – even when it has been replaced by a different material. The modelling process is based on the following premises. • The three-parameter Weibull distribution (η – scale parameter or characteristic life, β – shape parameter and γ – location parameter or time delay) provides enough flexibility to adequately model the deterioration behaviour of all types of communication pipes. • Optimisation using a numerical analysis technique (i.e. the method of least squares) is a valid optimisation technique. • The inclusion of feedback is essential; this occurs in a number of modes: o when a pipe fails and is replaced, the replacement pipe is treated as a new asset with its commissioning date in the same year as the failure o when a pipe is renewed for other reasons, the pipe is also treated as a new asset with a commissioning date in the year of renewal o wll replacement and renewed pipes take account of the probable changes of the replacement pipe material. The calibration of the Weibull distribution is assessed using an optimisation procedure, which has been developed to determine the most likely set of deterioration curves for each respective categorisation of material. The Weibull parameters are calibrated to achieve an optimum comparison (method of least squares) between the modelled failure rate and the number of recorded failures, for each birth year, as shown below in Figure B3 : 40 for galvanised iron. B3 – Maintaining Service and Serviceability 2010 Page 101 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 40 Correlation between modelled and recorded failures for the galvanised iron part of the asset stock (1920+) TOTAL Regression Line R2 = 0.9475 900 Modelled Number of Failures 800 700 600 500 400 300 200 100 0 0 100 200 300 400 500 600 700 800 900 Recorded Number of Failures The cumulative Weibull distribution provides the reliability of an asset (within a class) over a range of ages. At a general asset age of N years, the reliability is RN and the cumulative likelihood of its failure (or ’unreliability’) is (1 - RN). To support the statistical modelling approach to failure prediction we have also carried out extensive sampling of our in-situ communication pipes, including 80 samples where we have measured thickness using a laser measuring device to measure wall thickness and derive thickness contours. A typical sample for galvanised iron is illustrated below in Figure B3 : 41 The thickness of the original material has reduced significantly, leaving the remaining pipe very brittle. When new the pipe would have 100% of its profile on the right-hand side of the chart, i.e. its entire thickness would have been 3.1mm. B3 – Maintaining Service and Serviceability 2010 Page 102 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 41 Galvanised iron communication pipe sample, thickness assessed using laser profilometry As the pipe decays it produces a friable corrosion product that surrounds the original material and helps maintain some of the pipe’s integrity, as depicted in the reliability curves shown below in Figure B3 : 42. Galvanised iron has a similar reliability curve to lead. However, this corrosion product is often destroyed when the pipe is disturbed, such as when connecting it to a new main or undertaking a repair. At best, the serviceability of the remaining communication pipe is significantly reduced, and often a connection cannot be made, requiring the pipe to be replaced. The modelling process takes account of historic failures and the subsequent replacement of assets with different materials, depending upon the year of failure and the location. The result of this ‘migration model’ is an estimate of the current asset stock by material. First, the curves are applied to the asset stock as originally installed. For each pipe material/soil risk combination, the assets are deteriorated by the model, with failing assets being reintroduced as repaired (i.e. same material with the same age) or replaced by a new asset of the appropriate material for the year of failure. This results in a calculated current asset stock, where each asset is assigned a probability of being a particular material. The strategy component of the model is then run, which applies the deterioration curves to the current asset stock to determine the probability of an asset failing in a given year, from 2010-50. Coupled with this forecast of pipe failures are rules for each material regarding the ratio of failures that are repaired or replaced, and options for proactive renewal of pipes in conjunction with distribution mains. These are combined to produce alternate strategies. The financial output from the model consists of a set of results for each strategy containing, for each year from 2010-50, a forecast of: • predicted number of pipe failures (bursts) • opex maintenance costs (pipe repairs) B3 – Maintaining Service and Serviceability 2010 Page 103 of 218 5 November Three Valleys Water Final Business Plan • capex maintenance costs (pipe replacements) • capex investment costs (pipe renewals) • social and environmental costs. These results are calculated at individual asset level and then aggregated at pipe group level (as used by the distribution mains investment model) at zone and company levels. Strategy options are compared to a ‘fail and fix’ base case. The strategies examined for proactive renewal were modelled through the renewal of communication pipes associated with distribution mains schemes where: • pipe material is galvanised iron or is in a road designated as traffic sensitive • all materials except lead and medium density polyethylene (MDPE) • all materials except MDPE • all materials. 7.2.2 Results The results from the analysis for communication pipes include the deterioration curves shown below in Figure B3 : 42 Figure B3 : 42 Reliability graph for communication pipes by material Lead Copper Medium Density Polyethylene Galvanised Iron Black Polyethylene 100% 90% 80% Reliability % 70% 60% 50% 40% 30% 20% 10% 0% 0 20 40 60 80 100 120 140 160 180 200 Age / Years The graph shows that the two predominant materials of galvanised iron (GI) and lead (Pb), which comprise more than 60% of our asset stock, have fairly similar reliability curves. It shows that when these assets reach ages of 60 years and 50 years respectively, they have a 20% chance of having failed and continue to deteriorate at about 7-10% every 10 years. We know from our sample analysis that failure of lead pipes is mainly at the joints and not the pipe wall. Repairs can effectively be carried out by replacing the joint. We have ascertained that 75% of our galvanised iron communication pipes were laid between the 1930s and the B3 – Maintaining Service and Serviceability 2010 Page 104 of 218 5 November Three Valleys Water Final Business Plan 1960s and a further 23% are older, although a small proportion have been replaced with more modern materials following failure. Galvanised iron pipes corrode significantly over the course of their lives and the corrosion is often displaced when the pipe is disturbed, such as when connecting it to a new main, undertaking a repair or installing a meter. This disturbance can create issues for the customer’s supply pipe which is usually of the same material. The serviceability of the remaining communication pipe is significantly reduced with repeat repairs. Often a connection cannot be made, requiring the pipe to be replaced. The whole life costs for the different levels of intervention indicate that wholesale renewal of all communication pipes is not cost effective at this time. The current differential between proactive renewal and reactive repair/replacement unit costs is not large enough to promote blanket renewal. In many cases our galvanised iron stock cannot be repaired effectively and repeat repairs with consequent disturbance to customers will result. We therefore propose to follow a common sense strategy and take the opportunity to replace our galvanised iron communication pipes with our renewal schemes. Similarly, communication pipes located in traffic-sensitive streets, as designated under the New Roads and Street Works Act, should also be replaced when conducting mains renewals. This will minimise the possibility of future disruption to critical parts of the transport infrastructure. Combining this strategy with a distribution mains renewal programme of 126km/yr results in a total spend of £5.1 million in AMP5, and will lead to the renewal of 12,600 communication pipes. Table B3 : 22 Activity and cost profile for communication pipe renewal as part of mains renewal 7.2.3 Number of pipes to be pro-actively renewed Cost (£m) AMP5 12,600 5.082 AMP6 14,900 6.010 Reactive replacement of communication pipes The model described above is a sophisticated predictive tool that assesses the future behaviour of our communication pipe asset stock. We can use it with a good degree of confidence for assessing behaviour over a long term planning horizon, as is the case for looking at pro-active mains renewals, where decisions are based on net present valuations during the 40-year period 2010-49. For reactive maintenance however, the effective planning horizon is very short – immediate expenditure in each of the next five years. The nature of the model does not lend itself to reliably predicting exact failure numbers over such a short timescale. As each year passes more failure data will be accumulated and the short-term capability of the model will increase. It is likely that the failure data collected over the next five years, together with further mathematical refinements, may be enough to make the model valid for short-term predictions. It is more appropriate to base our reactive maintenance predictions on recent expenditure. The reactive capital maintenance expenditure on communication pipes accounts for those cases where a failed pipe is replaced rather than repaired. The decision on whether to replace or repair is a pragmatic one made by the member of field staff responsible for the work. The two key influencing factors are explained below :B3 – Maintaining Service and Serviceability 2010 Page 105 of 218 5 November Three Valleys Water Final Business Plan . • Condition – if the pipe is severely degraded then replacement is the only sensible option as it would continue to fail. With materials such as galvanised iron it is often not possible to repair as there is no sound part to apply the repair to. • Cost – replacement may be the cheaper option if trying to locate the point of failure (in order to effect a repair) would require digging multiple trial holes rather than just moleing straight through. If the failure is on a short-side pipe, it may be that most of the pipe’s length has already been exposed during investigation and replacement would be no more expensive than repair. Inevitably, there is a large variation in the cost and complexity of individual jobs that arise from the decision making process described above. Examining expenditure on the activity as a whole is the best way to reliably assess costs and capture the extent of this variability. Historical expenditure on reactive communication pipe replacements is shown below in Table B3 : 23. We foresee a continuation of this level of spend into the future, at £3.9 million a year during the course of AMP5, to a total spend of £19.5 million. Table B3 : 23 Historical expenditure on reactive communication pipe replacements in 2007/08 prices Financial year Total (£m) 7.3 2003/04 2004/05 2005/06 2006/07 2007/08 Average 4.962 4.020 2.959 3.971 3.586 3.900 Stop-tap replacement Our analysis and future projections are based on actual expenditure driven by particular maintenance or operational strategies. External stop-taps require replacement as part of routine reactive maintenance activity. Typically this will be due to: • leakage: usually identified through active leakage control (ALC). • inoperability: identified by the customer or field-staff when use of the stop-tap is required • poor pressure: uncommon, but it is usually due to the stop-tap being inoperable past a certain point of opening. The majority of cases are driven by leakage related activity; 68% of work in the past five years. We will continue our recent level of ALC through AMP5 to continue producing 2 Ml/day reductions each year (our leakage strategy is detailed in Section C4). We envisage a continuation of our recent level of expenditure on stop-tap renewal activity, see Table B3 : 24.below. We expect to spend £3.653 million a year over the course of AMP5, to a total of £18.265 million. Table B3 : 24 Historical expenditure on reactive stop-tap replacements in 2007/08 prices Financial year Total (£m) 2003/04 2004/05 2005/06 2006/07 2007/08 Average 4.829 3.085 2.028 3.952 4.373 3.653 B3 – Maintaining Service and Serviceability 2010 Page 106 of 218 5 November Three Valleys Water Final Business Plan B3 – Maintaining Service and Serviceability 2010 Page 107 of 218 5 November Three Valleys Water Final Business Plan 7.4 Supply pipes Our analysis and future projections are based on our supply pipe renewal policy (also discussed in section C4) which is: “When supply pipe leaks are detected by either a customer or our leakage technicians we have a duty to ensure repairs are undertaken expeditiously. Our policy is to progress all supply pipe leaks to a satisfactory conclusion, through our free repair/subsidised replacement scheme or through waste notice procedures which compel the customer to arrange for a repair.” Our policy ensures we carry out repairs to leaking supply pipes where it is expedient and likely to be effective in the medium term. Our customers told us that they prefer to arrange work on their supply pipe with their own plumber so we no longer carry out renewals ourselves at the subsidised rate but we do encourage customers to replace their supply to the internal stop cock by offering a £100 payment on completion (subject to conditions). This incentive is available to each customer on a joint supply. In parallel with this new policy our process for enforcing waste notices has been enhanced. Our historical expenditure on supply pipe renewals is shown below in Table B3 : 25. We expect our new policy to produce a similar level of spend in subsidies going forwards. It results in a predicted annual spend of £151,000 and a total of £755,000 over the course of AMP5. Table B3 : 25 Historical expenditure on supply pipe replacements in 2007/08 prices Financial year Total (£m) 2003/04 2004/05 2005/06 2006/07 2007/08 Average 0.246 0.236 0.081 0.106 0.084 0.151 B3 – Maintaining Service and Serviceability 2010 Page 108 of 218 5 November Three Valleys Water Final Business Plan 7.5 Summary Asset group: service pipes The problem Planning objective • Asset group including • Maintaining the current high communication pipes, stop taps standard of service (DG3, DG2, and supply pipes that are in poor zone compliance) to our condition but with low customers from the network. consequences of failure. • Meeting a reducing leakage target for AMP5 and AMP6. • Large numbers of assets involved, many of which have • Providing a realistic free repair reached their end of life but still supply pipe policy to our serviceable until disturbed (e.g. customers and responding to through leakage or metering requests for a serviceable stopprogrammes). tap. Data and analysis • Extensive data base of communication pipe stock including historical “plumbing” records, age and material data for communication pipes, works management systems, leakage reporting. Communication pipe deterioration model developed and linked to mains renewal investment process. The solution • Continuation of the current AMP4 find and fix strategy for reactive communication pipes, stop-taps, and supply pipes mainly driven by the leakage reduction target but also responding to customer requests for use of the stop-tap asset and the supply pipe repair policy. • Planned and pragmatic renewal of galvanised iron communication pipes and those in traffic sensitive streets, both as part of the mains renewal programme. Cost and cost identification • Numbers of planned communication pipe renewed defined from investment model. Unit costs are obtained from AMP4 outturn values with additions to scope to represent changes in the AMP5 programme. Average historic costs (2003-04 to 2007-08) are used for expected expenditure on reactive renewal of communication pipes, stop-taps and supply pipes for AMP5 Planned CP replacement £5,082,000 Reactive CP replacement £19,500,000 Reactive stop-tap replacement £18,265,000 Reactive supply pipe replacement £755,000 Cost benefit analysis • Overall it is not cost beneficial to adopt a planned pro-active renewal strategy for service pipes and stop taps. Instead a fix when failed strategy is adopted driven by leakage and response to customer requests. How has this project changed since the Draft Business Plan? • The scope of this work has not changed from the Draft Business Plan. B3 – Maintaining Service and Serviceability 2010 Page 109 of 218 5 November Three Valleys Water Final Business Plan 8 Our plan for non-infrastructure assets: overview The planning objective for our non-infrastructure assets is to maintain stable service to our customers. With the exception of the non-operational asset group, our planning objectives for the maintenance of our non-infrastructure assets are to maintain serviceability to customers and the existing levels of risk in a way that is cost-effective. In the case of the operational asset group we have adopted the cost benefit objective. This has demonstrated that we will have stable serviceability with an optimum balance of costs and benefits. Where we have adopted the cost-effective objective we have also carried out cost benefit analysis (CBA) to understand if projects are beneficial in the wider context of customer willingness to pay and social and environmental benefits. 8.1 Introduction Our non-infrastructure assets comprise both operational and non-operational assets. • Our operational assets consist of 98 treatment works, 95 treated water service reservoirs, 52 treated water towers and 325 pumping stations. • In total we have more than 37,000 assets that require periodic renewal. • Around 40% of our raw water is abstracted from the River Thames in the southern part of our area and treated in four of our largest treatment works at Iver, Egham, Chertsey and Walton. • Once treated, a significant proportion of this flow is pumped north and east through our pumping station, strategic reservoir and trunk main network. • The remaining 60% of our raw water is abstracted from wells and boreholes throughout the region. These range from tiny boreholes abstracting fractions of a megalitre per day (Ml/d) through to our largest groundwater treatment plant at Clay Lane treating up to 160 Ml/d. • Our treatment processes range from the simplest form of disinfection using only a low dose of chlorine, otherwise known as marginal chlorination, through to highly sophisticated systems using complex membrane technologies. Many of these have been installed since 1989 to comply with drinking water regulations and have both extended the number of our assets and made them more complex. • The table below shows the range and complexity of our treatment works. In particular, 37% of our output is treated at works with membrane filtration to guard against cryptosporidium. This is the highest proportion in the industry. B3 – Maintaining Service and Serviceability 2010 Page 110 of 218 5 November Three Valleys Water Final Business Plan Table B3 : 26 Extract from asset inventory for treatment works < 5 Mld 5-24.9 Mld 25-49.9 Mld 50-99.9 Mld > 100 Mld Total SD Treatment works 18 3 1 0 0 22 W1 Treatment works 0 1 0 0 0 1 W2 Treatment works 11 11 0 0 0 22 W3 Treatment works 5 10 1 0 0 16 W4 Treatment works 9 20 2 2 3 36 Where: SD treatment works W1 treatment works Are works providing simple disinfection plus simple physical treatment only (e.g. rapid gravity filtration, slow sand filtration or pressure filtration). Works should be allocated to size bands according to their peak hydraulic capacity. W2 treatment works Are works providing single stage complex physical or chemical treatment (e.g. super chlorination, coagulation, flocculation, bio filtration, pH correction, orthophosphate dosing, softening and membrane filtration) but excluding processes in category W4. Works should be allocated to size bands according to their peak hydraulic capacity. Are works providing more than one stage of complex physical treatment (see examples given in category W2) but excluding processes in category W4. Works should be allocated to size bands according to their peak hydraulic capacity. W3 treatment works W4 treatment works • Are works providing simple disinfection only (e.g. marginal chlorination). Works should be allocated to size bands according to their peak hydraulic capacity. Are works that have processes with very high operating costs (e.g. ozone addition, activated carbon/pesticide removal, UV treatment, arsenic removal and nitrate removal). Works should be allocated to size bands according to their peak hydraulic capacity. Our non-operational assets, also known as ‘management and general’ (M&G) assets consist of those supporting assets required to operate the water business. The principal assets are our IT systems but the class also includes our vehicle fleet, offices, depots and our laboratory. Full details of our portfolio of non-infrastructure assets are set out in Section C3, the Asset Inventory. We have improved considerably our understanding of our non-infrastructure assets in the AMP4 period. This has come about as we have upgraded our asset information systems and our organisational structure in order to apply greater focus on capital maintenance planning. Early in 2008 we completed a re-survey of our non-infrastructure operational assets. This was extremely useful in validating the data; filling gaps in our asset information system and the condition assessments helped us to understand future investment needs for our buildings and large civil structures. 8.2 Historical analysis 8.2.1 Serviceability Our key future objective is to maintain ‘stable’ serviceability for our non-infrastructure assets. Serviceability is measured using numbers of coliforms at treatment works, service reservoirs and water towers and turbidity at treatment works. The historical assessment is shown in the table below. B3 – Maintaining Service and Serviceability 2010 Page 111 of 218 5 November Three Valleys Water Final Business Plan Table B3 : 27 Serviceability assessment for non infrastructure assets Year Serviceability 2000/01 Stable 2001/02 Stable 2002/03 Stable 2003/04 Stable 2004/05 Improving 2005/06 Improving 2006/07 Stable 2007/08 Stable Our performance against the long term average for these individual measures is shown in the figures below. It is clear that for these measures serviceability of the assets has significantly improved during the past 10-15 years. In the past five years the number of failures have been very low with overall trends becoming increasingly sensitive to single individual failures. In 2007 and 2008 there was an increase in the number of coliforms in samples taken from water treatment works. From 2001 to 2006 the average number of coliform detections was four per year, while in 2007 there were 11 and 12 in 2008. The increase in the detection of coliforms does not represent a deterioration in the serviceability of our treatment works. Investigations into the detection of coliforms has either identified the cause as being a contaminated sample point, contamination by the sampler or contamination in the laboratory. Or, where a definitive cause was not identified, the investigation confirmed that the treatment works was operating satisfactorily at the time the sample was taken. Disinfection was not compromised, there was no evidence of any ingress of contamination into the treatment stream and all repeat samples were satisfactory. Our current serviceability is stable but we are mindful that every failure is cause for concern. As we wrote in our Strategic Direction Statement, “The key to reliable supply is maintenance” and we are not complacent about continuing to apply the correct level of maintenance to our assets. Inadequate maintenance levels will result in increases in risk. This will eventually have implications for our customers – whether from failures in water quality or interruptions to supply. B3 – Maintaining Service and Serviceability 2010 Page 112 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 43 Coliforms at water treatment works; ratio of [actual number. of water treatment works with coliforms detected] to [long term annual average] 4.0 Ratio to average Compliance Rate 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0.0 Figure B3 : 44 Coliforms at service reservoirs and towers; ratio of [actual number of SRs and WTs with coliforms detected in more than 5% of tests] to [long term average] 12.0 Ratio to average Compliance Rate 10.0 8.0 6.0 4.0 2.0 B3 – Maintaining Service and Serviceability 2010 Page 113 of 218 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0.0 5 November Three Valleys Water Final Business Plan Figure B3 : 45 Turbidity at treatment works; ratio of [number of water treatment works with turbidity 95 percentile > 0.5NTU] to [long term annual average] 8.0 Ratio to average Compliance Rate 7.0 6.0 5.0 4.0 3.0 2.0 1.0 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 0.0 In addition to the measures used for regulatory reporting we monitor a number of other performance trends that help inform us of the state of our non-infrastructure assets. These include availability of sources and booster pumping stations and the quantity of plant ‘at risk’ at any given time. Our modelling uses sub-threshold indicators for chemical and biological water quality, water quality aesthetics, decreased/poor pressure, supply interruptions and health and safety. 8.2.2 Costs and activity In our 2004 Final Business Plan we made the case for spending £137 million (2007/08 prices) on MNI in AMP4. In the final determination after making an adjustment to the uplift, Ofwat allowed £123 million (2007/08 prices). This level of expenditure is low relative to other companies, as shown in the graph in Figure B3 : 46. We accepted the Final Determination but knew we were going to have to spend more on MNI in future AMPs as assets installed during the 1990s come up for replacement for the first time. B3 – Maintaining Service and Serviceability 2010 Page 114 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 46 Comparison of TVW PR04 final determination with other companies on a per property basis 35.00 £/property/annum 30.00 25.00 20.00 15.00 10.00 Wessex Dee Valley South West Sutton & East Surrey B&WH THWS Mid Kent Anglian Southern FDWS Thames Yorkshire UU Northumbrian South East Bristol TVW Welsh South Staffs Cambridge Portsmouth 0.00 Severn Trent 5.00 We have carried out work during AMP4 in five different activity areas: • base maintenance of operational assets – maintenance required to keep our water supply systems operating; typically as a result of asset deterioration or failure • base maintenance of IT assets – keeping our critical information systems operating • base maintenance of business support activities – the activities we need to carry out so that we can effectively manage our assets (e.g. reservoir inspections, leakage detection equipment etc) • specific programmes of work – to deliver a defined output (e.g. domestic meter replacements) • specific asset renewals – where, as a result of deterioration, we need to replace an existing asset, generally ‘lumpy’ expenditure (e.g. building refurbishments). Our strategy for AMP4 has been to maintain our treatment works, booster stations, storage reservoirs and towers using a risk-based approach. We have monitored the performance of our mechanical and electrical assets and where required performance levels have not been met, we have implemented solutions on a priority basis, using probability and consequence of failure. We have continued to monitor the condition of our civil structures by physical inspection, where appropriate, and where remedial work has been identified we have carried it out on a priority based on the likelihood and implications of failure. We expect to spend £136 million on MNI, compared with a final determination allowance of £123 million (2007/08 prices). Around 60% of our MNI expenditure in AMP4 has been spent on base maintenance of our operational assets. Base maintenance of our IT assets has absorbed another 13%. We have spent 5% on the specific programmes of work to replace our failed domestic meters and to upgrade our disinfection plant from marginal to full B3 – Maintaining Service and Serviceability 2010 Page 115 of 218 5 November Three Valleys Water Final Business Plan chlorination. We have invested significantly in three specific asset renewals; an additional contact tank at our principal treatment works at Iver; refurbishment of our laboratory at Staines and the fit-out of our new office building at Hatfield. These investments have used 13% of MNI. Expenditure on business support activities such as vehicles, security, essential equipment for leakage detection and our reservoir inspection programme, has taken the remaining 9%. A breakdown of cost by activity is shown below in Table B3 : 28. Table B3 : 28 Cost by activity in AMP4 Activity Cost AMP4 (£m) Base maintenance of operational assets Base maintenance of IT assets Base maintenance of business support activities Specific programmes of work Specific asset renewals 81.0 18.2 11.8 7.1 17.4 Total B3 – Maintaining Service and Serviceability 2010 Page 116 of 218 135.5 5 November Three Valleys Water Final Business Plan We updated the historical analysis undertaken by Mott MacDonald for Ofwat at PR04. This outline of historical expenditure (both capex and opex) against serviceability measures is shown below in Figure B3 : 47. The low absolute levels of compliance failure make it difficult for any meaningful conclusion to be drawn. There is no clear correlation between expenditure and serviceability measures. This absence of relationship requires us to look at alternative serviceability measures – hence our use of the measures ‘plant availability’ and ‘at risk’ and the use of sub-threshold indicators for chemical and biological water quality, water quality aesthetics, decreased/poor pressure, supply interruptions and health and safety. Figure B3 : 47 Historical analysis of serviceability and expenditure MNI R&P Maintenance Total Coliforms at SR/WTs Coliforms at WTWs Turbidity at WTW Possible Enforcement 6.00 Ratio of Actuals to Average 5.00 4.00 3.00 2.00 1.00 0.00 97-98 8.2.3 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 Benefits to customers As a result of our investment in our non-infrastructure assets we have been able to maintain stable serviceability during AMP4. Water quality has been stable, as indicated in paragraph 8.2.1 above. Interruptions to supply as a result of non-infrastructure asset failure have been minimal. The only event resulting in DG3 failures was caused by the loss of twin-power supplies (owned by a third party) at our Walton WTW in June 2007. This resulted in 137 properties being without supplies for more than six hours. We have subsequently installed standby generation B3 – Maintaining Service and Serviceability 2010 Page 117 of 218 5 November Three Valleys Water Final Business Plan 8.3 Processes Our overarching asset management process is detailed in Figure B3 : 4 and described in section 2.2. Our non-infrastructure assets performance monitoring (as indicated in Figure B3 : 4 box 2) is carried out through on-line monitoring e.g. water quality parameters, flow, pressure, energy consumption, reliability); or less frequently through sampling or occasional measurement (e.g. pump performance investigations, asset inspections, failure modes, effects and consequence analysis (FMECA) exercises or chemical consumption reviews). Targets for asset performance are established and applied (box 3) and the gaps between desired and actual performance are assessed (box 4). Where gaps in performance are identified ‘statements of need’ are raised and added to our ‘issues register’. The issues register is a web-based database located on our corporate intranet. On entering the statement of need the originator is required to assess the implications of the issue occurring against a set of risk criteria. This is used as a preliminary assessment of the priority. The risk criteria reflect the consequence and probability of the issue in terms of water quality, water sufficiency, financial, health and safety and regulatory and environmental impacts. Once validated, the issue is provided with a notional solution and associated cost. This allows an initial assessment of cost-effectiveness to be made, resulting in a £cost/risk reduced score. Issues are progressed on the basis of their priority (box 6). An initial assessment of the most appropriate solution is made based on an economic appraisal of the various options for solving or mitigating the problem (boxes 7, 8 and 9). Solutions to be provided through a ‘noinvestment’ route are implemented within the operational teams (boxes 11 and 13). Options requiring capital investment follow a well-established route and are subject to our project management system (PMS) (boxes 10, 12 and 14). Once the solution has been implemented the assets are returned to service and the cycle recommences. To date a mixture of reactive and pro-active issues have been raised to the issues register. These include individual assets that have failed, issues that are anticipated to cause problems if not addressed within certain time-frames and issues resulting from pro-active risk assessments. The processes described above have been in operation throughout AMP4 and have proven to be effective in aligning appropriate solutions to business needs. Their simplicity, clarity and accessibility – with the ability to review current issues and their status – has improved staff and management confidence in the overall capital maintenance process. In addition to capital maintenance investment, the asset management cycle also effectively describes the process used for identifying enhancement plans. Water quality, security, resilience to flooding, supply-demand and network issues are captured on the issues register. The Asset Management team is responsible for managing the issues register process and for initiating all operational asset investment as a result of the priority assessment. Whenever projects to address business needs are initiated a review of all the other issues affecting that site/asset are considered and grouped as appropriate. As a result, a number of the enhancement projects implemented in AMP4 have been scoped to address capital B3 – Maintaining Service and Serviceability 2010 Page 118 of 218 5 November Three Valleys Water Final Business Plan maintenance needs. This has had a number of benefits, both in terms of project and procurement efficiency and also in terms of minimising site outages. The business process defining the stages and responsibilities after raising a statement of need through to its resolution – as confirmed by the post-project appraisal – is documented in our procedures. It ties-in with our project management procedures and includes a definition of those who are responsible, accountable, consulted and informed at each stage (RACI). This provides clarity of the interfaces between various business departments and teams. The process is reviewed regularly and audited as part of our asset management audit. It is fully compliant with our quality management system. While the Issues Register governs short and medium term asset management planning, the following process map sets out key stages for our long term non-infrastructure asset planning. Figure B3 : 48 Above ground assets – long term maintenance planning Three Valleys Water – Non-Infrastructure Assets – Long Term Maintenance Planning Link from Short/Medium Term 1 Operations Specific network knowledge 2 Customer Compensation £ 6 Consequence Analysis Criticality £ 5 Asset Data and Maintenance Activity 9 FMECA Analysis 7 Unit Costs from PM £ 8 Carbon, Environmental Social & Values £ 13 Optimised Programme Opex Programme Capex Programme Risk Cost 10 Capital Maintenance Planning Tool 3 Procurement cost data 4 Energy data 14 Business Plan 5 year AMP Volumes & Costs Link to Short/Medium Term 11 Deterioration Analysis Models Probability 12 Engineering Judgement Internal Manufacturers In 2005 we recognised we needed to enhance our approach to long term non-infrastructure capital maintenance planning, ideally to improve the granularity of our analysis to individual asset level. With more than 37,000 renewable items (the level at which the asset is renewed rather than repaired) in our operational asset base, we knew this would be an ambitious challenge. We identified that we needed a risk-based approach to model deterioration and interventions on a large number of discrete assets. We were also aware that the tool we were seeking did not readily exist. After undertaking market research, we appointed Asset Management Consulting Ltd (AMCL), part of a group that undertook the INVESTOR research (a crosscompany project looking to improve capital maintenance planning in the water industry prior to PR04), to work with us to create a bespoke capital maintenance planning tool (CMPT), (box 10 in the diagram above). B3 – Maintaining Service and Serviceability 2010 Page 119 of 218 5 November Three Valleys Water Final Business Plan We recognise that we made a poor job of explaining this approach and the working of the CMPT in the Draft Business Plan and so we have re-written our description in the Final Business Plan, so that the strength of our capital maintenance planning results is much better understood by the reader. In simple terms the CMPT performs risk and cost optimisation to determine the optimum time at which to renew an asset. The process map shows each of the inputs into the CMPT which are described in more detail below. Since our Draft Business Plan, our approach to optimisation using the CMPT has received the Institute of Engineering and Technology Award for Innovation 2008, beating 15 entries in the asset management category. The CMPT is a risk-based tool that takes its ‘severity’ from failure modes, effects and consequence analysis (FMECA) assessments (box 9); its ‘probability’ from asset deterioration assessments (boxes 11 and 12); and its costs from our unit cost systems (boxes 5, 7 and 8). Outputs from the model are optimised asset interventions which are grouped into programmes of work for business planning purposes. They are also used to create master development plans for all of our key sites, providing focus for more detailed on-site investigation and design study. The basis for the CMPT is the concept of ‘total business impact’ (TBI). TBI is the total annual cost to the business of a particular renewal frequency for any specific asset. It consists of ‘direct’ costs (capital costs to build, operational costs for operation and maintenance) and ‘risk’ costs (associated with the cost of asset deterioration and failure – including asset performance, safety and serviceability and external factors such as carbon). Working at renewable item level the CMPT tool identifies the optimal renewal frequency for each asset. Renewing at a frequency greater than this optimum results in a premium for improved reliability; renewing at a lesser frequency may result in a lower ‘direct’ cost but higher total cost as the risk increases. This is displayed graphically below. The renewal frequency and the annual cost will be bespoke for each asset B3 – Maintaining Service and Serviceability 2010 Page 120 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 49 Above ground assets – total business impact Premium paid to meet reliability target Premium paid to meet cost target 120 100 Annual Cost (£s) Total Business Impact Economic Optimum 80 Risk 60 40 Direct 20 0 1 2 3 4 5 6 7 8 9 10 Renewal Frequency (Years) We have analysed our asset base and ranked the non-infrastructure assets by their TBI. This ranking has been divided into three sections (top 30%, middle 40% and bottom 30%). This allows us to focus efforts on those assets with the highest TBI. Assets in the top 30% include booster pumps, reservoirs and variable speed drives. Whole life cost templates are generated based on the optimum renewal frequency. These are reasonably simple for the assets with lowest TBI and fairly sophisticated for those with the highest TBI, taking into account deterioration patterns and the level of asset criticality. Further details of the approach are given in Section 10. B3 – Maintaining Service and Serviceability 2010 Page 121 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 50 Above ground assets – categorisation of renewable items by TBI Output from the CMPT is an overall investment programme during a 25-year period, optimised at renewable item level. This approach of optimising the frequency of intervention based on minimising the ‘total business impact’ is being applied to our operational maintenance practice. Since the previous Periodic Review we have brought the two teams responsible for capital maintenance planning (production asset strategy) and operational maintenance planning (production asset maintenance) together into the same department (production asset performance). This has enabled parallel development of the strategy in both areas with the result that similar approaches are now being adopted for optimising both areas of maintenance. The benefits of adopting this approach for investment planning are that a plan has been developed which strikes the optimum balance between cost and benefit to customers and the environment in terms of carbon emissions. When this is combined with the operational maintenance approach above, the balance of planned versus reactive operational maintenance events will also be optimal and will be used to further refine the capital investment plan. Our operational maintenance processes are also well-defined and integrated into ‘business as usual’. The procedures are all documented within our quality assurance system and audited regularly. Recent developments have included a revised process for updating our asset management information system with asset information arising from completed construction projects. Our above ground works management system (see section 8.4 below) B3 – Maintaining Service and Serviceability 2010 Page 122 of 218 5 November Three Valleys Water Final Business Plan has been designed to capture real failure data and the reliability and robustness of the data submitted will improve when we replace the current paper-based system with new field devices later this year. We are currently finalising our detailed blueprints for these devices with the needs of both our operational and asset management teams included. This will enhance our understanding and improve confidence in our risk-based planning through CMPT. Key strands of our asset management planning process are the development and implementation of master development plans (MDPs). Through AMP4 we have developed MDPs for our surface water sites and have used these to plan and deliver holistic schemes of work that encompass maintenance, quality, security, supply-demand and environmental scopes of work on each of the sites. Work at Iver, Walton and Egham will be completed early in 2010. SEMD improvements at Chertsey will be completed by March 2010 with the project continuing into AMP5 to complete maintenance activities. We are working on the next phase of our MDPs, looking how we are to deliver our AMP5 activities in the context of our 25-year plans. In 2007 we initiated a project to implement a certified environmental management system (EMS) across the company. Our North Mymms Water Treatment Works was chosen as a pilot site and was certified to the ISO 14001 standard in September 2007. During the first six months of 2008 the scope of the EMS was extended to include the rest of the Karstic Production area, which successfully achieved certification in July 2008. the surface works and small sites regions successfully achieved certification in December 2008, and the extension of scope of ISO 14001 will be rolled out to the rest of the Company during 2009/10. The basis for our processes is our systems. In the next section we discuss the systems we use and how they are linked to help our day-to-day asset management. 8.4 Systems We have a number of systems in place for asset management. The principal systems used for monitoring and reporting on asset performance and serviceability are our above ground asset management information system (AMIS); our telemetry system (Serck); our issues register (as discussed above); our reservoir condition database; our criticality database; our water quality database sample manager; our unit cost database (see section 2.3) and a spreadsheet tool for calculating social and environmental costs (including carbon) for investments. Figure B3 : 53 below illustrates our non-infrastructure systems and the flows of data between them. We discuss the key features of these systems in the sections below. B3 – Maintaining Service and Serviceability 2010 Page 123 of 218 5 November Three Valleys Water Final Business Plan Figure B3 : 51 Non-infrastructure systems Reservoir Inspection Database Condition data Reports AMIS Quadrant Reports Asset data Asset Inventory Issues SERCK Telemetry System Asset data Flow data, operational data Risk Models • Criticality • FMECA • OPMs Water Quality results Asset data, Risk cost Business Plan Investment needs Sample Manager Capital Maintenance Planning Tool (CMPT) Maintenance costs Oracle Procurement Costs Cost-Benefit Analysis tool Unit Costs Reactive Issues Costs Issues Register Issues for investigation Ad Hoc Issues Ongoing Programme During AMP4 we have combined both our above ground asset inventory and works management systems into AMIS. This proprietary system (based on the AMT Sybex Ellipse software) is used both for scheduling and recording our operational maintenance (planned, corrective and reactive) and also for recording failure modes and causes – used in longer term asset management planning. Common referencing of assets using structured plant numbers (SPNs) allows asset failures to be recorded at plant item level. Work is ongoing to link the telemetry system failure data to assets at this level. This has proved useful in improving reporting and is now incorporated in the monthly serviceability quadrant report we use for performance monitoring. Our telemetry system links our 416 operational sites to our operational control centre. Realtime performance information and alarm management is key to the efficient management of our distribution system and accurate provision of asset performance data. Using both telemetry data and information coming from AMIS we produce monthly reports for our B3 – Maintaining Service and Serviceability 2010 Page 124 of 218 5 November Three Valleys Water Final Business Plan balanced scorecard. The key reports produced on asset performance include sub-threshold indicators that have been developed based on asset reliability and asset ‘at risk’ data. Since we first applied it at PR04 we have developed the concept of ‘criticality’ for asset management. This is quantified in monetary terms and is a measure of the strategic value of assets. Each has a criticality value which reflects the implications to our customers and the wider business should that asset fail. It is based on an understanding of how the asset is linked to other assets in the process, on the site or within the wider distribution network. It is a measure of how influential the asset is on water flow. A site which impacts directly on customers when it fails and which cannot be replaced with another site, or a large asset with no standby which causes the site to fail, will have a large criticality value. A small site that can be easily replaced or an asset in a set with multiple standby will have a small criticality value. This index is used consistently in our asset management processes when considering risk. Monthly quadrant reports are produced on asset reliability. They are based on frequency and duration data taken directly from our telemetry system and provide useful easy-to-read trends on asset performance. They are reviewed by both asset managers and production managers to identify problem areas. Where monthly results show an adverse trend, the causes are investigated and corrective action taken. We also produce monthly ‘at risk’ reports on our above ground assets. These identify where treatment and booster sites could potentially be at risk due to plant failure or outage during the month. Asset performance is monitored by tracking the number of times the ‘problem’ sites have appeared on the report over the previous 12 months. We take corrective action as appropriate. This generally consists of investigation and, if applicable, raising a statement of need to rectify the problem through a capital intervention. Water quality reports are produced routinely and failures reported monthly through our balanced scorecard system. Absolute results, criticality-weighted results and top 10 failing assets are reported monthly. The issue is logged on our issues register and corrective action taken where appropriate. Daily reports on site outputs and outage are produced and circulated widely throughout the business. There are separate reports on alarms and call-outs and these are used by operational and asset managers. We have a programme of energy improvement initiatives and progress on these is reported monthly through our balanced scorecard. We are in the process of moving AMIS from paper-based work order management to fieldsystem devices. This is planned for roll-out during 2009 and will enhance the reliability, accuracy and speed of data capture. With carefully planned training and appropriate scripting of the field system we believe the implementation of these devices will further enhance our approach to risk-based capital maintenance planning. All our end-to-end business processes related to asset management planning and the interfaces between asset management planning and other business functions are defined, documented and managed. They are subject to internal audit and quality assurance review and are available to all staff via our corporate intranet. We use the same systems for managing the business as we do for our regulatory reporting. B3 – Maintaining Service and Serviceability 2010 Page 125 of 218 5 November Three Valleys Water Final Business Plan 8.5 Objective for AMP5 Our key objective for non-infrastructure assets is to maintain stable serviceability. Headline serviceability for these assets is measured using numbers of coliforms at treatment works, at service reservoirs and water towers and turbidity at treatment works. As recent performance for these measures has been extremely good with very low levels of coliforms and turbidity, our reference levels for 2014/15, as set by best historic levels achieved by the Company, are extremely low. These are 0.02% for water treatment works coliforms non-compliance (control limits +/- 0.05%); 0.05% bacteriological samples from service reservoirs failing standard (control limits +/- 0.05%); and 100% mean zonal compliance with the PCV for iron at the tap (control limit – 0.02%). These are extremely high standards which will be a challenge to achieve and maintain. As requested in the updated guidance for B3, we enclose in Table B3 : 29 below the level of performance for service reservoir non-compliance. Table B3 : 29 Total coliform compliance for service reservoirs Indicator service reservoirs Percent coliform noncompliance Level of performan ce by 2014/15 Reference level of performance during 2010-15 Control limits (+/-) Level of performa nce by 2015-20 Reference level of performance during 2015-20 Contr ol limits (+/-) 0 0 0.8% 0 0 0.8% These headline serviceability measures focus on water quality measures. We also need to ensure we maintain the availability of sources and booster pumping stations and the quantity of plant ‘at risk’ cost effectively. By monitoring the trends in availability of this plant, which can lead to failures in customer service, we can anticipate future performance. Our objectives for the future include maintaining customer service through continuation of current levels of reliability and risk. To achieve this we need to develop and test our new tools to confirm their validity in future modelling to ensure we capture sub-threshold indicators for chemical and biological water quality; water quality aesthetics; decreased or poor pressure; supply interruptions and health and safety – so they can be even more reliably utilised at PR14. Our information technology (IT) assets are our key non-operational assets. Our objective for them is to ensure that these essential business support systems provide effective storage and retrieval of electronic data so that whether users are at the front line in operations and consumer services or in supporting functions, they can use the data and systems to deliver excellent customer service. B3 – Maintaining Service and Serviceability 2010 Page 126 of 218 5 November Three Valleys Water Final Business Plan 8.6 Overview of the Plan for AMP5 and beyond As in AMP4, we plan to carry out five different types of activity: • base maintenance of operational assets • base maintenance of IT assets • base maintenance of business support activities • specific programmes of work • specific asset renewals. With more than 37,000 renewable items (RI) we have employed a modelling approach to identify the base maintenance of our operational assets from the bottom-up. Outputs have been reviewed by experienced individuals who have sense-checked and challenged the plans arising from the planning tool. Our analysis has shown that we have a number of assets that are now past the point of optimum renewal. This means that, together with the assets that will need to be replaced in AMP5, we should significantly increase our expenditure in base maintenance throughout AMP5. This is particularly the case for pumping plant. To manage this, we will go-ahead with replacing pumping plant that has been shown to be beyond its optimum life but will delay the replacement of pumps that are assessed for replacement in AMP5. We will monitor our pumping plant more closely to improve our understanding of their deterioration; to identify when customer service may be affected. and to improve our modelling for the future so that at PR14 we are in a strong position to determine the optimum future strategy. The short term benefit is that there will be less pressure on customer bills at this price review. The information technology (IT) assets – our diverse collection of hardware, software and services used to create, process, store, transmit and display information – is a critical facilitator for a successful, customer-focused organisation. IT enables business processes to flow and assists decision making; it promotes organisational efficiency and ensures an increase of growth. And it enables an increase of collaboration, communication and development of business models. The MEAV of our IT assets is £38.2 million. We need a programme of £25.6 million in AMP5. The business support activities that form part of our ongoing capital maintenance plan are the reservoir inspection programme; maintenance of offices, depots and our laboratory; pump efficiency assessment programme; replacement of our company vehicles; replacement of laboratory equipment and maintenance of our leakage monitoring and detection infrastructure – required to ensure we can reduce leakage and meet our target. This latter expenditure was previously allocated to IRE. The specific maintenance work we have identified is a continuation of the AMP4 programme to upgrade our disinfection systems at 26 sites where we have identified risk associated with the type or level of disinfection applied, and modification of some of our run-to-waste facilities at treatment works to reduce the risk of allowing inadequately treated water into supply. These items are specific to AMP5 and are not typical of our base maintenance activities. In each case they have a defined output that benefits customers and for which implementation can be tracked. As such, we believe they could easily be considered as exceptional items under the CIS. B3 – Maintaining Service and Serviceability 2010 Page 127 of 218 5 November Three Valleys Water Final Business Plan Our analysis has also identified four reservoirs (St. George’s Hill, Windmill Hill, Bushey Heath No. 1 and Hart Lane) that ought to be replaced during AMP5. We have examined our detailed reservoir reports of these structures and considered whether we could, with careful monitoring, extend their life into AMP6. As a result, we plan to defer the renewal of the reservoirs at Bushey Heath, Hart Lane and St. George’s Hill to AMP6 (we have included St. George’s Hill in the ‘overlap’ programme as we think we can only delay this renewal for a few years beyond AMP5), but plan to construct a new reservoir at Windmill Hill by 2012. As this is an atypical ‘lumpy’ expenditure item we suggest that this specific asset renewal could be considered an exceptional item under the CIS. The table below sets out the expenditure for non-infrastructure maintenance subdivided into the key cost areas. Table B3 : 30 Summary of proposed MNI expenditure AMP4 FD (£m) - Cost AMP4 (£m) Cost AMP5 (£m) Cost AMP6 (£m) 81.0 95.8 123.3 Base maintenance of IT assets - 18.2 25.7 15.7 Base maintenance of business support activities - 11.8 14.4 14.9 Specific programmes of work (exceptional items) - 7.1 18.9 34.1 Specific asset renewals (exceptional items) - 17.4 135.5 1.8 156.5 4.4 192.5 Activity Base maintenance of operational assets Total 123.0 The main reasons for the increase in forecast expenditure between AMP4 and AMP5 are listed below. • A number of our operational assets are now beyond the point of optimum renewal and should be replaced. In particular, there was a growth in the number of pumps installed and renewed in the 1990s and these are coming up for renewal. • A number of water treatment assets installed for the drinking water compliance programmes in earlier regulatory periods are starting to come up for replacement for the first time. • Domestic meters installed since the 1990s on new properties and for meter Optants are coming to the end of their life and starting to fail in increasing numbers. • It is becoming increasingly difficult and uneconomic to continue with a ‘patch and repair’ approach at several of our very old reservoirs. They need to be replaced. We will replace one in AMP5. • Our contribution to the cost of maintaining Anglian Water’s Grafham treatment works is increasing. • A number of our corporate IT systems are becoming obsolete and do not have the modern functionality that we need to provide the improved customer experience we are seeking. The programme, broken down by asset class, is shown below in Table B3 : 31. Changes in investment levels between AMP4 and AMP5 can be explained by a change in needs. For example, the increase in expenditure under water distribution (non-infrastructure), is due to the increasing scale of domestic meters. Detailed explanations for each of the asset groups are given in sections 9-11. B3 – Maintaining Service and Serviceability 2010 Page 128 of 218 5 November Three Valleys Water Final Business Plan Table B3 : 31 Summary of MNI expenditure by asset group Asset group AMP4 (£m) AMP5 (£m) Raw water aqueducts, dams and impounding reservoirs 2.67 10.8 Water distribution (non-infrastructure) 8.27 28.1 Water treatment works 39.95 32.9 Water pumping stations 11.18 23.2 Service reservoirs 14.88 12.1 Management & general 58.54 52.2 135.50 159.3* Total non-infrastructure investment * Includes Takeley Tower at £2.7 million funded by contribution. Tables B3 : 33 below, summarise the analytical approach taken for each asset grouping of table B3.6, referring to chapter 4 of the CMPCF Review4, and illustrates the relative weight of our investment programme. You can see that the majority of our AMP5 investment (55%) has the highest level of analytical approach under the CMPCF and more than 74% is covered by an approach between 1a and 3 illustrating the high quality of analysis we have undertaken. 4 UKWIR, Capital Maintenance Planning Common Framework: Review of Current Practice, Ref: 05/RG/05/14. B3 – Maintaining Service and Serviceability 2010 Page 129 of 218 5 November Three Valleys Water Final Business Plan Table B3 : 32 AMP5 investment by CMPCF category CMPCF Category Table B3.6 Asset Group 1a Capital investment in raw water aqueducts, dams and impounding reservoirs 10.7 Capital investment in water distribution (non-infrastructure) 0.6 3 4b 7 9 24.0 10.8 3.5 28.1 Capital investment in water pumping stations 22.9 0.2 Capital investment in service reservoirs 4.6 7.5 Capital investment in non infrastructure management & general 20.6 26.2 Percent of MNI 54.9 19.4 19.9 1.2 87.4 30.9 31.7 1.9 Where; 1a = 1b = 1c = 2 = 3 = 4a = 4b = 5 = 6 = 7 = 8 = 9 = 10 = 0 = 0 0.16 Capital investment in water treatment works Total AMP5 Non-Infrastructure Investment AMP5 Investment £m 4.7 28.1 32.9 0.16 23.2 12.1 1.9 3.5 52.2 0.2 4.4 100 0.3 7.0 159.3 Service modelling with repairable and non-repairable failure modes Service modelling with repairable failure modes only Service modelling with repairable failure modes and state transitions Service modelling without repairable failure modes Asset performance modelling Recover following historical deterioration in aggregated serviceability Recover following historical deterioration in local serviceability Maintain grade profile Grade based maintenance Age based maintenance Top down relationships Least cost grounds alone Prioritisation only Conclusion based on historical analysis Table B3 : 34 identifies the CMPCF category by investement area. The key investment area of operational assets is of the highest level of analysis and a number of specific maintenance projects are at level 3. B3 – Maintaining Service and Serviceability 2010 Page 130 of 218 5 November Three Valleys Water Final Business Plan Table B3 : 33 Investment Areas by CMPCF category CMPCF Category Investment Area 1a Operational Assets and M&G (from CMPT) 87.4 3 4b 7 9 AMP5 Investment £m 0 87.4 Reservoir Monitoring and Inspection 3.2 3.2 Pump Condition and Efficiency Modelling 0.3 Vehicles 0.3 1.9 1.9 Preparation for PR14 3.5 Laboratory Equipement 0.5 Leakage Monitoring and Detection 3.5 Grafham Revenue Meters 3.5 0.5 3.5 9.7 9.7 14.3 14.3 Disinfection Upgrade 3.9 3.9 Run to Waste 0.8 0.8 St Georges and Windmill Hill Reservoirs 1.8 1.8 Compulsory Relocation of Takely Tower 2.7 2.7 IT Hardware and Software 25.7 25.7 % of MNI 54.9 19.4 19.9 1.2 0.2 4.4 100 Total AMP5 Non-Infrastructure Investment 87.4 30.9 31.7 1.9 0.3 7.0 159 Where; 1a = 1b = 1c = 2 = 3 = 4a = 4b = 5 = 6 = 7 = 8 = 9 = 10 = 0 = Service modelling with repairable and non-repairable failure modes Service modelling with repairable failure modes only Service modelling with repairable failure modes and state transitions Service modelling without repairable failure modes Asset performance modelling Recover following historical deterioration in aggregated serviceability Recover following historical deterioration in local serviceability Maintain grade profile Grade based maintenance Age based maintenance Top down relationships Least cost grounds alone Prioritisation only Conclusion based on historical analysis B3 – Maintaining Service and Serviceability 2010 Page 131 of 218 5 November Three Valleys Water Final Business Plan 9 Our plan for non-infrastructure assets: business support activities – the cost of doing business 9.1 Introduction and scope In this section we discuss the ‘cost of doing business’ i.e. the various business support activities that need to continue alongside planned refurbishment and replacement works. The activities addressed in this way include our reservoir inspection programme; our pump condition and efficiency assessments; maintenance on our offices and laboratory; our security systems; our vehicles; our laboratory equipment; our preparations for PR14 and our leakage monitoring and detection infrastructure. These are required for us to continue to provide stable service and to have a cost-effective planning objective. We appreciate that this way of explaining our Plan does not fit with the request to break it down by asset group. However we note in the guidance that it is acceptable “to provide information at sub-service level”. We trust our approach provides this clarity. For ease of use we have included in Appendix 2 a route map linking the reporting requirements based on AMPAP to the appropriate sections of our Plan. Analysis of these activities does not fit with the CMPCF type approach. This is because the outputs do not impact directly on customer service. Consequently, we have not been able to follow the detailed data/analysis structure requested in the guidance for all activities. Where possible, we have carried out historical analysis and produced a forward looking analysis on service, cost and intervention. While each activity has a cost-effective planning objective, generally linked to the maintenance of the particular asset group, we have also carried out a cost benefit analysis to help us understand whether the wider benefits of the activity outweigh the cost. Details of our CBA methodology are given in section C8 of our Plan with full results given in section C5. 9.2 Methodology Each element of our Plan has been drawn up based on a detailed assessment of the needs. A brief description of the methodology is given here with further detail provided in the summary table and accompanying references within the results section in 9.3. • Reservoir inspection programme – planned risk-based schedule of reservoir inspections and costs based on historical experience. • Pump condition and efficiency assessments – rolling programme of investigations based on a prioritised assessment of current performance. • Offices, laboratory and maintenance of our security assets – identified through analysis using our capital maintenance planning tool. For details of the methodology please refer to section 10 of this Plan. • Vehicles – AMP5 requirements based on planned replacement frequency according to company policy. • Laboratory equipment – needs based on experience recommendation on equipment replacement dates. B3 – Maintaining Service and Serviceability 2010 Page 132 of 218 and manufacturers’ 5 November Three Valleys Water Final Business Plan • Preparations for PR14 – understanding based on experiences at the PR09 review. • Leakage monitoring and detection infrastructure – plan built up from experience and manufacturers’ recommendation on equipment replacement dates. 9.3 Results 9.3.1 Reservoir monitoring and inspection Project title: reservoir inspection Project reference number: NALLSI15056 programme What is the problem? What is the solution? • Reservoirs and water tower • Continue the current practice of deteriorate with time and we need to inspecting storage structures be proactive in their management. externally every five years and internally every 10 years unless • The conditions inside storage tanks identified risks warrant an increased cannot be determined whilst they are frequency. in service. • Undertake timely minor repairs and • Accurate internal and external improvements during internal assessments are required to inspection outages. determine maintenance and refurbishment needs. • Major repairs are added to the capital refurbishment programme. • Sediments build up on the floors of tanks, which could be carried into • Clean and disinfect storage tanks in supply. line with company policy. • The insides of many tanks do not • Inspect and supervise large meet current H&S standards. reservoirs as required by Reservoirs Act. • Large reservoirs are subject to requirements of Reservoir Act. When does this project need to be complete and why? • Continual programme of inspection and reporting (see Figure B3 : below for inspection programme). Costs: Capital cost to complete project: Operating cost following project £3,219,000 completion: £0/annum How have these costs been identified? • Based on proposed schedule of inspections with allowances for fees (20%), cleaning costs (40%) and minor repair costs (40%) • These estimates are based on average costs per structure from recent experience. If this project is not cost-beneficial why is it being Is this project costincluded in the proposed investment plan? beneficial?# Yes – see notes below What is the effect of this project on the embedded and operating carbon footprint?# Embedded carbon: 0 kg CO2(e) Operating carbon: minimal kg CO2(e)/annum How has this project changed since the Draft Business Plan? • Costs have increased slightly as a result of our requirement to produce accurate record drawings for all internal inspections. B3 – Maintaining Service and Serviceability 2010 Page 133 of 218 5 November Three Valleys Water Final Business Plan • Following statements from the Chief Inspector of the DWI, who had suggested that the increasing trend in positive coliform plate counts across the industry is related to the long term frequency of inspection and maintenance of towers and service reservoirs we reviewed our current and proposed inspection frequency. We concluded that there seems to be little correlation between the date the reservoir was last inspected and the date of coliform detection implying that increasing the frequency of inspections would not reduce the number of coliform detections. Consequently we plan to maintain the current inspection frequency of at least every ten years and continue the current practice of adopting a more frequent inspection rate when the inspecting engineer assesses that this is required. # For full details of our approach to CBA and carbon accounting see section C8. Figure B3 : 51 Proposed internal inspection schedule 2010-20 35 30 Number 25 20 31 15 31 26 10 19 20 2010 2011 33 29 26 22 19 17 5 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 Notes on assumptions used for CBA analysis: • Introduction – this programme is for the internal inspection of tanks and reservoirs. Part of the process includes cleaning the tanks • Water quality – biological and chemical – these inspections identify faults in structures that enable pre-emptive work to be undertaken to safeguard the quality of the supply. A typical tank serves around 5000 properties. The roofs often need attention. The most regular problem is a multiple PCV failure. However, we have had to activate boil notices as a result of the suspected ingress of rain water. These incidents happen about twice a year and will become increasingly common if we do not carry out the inspection. We assume that one incident in every 10 will cause a boil notice. • Water quality aesthetic – if we do not inspect, we will not clean the tanks and the risk of discolouration will arise. The risk is quite low at the moment but will gradually increase and we have had direct experience of this. B3 – Maintaining Service and Serviceability 2010 Page 134 of 218 5 November Three Valleys Water Final Business Plan • Risk of prosecution – regular inspections and cleaning of tanks is good practice. A failure, as indicated above, linked to a reservoir that had not been inspected would lead to prosecution. • Assessment of figures – this is a key part of the MNI programme. In addition the figures do relate to historic problems and thus relatively robust. 9.3.2 Pump condition and efficiency monitoring Project title: Pump condition and efficiency assessments What is the problem? • Pumpsets operating inefficiently due to excessive wear or inappropriate duty points, with in service failures. • Remedial action only investigated, once failure or major fault detected. • Historical low energy prices leading to replacement of higher efficiency vertical spindle pumps, with less efficient submersible pumpsets. Project reference number: NALLS15009 What is the solution? • Prioritise pumpsets to be tested (see ref. 1 below). • Confirm operational requirements. • Test pumpsets. • Determine available cost benefits • Propose operational changes for savings, without additional capital delivery. • Propose remedial actions, for capital delivery. When does this project need to be complete and why? • Rolling programme throughout AMP5 to identify, test and recommend remedial action on pumpsets most in need of improvement. Costs: Capital cost to complete project: Operating savings following project completion: £322,000 (Ref. 2). £39,800/annum by the end of AMP5 (Ref. 3). (from changes in operation, without additional capital) How have these costs been identified? • The costs have been taken directly from a similar continuous project, which has been running since June 2007 and now following a competitive framework awarded April 2008. Is this project cost-beneficial? If this project is not cost-beneficial why is it Yes. Additionally benefits are achieved being included in the proposed investment on the wider capital investment plan? programme on pumpsets. What is the effect of this project on the embedded and operating carbon footprint? Embedded carbon: Negligible Operating carbon: 195.6 tCO2(e) /annum reduction by the end of AMP5. How has this project changed since the Draft Business Plan? • Operational savings and operational carbon reductions have been added (Ref. 4). • Capital spend and savings identified in CBA, from AMP6 have been removed. # For full details of our approach to CBA and carbon accounting see section C8. B3 – Maintaining Service and Serviceability 2010 Page 135 of 218 5 November Three Valleys Water Final Business Plan 9.3.2.1 Reference 1 : list of pumpsets to be tested in AMP5 Prioritising pumpset testing is an ongoing process which is updated annually. This prioritisation is part of the project and is based upon several factors which are time-sensitive. The exact list of pumpsets to be tested is refined prior to each phase of testing. The factors considered in pumpset testing prioritisation are as follows. • Based on the working document Water UK – Energy Managements Forum, Portable Water Benchmarking Exercise – January 2007 an annual high level benchmarking analysis of sites is undertaken. It compares the average pumping head information, prepared for the June return, with the annual electrical consumption and annual site flow figures. The sites are additionally designated a ‘type’. Outliers in each type indicate a potential inefficiency at this site. • Through examining the asset management database, and records of pump testing, pumpsets which have not been tested recently are prioritised according to their size and type. Larger above ground pumpsets are often able to provide the most cost effective energy reduction. • A draft list of pumpsets to be tested is discussed with production managers and production team leaders. This provides and opportunity for production people to identify pumpsets which are thought to be serviceable, but inefficient. Local knowledge is valuable in influencing the prioritisation of pumpsets and the potential cause of the inefficiencies. • Planned capital works on pumpsets/sites are identified and considered. This is to ensure work is not duplicated and is still relevant should the planned works change the site operation. 9.3.2.2 Reference 2 : breakdown of capital costs The capital costs have been taken directly from two sources. • Following the appointment of an ‘energy optimisation engineer’ in June 2007, 23 pumpsets were tested in the following 12-month period under a ‘pump performance testing’ project. The management cost associated with the project for the first 12month period was £29,645. The annual management cost associated with testing 30 pumpsets per year was estimated to be similar to this initial 12-month period, due to an increase in efficiency for this ongoing work. • The professional services framework contract for site pump testing was competitively tendered in April 2008, based upon a pump testing rate of 23 pumpsets a year. The framework has since been awarded. The selected framework contractor’s rates were pro-rated to test 30 pumpsets per year, resulting in an annual cost of £34,689. The summation of these components gives an annual capital expenditure of £64,334, a total of £321,700 for the AMP5 period. 9.3.2.3 Reference 3 : breakdown of operational savings Pumpset performance and efficiencies are examined in relation to how they are required to operate. This examination is specifically from an ‘energy’ perspective. This process has been seen to identify inefficiencies, which can be resolved without spending additional capital, e.g. by changing the flow set point, pumpsets can operate more efficiently, whilst providing an acceptable site performance. Similar pump testing for the two and a half year period to December 2008 was examined and a total of £39,800 operational savings identified. The AMP5 estimated operational savings were taken as 50% of this figure, with a similar saving being achieved in twice the period (i.e. B3 – Maintaining Service and Serviceability 2010 Page 136 of 218 5 November Three Valleys Water Final Business Plan the five years of AMP5), providing the same saving of £39,800. The reason for the reduced rate of saving potential is that the majority of our largest pumpsets have already been tested, or will be refurbished/replaced under projects which due to be completed in AMP4. When converting the operational savings to carbon savings, it was estimated that 80% of these would be due to a reduction in energy usage, and thus a reduction in carbon. The remaining operational savings of 20% would be due to the operation of pumpsets within lower tariff periods, which provide no direct carbon saving. 9.3.2.4 Reference 4 : changes since the Draft Business Plan Operational savings resulting directly from this project have been estimated and added to the Plan. These minor savings make this project cost beneficial. The savings are entirely separate to the main deliverable objective of this project, which is to provide recommendations for the intelligent use of investment of capital to improve the energy utilisation of our pumping systems. B3 – Maintaining Service and Serviceability 2010 Page 137 of 218 5 November Three Valleys Water Final Business Plan 9.3.3 Vehicles Project title: vehicle replacements Project reference number: NALLSI50100 What is the problem? What is the solution? • While the majority of our vehicles • Vehicles are renewed in the case of are leased we have a fleet of 12 cars in accordance with HR policy (4 purchased cars and 55 vans and years) and other vehicles based on lorries. well established cost effective renewal intervals. • The majority of these will require replacement during AMP5. When does this project need to be complete and why? • Rolling programme throughout AMP5. Costs: Capital cost to complete project: £1.95 million Operating costs following project completion: included in base opex. How have these costs been identified? • The costs have been taken from a bottom-up assessment of our vehicle replacement requirements. Is this project cost-beneficial? If this project is not cost-beneficial why is it Marginal being included in the proposed investment plan? Vehicles are essential to keep the business operational. What is the effect of this project on the embedded and operating carbon footprint? Operating carbon: Expected to be marginally improved Embedded carbon: 90 Tonnes CO2e. over current position as engines become more efficient. How has this project changed since the Draft Business Plan? • No changes. # For full details of our approach to CBA and carbon accounting see section C8. B3 – Maintaining Service and Serviceability 2010 Page 138 of 218 5 November Three Valleys Water Final Business Plan 9.3.4 Preparation for PR14 Project title: preparation for PR14 Project reference number: MALLSI60003 What is the problem? What is the solution? • We are required to produce the five• We will comply with the necessary yearly Asset Management Plan at PR14. requirements for preparation of the This is a necessary step in our Business Plan in 2014, taking into investment planning process and has consideration requirements at the historically been capitalised. time. • We have seen a significant increase in • Without a full understanding of what our reporting requirements for AMP5 as will be required at PR14 we have a result of, among other things, the assumed a similar level of cost to our additional sections on CBA and carbon forecast for PR09. reporting. When does this project need to be complete and why? • We will need to submit our PR14 Business Plan in 2014 Costs: Capital cost to complete project: £3.5 million Operating costs following project completion: not applicable How have these costs been identified? • The costs have been based on a forecast outturn of PR09 Is this project cost-beneficial? If this project is not cost-beneficial why is it being Not assessed included in the proposed investment plan? Essential part of doing business What is the effect of this project on the embedded and operating carbon footprint? Embedded carbon: Negligible Operating carbon: None How has this project changed since the Draft Business Plan? • No changes. B3 – Maintaining Service and Serviceability 2010 Page 139 of 218 5 November Three Valleys Water Final Business Plan 9.3.5 Laboratory equipment Project reference number: MALLSI60004 Project title: laboratory equipment replacement Overview: Background: • In 2007, the refurbishment of • All TVW analytical services are provided by the company our laboratory facility at laboratory facility based at Staines. The laboratory Staines was completed. This equipment is financially depreciated over a variable term facility provides the analytical dependant on the nature of the equipment. More robust services to Three Valleys items such as incubators, ovens and non-analytical Water (TVW) to demonstrate equipment are depreciated over 10 years. Analytical compliance with the drinking instruments are depreciated over seven years. This is water regulations and provide the industry standard. Where possible, equipment is kept essential information to our in service for as long as it can be kept operational. The production, supply and network main factors which influence this are the availability of processes. spare parts and of maintenance support from the manufacturer. There are occasions when repairs become • Replacement of existing economically unviable and replacements are purchased. laboratory equipment with similar in order to maintain • Based on historical information, an assessment of annual service and to introduce any sample throughput has been made. From this, the analytical improvements driven equipment required to deliver the anticipated regulatory by best practice, legislation or and operational workload was identified. efficiency. When does this project need to be complete and why? • This is a rolling replacement of equipment throughout the five year period The solution: • Replacement of instruments/equipment in line with the programme detailed in Table B3 : 34. Costs Capital cost to complete project: £0.51 million Operating cost following project completion: No significant change in operating costs from current position How have these costs been identified? • A combination of formal quotes and requests for budget figures for equipment. Is this project costIf this project is not cost-beneficial why is it being included in beneficial? the proposed investment plan? Yes What is the effect of this project on the embedded and operating carbon footprint? No significant on going change in carbon footprint as instruments/equipment are direct replacements for existing equipment. How has this project changed since the Draft Business Plan? No significant change. Requirements remain unaltered. Prices have been confirmed with manufacturers. The request for additional capital to enhance the laboratory capability for rapid analysis of unknown compounds has been taken out of this project and submitted separately under the SEMD requirements. The request for additional opex to address the new analytical requirements of the Revised Drinking Water Regulations in respect of Annex 10 priority substances has been submitted separately under the water quality PR09 submission. B3 – Maintaining Service and Serviceability 2010 Page 140 of 218 5 November Three Valleys Water Final Business Plan Table B3 : 34 Details of replacement equipment needed. Description Asset number Equipment age (at Nov 2007) (years) S/00219 Replacem ent Cost (£) Regulatory and operational use of equipment S/00572 9 Washing of glassware used for microbiological analysis and bottles used for the collection of waters for pesticide analysis Washing of glassware used for microbiological analysis and bottles used for the collection of waters for pesticide analysis Sterilisation of glassware used in the preparation of media for microbiological analysis W/IN/00488 11 Analysis of metals by inductively coupled plasma – mass spectrometer 120,000 S/00491 11 Analysis of anions such as Bromide/Bromate and Chlorite/Chlorate 50,000 S/00414 13 The instrument is used for the analysis of the water quality indicator parameter, total oxidisable carbon (TOC) 20,000 5973 GCMS (for Head space analysis) W/GCP/00515 10 analysis of volatile organic compounds including disinfection by-products, by gas chromatography – mass spectrometer (GC-MS) 70,000 HP 7694 Head space analyser W/GCP/00515 10 The isolation, and transfer of, volatile organic compounds (VOCs) to a GC-MS to enable analysis 20,000 Agilent 1100 Fluorescence HPLC W/00532 8 a high performance liquid chromatography (HPLC) instrument for the analysis of polycyclic aromatic hydrocarbons (PAHs) 30,000 S/00715 6 W/IN/00375 S/00417 10-15 Miele Glasswasher Miele Glasswasher Rodwell Autoclave ICP MS 4500 Dionex 500 Ion Chromatograph TOC Analyser HP LC-MS Elga Deionisers W/MED/00262 16 14 A high performance liquid chromatography – mass spectrometer instrument (HPLC-MS) currently used for the analysis of non-volatile pesticides, acrylamide and PFOS. Units that produce very low impurity water used throughout the laboratory areas for amongst others, preparation of standards, media and effluents. B3 – Maintaining Service and Serviceability 2010 5 Page 141 of 218 4,000 4,000 15,000 200,000 11,200 November Three Valleys Water Final Business Plan 9.3.6 Leakage monitoring and detection infrastructure Project title: leakage monitoring and Project reference number: NALLSI50001 detection infrastructure What is the problem? What is the solution? • An aging district meter stock needs • District meters to be replaced when maintaining to ensure continuity of failed. DMA leakage reporting data. • Pressure reducing valves (PRVs) to • Pressure management system be replaced on failure. needs maintaining. • Logging devices and noise • Leakage detection equipment needs correlation equipment to be maintaining. replaced on failure. When does this project need to be complete and why? • Business as usual activity throughout AMP5 to replace failed district meters, PRVs, loggers and leak noise correlators (see ref. 1 below). Costs: Capital cost to complete project: £3.5 Operating savings following project million (see reference 2 below) completion: included in base opex How have these costs been identified? • Costs derived from historical expenditure and confirmed by contractual works and supply rates. Is this project costIf this project is not cost-beneficial why is it being beneficial? included in the proposed investment plan? Not assessed. This project is critical to ensuring the integrity of leakage reporting data for both operational and regulatory purposes. What is the effect of this project on the embedded and operating carbon footprint? Embedded carbon: Not assessed Operating carbon: Negligible How has this project changed since the Draft Business Plan? • No changes since Draft Business Plan. 9.3.6.1 Reference 1 : background Our leakage infrastructure (district meter areas, pressure management and field detection equipment), needs to be capable of delivering the expected service. We have approximately 800 reporting district meter areas covering more than 80% of our network, with 1500 flow meters monitoring day and night flows. These DMAs are used for targeting leakage and measuring and reporting it. We have a mature pressure management system using approximately 450 pressure reducing valves covering about 60% of properties. Pressure management plays an important role in controlling and reducing leakage and bursts. We detect leaks using portable modern technology e.g. noise correlators and radio microphones and semi-permanent logging devices which listen for noise on the network Each of our technicians is equipped with the necessary equipment needed to fulfil their roles. B3 – Maintaining Service and Serviceability Page 142 of 218 5 November 2010 Three Valleys Water Final Business Plan 9.3.6.2 Reference 2 : breakdown of capital costs Levels of expenditure are estimated at £3.5 million for the five-year period and are approximately split: • £1.05 million PRV maintenance • £0.7 million leakage detection equipment • £1.75 million district meter maintenance. 9.4 Summary – the cost of doing business The costs of doing business are summarised in Table B3 : 35 below. Table B3 : 35 The costs of doing business Activity Reservoir inspection programme Cost AMP5 (£m) Pump condition and efficiency assessments M&G – lab and office buildings M&G – security Vehicles Preparations for PR14 Laboratory equipment Leakage monitoring and detection infrastructure Total business support activities Cost AMP6 (£m) 3.2 3.7 0.3 0.3 - 0.2 1.4 1.2 1.9 1.9 3.5 3.5 0.5 0.5 3.5 3.5 14.4 14.9 While maintenance on our laboratory, office buildings and security assets is considered here under the costs of doing business; the analysis is based on the full CMPCF approach described within section 10. The results are reported here for completeness. B3 – Maintaining Service and Serviceability November 2010 Page 143 of 218 5 Three Valleys Water Final Business Plan 10 Our plan for non-infrastructure assets: base maintenance of our operational assets 10.1 Introduction and scope In this section we present the business case for the base maintenance of the asset groups, dams and impounding reservoirs; the non-infrastructure elements of our water distribution, our water treatment works and water pumping stations, service reservoirs and water towers; ICA equipment and our telemetry assets. The approach identifies the maintenance needs of our offices, laboratory and security systems. The outputs of the analysis for these assets have been presented in section nine as we consider them to be business support activities, or the cost of doing business. We have structured this section in line with the guidance, providing the information at subservice level and dividing the section into the two sub-sections of data and analysis. 10.2 Methodology As outlined in section 8.3.2 above, we utilise the CMPT to plan future investment in base maintenance of our operational assets. Our process follows the approach set out in the UKWIR report ref: 02/RG/05 Capital Maintenance Planning a Common Framework (CMPCF). The following sections explain the methodology we have implemented. We have adopted titles that reflect the asset management assessment (AMA) categories required by Ofwat’s guidance and sub-titles that signpost guidance and steps within the CMPCF. Appendix 2 of this document provides a ‘route map’ for easy reference. 10.2.1 Data The process flow chart in Figure B3 : 52 below, shows the approach adopted for the use of data and analysis in our Draft Business Plan. It identifies the section of the CMPCF which applies to the relevant process step and shows the categories of input data by asset group feeding-in to our asset management information system (AMIS). AMIS was introduced before PR04 as our operational non-infrastructure asset inventory. During AMP4 it has been further developed for work planning and work management and will shortly be working on field devices to provide the same level of functionality as we have for the network asset information systems. The analytical steps needed to provide the relevant inputs into our CMPT are shown and each step is explained in detail over the following pages. The key inputs into the tool are: • total business impact (TBI) ranking • operational performance measure (OPM) valuation • criticality model • failure modes, effects and consequence analysis (FMECA) • deterioration models (qualitative and quantitative) • planned, reactive and performance costs B3 – Maintaining Service and Serviceability November 2010 Page 144 of 218 5 Three Valleys Water Final Business Plan • capital, environmental and social costs. 10.2.1.1 Asset data, condition and performance observations In preparation for this periodic review we undertook a complete survey and revaluation of our non-infrastructure operational assets. All pumping stations, water treatment works, and operational buildings (including offices, depots and laboratories) were visited between November 2007 and January 2008 by experienced asset survey contractors. A specialist contractor was separately engaged to survey high voltage equipment. Offices, depots and laboratories were surveyed and checked by our estates team. Most other assets had existing survey information available or were derived from desktop analysis; this covers reservoirs and towers, boreholes, production flow meters, surge vessels and cranes. Surveyed data accounts for around 93% of operational assets. This means we have an up to date asset base for capital maintenance planning consistent with the asset inventory (chapter C3). Our surveys have been conducted at renewable item (RI) level. A RI is an asset which can be renewed independently of others, with discrete behaviour in terms of deterioration and risks as a result of failure. This is the optimal level at which to forecast deterioration, failure and interventions for accurate maintenance planning, since it is the level at which behaviour is discrete. Each of our more than 37,000 assets has been assigned an RI class. For greater accuracy, where there is a significant variation in unit cost, the class may be split into bands e.g. booster pumps are banded by size 0-100kW, >100-250kW and >250kW and service reservoirs are banded 0-20Ml, >20Ml. The asset hierarchy in AMIS reflects the linkage between renewable items and their parent assets and processes on a site-specific basis. Installation date information was gathered for all assets, either from nameplate information, manuals or adjacent plant. Condition grades were assessed for asset inventory purposes, and also to enable broad comparison with capital maintenance investment. Since the Draft Business Plan we have audited more than 16% of assets representing our asset base in terms of site type, size, geography and surveyor. The accuracy of the data gathered was based on assessment of installation date, date confidence, integrity grade and safety grade. Differences with respect to integrity and safety grades were minimal (3.97% of total assets validated) and these did not have any significant impact on the overall result for all sites. Equipment not found on the data sheets used for survey/validation but found on site (and vice versa) constituted less than 1% of the sample validated. In summary, based on this audit we are confident that an accuracy of ± 5% has been achieved and our data is of high quality. AMIS also provides work event information to enable us to model the lifetime performance of the assets, which we have utilised in our deterioration modelling. B3 – Maintaining Service and Serviceability November 2010 Page 145 of 218 5 B3 – Maintaining Service and Serviceability November 2010 Page 146 of 218 Planned, reactive and performance costs Procurement and AMIS work management data Outputs from other Investment Drivers: MI, SD, Q etc Flowmeters (NI) Deterioration Models: Weibull ++7 for quantitative B1.3, B2.3 Expert Workshops for qualitative models Non-Infrastructure Assets Cost/Service Reports A2.1 C1,C2,C3 B1.4 Willingness to Pay Survey Outputs fed into Investment Optimiser A1.3, B2.4 A1.2 Issues Register Offices and Laboratories Depots and Stores Surveyed Estates assets: - Management and General Key: Optimised Investment Input into Business Plan & C5 project database Optimised MNI Plan at Asset Level B3.6 B2.5 B1.1, B3.1-B3.5 Calibration with Historic, planned and reactive capex, opex and risk cost, Issues Register CAPEX and Environmental & Social Costs at Asset level Operational telemetry and comms plus security Surveyed/Assessed Telemetry assets: - Capital Maintenance Planning Tool (CMPT) B1.1 Total Business Impact Ranking AMIS Database Inventory updated and exported Borehole pumps Desktop survey: - Excluding: Non-company assets (e.g. electricity meters and transformers, new plant not yet commissioned or handed over) Items considered to be immaterial in terms of value (e.g. non-capital items) Maintenance of Enhancement Items: e.g Security B2.1, B2.3 A2.1-A2.4 B1.3 B2.3 B2.1 FMECA Analysis Boreholes, wells, headworks Reservoir and Towers Contact Tanks Flow Meters Pressure and Surge vessels Lifting equipment Already surveyed: - OPM Valuation and Criticality Models A1.1, B1.3 All above ground Pumping and Water treatment assets All operational Buildings Electrical systems incl. HV Surveyed for Asset Inventory: - Operational Assets Three Valleys Water MNI Investment Planning Process B3.1-B3.5 Capital Maintenance Planning Database & Spreadsheets: Deterioration model for IT Impact on service A1.1, B1.3 IT and Other Asset Registers IT Vehicles and plant Surveyed/Assessed Other Non-operational assets: - PA Performance Others Three Valleys Water Final Business Plan 5 Three Valleys Water Final Business Plan 10.2.1.2 Data on intervention activity and effect on serviceability Historic planned and reactive maintenance activity has been analysed in order to determine lifecycle trends in work orders per RI class. From this we are able to obtain maintenance frequencies and work durations for all types of asset. We have undertaken full failure mode and effects and consequence analysis (FMECA) across the asset group in order to understand the effect on service of any asset failure. FMECA uses the full asset hierarchy from AMIS, including site specific relationships between RIs to map the interdependencies between assets and their parent processes. This map is used to calculate the level of redundancy at each level of the hierarchy, up to site level and hence the likelihood that an asset failure will lead to an effect on service to customers. Further details are given in the analysis section below. 10.2.1.3 Cost data for failure consequences and interventions We have a consistent approach to capex unit costs for planned and unplanned renewals at RI level. These are based on maintenance framework contracts or out-turn costs otherwise similar costs from water industry applications have been used. They are consistent with the cost base submission. Planned and reactive operational maintenance costs for each RI class have been derived using work event data to establish the frequency of planned and reactive jobs. Durations of these work events from AMIS have been applied together with hourly rates for maintenance personnel, to give an inclusive labour cost. The procurement system has been used to extract material; contract and cost information related to procurement of plant and associated services, then allocated to the appropriate RI class. We have made allowance in our costs for deterioration in the performance of pumps across their lifecycle and therefore a corresponding increase in energy and carbon. Our approach to environmental and social costs is consistent with other investment areas. These cover embedded and operational effects translated into a value both prior to and after, renewal of the asset with current technology. Carbon costs are calculated using the DEFRA methodology for the shadow price of carbon. Carbon is the only social and environmental cost included for non-infrastructure assets within the CMPT. Noise and landscape/visual impact costs have been considered but not utilised, as our MNI programme reflects the renewal of assets on a like-for-like basis. Our cost benefit analysis also includes social and environmental costs, such as the impact of pollution and reflects customers’ willingness to pay for a change in occurrence. See section C8 of our Plan for full details. Operational carbon is based on the energy consumed by the asset. Energy use and percentage utilisation has been derived based on research conducted by our environmental experts which has been validated by our energy optimisation engineer. The DEFRA shadow price of carbon (SPC) methodology has been used to calculate the SPC. We have deducted the climate change levy to avoid double counting, as agreed with DEFRA and in the Plan’s information requirements. Embedded carbon includes an element for manufacture, based on the weight of raw materials within the asset and an element reflecting travel associated with its delivery. Pre and post-renewal operational and embedded carbon costs which reflect energy savings achieved by changes from historic to current technology, are applied to each template in the CMPT, so operational carbon changes at the point of intervention. There is B3 – Maintaining Service and Serviceability November 2010 Page 147 of 218 5 Three Valleys Water Final Business Plan also a one-off embedded carbon cost at the point of intervention and subsequent interventions. Further details can be found in Section C8. In terms of risks to service, we first derived models identifying the costs of consequences based on historic data and expert advice from safety, security and water quality professionals. This enabled us to value a set of operational performance measures (OPMs) – which put a monetary value on the risk – for a range of potential risks and quantify the service effects on customers. These risks are consistently applied across the business in the investment optimisation process and are listed in Table B3 : 36 below. The first column identifies the main performance measure used; the second and third columns provide greater distinction between different types of consequence and durations which are weighted when calculating the risk cost. The final bandings are weighted evenly. Table B3 : 36 Risk categories and OPMs Risk categories (Consequence cost model and CMPT) Water quality Sufficiency of supply OPM sub-categories Banding (for weighting of consequence) Chemical and biological incidents One off PCV failure (WQ non-event) One off PCV failure (WQ event) Persistent chemical PCV failure) Persistent bacteriological failure Illness Major illness – death Aesthetic Notable discolouration Poor pressure Decreased – poor pressure Supply interruptions Supply interruptions 0-6 hours Supply interruptions 6-12hours Supply interruptions 12-48 hours Supply interruptions >48 hours Prosecution Regulatory action Health and safety Personal injury Financial Avoided costs – staff productivity Minor injury/near miss (LTA <3 days) Reportable injury (LTA > 3 days) Serious injury/death 0-4 hrs 4-8 hrs 8-24 hrs >24hrs Each risk has been allocated, where appropriate, to a RI class. We have assessed our data quality in accordance with Ofwat’s confidence grading system as follows: Table B3 : 37 Data quality Data Asset data, condition and performance observations Grading A2 Data on intervention activity and effect on serviceability B3 Cost data for failure consequences and interventions A2 B3 – Maintaining Service and Serviceability November 2010 Page 148 of 218 5 Three Valleys Water Final Business Plan 10.2.2 Analysis During AMP4 we have significantly improved our approach in pursuit of best practice. The principles we have employed to enhance our approach are: • adopt cost benefit at programme level with willingness to pay; apply cost benefit approach at asset level without willingness to pay • application of carbon, environmental and social factors using DEFRA methodology to all investment drivers, including maintenance • full alignment with the CMPCF • improved granularity/resolution at asset level – greater visibility of costs, including capex and operational maintenance • full quantification of risk working with emergency planners, water quality teams, infrastructure, health and safety, public relations etc • deterioration modelling of all operational assets using, where possible, quantitative statistics • failure mode effects and consequence analysis (FMECA) to understand the effect on service • zero-based bottom-up approach calibrated against historic figures • optimisation of renewal frequency based on internal costs and external environmental and social costs, plus risk • integrated approach with quality and supply-demand investment drivers. Figure B3 : 53 illustrates the process followed and indicates the reference to the relevant step of the CMPCF. 10.2.2.1 Total business impact ranking (TBI) The first step in our investment optimisation process is to quantify the relative importance of the assets by class. This was achieved by conducting a TBI ranking. This analysis, outlined above, uses historic costs of capital investment, planned and reactive maintenance, performance related energy costs and analysis of supply risk costs. These are presented on a total annualised basis. The RIs are then ranked by the annualised cost and grouped into three bands by total annualised cost (top 30%, middle 40% and bottom 30%. This enabled us to focus the analysis and place more effort on the most important assets. The highest ranking assets are typically service reservoirs and pumping plant as they have a direct affect on service. 10.2.2.2 Failure modes, effects and criticality analysis (FMECA) The next step in our analysis of risk has been FMECA. This models the potential effect on customers of a failure of any given asset. The CMPT handles the concept of redundancy at renewable item level. However, the FMECA analysis weights the risk of a process or asset type failing, given the level of redundancy at each of these levels, using the hierarchy imported from AMIS. Since the full hierarchy has been used, the impact on failure in FMECA is site specific. Conclusions are used to derive the weighted consequence per renewable item class (and per consequence) for use in the CMPT templates. FMECA is therefore carried out at B3 – Maintaining Service and Serviceability November 2010 Page 149 of 218 5 Three Valleys Water Final Business Plan renewable item level. The figure below illustrates the weighting of impact based on the hierarchy of a typical treatment system. The effect of redundancy is calculated in the FMECA. It assesses the proportion of consequence of the asset failing at the parent (sub-process) and grandparent (process) level. The calculation counts the number of assets (N) at the parent and grandparent levels using the following equations. • Proportion of consequence = 100% for asset types that are not redundant. • Proportion of consequence = 1 for asset types with possible redundancy. N • Proportion of consequence = 1 N −1 for assets types with a standby configuration. In the example below we consider WQ monitor 1. For WQ monitors where there is no possible redundancy, as in this example, the CMPT assigns 100% of consequence to the WQ monitor at plant level. The FMECA calculates the proportion of consequence of the two GAC filters (A and B) at sub-process level and the two GAC filtration processes (1 and 2) at process level. For GAC filters and filtration processes there is possible redundancy and no standby. The total proportion of consequence is calculated by the product of all proportions of consequence in the tree. So in this case: • total proportion of consequence = Use plant × Use subprocess × Use process = 1× 1 1 × = 25% 2 2 Figure B3 : 51 : Typical FMECA calculation Impact on customers in zone of supply Asset Type Process FMECA Treatment Works GAC filtration 1 This level utilisation is 1/N = 50% Subprocess GAC filter A This level 1/N = 50% Plant WQ monitor 1 This level no redundancy GAC filter B This level 1/N = 50% GAC filtration 2 This level utilisation is 1/N = 50% GAC filter C This level 1/N = 33% WQ monitor 2 This level no redundancy GAC filter D This level 1/N = 33% GAC filter E This level 1/N = 33% CMPT The combination of these tools enables us to calculate the probability of the failure of any given asset leading to a potential service risk to the customer. B3 – Maintaining Service and Serviceability November 2010 Page 150 of 218 5 Three Valleys Water Final Business Plan 10.2.2.3 Criticality assessment The relative importance of each of our sites and hence the magnitude of the impact of failure on customers, is assessed by criticality analysis. Built for PR04 and updated for PR09, it uses population data from our demand forecasts and expert review by our control centre managers, to assess the potential impact of site failure on our customers in financial terms. Selected data is utilised within the FMECA model as follows: Table B3 : 38 Information from criticality assessment used in consequence model Information from criticality assessment Use Property counts Used to calculate the size of a potential incident and the size band of OPM Cost to supply by other means Used as an avoided cost Time to restore supply Added to assess which subdivision (duration band) of OPM to apply (See Table B3 : 36 Risk categories and OPMs) Time before customers affected From the combination of likelihood and impact we calculate the risk value in monetary terms for each RI class. 10.2.2.4 Deterioration modelling We have analysed work event data from AMIS to produce quantitative probability distribution functions of lifetime failure using Weibull ++7 proprietary software. This employs the same techniques as the UKWIR project5. The software provides either a log normal or Weibull 2 parameter probability distribution function to be directly input into our capital maintenance planning tool (CMPT). This type of model is most effectively used on assets such as borehole, booster, intake and transfer pumps; which also tend to be the most critical and where sufficient failure data is available. These models cover 31% of our CMPT generated investment in AMP5/6. The remaining RI classes have been assigned qualitative models. We have conducted a number of expert workshops with experienced production operational staff and specialist principal engineers in asset management, to derive probability distributions by defining the likely failure rate of assets during burn-in, random and wear out phases of an asset’s lifecycle. Judgements have been challenged using the extensive age information gathered during surveys, in particular by plotting the age of surviving assets. This gives us the ability to define a more accurate shape to a probability distribution, rather than a traditional straight line deterioration approach. 10.2.2.5 Capital maintenance planning tool (CMPT) The CMPT identifies expenditure based on whole-life forecast cost versus risk profiles and optimised interventions for all of our above ground operational assets. It also enables us to fulfil the ‘cost effectiveness’ and ‘cost benefit’ objectives specified in the CMPCF. We are the only water company to implement this solution. In November 2008, we won the Institute of Engineering and Technology Innovation Award for asset management, for our approach to investment optimisation using the CMPT. 5 UKWIR, Deterioration Models and tools for Non Infrastructure Assets, 07/RG/05/17. B3 – Maintaining Service and Serviceability November 2010 Page 151 of 218 5 Three Valleys Water Final Business Plan The CMPT comprises a number of templates. In the case of the top 30% of assets identified through TBI analysis, 16 templates per renewable item are used to differentiate the assets. This covers almost 4000 assets. For the middle 40% of assets, this reduces to four templates per RI. The lower 30% have a single template per class. The principle of analysis is the same for all three bands, i.e. total whole life optimisation of costs, risks to service and social and environmental values, illustrated below in Figure B3 : 54 Optimisation in the CMPT The costs and deterioration characteristics of each template are varied and based on further subdivision using drivers of deterioration and criticality. This allows us to distinguish and tailor the templates to site-specific circumstances, focusing most effort on our most important assets. Taking the example of booster pumps, a renewable item class in the top band, the 16 templates represent bands described by hours run on the x-axis and the criticality of the site on the y-axis, the deterioration driver on the x axis varies dependant on asset class: Figure B3 : 53 Matrix of templates for top 30% of assets 4,1 4,2 4,3 4,4 3,1 3,2 3,3 3,4 2,1 2,2 2,3 2,4 1,1 1,2 1,3 1,4 Hours run A renewable item on a critical site running 24 hours/day is likely to adopt template 4,4, whereas a small booster operating three hours/day may adopt template 1,1. In template 1,1 we would expect less rapid deterioration characteristics, lower capital costs, and lower risk impact, but perhaps higher numbers of unplanned failures. In template 4,4 we might expect the converse, but may obtain benefits from renewal due to opex energy savings and carbon savings. These are known as risk-based templates and allow asset differentiation by deterioration and site criticality drivers e.g. hours run for pump sets. Each template for each RI class assembles: • the risk costs of each risk effect for each template and therefore future cost consequences and service levels • a deterioration model (quantitative or qualitative) • planned and reactive maintenance costs, which may rise over asset life-cycles (opex) • performance related energy costs (opex) • planned and unplanned capex costs • the shadow price of embedded and operational carbon net of climate change levy B3 – Maintaining Service and Serviceability November 2010 Page 152 of 218 5 Three Valleys Water Final Business Plan • the current asset renewal frequency. We carry out risk cost optimisation based on the costs input above. Given the deterioration characteristics of each class, the costs are calculated for a range of renewal intervals from 0 to n years as seen below. As the renewal interval increases, capital costs decrease, since the time between renewals increases. Conversely, the risk costs increase. The tool sums all of the costs to derive a ‘u’ shaped total cost curve shown applied for pumps in the software in the following figure. This enables the optimum renewal interval to be calculated. In this example the optimum total annualised cost is £3600, corresponding with an optimum intervention interval of seven years. Figure B3 : 54 Optimisation in the CMPT 10.2.2.6 Risk cost The cost associated with the risk of failure throughout the lifetime of the asset is defined as the probability of a failure in a given year multiplied by the cost of that failure. It is a function of the asset’s age and hence the cost is incurred in every year of the asset’s life, B3 – Maintaining Service and Serviceability November 2010 Page 153 of 218 5 Three Valleys Water Final Business Plan and changes from year to year. We choose the way in which the risk of failure is defined by using either a pre-defined failure distribution based on our data, or by constructing a failure distribution based on engineering judgement and tacit knowledge. The model allows us to account for situations in which an asset forms part of a redundant configuration. We specify the nature of the configuration from a pre-set list. The model adjusts the costs and probabilities accordingly. The configurations used within the model consist of numerous assets in parallel, with one permanent standby asset. The probability of failure in a redundant configuration is defined as the probability that both the asset itself and the standby asset will fail, and is approximated by squaring the probability that the asset itself with fail. The consequence of failure is adjusted according to the number of assets in the redundant configuration: if there are 10 redundant assets in a process and a single asset fails (along with the standby) then the consequences of those failures are 1/10th of what they would have been had the process been undertaken by a single asset. The predefined distributions available to us in the CMPT for quantitative models are Weibull and Log-Normal probability of failure distributions. In this case the Weibull ++7 software selects the best fitting distribution to apply. One of these distributions is then applied. Illustrations of these distributions are shown below: Figure B3 : 55 Weibull distribution Where x is time, y is probability, λ is the mean time to failure and k is the shape factor The Weibull probability distribution is almost symmetrical. The first (rising) part of the curve is dependant on the rate at which assets fail due to burn in, the second defining more random failures and the last, defining the wear-out phase of an asset’s lifecycle. This distribution is often applicable to mechanical assets, such as pumps. B3 – Maintaining Service and Serviceability November 2010 Page 154 of 218 5 Three Valleys Water Final Business Plan Figure B3 : 56 Log-normal distribution Where x is time y is probability and σ is the standard deviation of the natural logarithm of time This type of distribution also has three phases, but often has a longer wear-out phase characteristic of long life assets, such as reservoirs. The tool also allows us to build a customised failure distribution based on engineering judgement. The user-defined failure distribution function allows us to build up a representative failure distribution that reflects engineering judgement of the failure behaviour of the asset. The function allows us to model the behaviour of a wide variety of generic engineering systems by defining a number of reliability curves which are then combined to form an overall distribution. We can assign three types of behaviour to the asset in question: burn-in failures, random failures, and wear-out failures. The three distributions are tailored to the parameters we enter regarding the asset failures. We specify which types of behaviour are to be applied to the asset in question, and the times over which those behaviours apply. Based on the input data, the CMPT calculates a three-part survival curve that is subjected to a curve-smoothing algorithm to produce a continuous curve representative of the desired asset behaviour. This smoothed curve is used to derive a probability density function and corresponding hazard curve. The piecewise survival curve is made up of any combination of the three behaviours outlined above. The distributions used to describe these behaviours in the model are as follows. • Burn-in (Infantile failure of the asset) – early failure, often due to manufacturing or installation faults. This is defined by a Weibull distribution with the alpha parameter B3 – Maintaining Service and Serviceability November 2010 Page 155 of 218 5 Three Valleys Water Final Business Plan set to less than one. The distribution is calculated by rearranging the formula for the survival curve and solving for the user-defined point. • Random failure – failure at any point due to random events, such as an assetspecific fault. This is defined by an exponential distribution with the lambda parameter set to the user-defined failure rate during the random failure period. The distribution is matched to the burn-in distribution (if it is being used) by offsetting the random distribution with respect to time so that the value of the survival curve matches at the transition point. • Wear-out (typically mechanical wear or fatigue) – this is defined by a Weibull distribution. The distribution is calculated by rearranging the formula for the survival curve and solving with respect to the user-defined starting point and the userdefined point during the wear-out phase. The distribution is matched to any previous distributions (either burn-in or random failure phases) using a secondorder Bezier curve to smooth between the end of the previous phases and the user-defined point during the wear-out phase. Once the piecewise curve has been created it is then smoothed using an averaging function that removes significant discontinuities in the gradient of the curves. We then use the smooth survival curve to calculate the hazard function and probability density function. The use of each of these phases has been validated by experienced engineers in the appropriate field of expertise and cross-checked with any known data on age from AMIS, where appropriate. 10.2.2.7 Patch and continue (reactive maintenance costs) The model allows us to account for the costs involved in rectifying minor failures of the asset that do not require renewal or replacement. The model assumes that these failures increase linearly throughout the asset’s lifetime. The exact nature of this linear relationship between time and frequency of failures is defined by us, and we also specify the frequency of patch and continue failures at two points during the asset’s life. The model then fits a straight line between these points by simultaneously solving the equation of a line with constant gradient. The cost in each year of the template is the cost of each ‘patch and continue’ failure, multiplied by the frequency of failures per year. 10.3 Results Results of the calculations are aggregated to form an investment plan over 50 years for each template as illustrated in Figure B3 : 57 below, showing typical output from the software. The tool also outputs the risk cost for every asset and therefore enables us to calculate the service effect on customers. 10.3.1 Comparison with historic investment Before moving on to forward looking analysis, outputs from our model have been compared with historic investment by fixing current renewal frequencies (base case) and comparing with historic capex, opex, planned and reactive costs from our records and June Returns. This calibration and gives us a robust foundation for the optimisation of the forward looking approach. B3 – Maintaining Service and Serviceability November 2010 Page 156 of 218 5 Three Valleys Water Final Business Plan Based on historical data and expert judgement, we have assessed the current renewal frequency of every renewable item based on a class template. We have analysed and aggregated the costs and risks using the CMPT at investment programme level. Figure B3 : 57 Typical template in CMPT At the high level we have compared the outputs of our base case with historic June Returns and our forecasts for 2008/09 and 2009/10. We have compared the five-year averages with the base case from our CMPT analysis. The AMP5 average annual investment from CMPT is broadly similar to our historic five-year average. This period has been chosen as representative of ongoing levels of investment to maintain stable serviceability and, secondly, to align with Ofwat’s approach in selecting the baseline under the capital incentive scheme. Once we were confident that our predictions of current levels of capex were correct, and the input data represented reality, we set the CMPT tool to optimise the balance of costs versus risks (and therefore service) as described in section 10.2. Output is an optimised plan at asset level described below. 10.3.2 Plans for investment Our analysis identifies a significant number of assets that are now beyond the optimum point of renewal. B3 – Maintaining Service and Serviceability November 2010 Page 157 of 218 5 Three Valleys Water Final Business Plan Despite our intention to increase MNI investment beyond the AMP4 Final Determination of £123 million to £136 million in AMP4, we will not be able to address all of these outstanding renewals. To manage this issue in a planned manner we have re-phased £52 million evenly across the AMP5 period, eliminating the backlog completely by 2014/15. Our analysis has shown that we have an emerging issue with pumping plant installed in the 1990s (see the following table). The installation profile means many of these items now require replacement. We have around £22 million worth of pumping plant that is beyond its optimum point of replacement and a further £17 million that will require renewal in AMP5. Of itself, a decline in pump availability does not threaten service levels as we have a significant level of standby capability that can be called on when primary pumps fail. However, when we look at levels of plant ‘at risk’ – defined here as plant that does not have standby, through design or failure of secondary equipment – it would appear that the level of plant ‘at risk’ is increasing. This is a concern in the medium to long term. This is a significant uplift in investment in pumping plant, with AMP4 expenditure on pumps being less than £10 million. We recognise that our methodology is new and requires proving. Consequently, we believe we should address this emerging issue through a phased approach, ramping up over AMP5 and AMP6. We will monitor the performance of the pumps that have been identified for replacement, together with their availability and alarm levels, and will, if appropriate, include them in our AMP6 plan. In doing so, we recognise that we may run the risk of an increase in failures and operating costs during AMP5. Figure B3 : 58 Distribution of pump ages, pumps classed by criticality Booster Pumps Borehole Pumps Intake Pumps 80 70 Number of Pumps 60 50 40 30 20 10 0 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Commission Year In our analysis of our civil assets our modelling tool has identified two reservoirs that will require replacing in the next few years. They are at Hart Lane and Bushey Heath. We have challenged the modelling approach by reviewing our detailed inspection reports and concluded that with an appropriate inspection regime, investment identified for these reservoirs can be deferred into AMP6. The investment profile below reflects this. B3 – Maintaining Service and Serviceability November 2010 Page 158 of 218 5 Three Valleys Water Final Business Plan The adjusted profile of investment on our operational assets is shown below. It can be seen that our optimised five-year plan for AMP5 is equivalent to £17.5 million per annum compared with £14.9 million for the equivalent during AMP4, highlighting the need for an increase in investment. Figure B3 : 59 Capital investment in base maintenance from our planning tool analysis CMPT equivalent expenditure (£k) CMPT equivalent AMP4 (£k) CMPT forecast (£k) Average expenditure AMP4 Average expenditure AMP5 30,000 25,000 £,000 20,000 £17.5m £14.9m 15,000 10,000 5,000 19/20 18/19 17/18 16/17 15/16 14/15 13/14 12/13 11/12 10/11 09/10 08/09 07/08 06/07 05/06 04/05 03/04 - Year We have analysed and challenged the outputs from our CMPT using engineering judgement and historical experience. Part of this review process was a class by class and asset-specific sense check by senior asset managers. We compared the outputs with our Draft Business Plan investment proposals, our detailed knowledge of individual assets and our experience of historic investment levels to confirm validity. Once we were satisfied that the detailed modelling outputs were accurate at individual RI level, we divided the investment plans into ‘site-based work packages’ and ‘engineering-based work packages’ as indicated below in Table B3 : 40. For capital maintenance of our operational non-infrastructure assets we have packaged site-based work into an overall project >£0.5 million over AMP5 at individual sites. We have included other work packages based on the aggregation of renewable item replacement in the following engineering disciplines - buildings and access; electrical; reservoirs and towers; ICA; mechanical and electrical; process; civils; pipework and valves; chambers, intake shafts, boreholes and tunnels. As set out in section C5, we believe this will help us to have an effective capex implementation strategy in AMP5. The investments at site level form projects for entry into our capital investment programme and subsequently into the projects database. B3 – Maintaining Service and Serviceability November 2010 Page 159 of 218 5 Three Valleys Water Final Business Plan Maintenance of new items installed as part of the enhancement programmes that may require maintenance during the AMP period are either added with a future installation date at the point of enhancement to the CMPT, or we have cross-checked the enhancement project for overlaps at asset level and eliminated individual investments. Our investment needs are further supported by the asset inventory. Table C3 : 2 illustrates the change in condition of our assets compared with the two previous periodic reviews. While condition alone is not a substitute for full risk-based planning under the CMPCF, it can give an indication of areas for investigation. The majority of our CMPT based investment is in block B (water treatment works) and block C (pumping stations). During AMP4 we have addressed a number of these assets in condition grade 4 and 5. There are now significant proportions of assets in grades 3 and 4. In these blocks. Given that the majority of these are short life, we will see many of the grade 3 assets falling into grade 4 or 5 during AMP5 and AMP6. With the exception of two reservoirs that have been identified, by inspection, for renewal in AMP5/6 we believe the condition of our reservoir stock is generally improving. This is reflected in the proposed lower expenditure levels for service reservoirs and towers in AMP5 than we have seen in AMP4. See Table B3 : 39 below. Table B3 : 39:AMP4/5 expenditure on reservoirs and towers AMP4 (£m) AMP5 (£m) 14.9 12.1 The table below summarises the projects and work packages covering CMPT based investment and compares our Plan’s proposals with those at our Draft Business Plan. The major area to note is that for the Plan we have changed the definition of our site-based projects from >£1 million to >£500,000. This has resulted in a larger number of site-based projects and lower value projects in the engineering-based packages of work. Table B3 : 40 CMPT results (2007/08 prices) AMP5 £k Operational base maintenance summary Final Business Plan Draft Business Plan Site-based work packages (excluding M&G elements) Allenby Road 1.408 1.869 Bushey Heath 2.209 2.119 Chertsey 5.698 2.787 Clay Lane 2.811 2.748 Egham 8.450 5.879 Hadham Mill 1.792 2.450 Hart Lane 0.778 1.030 Iver 9.944 4.888 Mill End 2.131 1.122 Walton 4.997 5.546 In engineering based Adeyfield 0.584 work packages Anthonys 0.571 Arkley 0.501 Batchworth 2.407 Blackford 0.963 Bricket Wood 0.546 B3 – Maintaining Service and Serviceability November 2010 Page 160 of 218 5 Three Valleys Water Final Business Plan Chalfont St. Giles 0.519 Eastbury 2.262 Great Missenden 1.002 Hunton Bridge 0.516 Ickenham 0.839 Kingshill 0.543 Kings Walden 0.529 Netherwild 0.841 North Mymms 3.984 Oxhey Woods 0.509 Piccotts End 0.542 Roydon 0.836 Runley Wood 0.833 Sacombe 0.520 Shakespeare Road 0.661 Stonecross 0.533 St. George’s Hill 1.008 The Grove 0.688 Uttlesford Bridge 0.549 Whitehall 0.877 CMPT engineering-based work packages (including patch and continue) Operational estate - buildings and access 1.424 Electrical 1.881 Reservoirs and towers 0.552 Process – civils Pipe work and valves 0.793 Civils – below ground (chambers, intake shafts, tunnels and boreholes 0.271 M&E – process 2.146 M&E – other 1.635 M&E – high lift pumps 4.109 M&E – drives 0.432 M&E – low lift pumps 2.807 Non operational (M&G) M&G – ICA 4.433 M&G – telemetry 1.199 M&G – lab and office buildings M&G – security 1.383 10.3.3 0.857 3.540 5.561 2.536 0.809 5.682 2.760 14.343 5.152 1.737 1.490 0.552 Changes since the Draft Business Plan Since the submission of our Draft Business Plan we have refined our approach in a number of areas. The specific changes to the sub-programme above are shown below: Table B3 : 41 Summary of changes to CMPT investment since Draft Business Plan Site-based work packages (excluding M&G elements) Main driver of change Allenby Road Pumps re-phased Increases for switchgear, engine and control panels B3 – Maintaining Service and Serviceability November 2010 Page 161 of 218 5 Three Valleys Water Final Business Plan Bushey Heath Pumps re-phased Change in unit cost for service reservoirs Chertsey Large pump asset life changed from 46 to 14yrs GAC and sand media increase Ozone generators moved out of AMP5 - increase from 16 to 24yrs Clay Lane Problem with pump template at Draft Business Plan and change in asset life Large pumps optimum asset life reduced Pumps re-phased Buildings and booster pumps change in optimum life GAC was included as a separate project at Draft Business Plan Increase in unit costs for filter media, plcs, small pumps, tanks and fixed speed drives Pumps re-phased Egham Hadham Mill Hart Lane Iver Mill End Walton Problem with pump template at Draft Business Plan Contact tank increase in asset life Pumps re-phased Reservoir unit cost change Problem with pump template at Draft Business Plan though pumps re-phased Centrifuges, switchgear, valves, screw feeders, monitors, mixers, process pumps unit cost change Additional control systems added Problem with pump template at Draft Business Plan, membranes (separate project at Draft Business Plan) decrease in boreholes (unit cost) and contact tanks (asset life) Optimum asset life for intake shaft changed Building decrease (£1.4 million) attributed to unit cost Electrical services decrease (£0.7 million) due to asset life increase Adeyfield Anthonys Arkley Batchworth Blackford Bricket Wood Eastbury Great Missenden Hunton Bridge Ickenham Kingshill Netherwild New project >£500,000 and <£1 million North Mymms Picotts End Roydon Runley Wood Sacombe Shakespeare Road Stonecross St Georges Hill The Grove Uttlesford Bridge Whitehall Engineering-based work packages (excluding M&G elements and patch and continue) Operational estate – Kiosks separated from buildings (asset life reduced from 120 at Draft Business Plan to buildings and access 30yr) and additional roadways in inventory Electrical Unit cost decrease in panels B3 – Maintaining Service and Serviceability November 2010 Page 162 of 218 5 Three Valleys Water Final Business Plan Reservoirs and towers Process – civils Pipe work and valves Civils – below ground (chambers, intake shafts, tunnels and boreholes M&E – process Decrease – patch and continue for roof membranes now separate Now in other projects Minor change to unit costs Mainly due to borehole unit cost decrease (£0.9 million to £90,000) M&E – other Sub-divided from M&E at Draft Business Plan. Part of this package of work M&E – high lift pumps redistributed to projects less than £500,000. M&E – drives M&E – low lift pumps Management and general M&G – ICA Additional ICA equipment from survey added from inventory (such as ~100 control systems at Iver) not included at Draft Business Plan (although was in inventory) Most work now in site based work packages M&G – telemetry Operating system now renewed in AMP6 (was in AMP5 at Draft Business Plan) M&G – lab and office buildings M&G – security Incorporated into site based work packages or deferred to AMP6 More fences and doors, unit cost increase We have taken on board feedback on our draft plan from Ofwat, CCW, the EA and our Reporter. In the area of MNI investment we have: • updated and expanded our commentary to more clearly present the evidence behind our asset management plan • incorporated all of our Reporter’s recommendations • completed an audit of our asset survey and confirmed the data should be more than 95% accurate in terms of age, condition and completeness • improved our estimates of the embedded carbon associated with the procurement of new assets to provide a more complete picture using the new UKWIR methodology6 • updated our cost models with new data • modified our capital maintenance planning tool (CMPT) software to allow asset specific reporting and improved reporting for pumps • completed an assessment of the impacts of climate change on the asset life, reliability and performance of our non-infrastructure assets • carried out further work on our approach to cost-benefit analysis and improved our confidence in the outputs. 10.3.4 Effect on operating costs (opex) Replacement of assets as part of a renewal programme can result in an initial reduction in opex due to the ongoing development of efficient technology and specifications. Using the 6 Carbon Accounting in the UK Water Industry: Guidelines for Dealing with ' Embodied Carbon' and Whole Life Carbon Accounting, UKWIR, 2008. B3 – Maintaining Service and Serviceability November 2010 Page 163 of 218 5 Three Valleys Water Final Business Plan expert advice of our energy optimisation engineer we have modelled an improvement in efficiency for large energy consuming items such as pumps on renewal, but have allowed for deterioration over the lifecycle of the asset concerned. The planned and reactive maintenance costs are also affected. Since the CMPT optimises total costs, risks and environmental and social consequences, the impact of our optimised investment programme is a decrease in opex. The effect on opex is an average reduction of £262,000 per annum over AMP5. Figure B3 : 60 Cost benefit arising from AMP5 investment 500 450 400 £ Thousands 350 300 250 200 150 100 50 2010/11 10.3.5 2011/12 2012/13 2013/14 2014/15 Effect on non-infrastructure serviceability Using the CMPT we have identified the optimum unconstrained intervention interval based on the least total annualised ‘cost’, including risks to service (i.e. the most cost beneficial solution). We believe we can implement an optimised capital maintenance programme into the future which will manage our risk more effectively and at lower total cost (including risk and carbon cost). If we had not used the CMPT to optimise the mix of investment, either our levels of risk would rise and hence serviceability would decrease – as shown below – or, investment would need to significantly increase to maintain serviceability. We have modelled the three strategic options of: • replace on failure (‘on-failure renewal’) • replace on asset life (‘base renewal’) • replace on risk of failure (‘optimum renewal’). The figure below shows the effect of these three future investment scenarios. The graph shows the annualised risk cost over time. The ‘on-failure’ renewal approach results in a large increase in risk over time as assets will only be replaced when they have failed. This is clearly shown in the output from our CBA modelling. The ‘base renewal’ case is effectively the approach of replacing assets when they approach the end of their life. We B3 – Maintaining Service and Serviceability November 2010 Page 164 of 218 5 Three Valleys Water Final Business Plan have adopted a risk-based approach using the CMPT so that we optimise our renewal frequency, reducing both the overall cost of asset ownership while at the same time minimising the annualised risk cost. The graph shows that the ‘optimum’ approach we plan to follow keeps the risk profile relatively constant over the planning period. Figure B3 : 61 Risk levels arising from investment scenarios Optimum strategy £50,000 AMP4 AMP5 Current renewal strategy AMP6 AMP7 Renewal on failure AMP8 AMP9 Annualised risk cost (x £1,000) £45,000 £40,000 £35,000 £30,000 £25,000 £20,000 £15,000 £10,000 £5,000 10.3.6 2034/35 2033/34 2032/33 2031/32 2030/31 2029/30 2028/29 2027/28 2026/27 2025/26 2024/25 2023/24 2022/23 2021/22 2020/21 2019/20 2018/19 2017/18 2016/17 2015/16 2014/15 2013/14 2012/13 2011/12 2010/11 2009/10 2008/09 £- Effect on carbon emissions Results from our optimum investment option demonstrate that our proposed investment in the table above will reduce carbon emissions in the long term compared with the on-failure option. During AMP5 adoption of our investment plan will result in cumulative carbon emissions of 19,374 tonnes of CO2e. Since we have deferred investment in pumping plant, this is primarily embedded carbon arising from the replacement of assets. This compares with our total carbon emission of 114,364 tonnes of CO2e for 2007/08. However, by 2016/17 the optimum option begins to demonstrate cumulative benefits compared with the on-failure option and by the end of AMP6, the cumulative benefit is more than 21,000 tonnes. The difference continues to widen for a further 13 years. The level of ‘operating carbon’ benefit by the end of AMP5 will be 6622 tonnes of CO2e, less than the on-failure option. 10.3.7 Sensitivity of results Since our process identifies the optimum unconstrained intervention interval based on the least total annualised ‘cost’, including risks to service, for a range of intervention options between zero and infinity, for every asset, an incremental change to reference levels (either up or down) would not lead to a more optimal plan. 10.3.8 Level of confidence Where possible, we have made full use of our own data to build our optimisation process. B3 – Maintaining Service and Serviceability November 2010 Page 165 of 218 5 Three Valleys Water Final Business Plan The foundation for our operational base maintenance plan is our asset inventory which we believe is particularly robust due to the comprehensive resurvey and revaluation work undertaken (Section C3). Surveyed data accounts for around 93% of operational assets. Capital unit costs are derived from own contracts or provided by specialist cost consultants who are familiar with our programmes. Cost data for planned and reactive maintenance is founded on intervention activity from our work management process on a renewable item basis. We have improved the quantity of outturn data used for capital costs for the Plan using recently completed projects. Where possible, quantitative deterioration models have been compiled based on our own failure data. Where this is not possible, principal mechanical, electrical, process and security engineers and experienced production operators have been engaged to make judgements. These have been challenged in some areas by independent asset management consultants. We have cross-checked and challenged judgements using the comprehensive age information gathered during surveys, in particular by plotting age distributions of asset classes. Our operational performance measures (OPMs) are derived partly from fixed GSS payments and partly from bottom-up estimates from experts within the business. We have reviewed the relative weight of the various risks (e.g. security of supply vs. water quality) and incident bands (e.g. 0-6 hours, 6-12 hours) incorporating all recommendations identified by our Reporter in his report. However, the overall impact is not material. For these reasons, we maintain a high level of confidence in our results and plans. 10.3.9 Effect of climate change on maintenance Since our Draft Business Plan and in line with Preparing for the Future: Ofwat’s Climate Change Policy we have reviewed the impact of climate change on the maintenance of our non-infrastructure assets. Our climate change scenario is extracted from UKCIP027 We have focused on climate change in our region – the South-East of England – and have used the average of the scenarios, low-medium and medium-high carbon emissions. Our methodology has utilised the UKWIR report Water UK Climate Change Adaptation Approach for Asset Managing Planning8 as the basis for impact assessment. In order to score impacts, we have classified all our assets by type: • electrical power • electronics • mechanical assets • civil / building roof • civil / building structure • underground assets. 7 UKCIP02 : Hulme,M., Jenkins,G.J., Lu,X., Turnpenny,J.R., Mitchell,T.D., Jones,R.G., Lowe,J., Murphy,J.M., Hassell,D., Boorman,P., McDonald,R. and Hill,S. (2002) Climate Change Scenarios for the United Kingdom: The UKCIP02 Scientific Report, Tyndall Centre for Climate Change Research, School of Environmental Sciences, University of East Anglia, Norwich, UK for DEFRA. 8 Water UK Climate Change Adaptation Approach for Asset Managing Planning. (2008). MWH Ltd for UKWIR. B3 – Maintaining Service and Serviceability November 2010 Page 166 of 218 5 Three Valleys Water Final Business Plan We have conducted expert workshops with our most experienced engineers to assess the impact of each factor of climate change on: • performance of our assets • effect on deterioration and therefore asset life • change in the repairable failure rate. The impacts are summarised in the table below. The main effects are a reduction in asset lives, particularly civil assets, and increases in repairable maintenance, but these are in the long term. Table B3 : 42 Summary of climate change effect on asset types Asset type Electrical power Performance change (%) Asset life change (%) 2011-40 2011-40 2041-70 2041-70 -0.7% -2.9% Change in the repairable failure rate (%) 2011-40 2041-70 -1.0% -6.0% 3.4% 14.5% Electronic 0.0% 0.0% -0.7% -2.9% 5.1% 21.6% Mechanical 0.0% 0.0% -1.3% -4.0% 2.4% 11.3% Civil/building structure Civil/building roof 0.0% 0.0% -0.4% -1.5% 0.5% 2.3% 0.0% 0.0% -3.7% -15.4% 5.4% 23.2% Underground 0.0% 0.0% -1.7% -6.7% 0.3% 1.3% We have used the above figures to establish the likely effect on our investment plans based on our Draft Business Plan. The expected increase in MNI investment by 2025 is less than £465,000, with an increase in repairable failure costs of £6500 per annum. Given the uncertainty of climate change predictions, we have concluded that the effect on maintenance is well within the bounds of uncertainty in our investment forecasts. We have therefore excluded any impact from our plans. We will continue to monitor research in this area beyond our Final Business Plan, in particular the new UKCIP report to be launched in 2009. Figure B3 : 62 Summary of operational asset base maintenance requirements Project title: operational assets (CMPT) What is the problem? • Our operational assets deteriorate with time and will eventually fail • We need to be proactive in their management so that service is maintained and the optimum balance of costs and benefits is achieved Project reference number: various What is the solution? • Adopt a programme of asset renewals which is optimised to ensure that interventions take place before the risk failure becomes too great. When does this project need to be complete and why? • To maintain serviceability and service to our customers Costs: Capital cost to complete projects: £87 Operating cost following project million in AMP5 completion: £ -488,000/annum by the end B3 – Maintaining Service and Serviceability November 2010 Page 167 of 218 5 Three Valleys Water Final Business Plan of AMP5 How have these costs been identified? • Based on the forward looking approach to optimising renewals detailed in section 10 above • These estimates are based on average costs per structure from recent experience. Is this project cost-beneficial? If this project is not cost-beneficial why Overall base maintenance of our is it being included in the proposed operational assets is strongly beneficial investment plan? To maintain service at current levels What is the effect of this project on the embedded and operating carbon footprint? Embedded carbon: 12,580 t CO2(e) Operating carbon: -6,294 t CO2(e)/annum How has this project changed since the Draft Business Plan? Please refer to Table B3 : 41. 10.4 Summary – base maintenance of our operational assets The approach using CMPT has identified the majority of the base maintenance requirements of our operational assets. We have collected the maintenance needs into packages of work based on the value per site or by the type of activity undertaken. These needs are summarised in the table below: Table B3 : 43 Summary of base maintenance of operational assets Activity Cost AMP5 (£m) Cost AMP6 (£m) Site-based work packages Engineering-based work packages Anglian Water’s capital maintenance requirement for the provision of water from their Grafham reservoir.# 64.4 16.1 9.7 69.7 34.2 9.7 M&G ICA M&G telemetry Total base maintenance of operational assets 4.4 1.2 95.8 6.7 3.0 123.3 # The Grafham source and the associated assets are owned and maintained by Anglian Water Group (AWG). We pay an ongoing contribution to maintain AWG’s assets along with a marginal cost based on the volume of water imported. Further details of this work is included on the following page. B3 – Maintaining Service and Serviceability November 2010 Page 168 of 218 5 Three Valleys Water Final Business Plan Table B3 : 44 Summary of Grafham base maintenance requirements Project title: Grafham What is the problem? • Project reference number: NGRAFH16000 What is the solution? • AWG maintain the assets on an ongoing basis. The Grafham source and the associated assets are owned and maintained by Anglian Water Group (AWG). We pay an ongoing contribution to maintain AWG’s assets along with a marginal cost based on the volume of water imported. When does this project need to be complete and why? • No change from current practice is necessary. Grafham is included within our Water Resource Management Plan as an important deployable output in order to maintain the supply demand balance. Costs: Capital cost to complete project: Operating cost following project £9,738,000 completion: not required How have these costs been identified? • A schedule of proposed investment has been provided to us by Anglian Water and discussed with them on 20 January 09. Is this project costIf this project is not cost-beneficial why is it being included # beneficial? in the proposed investment plan? Cost benefit analysis will We do not have an option other than to incur this expenditure. be undertaken by Anglian. What is the effect of this project on the embedded and operating carbon footprint? Anglian is assessing carbon equivalent emissions for embedded and operational carbon. Embedded carbon: Since Anglian are Operating carbon: Since Anglian are likely to likely to likely to include within their likely to include within their Business Plan we Business Plan we have omitted to avoid have omitted to avoid double counting double counting How has this project changed since the Draft Business Plan? • Anglian has produced a new profile of expenditure for AMP5. This has increased expenditure from £8.4 million in the Draft Business Plan to £9.7 million in the Plan. # For full details of our approach to CBA and carbon accounting see section C8. B3 – Maintaining Service and Serviceability November 2010 Page 169 of 218 5 Three Valleys Water Final Business Plan 10.4.1 Cost benefit analysis Although our approach for base maintenance of operational assets is to maintain service at current levels, we have carried out a cost benefit analysis (CBA) for each project identified. The table below shows the whole life benefit (WLB), whole life cost (WLC) and net benefit over 40 years for each project in this section of the Plan: Table B3 : 45 Net benefit of base maintenance projects from CMPT Project Benefit Cost £m WLB £m WLC £m 104.87 107.92 3.05 65.08 69.94 4.86 279.02 296.88 17.87 Beneficial Clay Lane 15,545.98 15,563.10 17.12 Beneficial Egham 15,275.62 15,309.82 34.19 Beneficial Hadham Mill 282.13 287.81 5.68 Beneficial Hart Lane 139.83 150.27 10.44 Beneficial 32,092.29 32,126.96 34.68 Beneficial Mill End -1.00 6.59 7.59 Walton 48.57 68.34 19.77 Beneficial Adeyfield 25.85 26.86 1.01 Beneficial Anthonys -0.22 0.90 1.11 Required to maintain adequate serviceability to customers. Arkley 259.55 261.61 2.06 Beneficial Batchworth 150.66 157.81 7.15 Beneficial 0.02 2.24 2.22 Beneficial Bricket Wood -0.09 1.42 1.51 Required to maintain adequate serviceability to customers. Chalfont St. Giles -0.56 3.07 3.63 Required to maintain adequate serviceability to customers. 0.46 5.06 4.60 Beneficial Great Missenden -0.12 1.78 1.90 Required to maintain adequate serviceability to customers. Hunton Bridge 20.86 22.98 2.13 Beneficial 235.99 237.60 1.61 Beneficial 0.39 1.46 1.07 Beneficial -0.26 1.14 1.41 Required to maintain adequate serviceability to customers. 1.26 3.63 2.38 Beneficial North Mymms 41.80 51.33 9.54 Beneficial Oxhey Woods 3.71 4.53 0.82 Beneficial Piccotts End -0.24 1.26 1.49 Required to maintain adequate serviceability to customers. Roydon -0.62 2.17 2.79 Required to maintain adequate serviceability to customers. Runley Wood -0.19 -0.11 3.41 1.28 3.60 1.40 Required to maintain adequate serviceability to customers. Required to maintain adequate serviceability to customers. Shakespeare Road 0.72 2.39 1.67 Beneficial Stonecross 5.43 7.46 2.03 Beneficial St. George’s Hill 3.94 5.41 1.46 Beneficial 73.98 76.51 2.54 Beneficial 4.60 6.17 1.56 Beneficial Whitehall Operational estate buildings and access 26.16 28.45 2.29 Beneficial 2.13 6.70 4.58 Electrical 89.64 104.95 15.30 Reservoirs and towers -4.53 3.45 7.98 Allenby Road Bushey Heath Chertsey Iver Blackford Eastbury Ickenham Kingshill Kings Walden Netherwild Sacombe The Grove Uttlesford Bridge Beneficial Beneficial Required to maintain adequate serviceability to customers. Beneficial Beneficial Required to maintain adequate serviceability to customers. B3 – Maintaining Service and Serviceability November 2010 Page 170 of 218 5 Three Valleys Water Final Business Plan Process – civils -0.68 8.47 9.15 Required to maintain adequate serviceability to customers. Pipework and valves Civils – below ground (chambers, intake shafts, tunnels and boreholes 38.40 41.48 3.09 Beneficial 3.11 15.12 1.78 11.40 Beneficial M&E – process 1.33 3.72 Beneficial M&E – other 1.96 6.78 4.81 Beneficial -5.64 27.55 33.19 M&E – drives 3.74 5.54 1.80 Beneficial M&E – low lift pumps 0.20 12.33 12.13 Beneficial M&G – ICA M&G – telemetry M&G – lab and office buildings M&G – security 169.98 185.44 15.45 Beneficial 38.90 44.53 5.62 Beneficial -0.34 0.04 0.64 6.25 0.97 6.21 Beneficial M&E – high lift pumps Required to maintain adequate serviceability to customers. Required to maintain adequate serviceability to customers. The WLB column represents the benefits of the project discounted over a 40-year period and includes risk to private costs, consequential damages and willingness to pay drawn from our customer survey. The WLC column represents the net present value of our costs. It can be seen that the vast majority of our maintenance projects are cost beneficial, despite being required to only maintain service. We have validated the results from our cost benefit analysis by internal peer review and through our external consultants ICS. This gave us confidence that the benefit values were appropriate for the larger projects where benefit values are greatest. In the case of the Iver Water Treatment Works Project, the scenario of renew on fail would lead to an equivalent loss of supply of more than 24 hours to all 265,000 customers supplied every one and a half years, illustrating the importance of maintaining investment at current levels. A small number of projects are just non-beneficial. However, our approach in analysing them has been to consider the impact of asset failure on our service to customers in the supply zone fed from the site in question. If we were to leave the site in a failed state there would be no redundancy in the system and service would not be maintained. Further details of our cost benefit approach and other projects can be found in Section C8. B3 – Maintaining Service and Serviceability November 2010 Page 171 of 218 5 Three Valleys Water Final Business Plan 11 Our plan for non-infrastructure assets: specific programmes of work and specific asset renewals 11.1 Introduction and scope In section 10 we presented the base maintenance requirements for our operational assets. We have identified, in section 9, the ongoing investment in business support activities that we need. In this section we present the case for specific programmes of work and specific asset renewals that have resulted from a risk-based review of our asset stock. We consider these to be exceptional items under the terms of the CIS. These items and the reasons why we consider them to be exceptional are given in Table B3 : 46 below. Table B3 : 46 Specific programmes and projects as exceptional items Specific programmes of work Cost AMP5 (£m) Disinfection upgrade 3.9 Run to waste facilities 0.8 Domestic meter replacements Total specific programmes of work Specific asset renewals St. George's Hill reservoir 14.1 Cost AMP5 (£m) 0.1 in AMP5 with 4.4 in AMP6 1.7 Cost AMP5 (£m) Takeley Tower 11.2 17 sites upgraded to improved disinfection capability in AMP5 with a further nine to be delivered early in AMP6 as part of the overlap programme Improved operability of four iron removal sites during startup Failed meters replaced on a rolling programme basis Why should this be an exceptional item? Investment is not typical – work is a one-off and will not be required once this programme is complete Investment is not typical – work is a one-off and will not be required once this programme is complete Identified in CIS as exceptional item 18.9 Windmill Hill reservoir Other required work Output 2.7 Output Why should this be an exceptional item? New 12 Ml reservoir. Design to be started in AMP5 with construction to be completed in AMP6 as part of the overlap programme Maintenance of a long life asset resulting in ‘lumpy’ investment New 3.1 Ml reservoir Maintenance of a long life asset resulting in ‘lumpy’ investment Output Why should this be an exceptional item? Replacement tower Atypical investment fully offset by developer contribution Methodology Each of these elements of our Plan has been drawn up based on a detailed assessment of the needs. A brief description of the basis of the methodology is given here with further detail provided in the individual sections of 11.3. • Domestic meter replacement programme (revenue meters) – based on historical analysis of meter failures and future forecast based on modelled failure rates. • Disinfection upgrades – based on understanding of individual site requirements and AMP4 experience of completing similar work. B3 – Maintaining Service and Serviceability November 2010 Page 172 of 218 5 Three Valleys Water Final Business Plan • Run to waste facilities – detailed site-by-site engineering assessment of risk and most cost-effective solution. • Replacement of reservoirs at Windmill Hill, Hitchin and St. George’s Hill, Weybridge – need has resulted from detailed structural inspections and monitoring of condition through successive supervising engineer reports. Designs for replacement structures completed by engineering service provider delivering our AMP4 programme. 11.3 11.3.1 Results Revenue meters We have been installing revenue meters in substantive numbers since the early 1990s and have currently metered: • 397,383 household customers • 53,672 commercial customers • 451,055 in total. The pace of metering has been more rapid in recent years due to our policy of metering on ‘change of occupier’, in addition to those who opt for a meter. This will be sustained through AMP5 by our metering strategy, detailed in section C4. When a meter failure occurs the customer’s bill must be estimated until it is replaced. Not only is this a detriment to the quality of service the customer experiences, but repeated estimated readings will result in DG8 occurrences and additional costs from billing enquiries. It is also a legal requirement to ensure that customer meters are working properly. It is therefore necessary to replace failed meters in a timely fashion, and understand how many meters are likely to fail in the future. Revenue meter asset data is recorded both in WMIS, our work management information system, and Hi-Affinity, our billing system. Although meter information is held in both these systems, we used the billing system as the basis for developing our meter replacement strategy. It is more robust due to the customer control over its veracity. In collaboration with consultants Mott MacDonald, the billing database was refined to create two principal datasets. These were used for developing the meter failure model. The first dataset includes information about the age, meter reading, manufacturer and other fields of all the meters that failed between 1990 and 2007. The data was obtained by filtering specific reading codes and identifying their associated reading dates in order to discover when meters were exchanged and installed at each meter location. In this way it was possible to determine how the meter stock has evolved and the failure rates of meters of different ages. The second dataset contains the current meter stock. It includes the age, meter reading, manufacturer and other data fields of all the meters currently in operation. It was obtained by identifying all meters – new or replacement – installed for billing purposes and still in use. This provides the starting point from which the failure rates can be applied, and from which we can calculate the likely number of future failures B3 – Maintaining Service and Serviceability November 2010 Page 173 of 218 5 Three Valleys Water Final Business Plan The figure below illustrates the age profile of our meters and shows how the asset base has increased over the past 10 years. The rate of increase will be sustained at least through AMP5 as a result of the continuation of the current strategy of Optant and ‘change of occupier’ metering, as set out in C4. Figure B3 : 63 Meter stock – showing the composition of the current asset base by age, as at end of calendar year 2007 60000 50000 No. of Meters 40000 30000 20000 10000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Age (years) Our current policy for revenue meters is to replace on failure, where a failure is defined as anything that causes the meter to no longer be fit for purpose. Typically this would be due to: Mechanical failure Fogging Boundary box failure Third party damage The measuring mechanism or register has broken. Water ingress causes condensation which prevents a reading from being taken. A problem with older meters before the introduction of sealed copper can registers. Ground movement or third party damage that has effectively destroyed the boundary box or pit that the meter is situated in, making readings no longer possible. The meter may actually still be working, but it is replaced at the same time as the boundary box so as to avoid contamination during its removal. The meter has been removed, has had its register smashed, or otherwise been disabled or tampered with by a customer or other 3rd party. The wide variety of failure modes, and the difficulty in accurately assessing these in the field, does not permit a robust analysis of failure by cause. Thus the inclusive definition of failure as described above has been used as the basis for modelling. Similarly, the size and type of meter, i.e. semi-positive displacement, Woltman, single-jet or electromagnetic, have not been used as discrete variables in the analysis. The vast majority (>97%) of the meter stock however, consists of small grade meters of a particular type; namely semi-positive displacement in the range 15-40mm. B3 – Maintaining Service and Serviceability November 2010 Page 174 of 218 5 Three Valleys Water Final Business Plan Large meters, which are mainly commercial (50mm+), make up less than 3% of the total meter stock. We have not considered these separately in the analysis but are actively participating in a number of industry-wide initiatives to better understand the mechanics of these meters and how they change over time. The approach to forecasting the quantities of meters that will fail in the future and require reactive replacement is fully compatible with the CMPCF and includes the main components: • historical analysis • meter failure analysis and how the future is different • meter replacement or intervention forecasts. The meter failure analysis involved calculating the average percentage of the meter stock likely to fail for each meter age cohort, where cohorts are determined by the calendar year of the meter installation date. The failure rate for each age cohort was averaged for the most recent data available at the time of analysis, i.e. 2003, 2004, 2005, 2006 so that the results would not be unduly influenced by the failure rates of meters that are no longer in use. Using our forecast installation figures, meter stock details and the average historic meter failure rates by age, a model was developed which calculates the forecast number of reactive meter exchanges up to 2050. The figure shows the increased likelihood of failure as the meter ages. This type of ‘bathtub’ failure curve is typical of mechanical devices. There are signs that failure rates increase at about 12 years. Figure B3 : 64 Likelihood of meter failure with age Average 2006 - 2003 Trendline 4.50% 4.00% Average Failure Rate 3.50% 2 R = 0.9416 3.00% 2.50% . 2.00% 1.50% 1.00% 0.50% 0.00% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Age B3 – Maintaining Service and Serviceability November 2010 Page 175 of 218 5 Three Valleys Water Final Business Plan The meter replacement forecasts are made by applying the calculated failure rates to the existing meter stock. This produces the number of meters that likely to fail and the number of reactive replacements required in each year. The model allows for different levels of intervention in the asset stock to be applied. This allows us to include all interventions resulting from our metering strategy set out in Section C4; such as the effect of replacing Advanced Meter Reading (AMR) units due to battery life. This way the forecast reactive failure rates take account of all other influences. The figure below illustrates the number of meters projected to fail over the next two AMP periods, and also the historical performance dating back to 2000. The increase in numbers reflects the substantially increasing asset stock due to our change of occupier metering strategy. The unit cost for reactive meter replacements of £295.81 is a composite figure derived from all meter replacement activity in the year 2007/08. It includes in proportion all internal, external (with and without boundary box replacement) and all larger meters that have been exchanged. The total number of failures and associated cost is summarised in the following table. Table B3 : 47 Summary of reactive meter replacement numbers and cost No of failures and replacements Cost (£’000) AMP5 48,041 14,253 AMP6 74,648 22,224 The metering strategy detailed in Section C4 includes an element of walk-by advanced meter reading. This technology will be used on new build properties as well as internal and difficult to fit meters. The expected failure rate for these meters is taken to be the same as for manually read meters. Our experience from sister companies in other countries is that the additional failure rate of the AMR unit – over and above that of the meter itself – is of the order of only 0.1% per year. However, when an AMR meter does fail, its replacement cost is increased by £25 to account for the premium of the AMR unit. During the course of AMP5, of the 48,041 meters expected to fail, 1661 will be of the AMR variety. The component of spend on the AMR units is £42,000 out of the total of £14.3 million for meter replacements. B3 – Maintaining Service and Serviceability November 2010 Page 176 of 218 5 Three Valleys Water Final Business Plan Figure B3 : 65 Projected meter failure rates in AMP5 and AMP6 20,000 18,000 16,000 Meter Failures 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 AMP 3 AMP 4 AMP 5 AMP 6 The cost benefit assessment of reactive meter replacements is not straightforward. Financial and carbon costs can be calculated, but the appropriate benefit to use is less clear. Maintaining the meter stock in good working order is mandated in the following Statutory Instruments: • Measuring Equipment (Cold-water) Regulations 1988 • Measuring Instruments (Cold-water) Regulations 2006. While an avoided cost of prosecution could be assessed for each meter replaced, this does not seem appropriate. Therefore the assessment is restricted to financial and carbon costs for the mandatory activity of reactive meter replacements, with the understanding that real benefits exist but cannot be monetised at this time. A summary of the financial and carbon costs for AMP5 and AMP6 are given in the table below and the full calculation is reported in Section C8. Table B3 : 48 Projected meter failure rates in AMP5 and AMP6 Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Cost (£’000) 2,364 2,569 2,804 3,093 3,422 3,789 4,115 4,443 4,762 5,124 Carbon cost (tCO2e) 146 158 173 190 210 233 252 272 292 314 With our meter stock set to increase to 90% of customers metered by 2030, we recognise that the information we have on this equipment needs to improve. We will work towards this by PR14 with the greater data sets now available. A summary of the investment is given in the following table. B3 – Maintaining Service and Serviceability November 2010 Page 177 of 218 5 Three Valleys Water Final Business Plan Project title: revenue meter replacements Project reference number: IMETRP6001 What is the solution? • Replace revenue meters as and when they fail, as part of normal maintenance activity. What is the problem? • Revenue meters fail in service due to a variety of causes. They must be replaced on failure as we have a statutory duty to ensure that metering devices are working properly. When does this project need to be complete and why? • It is ongoing regular maintenance. Costs: Capital cost to complete project: Operating cost following project £14,253,000 in AMP5 completion: N/A How have these costs been identified? • A CMPCF compatible failure model was constructed from the customer billing database. • The resulting prediction of the number of revenue meters expected to fail was applied to a composite unit rate for meter replacements obtained from replacement activity in the 2007/08 period. If this project is not cost-beneficial why is it being Is this project costincluded in the proposed investment plan? beneficial?# No It is a mandatory activity where known benefits cannot be monetised at this time. What is the effect of this project on the embedded and operating carbon footprint?# Embedded carbon: 869 tCO2(e) in AMP5 Operating carbon: N/A How has this project changed since the Draft Business Plan? • The unit cost for replacements has been re-assessed at £295.81. • The metering strategy (see Section C4) has changed substantially since Draft Business Plan. The removal of the ‘upgrade to AMR capability’ programme has led to an increase in the number of expected failures (at Draft Business Plan a number of old meters would have been pro-actively replaced as part of the upgrade programme). 11.3.2 Disinfection upgrade At PR04 we identified that we had 30 groundwater sources where the only treatment was marginal disinfection. This was applied to provide protection in the distribution system. At that time we reassessed the appropriate level of disinfection at these sources based on water quality results, a site-specific risk assessment and the company disinfection policy. This highlighted the need to up-grade to a full disinfection stage, in line with DWI guidance. The proposed work was supported by the example of a groundwater source which historically was considered to be of good raw water quality with very few coliform positive results up to the winter of 2000. But in spring 2001 results of more than 100/100ml were suddenly seen in a sample. This led to high numbers of coliforms being seen in the treated water, resulting in a precautionary boil notice being instigated. At PR04 ultraviolet (UV) disinfection was shown to be the cost effective solution and was subsequently installed. B3 – Maintaining Service and Serviceability November 2010 Page 178 of 218 5 Three Valleys Water Final Business Plan It was recognised that this event was not an isolated incident, but rather the beginning of a step-change in raw water quality which remained generally poor. Because of this real risk, we believed that disinfection of sources with only marginal chlorination presented an unacceptable and unnecessary risk to customers and that more robust treatment should be applied to mitigate this risk. A programme of supplementing marginal disinfection was planned at PR04 with high risk sites to be completed during AMP4 and low risk sites being deferred until AMP5. We have completed our proposed upgrades in AMP4 and are now proposing to continue with this plan into AMP5 and, through the overlap programme, into AMP6. We plan to upgrade the remaining 23 sites with only marginal chlorination. We will upgrade three sites where the existing contact tanks do not have adequate detention time. The most effective method of upgrading most of these sources will be to install UV disinfection. We have completed a cost benefit analysis of the project and found it to be cost beneficial (NPV of benefits – NPV of costs = £2.27 million). This is based on a failure occurring once every 20 years with 9000 properties affected (average of the sites affected). For each of these sites we have undertaken a historical analysis of the site issues. We have considered, using our criticality assessment, whether each site is required for ongoing service, identified the number of customers who would be affected and whether a redesign of the network system could make the investment redundant. In each case we will require the site to remain in service. Sites to be upgraded and proposed dates are as per the table below. Table B3 : 49 Sites for disinfection upgrade Site name Work proposed in AMP5 Completion date Northmoor Install UV disinfection 2011 Molewood Install UV disinfection remove contact tank 2011 Hartham/Porthill Install UV disinfection remove contact tank 2011 Hart Lane Modify existing contact tank 2011 Thundridge Install UV disinfection 2011 Uttlesford Bridge Chlorination in existing tank 2011 North Stortford Install UV disinfection 2012 Chesham Install UV disinfection, surge vessel 2012 Hadham Mill Install UV disinfection 2012 Oughton Head Install UV disinfection 2013 Hare Street Install UV disinfection 2013 Hempstead Install UV disinfection 2013 Temple End Install UV disinfection 2013 Therfield Heath Install UV disinfection 2014 Hughenden Install UV disinfection 2014 B3 – Maintaining Service and Serviceability November 2010 Page 179 of 218 5 Three Valleys Water Final Business Plan Little Gaddesden Install UV disinfection 2014 West Horsley Install UV disinfection 2015 Site name Work proposed in AMP6 Completion date Eagle Tavern Install UV disinfection 2016 Newport Install UV disinfection 2016 Aston Install UV disinfection 2016 Chartridge Install UV disinfection 2016 Well Head Install UV disinfection 2016 Offley Bottom Install UV disinfection 2017 Redbourn Install UV disinfection 2017 School Lane Install UV disinfection 2017 Wymondley Install UV disinfection 2017 B3 – Maintaining Service and Serviceability November 2010 Page 180 of 218 5 Three Valleys Water Final Business Plan Project title: disinfection upgrade What is the problem? Project reference number: NALLSI15003 What is the solution? • Risk of deterioration without warning • Install UV disinfection systems at of water quality at borehole sites, and pressure sites with marginal concern over protection provided by chlorination. marginal chlorination. • Convert marginal chlorination sites to chlorination with contact where • A decision was taken in 2005 to upgrade to full disinfection at all sites tanks exist and are suitable. by 2015. • Convert two sites with pressure contact tanks to UV disinfection. • 23 sites remain with marginal chlorination. • Improve detention performance of contact tanks at one site. • Additionally there are three sites where the existing contact tanks do not have an adequate detention time. When does this project need to be complete and why? • Phased completion on programme to 2017 with priority for highest risk. • Prioritisation will mitigate the risk of disinfection failure following pollution of aquifer and accompanying supply difficulties. Costs: Capital cost to complete project: Operating cost following project £5,850,000 (£3,902,000 in AMP5 and completion: £130,000 /annum £1,948,000 in AMP6) How have these costs been identified? • The costs have been taken directly from framework prices and similar projects carried out within TVW between 2001 and 2008. • Operating costs have been derived on a component basis using typical consumptions. Is this project costIf this project is not cost-beneficial why is it being beneficial?# included in the proposed investment plan? Yes – see notes above What is the effect of this project on the embedded and operating carbon footprint?# Embedded carbon: 158 t CO2(e) Operating carbon: +118 t CO2(e)/annum How has this project changed since the Draft Business Plan? • Confirmation of costs and scope of supply for individual sites. Inclusion of surge analysis, security, MCC and software upgrades. • Larger number of sites determined where a kiosk or building is required. • Decision taken to extend the programme timetable into AMP6 to reduce effect on customer bills in AMP5. # For full details of our approach to CBA and carbon accounting see section C8. B3 – Maintaining Service and Serviceability November 2010 Page 181 of 218 5 Three Valleys Water Final Business Plan 11.3.3 Run to waste In order to comply with the Water Supply (Water Quality) Regulations 2000 we need to have treatment processes and safeguards in place to ensure that water not meeting the quality requirements for disinfection does not reach the disinfection stage and subsequently enter supply. Online instrumentation is used to detect problems and initiate a shut down. Shutdowns are disruptive and make it difficult to re-start some sources or to change flows as the water quality at start-up may differ from normal. We have reviewed the processes at each of our sites and have identified a need to modify them at four of our iron removal sites. These modifications allow the system to ‘run to waste’ during start-up. Water collected will subsequently be returned to the inlet of the works during normal operation. The iron removal sites, which will all have a run to waste connection to a reception tank from which water will be recovered, are at Dunmow, Redricks Lane, Runleywood (greensand) and Thaxted. For each of these sites we have undertaken a historical analysis of the site issues. We have considered, using our criticality assessment, whether each site is required for ongoing service, identified the number of customers that would be affected and whether a redesign of the network system could make the investment redundant. In each case we require the site to remain in service. We have carried out a CBA analysis for this project and found it to be cost beneficial under all three alternative risk scenarios based on 10, 20 and 40- year return periods. B3 – Maintaining Service and Serviceability November 2010 Page 182 of 218 5 Three Valleys Water Final Business Plan Project title: run to waste facilities Project reference number: NALLSI199980 What is the solution? • Install receiving tanks to catch first product water from filters during start up for later return to head of works. • Sites with filters for Iron and Manganese removal at Runley Wood (greensand), Redricks Lane, Thaxted and Dunmow. What is the problem? • Water quality regulations require water for disinfection to always be below 1NTU turbidity. • At filtration sites for Iron and Manganese start-up can be difficult due to difficulties in establishing chemical oxidation of metals resulting in higher turbidity arising from metals, and low chlorine residual. • Related incident at Thaxted in 2006 during start-up. When does this project need to be complete and why? • Completion by 2015. Sites to be dealt with in priority order to reduce operational difficulties. Costs: Capital cost to complete project: Operating cost following project £844,000 completion: £30,000 /annum How have these costs been identified? • Cost estimates based on estimated quantities required for project. Is this project costIf this project is not cost-beneficial why is it being beneficial? included in the proposed investment plan? • Yes What is the effect of this project on the embedded and operating carbon footprint?# Embedded carbon: 338 t CO2(e) Operating carbon: 23 t CO2(e)/annum How has this project changed since the Draft Business Plan? • Project was originally included in Draft Business Plan for AMP6. We have brought the project forward into AMP5 on consideration of the risk and problems with operability of the current systems. # For full details of our approach to CBA and carbon accounting see section C8 B3 – Maintaining Service and Serviceability November 2010 Page 183 of 218 5 Three Valleys Water Final Business Plan 11.3.4 St. George’s Hill Reservoir Project title: St. George’s Hill reservoir What is the problem? • Brick construction, built 1899. One of three reservoirs on the site, giving total site storage of 27Ml and supplying 40,000 properties in the Weybridge area. Movement has caused cracks in structure. History of problems, grouting of voids under and around the reservoir during 1970s. Structural failure of floor, cracked, caused by differential settlement. Concern over potential contamination through ingress or loss of water through leakage as structure deteriorates. Project reference number:NSTGE15054 What is the solution? • Replacement 12Ml reservoir to be built on land adjacent to current site. This land is already owned by the Company and was acquired for the purpose. • • Alternative locations and storage volumes for the reservoir have been reviewed and discounted on the basis • of cost or viability. • The option of abandoning and not replacing the reservoir is not • acceptable as storage would be unacceptably low during periods of • peak demand. • Refurbishment of existing reservoir would be problematic and expensive, due to age and poor condition. Asset has reached the end of its useful life. When does this project need to be complete and why? • 2013, to reduce supply and water quality risks. Costs: Capital cost to complete project: Operating cost following project £4,500,000. completion: £0 How have these costs been identified? • Cost build-up by consultants. • Based upon unit costs and past projects. If this project is not cost-beneficial why is it being Is this project costincluded in the proposed investment plan? beneficial?# Yes – see notes below What is the effect of this project on the embedded and operating carbon footprint?# Embedded carbon: 687 500 kg CO2(e) Operating carbon: 0 kg CO2(e)/annum How has this project changed since the Draft Business Plan? • Design review has been completed # For full details of our approach to CBA and carbon accounting see section C8. In undertaking the CBA we have assumed there is an increasing risk that the reservoir water will become contaminated. Normally this is likely to involve a multiple PCV failure, but it is possible that 1 in 10 of these will result in a boil notice. The risk is regarded as being about 1 in 10 years, growing with time. The population affected is the number in the zone supplied by the reservoir. In the event of a water quality incident it is likely that we would be prosecuted as the problem is known. These assumptions have made the investment strongly cost beneficial with the NPV of benefits – NPV of costs = £429 million. B3 – Maintaining Service and Serviceability November 2010 Page 184 of 218 5 Three Valleys Water Final Business Plan 11.3.5 Windmill Hill Reservoir Project Title: Windmill Hill Reservoir Project reference number: NWINH-15055 What is the problem? What is the solution? • Brick construction, built 1908. • Build replacement reservoir in 1.36Ml. location of existing. • Reservoir is in extremely poor • New reservoir to have a capacity of condition with known water ingress 3.1Ml, similar in capacity and depth through roof and walls. as existing reservoir no. 1. This will allow full use of existing site storage • Cracks in columns due to and permit outages and inspections settlement. of both reservoirs. • Reservoir is 1.8m shallower than • Unable to economically refurbish adjacent reservoir, thus preventing and extend. Asset has reached the full use of site storage. end of its useful life. • Concern over potential contamination through ingress or loss of water through leakage as structure deteriorates. When does this project need to be complete and why? • 2012, as tank roof is leaking and an urgent solution is needed. Costs: Capital cost to complete project: Operating cost following project £1,663,000 completion: £0 /annum How have these costs been identified? • Cost estimated by consultants. • Based upon unit costs and past projects.. If this project is not cost-beneficial why is it being Is this project costincluded in the proposed investment plan? beneficial?# Yes – see notes below What is the effect of this project on the embedded and operating carbon footprint?# Embedded carbon: 201 000 kg CO2(e) Operating carbon 0 kg CO2(e)/annum How has this project changed since the Draft Business Plan? Design review has now been completed # For full details of our approach to CBA and carbon accounting see section C8. Windmill Hill Reservoir is leaking. Drop test results have indicated that around 100 m3/d is being lost. In undertaking the CBA we have assumed that there is an increasing risk that the reservoir water will become contaminated. Normally this is likely to involve a multiple PCV failure, but it is possible that 1 in 10 of these will result in a boil notice. The risk is regarded as being about 1 in 10 years, growing with time. The population affected is the number in the zone supplied by the reservoir. In the event of a water quality incident it is likely that the company would be prosecuted as the problem is known. These assumptions have made the investment cost beneficial with the NPV of benefits - NPV of costs = £42 million. B3 – Maintaining Service and Serviceability November 2010 Page 185 of 218 5 Three Valleys Water Final Business Plan 11.3.6 Compulsory relocation of Takeley Tower Project title: Takeley water tower relocation What is the problem? • BAA Stansted intends to enlarge the runway capacity at Stansted airport. Once confirmed by the Department for Transport, Takeley water tower will be located in the path of the new second runway • Takeley Water tower is currently providing security of supply in Takeley area. • The second runway is planned to be open in 2015. Project reference number: NTAKEL10000 Embedded carbon: 2,262 tCO2(e) Operating carbon: 17.3 tCO2(e)/annum increase What is the solution? • We will have to relocate Takeley water tower to an appropriate location to be able to maintain security of supply to Bambers Green area (800 properties). • A new main is necessary to link the new water tower with the existing mains infrastructure close to junction 8a of the M11. • A new booster station will be constructed at Bambers Green to provide the right pressure. • We have considered two possible sites for the water tower, two possible sites for the booster station and three routes for the water main. When does this project need to be complete and why? • The tower will need to be available before 2015. Without a water tower, we will not be able to provide water to all of our customers. In addition, this project will provide security of supply in this area with a new water main forming a triangular network. Construction will begin in 2010/11. Costs: Capital cost to complete project: Operating cost following project £3,863,000 but this will be offset through completion: £ 3200 /annum contribution from the developer. How have these costs been identified? • A feasibility cost study has been carried out using bottom up estimation. Is this project costIf this project is not cost-beneficial why is it being # beneficial? included in the proposed investment plan? Not applicable as not a This is an enforced change due to the expansion of the discretionary investment runway and is necessary to maintain service to customers. What is the effect of this project on the embedded and operating carbon footprint?# How has this project changed since the Draft Business Plan? • A feasibility study has been carried out on the locations of the water tower, the water main and the booster station. # For full details of our approach to CBA and carbon accounting see section C8. B3 – Maintaining Service and Serviceability November 2010 Page 186 of 218 5 Three Valleys Water Final Business Plan 11.4 Summary – plan for specific programmes of work and specific asset renewals The costs, completion dates and outputs for the specific programmes of work and specific asset renewals are summarised in the table below. Table B3 : 50 Summary of specific programmes of work and specific asset renewals Specific programmes of work Cost AMP5 (£m) Planned completion date Cost beneficial? Disinfection upgrade 3.9 March 2017 Yes Run to waste facilities 0.8 March 2015 Yes 14.1 March 2015 Yes Domestic meter replacements Total specific programmes of work Specific asset renewals St. George's Hill reservoir 17 sites upgraded to improved disinfection capability in AMP5 with a further nine to be delivered early in AMP6 as part of the overlap programme Improved operability of four iron removal sites during start-up Failed meters replaced on a rolling programme basis 18.9 Cost AMP5 (£m) Output 0.1 in AMP5 with 4.4 in AMP6 March 2018 Yes Windmill Hill reservoir 1.7 March 2012 Yes Other required work Cost AMP5 (£m) Takeley Tower Output 2.7 New 12ml reservoir. Design to be started in AMP5 with construction to be completed in AMP6 as part of the overlap programme New 3.1Ml reservoir Output March 2012 B3 – Maintaining Service and Serviceability November 2010 Page 187 of 218 Not assessed Replacement tower 5 Three Valleys Water Final Business Plan 12 Our plan for non-infrastructure assets: information technology assets 12.1 Introduction Our information technology (IT) assets – our diverse collection of hardware, software and services used to create, process, store, transmit and display information – is a critical facilitator for a successful, customer focused organisation. IT enables business processes to flow and timely decision making; it promotes organisational efficiency and growth and enables an increase of collaboration, communication and development of business models. We propose to invest £25.6 million in AMP5 maintaining an asset base with an MEAV of £38.2 million. Many of these assets have short asset lives compared to operational assets. Excluding the datasets (MEAV £63 million) we are proposing to replace our assets on average every seven and a half years. This investment is essential if we are to maintain support for all areas of the business and embrace our number one priority – to keep our customers satisfied and, wherever practical and economic, to improve the customer experience. Historical analysis was conducted in order to compare investment during previous and current AMP periods (2000-10) to the proposed AMP5 spend. There was high investment in AMP3 with a dip in investment in AMP4, which indicates that we are behind on our investment in our applications. The dip in spend has identified the need to invest more on business applications and core infrastructure components in AMP5. After this investment we will return to a more steady state, where we will see consistency in future investments. During AMP4 we adopted a break-fix approach to ‘sweat’ our hardware assets. We discovered a need to accelerate the pace of renewal with IT outages happening more frequently. Investments will be targeted where we have vulnerabilities or an inability to service our customers and meet their expectations. Since the Draft Business Plan we have undertaken a critical review of the proposed IT improvement projects and taken account of the investment made in the asset base as part of our relocation to a new office in spring 2009. This has reduced the previously proposed investment of £32 million at the Draft Business Plan by 19.7%. In this Final Business Plan we have made the link to service by showing how our business applications support our service to customers. This is reflected in our levels of services performance indicators (DGs). Our IT assets play a crucial part in supporting our service to customers. Within the business plan we have laid out a strategic approach which will significantly mitigate the risk of future system failure and hence enable an even higher quality of customer service. 12.2 Approach A straightforward process was developed to determine the future IT programme for PR09. This is summarised in the following figure: the ‘IT investment planning process’ and is explained in detail later B3 – Maintaining Service and Serviceability November 2010 Page 188 of 218 5 Three Valleys Water Final Business Plan Figure B3 : 66 IT investment planning process 12.3 12.3.1 Analysis Validation of asset database (CMDB) Information about all IT assets is held in the configuration item management database (CMDB) This is our asset inventory and holds details such as asset tag, make, model, category, serial number, age and price. Any reactive maintenance work or asset changes are linked with the individual asset, building a view of reliability and cost of maintenance. The process of validating the CMDB began with the execution of two audits; a network wide automated check using industry standard software (Altiris) and a physical check of assets unable to be detected automatically (monitors, printers, Thin-Client terminals, and high value equipment). Altiris was used for the analysis of equipment connected to the Local Area Network, extracting the asset information over two consecutive months. This ensured all PC workstations and laptops were audited and the subsequent data was compared with the asset information in the CMDB. B3 – Maintaining Service and Serviceability November 2010 Page 189 of 218 5 Three Valleys Water Final Business Plan Monitors, thin-client machines (devices without hard disks), printers and high value equipment (servers, server room facilities, etc.) were not able to be audited via Altiris. These were inspected during site visits by internal IT personnel who validated the CMDB data against the physical asset. Information was also obtained from suppliers. 12.3.2 IT hardware assets: identifying optimum replacement period In AMP3, our IT assets were renewed based on an industry standard replacement policy. In AMP4 we adopted a break-fix approach to ‘sweat’ these assets. As we approach the end of AMP4, this approach needs to change as the deteriorating of our IT infrastructure is becoming more noticeable. It tends to fail and cause system outages which in turn affect the service we provide to our customers. To avoid this a replacement policy for maintaining IT assets (which has been reviewed by IT experts and compared to industry standards) has been put back into place. To highlight the importance of investing in the maintenance and improvement of the IT infrastructure, we used statistics from recent IT outages to asses the financial impact to the Company and the impact on customers. To identify the optimum life expectancy of IT assets, we conducted an analysis of Gartner reports. Gartner is a leading information technology research and advisory company. One of its key findings indicates that keeping IT assets for too long can reduce capital expenditure; but operating costs will rise and end-user productivity decrease. As a part of the PR09 process, the existing replacement policy has been refined. We have focused on the replacement trends in AMP4, where we had adopted the break-fix approach. Based on this analysis and the information supported by the National Audit Office and Gartner, we have optimised the life expectancy of our hardware assets. We are proposing to invest £5.6 million in AMP5 in the hardware asset base (MEAV of £8 million) on average replacing every seven and a half years. Trying to maintain equipment beyond the replacement periods defined will have an adverse impact on systems availability and the levels of service provided for our customers. 12.3.3 IT software assets: identifying optimum replacement period Gartner recommends consideration of four factors when determining whether and when to upgrade or replace software. • Business value; ensure that the application upgrade provides some meaningful value to the business, whether in capability improvements, cost reductions or as a positioning move to gain future capabilities. • IT infrastructure needs; the business case for upgrades that modernise the IT infrastructure should address cost improvements, systems reliability and improvements in the ability to deliver, as well as ‘keeping current’ through a general refresh of technology. • Business risk; weigh the benefits and risks of retaining an ageing system against those of upgrading, particularly when the upgrade does not provide immediate value to the business. • Optimal timing; factor in benefits and risks associated with the timing and sequencing of the upgrade or replacement, particularly if your organisation is in a growth or acquisition phase. B3 – Maintaining Service and Serviceability November 2010 Page 190 of 218 5 Three Valleys Water Final Business Plan The above factors were used as the foundation for the analysis undertaken to assess the investment for the software assets in AMP5, 6 and 7. 12.3.4 Business applications Software applications support the business processes by ensuring we provide an acceptable service to our customers. It is essential to understand the strategic direction of each business area where its prime objectives involve service to customers. Workshops and regular meetings were held to understand the interdependencies between the business and IT. The results of these discussions have a direct impact on how we plan to maintain and improve software applications. It is also important to understand the future requirements of our customers. For example, online billing is becoming increasingly popular, many customers expect to be able to view and pay their bills online. We must ensure that we cater for our customers’ needs and expectations through the future development of IT applications. This example can be achieved through enhancing the website and billing system and implementing a solution which combines the two technologies. Awareness of how suppliers are planning to develop their solutions is another important point. Interviews were conducted to ascertain future development plans and obtain expert opinions on how technology will be changing and developing. Analysis of the core drivers has enabled us to plan an investment profile for business applications, and to identify when to replace a system or upgrade it. The largest investment element of the IT maintenance programme in AMP5 is £15.4 million for the replacement, upgrading and development of existing software applications. The software maintenance strategy for the large Corporate Applications has been tailored to the product and individual business cases have been written for each one. In AMP5 we plan to replace the billing application, electronic document management system, job management application, job scheduling application and field information system. These assets need to be replaced due to various unique factors covered in the detailed business cases. The Oracle application, geographical information system and the asset management information system, all need to be upgraded in line with supplier recommendations. This choice is the best fit for the business and is again detailed in the business cases. The following sections describe the six principle business applications categorised in the departmental directorates: 12.4 Operations In the operations directorate various application developments are proposed for the period 2010-15. The executive summary from the business cases that have been written to justify the applications replacement or upgrade strategy are provided below. 12.4.1 Job management systems The job management suite comprises four main systems. The works management information system (WMIS) provides the core works management functionality for below ground assets. It is replicated in a simplified field interface on the field information system (FIS), supplied by ESRI. Jobwise is the ‘best of breed’ scheduling module that supports the efficient allocation of field resources to tasks. Insight, a specialist street works B3 – Maintaining Service and Serviceability November 2010 Page 191 of 218 5 Three Valleys Water Final Business Plan application from Symology, completes the suite of systems supporting day to day operational activities. 12.4.1.1 Work management information system (WMIS) Supplied by Logica, this is the corporate below ground works management system and has been in use since 1997. It has an active user base of around 250 and through integration with a number of corporate systems, is pivotal to the day to day functioning of the operations department, as well as the provision of data to a number of other departments. All maintenance/installation tasks undertaken on the underground pipe network, from task initiation through to the enabling process – such as the issuing of quotations and inspections – to the completion of the task and costs being transferred to the financial systems, are managed by WMIS. 12.4.1.2 Field information systems (FIS) It is split into two functional areas: network services/customer operations/leakage (below ground field tasks) and production (above ground field tasks). FIS for below ground tasks consists of four separate applications that run on Panasonic CF-19 Toughbooks. The applications are a light version of the backend systems WMIS, QOS, ETON Log and GIS. There are 250 users with CF-19 Toughbooks, including gangs, customer service technicians (CST’s), field technicians (FT’s) and leakage technicians (LT’s). FIS for production provides Panasonic Toughbooks (CF27/CF28) to 55 production engineers to allow thin client access in the field, as well as access to a range of monitoring and diagnostics tools. The server component of FIS has been in use in the Company since 2001. 12.4.1.3 Jobwise This is a scheduling module, supplied and installed by Workplace Systems in 2000, which is linked to WMIS by a two-way interface. Jobwise provides a graphical interface for scheduling work to field staff while taking into account relevant constraints, such as staff skill, work areas, availability and working hours. The module also contains an auto scheduling facility which allows a schedule to be automatically produced, taking into account the above constraints. 12.4.1.4 Insight This is a specialist legislation engine that provides New Roads and Street Works Act 1991 (NRSWA) and Traffic Management Act 2004 (TMA) compliant functionality. It was installed in 2008. It is linked to WMIS at both job creation and job completion stages and facilitates two-way communication with the Highway Authorities, Transport for London and other interested parties to inform them of tasks we plan to undertake in public highways. This application ensures adherence to the strict codes of practice around notice periods and working practices. 12.4.1.5 Job management AMP5 forecast summary In order to maintain current levels of service and to give us a platform from which we can gain service level improvements, we plan to replace the job management system, the job scheduling system and the field information system that enables the information from these two corporate systems to be used in the field. We also intend to reproduce all interfaces between these systems and other corporate systems. We plan to gain further benefit from this strategy and improve the integration of the various systems servicing the operations arm of the business. This will include a close coupling of street works with the scheduling and planning tool and integration of these systems with other corporate systems. For example, the link up of job management and planning systems with vehicle tracking and photographic library systems. B3 – Maintaining Service and Serviceability November 2010 Page 192 of 218 5 Three Valleys Water Final Business Plan 12.4.2 Geographical information systems (GIS) This is a system of hardware and software used for the storage, retrieval, mapping and analysis of geographic data. Around 80% of business information has a geographic or ‘location’ component, and as such, GIS is fast becoming a critical tool for managing a wide array of information. Within our Company, GIS is being used in asset management, works management, customer relationship management, development planning and a range of other applications. The GIS system represents an authoritative source of the asset information around the pipe network. The system is accessed by more than 600 staff either delivered over thin client to office locations or to the field through mobile devices. It is used to support a wide range of business activities from decision support, investment planning, through to work and job planning. This is an example of an operational system that supports the service we provide to customers especially around the quality of continuous water supply (DG1,2,3), The GIS is a critical business information system as it: • provides the data and maps that support field operations • ensures our field staff can easily locate assets in the field for more efficient maintenance • ensures the safety of our field staff by showing the location of underground water, gas and electrical assets • ensures the correct positioning of what we do, thus avoiding costly re-work • enables flexible reporting on the nature, performance and location of assets. During 2008, we undertook a major overhaul of the GIS environment. This rationalisation was undertaken to upgrade the GIS platform to current technology, and to ensure that GIS can be more easily integrated with other business information systems across the Company. We are now in a position to fully exploit the power and functionality of GIS across the business, and to make GIS an even more valuable tool for a wide range of our staff. The objectives of the GIS software maintenance project for PR09 are as follows: • to ensure that GIS software we use remains up-to-date and utilises current technology • to ensure that GIS applications we use continue to be supported by the software vendor(s) • to ensure that GIS applications we use utilise commercial off-the-shelf technology wherever possible, thus minimising costs of customisations and future upgrades • to ensure that GIS applications we use continue to meet needs when responding to customer issues. The scope of the GIS software maintenance project for PR09 is as follows: • undertake minor software upgrades every two years, in line with the software vendor’s release programme B3 – Maintaining Service and Serviceability November 2010 Page 193 of 218 5 Three Valleys Water Final Business Plan • undertake major software upgrades every six years, in line with the software vendor’s release programme • ensure sufficient GIS software licenses are available to cope with continued gradual rate of growth in our GIS user base • ensure GIS functionality available to our staff meets current user requirements and industry standards. This project includes internal and external resource costs for software upgrades and additional licensing only. Existing GIS software maintenance and license fees are covered in operating expenditure and are not considered here. As a complete replacement of GIS software and systems has just been completed, the GIS Software Maintenance project for PR09 does not propose any major replacement of systems or software in the next five-year period. 12.4.3 Asset management information system The Above ground asset information system was installed during 2002 and we presently use it as our above ground asset inventory and works management system for production staff. We will extend the capability of the works management system during 2009 through the introduction of the field component. The objectives of the AMIS software maintenance project for PR09 are as follows: • to ensure that AMIS remains up-to-date and utilises current technology • to ensure that AMIS continues to be supported by the software vendor • to ensure that AMIS utilises commercial off-the-shelf technology wherever possible, thus minimising costs of customisations and future upgrades • to better integrate AMIS with GIS, thus providing users with powerful spatial analysis tools to improve efficiencies • to ensure that AMIS continues to meet needs when responding to customer issues. The scope of the AMIS software maintenance project for PR09 is as follows: • undertake routine software upgrades every two years, in line with the software vendor’s release programme • ensure sufficient software licenses are available to cope with continued gradual rate of growth in the AMIS user base • ensure AMIS functionality available to our staff meets current user requirements and industry standards • link AMIS with GIS, allowing users to view the location and details of above-ground assets on a map-based interface, so providing users with powerful spatial analysis tools to improve efficiency. 12.5 Customer services B3 – Maintaining Service and Serviceability November 2010 Page 194 of 218 5 Three Valleys Water Final Business Plan In the customer services directorate various application developments are proposed for the period 2010-15. Below is the executive summary from the business cases that have been written to justify the applications replacement or upgrade strategy. 12.5.1 Billing systems The billing application (Hi-Affinity) is the primary repository for customer, property and meter information and uses this data to generate customer bills on a monthly, quarterly, half yearly and annual basis for both metered and non-metered consumption. It provides all necessary processes for managing the billing function, including tariff management, apportionment of accounts, change of services and meter route and reading management. It also provides facilities for the recording and management of customer contact, the management of debt recovery activity, and the tracking of a number of internal activities. All reporting relating to billing, customer contact, customer account activity and response times, customer debt and payments are provided by the reporting facilities built into the product. Currently there are approximately 750 registered users, with a contiguous licence for our 250 users. We have been using versions of the product for 20 years, during which time it has gone through a significant number of upgrades and enhancements to support business and regulatory change. The Hi-Affinity system forms a hub for all the customer related processes that are fundamental to good customer service. DG 6, 7 and 9 are all supported by the suite of applications that surround and interact with Hi-Affinity. The following is an illustration – using metering as an example – of how IT applications support the service we provide to our customers. Meter installation consists of three stages: request, installation and update. The request for a meter is managed via the Hi-Affinity billing application which in turn interfaces into operational applications (works management, street works, job scheduling, GIS and job location plotting), to manage the process for the actual installation. On completion of the installation stage the Hi-Affinity billing application is updated with the installation data, while the works management system is updated with materials used and dimensions of any reinstatement necessary. This work is carried out via a field information system which effectively puts these corporate systems in the hands of the workforce carrying out the work.. Data is transferred from the field to the back office via 3G mobile communications, allowing for the very latest data to be available on the corporate systems. In the event of a customer calling with a query, this information is in the hands of the call agent giving them the ability to service the customers’ needs immediately. We have contracted a prominent third party, H20, to carry out meter installations and exchanges. They are co-located with us and work in tandem with the corporate applications. End-to-end management of the meter reading process is achieved using the Hi-Affinity billing application, feeding a dedicated hand-held meter reading system (Routestar). The interfaces between the two systems have been tailored for efficient data transfer. It is exchanged using GSM technologies which means meter readers can send and receive readings remotely. B3 – Maintaining Service and Serviceability November 2010 Page 195 of 218 5 Three Valleys Water Final Business Plan Currently, the AMR technology is used on a small scale. This is presently being expanded in a trial that is looking at the benefits that more frequent automated readings may provide to support the concept of introducing seasonal tariff billing and better information for customers. This example shows how an IT application can directly affect the customer experience and how future developments will further enhance our capability to deliver services our customers expect. 12.5.1.1 Billing system AMP5 forecast summary Our plan is to replace the existing billing system (HiAffinity) with a full end-to-end processing system that embraces customer relationship management and billing functionality. The key requirements are to improve engagement with our customers, increase the options we offer for contact and to increase our efficiency. We plan to increase efficiency and meet technology and creativity improvement goals set out in our customer experience programme. Our plan is to acquire and implement a system which enables us to deliver a service to our customers which goes beyond meeting their needs and expectations. We have established our project objectives as follows. • To maximise process efficiency and resource optimisation, enabling us to reduce costs and deliver a quicker and vastly improved customer service. • To align systems to the needs of the business; bring about a fundamental change from being in a total reactive state to one of being proactive. • To deliver key process improvements for: • • o waste water notices o high consumption o change of occupancy and re-billing o data management o integration of customer relationship technology o integration of customer engagement system. o one view of the customer. To introduce a new and improved online capability embracing: o online self service and account management o automation of key processes online o development of an online marketing strategy o improve and target data collection o improve interactive capabilities o introduce a self servicing tracking capability. Improve our debt management capability by: B3 – Maintaining Service and Serviceability November 2010 Page 196 of 218 5 Three Valleys Water Final Business Plan • 12.5.2 o implementing a system with ‘true’ debt management functionality o introducing a comprehensive action tracking facility o having full risk analysis features o interfacing with external credit scoring systems. To have the ability to accept imported data that would aid data segmentation e.g. socio-demographic and credit reference data to aid distinguishing between those customers who cannot pay and those customers who will not pay. Electronic document management system (EDMS) The current EDMS system is used to electronically capture and manage all correspondence that is received or sent to customers via post, fax or e-mail. The EDMS system consists of software from Vignette (a large content management company) and Tower/Staffware (owned by Tibco, a global systems integration company). Correspondence is scanned-in while faxes and e-mails are imported into a system. Content is then indexed and allocated to various queues depending on the type of correspondence (e.g. complaint, debt recovery etc.). Relevant staff members access the electronic images/documents via Hi-Affinity on their desktops. The existing EDMS system is not fit for purpose and it cannot be economically upgraded. It needs to be replaced. In other words, the cost to fix and operate the current system would provide lower value than replacing everything. A major advantage of adopting a new solution based on a standard platform is that the technology can be re-used across the organisation to solve other business problems. The investment made in a new EDMS could provide further benefits. The cost to replace EDMS based on Microsoft SharePoint will be circa £650,000 made up of £400,000 resource costs; £100,000 hardware costs and 150,000 software costs. The costs to maintain the system will be £80,000 (£30,000 internal specialist support and £50,000 external support). The customer benefit from this will be that we will be able to handle customer correspondence more efficiently and accurately. In addition, the new system will provide the call agent with complimentary correspondence, such as the bill. 12.6 Finance In the finance directorate the application developments proposed for the period 2010-15 is the upgrade of oracle financials. Below is the executive summary from the business case that has been written to justify the applications upgrade strategy. 12.6.1 Oracle finance system This application is the primary accounting system used to capture, record and report financial activities during the financial year from April to March. It is used to provide the information that goes into the statutory annual reporting to HMRC. The Oracle financial applications are also used to provide monthly management accounts information which is B3 – Maintaining Service and Serviceability November 2010 Page 197 of 218 5 Three Valleys Water Final Business Plan used to monitor and control costs, compare actual against budget and manage business activities from a financial perspective on a month by month basis. The original Oracle implementation was version 10.6 in the year 1996/97. This version was upgraded to version 10.7 in 1999 in order to be year 2000 compliant. The 11i version of Oracle Financials version 11.5.7 was implemented in 2002/03. This version is the one in current operation. Primary support for 11.5.7 ended in May 2007 and the system is at least two years overdue for upgrade or replacement. The decision to delay the upgrade of the existing system was made because an improved version of Oracle financials was due to be released in the following two years, and as such we wanted to take advantage of the added functionality available. Following the release of Version R12 (Fusion) we are now scoping the upgrade project and a detailed proposal will be produced for a plan to go live on R12 in 2010. It is part of the planned five-year maintenance of our IT systems to provide suitable sustainable IT systems for the business and its customers. To ensure maximum benefit to the business there will be a large focus on reducing the hard-coded workflow customisations as standard workflow customisations can be utilised for efficiency and consistency. The benefits of the upgrade are as follows: • greater functionality is available to users with provision for improvements and efficiencies in their roles • provides a better capture of data • the processes are simplified • the old software, which is already at a significantly reduced state of support, may become unsupported and therefore will produce a financial impact if the upgrade did not take place • without the upgrade the database and applications are at greater risk of failure, the result of which could affect financial reporting and hence the businesses ability to function effectively for the delivery of services to its customers • process improvements to gain business benefit are facilitated by having the most up to date software releases that are compatible with newly developed products. 12.7 IT operations software IT operations software includes standard business operating systems such as Windows, remote access and systems management software. The majority of IT operations software is under an annual (opex funded) support and maintenance contract which provides free upgrades to new releases of software. However, this only gives access to software upgrades; significant internal and external effort is often required to complete upgrades. The total expenditure required in AMP5 is £3.5 million. Within this period, the following six key projects will be delivered:- B3 – Maintaining Service and Serviceability November 2010 Page 198 of 218 5 Three Valleys Water Final Business Plan • upgrade to Citrix (Thin Client) environment • upgrade to Microsoft Exchange email/messaging system • ongoing maintenance of HP Openview systems management solution • update to Microsoft Windows operating system and Office productivity tools • ongoing upgrades to Portwise remote access solution • ongoing maintenance of existing security and system management tools such as anti-virus, patch management and software deployment. The aim of this investment is to ensure that the IT assets can deliver a consistent level of service and performance. This will ensure that staff productivity levels are high and our customers receive a very good level of service. 12.7.1 Results and conclusions 12.7.1.1 Processing the results All hardware asset information was put in a financial model which compares the cost, age and type of asset against the specified replacement periods. The Excel model was developed to identify the deterioration of hardware assets and determine a future investment plan based on the data extracted from the CMDB. The software asset information was also fed into the model to define the required total for all IT assets. The following table summarises the outputs of this model. 12.7.1.2 IT investments: past, present and future The trends shown in the analysis below highlight the front loading of the AMP3 programme which was the last period of significant investment in the large corporate applications. The result of this is the need in AMP5 to replace applications which are failing to meet the current needs of the business. Figure B3 : 67 IT spend on investments (actual and planned) between 2000-15 Total IT Spend Hub Related Spend £9,000,000 £8,000,000 £7,000,000 Spend £6,000,000 £5,000,000 £4,000,000 £3,000,000 £2,000,000 £1,000,000 14 -1 5 -1 4 20 13 20 12 -1 3 -1 2 20 11 20 10 -1 1 -1 0 B3 – Maintaining Service and Serviceability November 2010 Page 199 of 218 20 09 20 20 08 -0 9 -0 8 7 07 20 60 07 20 05 -0 6 -0 5 20 04 20 03 -0 4 -0 3 20 02 -0 2 20 01 20 20 00 -0 1 £0 5 Three Valleys Water Final Business Plan 2000-05 2005-10 2010-15 £15.289 at actual prices £15.507 (excluding Hub) at actual and current prices £25.6 million at 08-09 prices 2000-05 During the AMP period from 2000-05 several new key corporate systems were introduced, providing significant business benefit. • network field information system – £1.14 million • network job scheduling – £110,000 • above ground asset register – £350,000 • i-procurement – £735,000 • EMDS – £420,000. In addition there were major upgrades to a number of corporate systems. • Oracle R11i was implemented at a cost of £900,000 in 2002. • HiAffinity was introduced to replace Custima (a previous generation of this application) at a cost of £1.06 million (or £1.8 million) in 2002. • The below ground works management system WMIS was upgraded at a cost of £150,000 in 2004. 2005-10 The current AMP period, from 2005-10, has not seen a similar level of significant investment in key corporate systems. No new corporate systems have been introduced during this period. Time was spent investigating process improvements in the organisation, including an investigation of business process management technology, but the project was not implemented. We decided to put the project on hold because it would affect the business during our move to the new offices and the benefits would not be realised. Overall investment in this period has been lower than the previous AMP period and this is now impacting systems availability. There have been upgrades to some corporate systems, listed below, but others key systems have not been upgraded (Oracle, WMIS, and network job management) and are now out of support and in need of attention. Key enhancements to applications during the period are: • The Streetworks system has been made compliant with the new Traffic Management Act at a cost of £405,000 • The above ground asset register implemented in the previous AMP period has been enhanced to provide both job management and deployment to the field at a cost of £1 million • The GIS has been upgraded at a cost of £750,000. 2010-15 B3 – Maintaining Service and Serviceability November 2010 Page 200 of 218 5 Three Valleys Water Final Business Plan The 2010-15 plan is a result of an absence of investment on some key systems in AMP4. These applications now require appropriate investment, through upgrade or replacement, to ensure they continue to support key business processes. In comparison to the rest of AMP5, 2010/11 and 2013/14 indicates a peak in investment due largely to three elements of the IT maintenance programme; • Business applications: the replacement of the job management systems and the Hi-Affinity replacement form the bulk of the application spend for the initial four years of AMP5. Table B3 : 51 IT business applications investment profile AMP5 • 2010 2011 2012 2013 2014 £4,298,250 £3,075,500 £3,854,500 £3,479,839 £740,000 Operational software: the replacement strategy which sits behind the operational software assets in general proposes that the assets are replaced every three years. Hence, the pattern visible in the below table continues to repeat itself through the remaining AMPs. Table B3 : 52 IT operational software investment profile AMP5 2010 £1,109,850 • 2011 £306,712 2012 £92,920 2013 2014 £1,458,908 £464,466 Hardware / servers: the impact of the server consolidation project completed in 2009 was taken into account for the PR09 submission. In summary, we deployed 16 large capacity servers which allowed us to decommission 110 servers. With a replacement cycle of four years, the new server renewals fall into 2013 which adds to the peak in investment visible in this year. Table B3 : 53 IT servers investment profile AMP5 2010 2011 2012 £370,500 £113,283 £215,600 2013 £1,490,000 2014 £120,500 There is a consistent pattern of investment in general through AMP 3,4,5,6 and 7. The main inconsistencies that are apparent are due largely to the business application upgrades and the impact of the move to the systems at our other sites which are exclusive to the new site. 12.7.1.3 Summary of IT investment proposal The comprehensive analysis which we conducted for the IT asset base – taking into account the market and the business strategy – indicates that it is essential that we invest £25.6 million in AMP5 to ensure that we can meet our customers’ needs and expectations. As identified in the analysis above, we predict that after this investment, we will return to a more steady state where we will see consistency in our future investments. If we do not make this investment, the effects on the business will result in a continuously deteriorating IT infrastructure with many more outages for the Company and adverse effects on service for our customers. The cost benefit analysis shows that investment in IT assets is strongly cost beneficial with the NPV of benefits – NPV of costs = £112 million. Not carrying out the investment will B3 – Maintaining Service and Serviceability November 2010 Page 201 of 218 5 Three Valleys Water Final Business Plan result in increased response times to customers (and hence increased DG3 incidents) and increased customer contacts. B3 – Maintaining Service and Serviceability November 2010 Page 202 of 218 5 Three Valleys Water Final Business Plan Table B3 : 54 IT investment profile overview AMP5 Main categories Hardware devices / Number of assets Average replacement period – years AMP5 1776 6 Hardware / peripherals 1786 Telephony 2709 9 Hardware / servers 260 5 Security Network Software / business applications Software / other Hardware / communications room facilities Datasets IT risk resilience projects Total 12.8 128 119 5 Breakdown of categories (and AMP5 replacement years) PC workstations (6), Laptops (4), Thin client (8), Field devices (5) Monitors (4), Plotters (7) Printers (5), Projectors (3), Scanners(5), Desk phones (10). PDA (5), SMG (10) Linux/Unix servers (5), Windows servers (4), Storage and backup (5) 3 6 Based on supplier quotes and expert recommendations 56 58 Operating systems (5), Office productivity (5), Development tools (5), Mail messaging systems (5), Middleware (8) Aircon (10), Racks (10), Cabling (15) N/A GMEAV (m) AMP5 programme 2,163,632 £1,926,768 £830,963 £824,855 £1,016,497 £367,280 £2,543,383 £2,309,883 £55,000 £1,219,022 £110,000 £63,000 £18,507,239 £15,448,089 £3,330,168 £3,432,856 £212,000 £0 £63,077,723 £0 £1,160,000 £92,955,628 £25,642,731 Cost benefit analysis Although investment in our IT assets is needed to sought to demonstrate the value of our systems by our plans for key corporate systems and software. likelihood and impact of system failures on our willingness to pay. maintain essential services, we have undertaking costs benefit analysis on In each case we have assessed the costs and our customers, including In many cases failure would result in increased customer contact and duration of interruptions to supply. For example, our customer billing and CRM system – which is already experiencing failures – uses cluster reporting to minimise the amount of DG3 failures. We run the risk of losing this tool and if this happens the length of interruption will increase. B3 – Maintaining Service and Serviceability November 2010 Page 203 of 218 5 Three Valleys Water Final Business Plan From mains work the number of property interruptions per year is about 100,000 with an average time to repair and restore of around four hours. We estimate that as a result of not spotting trends, particularly on large events, the average time of repair will increase by 30 minutes to four and a half hours. It is assessed that 4000 extra properties will go over six hours. The table below summarises the cost and benefit values over a 40 year period. It can be seen that each project is beneficial, which confirms the value of this investment. Table B3 : 55 Cost benefit of IT projects Project Benefit cost £m Whole life benefit £m Whole Life Cost £m Electronic document management system 2.31 4.15 1.83 Customer billing and CRM 52.54 59.00 6.46 57.42 64.28 6.86 112.27 127.43 15.16 Replacement of job management systems Total IT maintenance Further details of the approach to cost benefit analysis can be found in section C8. B3 – Maintaining Service and Serviceability November 2010 Page 204 of 218 5 Three Valleys Water Final Business Plan Appendix 3: Our asset management policy and strategy Our asset management policy was approved by the Board in April 2008. Our current policy is detailed below. Our strategic asset management aims are to: • utilise our assets effectively and safely to achieve excellent customer service • maintain and wherever possible and economical, improve the reliability of our assets • meet all regulatory targets and outputs set by Government and our regulators, Ofwat, DWI and the EA • employ dedicated staff who are well-trained, competent, highly motivated and take responsibility for asset management outcomes • contribute to environmental improvements and promote long-term sustainable solutions • be at the forefront of best practice asset management by continuously improving and extending our asset knowledge and risk-based asset management processes and our supporting systems • undertake research and development that leads to our asset management being distinctive and innovative. It is our policy that our assets are designed, constructed and maintained in an efficient manner which: • complies with all relevant legal and regulatory requirements • supports the Company’s strategic aims and in particular the 25 year Strategic Direction Statement • supports the five year Business Plan and Monitoring Plan agreed with Ofwat at periodic reviews of prices • accords with our corporate responsibility, risk management, ethics and governance policies and framework. Strategy Our strategy for meeting the requirements of the asset management policy focuses on the two key areas of decision making and enablement. The current strategy is laid out below. (1) Decision making (a) Asset utilisation and definition of outputs – the physical outputs that assets need to achieve (for example, condition and performance, reliability and capability) are defined in order to meet the requirements of our customers, shareholders and other key stakeholders such as our regulators. The outputs defined provide targets against which decisions can be made about maintaining, renewing or enhancing our assets. B3 – Maintaining Service and Serviceability November 2010 Page 205 of 218 5 Three Valleys Water Final Business Plan (b) Asset policies, engineering standards, specifications and guidance – asset policy documents are supported where necessary by standards, specifications and other guidance documents. These prescribe specific requirements for asset interventions. They are reviewed annually and updated as appropriate. (c) Asset Plans – the actions necessary to achieve the interventions identified in (a) above are collated where appropriate into specific asset plans (for example master development plans for major treatment work, mains renewal plans) that can feed into the development of our future investment plan. (2) Asset management enablement – effective asset management needs to be stimulated and enabled. We have identified a number of key enablers: (a) Organisational Structure – in order to ensure we can achieve our vision and policy for asset management we will maintain a dedicated and competent asset management team led by a senior manager attending the Executive Management Committee, the Capex Committee and the Risk Management Committee. Asset Management will report through to the Board via the Operations Director who is an Executive Director. (b) Asset Information – timely, accurate and accessible information is a prerequisite for effective asset management and required to support all stages of decision making. We are committed to maintaining a comprehensive set of information on for example, asset type, location, installation date, utilisation, condition and performance, failure records, costs, work records, plans. We will continue to improve the quality and scope of our asset information. We are also committed to continuous improvement and maximising the deployment of new technology and will have system development plans for our key asset related information systems. It is essential that information and knowledge gained from operating and maintenance experience is captured and stored for future reference and use. Much of this knowledge lies with the technical resources in asset management and is captured and stored via electronic storage systems such as GIS. We seek to improve the effectiveness of our knowledge management processes and systems. (c) Decision support tools and methods – analytical tools and methods support decisions in a number of key areas of asset management. They are complimentary to normal engineering and economic judgements and can provide prediction of future behaviour of assets. We will continue to develop tools and methods through research and development so that they support a full range of tactical and strategic decisions for all the major asset types. (d) Risk management – the effective deployment of risk management techniques in asset management helps to identify and minimise uncertainty, identify critical assets and prioritise interventions, hence investment. Risk management is embedded in a great many of the asset management decision making elements and is aligned with the Company’s strategic risk management framework and risk appetite. We are committed to using risk management to identify and categorise reasonably identifiable threats to service and achievement of our objectives. With respect to water quality, asset management is aligned to assure the source to tap approach of drinking water safety plans is applied in the planning, design, construction and maintenance of the assets. B3 – Maintaining Service and Serviceability November 2010 Page 206 of 218 5 Three Valleys Water Final Business Plan (e) Business processes – we recognise that our asset management strategy has to be linked closely with the complete set of business processes to ensure that asset decisions and outcomes from strategy through to implementation are internally consistent and coherent. This is an essential requirement in order to define roles and responsibilities, to specify the requirements for asset information and decision support tools and for managing the interfaces with other company systems and processes. (f) Competency – the effectiveness of asset management depends ultimately on the competency of the people who make the strategic and tactical decisions on the asset interventions to be taken. It is therefore necessary make sure we have the competencies and technical skills required to sustain and enhance the asset management function. We achieve this though the technical competence section of our twice-yearly staff performance review and development plan. This identifies gaps in competency and enables the prioritisation of training and will facilitate effective recruitment when required. B3 – Maintaining Service and Serviceability November 2010 Page 207 of 218 5 Three Valleys Water Final Business Plan Appendix 4: Asset management assessment – route map AMA area Stakeholder engagement Guidance How the stakeholder preferences have been established and analysed. • How the planning objectives have been influenced by stakeholder views (e.g. through willingness to pay surveys) and the long term company strategy (e.g. with reference to their strategic direction statement). Demonstrate that the selection of the planning objectives has considered both historic and current performance in conjunction with stakeholder preferences. Set out the process for valuing service benefits, where the cost benefit objective is being applied. Section 2.4 Section 2.4 Section 2.4 Section 2.4 Section 2.4 and Part C8 Section 2.4 and Part C8 Demonstrate that there is a strong board level commitment to delivering the best value to consumers through the asset management planning polices and strategies used to produce the company plan. Explain how the company board has ensured its plan will deliver best value to consumers. Section 2.2 Section 2.2 Section 2.4 Section 2.4 Set out the evidence of the board's commitment to ensuring the asset management practices are integrated throughout the business and are committed to achieving best practice. Demonstrate the relationship and integration between the asset management policies and overall company policies and set out the process for ensuring these polices are accessible and dynamic. Demonstrate that the overall asset management strategy is linked to company policy and embedded within 'business as usual' asset management activities. Provide an Organogram showing how the company's asset planning is managed and delivered (including interaction with enhancement planning). Include a process chart/diagram(s) of the company's asset planning process highlighting that for capital maintenance, showing the key process from data capture through to decisions for interventions; monitoring and control to ensure output delivery and effectiveness; interfaces and overlaps with enhancement plans. Outline how asset planning processes meet 'CMPCF' principles and how the processes are integrated into other business processes. Demonstrate how information management processes support asset planning and how relevant information is provided for asset planning. Explain how the overall asset management planning processes are part of the 'business as usual' operations. Section 2.2 Section 2.2 Section 2.2 and Appendix 1 Section 2.2 Section 2.2 and Appendix 1 Section 2.2 Figure B3 : 5 Figure B3 : 5 Figure B3 : 4 Figure B3 : 4 Section 2.2 Table B3 : 5 Section 3.3 Figure B3 : 4 Section 2.2 Section 2.5 Section 2.2 Table B3 : 5 Section 8.3 Figure B3 : 4 Figure B3 : 7 Section 10.2 • • • • • • Management • • Processes Non-infrastructure reference Section 2.4 • • Leadership, policy and strategy Infrastructure reference Section 2.4 • • • B3 – Maintaining Service and Serviceability 5 November 2010 Page 208 of 218 Three Valleys Water Final Business Plan AMA area Guidance • Outline the approach for ensuring all asset planning is integrated to ensure optimum interventions • Systems AMA Area Data Explain the process to assess the quality of inputs, systems and outputs; include those relating to data quality and how measures of quality (statistical correlation, default assumptions, confidence limits etc) are carried through the processes to inform the outcome. • Outline the systems in place for capturing and utilising data on service (including serviceability indicators), asset performance and consequence costs, intervention activity and costs. • Describe the systems and how they have been used to monitor and report the day to day risk to service. • Outline the systems in place for capturing and utilising unit cost data for failure consequences and asset interventions. The company shall refer to their commentary about the processes for forecasting capital expenditure at the start of this (i.e. part B3) section. • Demonstrate how systems deliver the appropriate detail (granularity) and quality of data/ information. Business Distribution Guidance Trunk Mains Service Pipes Support Mains Activities Set out how the following types of data have been gathered to support robust asset management planning, in each case commenting on the robustness of data, and the data verification and validation processes. This should be set out in the following structure for each asset group. Service, serviceability and asset condition/ performance observations – with specific reference to the selected output measures. Section 5.2.1 Figure B3 : 18 Figure B3 : 19 Section 5.2.4 Section 6.2.1 Section 6.2.2 Section 6.2.3 Section 6.2.4 Section 7.2 B3 – Maintaining Service and Serviceability. n/a Infrastructure reference Section 3 Section 3.5 Section 5.2.5 Section 6.2.5 Section 2.3 and Section 3.3 and Section 3.4 Operational Assets Section 10.2.1.1 Section 8.1 Non-infrastructure reference Figure B3 : 48 Section 8.4 Section 2.3 and Figure B3 : 7 and Section 8.4 Specific Maintenance Information Technology Section 8.1 Section 11.3.1 Section 12.3.1 5 November 2010 Page 209 of 218 Three Valleys Water Final Business Plan 1. Data on intervention activity and its impact on serviceability Section 5.2.5 Table B:13 Table B:14 Section 6.2.4 Section 7.2 Business Support Activities n/a 2. Cost data for failure consequences and interventions. Including an explanation of how both Opex and Capex is captured. Section 5.2.5 Table B3 : 16 Section 3.4 Section 3.4 Section 9.3 AMA Area Analysis Guidance Trunk Mains Distribution Mains Service Pipes Describe the analytical approach supporting expenditure forecasts, exposing all perceived weaknesses in the analysis noting the reasons for the weakness (e.g. incomplete data, where engineering judgements have been made, lack of correlation to observations). Outline where shortfalls in desirable data or information have materially affected the analysis and therefore conclusions. The company must clearly explain any sensitivity analysis for assumptions, data and judgements. The company should also provide details of any verification and validation carried out, especially for the overall outcome. Section 9.1 B3 – Maintaining Service and Serviceability. Operational Assets Specific Maintenance Information Technology Section 10.2.2.2 Section 11.3 Section 12.7.1 Section 10.2.2.3 Section 11.3 Section 12.7.1 Section 10.2.2 Section 11.2 Section 12.3 5 November 2010 Page 210 of 218 Three Valleys Water Final Business Plan AMA Area Guidance Trunk Mains Distribution Mains 3.2 3.2 Service Pipes Business Support Activities Operational Assets Specific Maintenance Information Technology 1. Historical analysis The company should explain its analysis of historic performance and interventions for each asset group over a suitable time frame. The company should explain: • how serviceability measures and/ or performance and activity of the asset group has varied over time • how historic investment in each asset group has varied over time, highlighting the link to serviceability Figure B3 : 13 • how unit costs (of failure and interventions) have changed over time Section 3.4 Section 3.2 Section 3.2 Section 3.2 Section 9.3.1 Section 1.2 Section 8.2 Section 1.2 Section 12.1 Figure B3 : 13 Figure B3 : 13 n/a Section 10.3.1 Error! Reference source not found. Section 10.3.2 Table B3 : 30 Table B3 : 31 n/a Section 12.7.1 Figure B3 : 65 Section 3.4 Section 3.4 n/a n/a Section 12.7.1 B3 – Maintaining Service and Serviceability. 5 November 2010 Page 211 of 218 Three Valleys Water Final Business Plan Guidance Trunk Mains Distribution Mains Service Pipes • the current risk position (pre AMP5 investment) and how this has changed over time Section 3.2 Section 3.2 Section 3.2 Business Support Activities n/a • overlaps of performance/activity, expenditure and serviceability as a result of any enhancement programmes (e.g. Section 19 mains rehabilitation) n/a n/a n/a n/a • the basis of historic asset planning (e.g. condition based, age based). Section 3.2 Section 3.2 Section 3.2 Section 9.2 AMA Area Operational Assets Specific Maintenance Information Technology Section 10.3.2 Figure B3 : 61 n/a Section 12.1 Section 10.3.2 n/a n/a n/a Section 12.3.2 Table B3 : 33 2. Forward looking analysis – service and cost forecasting For each asset group the company should provide the following information to explain the analysis it has done to use its data and historic analysis in its forward looking analysis. The company should provide: B3 – Maintaining Service and Serviceability. 5 November 2010 Page 212 of 218 Three Valleys Water Final Business Plan AMA Area Guidance Trunk Mains Distribution Mains Service Pipes Business Support Activities Section 9.4 Table B3 : 35 Operational Assets Specific Maintenance Information Technology Table B3 : 30 Table B3 : 31 Figure B3 : 59 Section 11.4 Table B3 : 50 Figure B3 : 65 Table B3 : 54 • a summary of the planned activity and expenditure compared to historic levels (preferably tabulated) Section 1.7 Section 1.7 Section 1.7 • a summary of the specific outputs/ service measures (e.g. serviceability reference levels) being targeted in each asset group Table B3 : 12 Table B3 : 14 Section 5.2 Section 6.4 Section 7.5 n/a Section 8 Section 11.3 n/a • an explanation of how future asset performance has been estimated (e.g. deterioration modelling, failure probability) with reference to past observations Section 5.2.2 Section 5.2.3 Section 6.2.5 Section 7.2.1 n/a Section 10.2.2.4 Section 10.2.2.6 Section 11.3 Section 12.7.1 an explanation of how consequences (including social and environmental) of possible failure modes have been determined and incorporated into the analysis Section 5.2.5 Table B3 : 11 Table B3 : 7 Table B3 : 7 Section 6.4.3 Table B3 : 7 Section 7.2.1. Section 9.3 (where CBA has been carried out) Section 10.2.2 Section 11.3 n/a • B3 – Maintaining Service and Serviceability. 5 November 2010 Page 213 of 218 Three Valleys Water Final Business Plan • a description of the outcomes of the forward predictive analysis compared to (a) the 'do nothing' option (i.e. reactive repairs only) and (b) continuing at historic activity and expenditure levels Table B3 : 12 Section 5.3 Figure B3 : 25 Section 6.4 Section 7.2.2 Business Support Activities Section 9.3 (where CBA has been carried out) • an explanation of how much system and/or asset resilience or redundancy mitigates the consequences of possible failure modes Section 5.2.5 Section 5.2.8 Section 6.2.5 Section 7.2.1 n/a • an explanation of how the consequence of failure modes have been measured or valued (including failure costs) Section 5.2.5 Table B3 : 7 Table B3 : 19 Table B3 : 7 Section 3.4 n/a Section 10.2.2.3 Table B3 : 36 Section 11.3 n/a an explanation of how risk to service has been assessed, measured or valued and how risks relating to different asset groups have been compared Section 5.2.5 Section 3.5 Section 6.4.3 Section 3.5 Section 7.2.1 Section 3.5 n/a Section 10.2.2.5 Figure B3 : 53 Section 11.3 Section 12.8 AMA Area Guidance • Trunk Mains Distribution Mains Service Pipes Operational Assets Specific Maintenance Information Technology Section 10.3.2 Figure B3 : 61 Section 11.3 n/a n/a n/a Section 10.2.2.2 B3 – Maintaining Service and Serviceability. 5 November 2010 Page 214 of 218 Three Valleys Water Final Business Plan AMA Area Guidance Trunk Mains Distribution Mains Service Pipes Business Support Activities Operational Assets Specific Maintenance Information Technology Section 10.3.2 Section 11.3 n/a 3. Forward looking analysis – intervention analysis The company should provide in its commentary: • an explanation of how alternative intervention options, including no planned investment (i.e. reactive only) have been identified (e.g. generic interventions) Section 5.2.6 Section 5.2.8 Section 5.2.5 Table B3 : 14 Section 6.4 Section 7.2.1 n/a • an explanation of how the impacts of different intervention options have been estimated (including how the impacts relate to outputs e.g. serviceability) 5.2.5 Table B3 : 12 Section 6.4.1 Section 7.2.1 n/a Section 10.3.2 Section 10.2.2.2 n/a n/a • an explanation of how the capital and operating costs of the interventions have been estimated, including social and environmental costs Section 5.2.5 Section 5.2.6 Section 5.2.7 Section 5.3 Section 6.4.3 Table B3 : 7 Section 7.2.1 Section 9.3 Section 10.2.2.3 Section 11.3 Section 12.3 B3 – Maintaining Service and Serviceability. 5 November 2010 Page 215 of 218 Three Valleys Water Final Business Plan AMA Area Guidance • a justification for the interventions assumed (include explanation of any overlaps with enhancement programme/ activity) • in cases where there are competing objectives explain the principles of the optimisation process used to arrive at the chosen set of interventions • an explanation of the likelihood that the selected interventions will deliver the stated benefits/ results. Distribution Mains Service Pipes Section 5.1 Section 5.2 Section 6.1 Section 7.2.2 Section 5.2.5 Table B3 : 12 Section 6.2.5 Section 5.2 Section 6.2.5 Section 6.4 Trunk Mains Business Support Activities Operational Assets Specific Maintenance Information Technology n/a Section 10.3.2 Figure B3 : 58 Section 11.3 Section 12.3 – 12.7 Section 7.2.1 Section 7.2.2 n/a Section 10.2.2.5 n/a n/a Section 7.2.1 n/a Section 10.3.2 Section 11.3 n/a 3. Conclusions The company should summarise how it has made the final decisions about the investment needed to maintain stable serviceability and other expenditure included in capital maintenance. In doing this the company should summarise: B3 – Maintaining Service and Serviceability. 5 November 2010 Page 216 of 218 Three Valleys Water Final Business Plan AMA Area Guidance Trunk Mains Distribution Mains Service Pipes Business Support Activities Section 9.4 Table B3 : 35 Operational Assets Specific Maintenance Information Technology Table B3 : 40 Section 10.3.2 Table B3 : 43 Section 11.4 Table B3 : 50 Sections 12.7.1 Table B3 : 56 • the investment needed (capex and changes in opex) to maintain stable serviceability (including M&G) Section 5.5 Table B3 : 13 Table B3 : 14 Section 6.5 Section 6.4 Table B3 : 20 Section 7.5 • the additional expenditure needed to maintain other service levels n/a n/a n/a n/a n/a n/a n/a • the key reasons for change in both investment and activity needed to maintain stable serviceability (e.g. change in risk profile, increased deterioration rates, increased unit costs) Section 5.3 Section 6.4 Section 7.2.2 n/a Section 8.5 Section 10.3.2 n/a Section 12.7.1 • how the company is confident that it can deliver their programme in line with its profile Section 1.4 Section 1.4 Section 1.4 See section C5 See section C5 See section C5 • the link between the conclusions for this asset group to the objectives identified within the Company SDS and the overall objectives of the Business Plan submission Section 1.3 Section 1.4 Section 1.3 Section 1.4 Section 1.3 Section 1.4 B3 – Maintaining Service and Serviceability. Section 2.1 Section 2.4 Section 2.1 Section 2.4 Section 2.1 Section 2.4 Section 2.1 Section 2.4 5 November 2010 Page 217 of 218 Three Valleys Water Final Business Plan AMA Area Guidance • the companies approach to balancing the needs across all asset groups with the overall impact on customer bills. Trunk Mains Distribution Mains Service Pipes Section 3.5 Section 3.5 Section 3.5 B3 – Maintaining Service and Serviceability. Business Support Activities Section 1.5 Operational Assets Specific Maintenance Information Technology Section 1.5 Section 1.5 Section 1.5 5 November 2010 Page 218 of 218 Model FBP2009-ICS Final Business Plan 2009 Table B3.1 Three Valleys Water plc Water service - Base service output projections Reference level of performance Level of during 2010performance 11 and 2014- control limit by 2014-15 15 (+/-) AMP4 2007-08 2008-09 Reference level of performance Level of during 2015performance 16 and 2019- control limit by 2019-20 20 (+/-) 2009-10 Line description Units A 1 2 Key output projections - reliability and continuity DG2 Properties at risk of receiving low pressure DG3 Supply interruptions (overall performance score) nr nr 106 0.4 150 0.2 250 0.2 250 0.2 250 0.2 100 0.1 B 3 4 5 6 7 8 9 10 11 12 13 Key output projections - water quality Water treatment works coliform non-compliance % Bacteriological samples from SRs failing standard % mean zonal non-compliance for faecal coliforms % mean zonal non-compliance for pesticides % mean zonal non-compliance for nitrate % mean zonal non-compliance for aluminium % mean zonal non-compliance for manganese % mean zonal compliance with the PCV for lead. % mean zonal compliance with the PCV for iron at the tap Enforcement actions considered for microbiological standards Number of WTW where turbidity 95%ile greater than or equal to 0.5NTU % % % % % % % % % nr nr 0.09% 0.10% 0.06% 0.01% 0.18% 0.00% 0.16% 99.90% 99.90% 0 2 0.10% 0.05% 0.05% 0.00% 0.00% 0.08% 0.05% 99.50% 99.80% 0 1 0.05% 0.05% 0.02% 0.30% 0.00% 0.00% 0.05% 99.50% 99.90% 0 1 0.05% 0.05% 0.02% 0.00% 0.00% 0.00% 0.00% 99.50% 100.00% 0 0 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 100.00% 0 1 0.20% 1 1 100.00% 0 0 100.00% 0 1 0.20% 1 1 C 14 15 16 17 18 19 Key output projections - customer service DG6 % billing contacts dealt with within 5 days DG7 % written complaints dealt with within 10 days DG8 % metered customers receiving bill based on a meter reading DG9 % calls abandoned DG9 % calls receiving the engaged tone DG9 Call handling satisfaction score % % % % % nr 99.2% 99.6% 99.6% 9.2% 0.0% 4.51 99.6% 99.7% 99.6% 9.0% 0.0% 4.64 99.6% 100.0% 99.7% 8.0% 0.0% 4.70 99.8% 100.0% 99.8% 5.0% 0.0% 4.80 D 20 21 22 23 Key output projections - serviceability Number of burst mains DG3 unplanned interruption to supply exceeding 12 hours Unplanned non-infrastructure maintenance Unplanned non-infrastructure maintenance nr nr nr % 4,080 812 6,735 0 4,586 263 6,784 0 3,980 400 6,784 0 3,800 320 6,784 0 3,800 320 6,784 0 1,000 560 678 0 3,500 320 6,784 0 3,800 320 6,784 0 1,000 560 678 0 Three Valleys Water Final Business Plan B3.1 – Water Service – Base Service Output Projections Block A Key output projections-reliability and continuity Line 1 The number of properties on the DG2 register at the end of March 2003 was 242 in line with our monitoring plan target of 250. At the end of March 2008 the number of properties stood at 106. 150 properties remaining on the DG2 register for report year 2008-09 is our estimate at the time of Final Business Plan publication. It is not possible to provide a final position at this time as we still have to evaluate the effectiveness of pressure improvement schemes ongoing at year end and the numbers of properties that can be removed from the register. A final position will be reported in the June Return 2009. Our objective for AMP5 is to maintain DG2 properties at risk of receiving poor pressure at the AMP4 target with an actual target and reference level of 250 properties on the register at the end of each reporting year. We believe the reference level should have a control limit of +/- 100 properties. Line 2 In 2002-03, we achieved an overall performance score of 0.17 for DG3 while in 2007-08 we had slipped to an overall performance score of 0.36. We have been putting considerable effort into recovering our DG3 performance and expect to report 0.2 for 2008-09 and return to 0.17 by 2009-10. Our target for 2014-2015 and the reference level of performance is 0.17 with control limits of +/- 0.1. Future projections do not take account of exceptional one-off major events such as those that occurred in 2005-06 and 2006-07. Block B Key output projections-water quality All the figures in the 2007/08 and 2008/9 columns are based on the data sent to DWI for 2007 and 2008 respectively. Line 3 The Company will continue to take a diligent and robust approach towards disinfection at treatment works. We will seek to eliminate even the low level of coliforms detected at treatment works throughout AMP4 and AMP5. The slightly elevated number of detections of coliforms at treatment works in 2007 and 2008 appears to be atypical. We have identified some issues with sampling and analysis for which we have a corrective action plan. We will provide a detailed description in the 2009 June Return. We anticipate returning to past high levels of compliance in the future. Line 4 The Company has a proactive reservoir inspection programme which ensures structural weaknesses are identified before they lead to deterioration in the quality of the water stored in the reservoir. The slightly elevated number of detections of coliforms at B3.1 - Base service output projections 3 April 2009 Page 1 of 5 Three Valleys Water Final Business Plan reservoirs in 2007 appears to be atypical. We anticipate maintaining historic high levels of compliance in the future. Line 5 It is predicted that the number of samples taken from customers’ taps in 2009 that contain E coli will remain very low. Line 6 The Company continues to monitor and manage the situation with regard to pesticides. In 2008, the Company identified the presence of the pesticide Metaldehyde in a number of its source waters at concentrations above 0.1 µg/l. At present, Metaldehyde does not appear to be removed by conventional pesticide treatment and so it is likely that there will be exceedances of the Prescribed Concentration or Value (PCV) in samples taken from customers’ taps. Accordingly, the mean zonal non-compliance will increase until this issue is resolved. We provide more details of current actions in the main section commentary. Line 7 There is one AMP4 nitrate scheme (Offley Bottom) due for completion in 2010 and one nitrate scheme (Kings Walden) proposed for AMP5. In both cases the Company manages the current situation in the short term to ensure continued compliance with the nitrate standard, by blending. It is predicted that all samples taken from customers’ taps in 2008 and 2009 will be compliant with the standard for nitrate due to this blending. Line 8 It is predicted that all samples taken from customers’ taps in 2009 and in the future will be compliant with the standard for aluminium. Line 9 Two of the proposed water quality schemes for AMP5 are for the installation of manganese removal treatment at Roydon and Blackford treatment works. The raw water at both works contains manganese. While the water currently leaving the treatment works complies with the standard for manganese (50 µg/l), deposition occurs in the distribution network. This deposit can then be re-suspended by changes in flow which results in customers receiving discoloured water. It is predicted that two of the three zones supplied from these two works will be non compliant for manganese during the remaining part of AMP4 until installation of treatment and cleaning of the network is implemented. Line 10 The Company has plumbosolvency control treatment in place at thirty six sites and this continues to ensure compliance with the current 25 µg/l standard across the Company’s area. We do not believe that this level of compliance can be improved without replacement of lead pipes. B3.1 - Base service output projections 3 April 2009 Page 2 of 5 Three Valleys Water Final Business Plan Line 11 The Company continues to manage iron concentrations in the distribution network through its Distribution Operations and Maintenance Strategy (DOMS). The expectation is that this will ensure 100% compliance in the future. Line 12 It is envisaged that the Company’s microbiological performance will remain high and therefore enforcement action will not be required in the future. Line 13 Since this performance measure has been introduced in the June Return, Roydon WTW has been the one treatment works that has consistently had a 95%ile turbidity above 0.5 NTU. The reason for this has been deposition of manganese in the sample lines which has then been re-suspended at times of sampling leading to elevated turbidities. The proposed manganese removal scheme at Roydon WTW will ensure this will not happen in the future. Block C Key output projections-customer service Line 14 DG6 billing contacts performance in the 4 years to 2007/8 has not dropped below 99.2% and has been as high as 99.6%. Performance by 20014/15 is expected to rise to 99.8% due to the high number of improvement projects detailed in our B6 commentary. Line 15 DG7 complaints performance in the 3 years to 2006/7 was 100% but dipped to 99.6 in 2007/8. Full reasons for this were set out in the June Return commentary. We are committed to returning performance to 100% as well as reducing the number of complaints. Line 16 For DG8 customer billed on actual meter reading, following mis-reporting of data which has been fully discussed with Ofwat, performance in 2007/8 returned to 99.6%. We plan to use Automatic Meter Reading technology (AMR) for meters that are currently difficult to access. Therefore, we are confident that future performance will rise to 99.8%. B3.1 - Base service output projections 3 April 2009 Page 3 of 5 Three Valleys Water Final Business Plan Line 17 In JR07 we explain that calls abandoned has increased because of the inclusion of calls abandoned within the IVR system. Previously these were not included. Total calls abandoned are now running at about 9% (Nov 2008) and we are exploring options to reduce this figure. This includes an improvement in our ability to match calls to appropriately skilled agents. As a result, fewer calls will be abandoned whilst waiting for an agent to become available. We believe 5% by 2014/15 is achievable. Line 18 Calls receiving the engaged tone - we have sufficient line capacity to keep this figure at zero in the future. Line 19 In the first three quarters of 2008/9 our DG9 customer satisfaction average score was 4.65 moving us up to tenth place overall. Performance by 20014/15 is expected to rise to 4.8 due to the high number of improvement projects detailed in the section B6 commentary. Block D Key output projections- serviceability Line 20 In 2007/08, we experienced 4080 bursts. Our reference level for total bursts as defined by Ofwat in November 2008 is 3746. This includes a leakage allowance of 288 bursts to take account of the impact of our activity to reduce leakage by 2 Ml/d p.a. Our performance in 2008-09 of 4586 bursts was heavily affected by the exceptional spell of cold weather in January/February 2009. According to records this was the coldest period for over 10 years. We will report in detail about the impact of this extreme weather in the June Return. Our work set out in detail in the main B3 commentary shows that at a renewal rate of 126 km p.a. we expect to return to a reference level of 3800 by 2014-15. With a control limit of 1000 we believe we will certain of being within the ‘Stable’ band during AMP5. Line 21 In 2007/08, 812 properties experienced unplanned interruptions for more than 12 hours. We have made a considerable improvement in 2008-09 despite the extreme weather experienced in January and February and expect to report 263 properties in the June Return. B3.1 - Base service output projections 3 April 2009 Page 4 of 5 Three Valleys Water Final Business Plan The distribution mains renewal programme will mitigate the risk of a worsening DG3 position through mains deterioration and with continuous improvement in managing operational interventions we will reduce our DG3 >12 hours to the reference level of 320 level by 2014-15. The control limit (CL) range of +/- 560 takes account of the volatility of this indicator. Lines 22 and 23 During 2006/07 and 2007/08, 6,833 and 6,735 unplanned maintenance jobs were undertaken on non-Infrastructure assets respectively, as reported in June Return 2008, table 11a. These are recorded on AMIS, the Company’s asset register and maintenance system, with details of the asset that has failed its location and the type of unplanned work undertaken. As the projected risk profile for non-infrastructure assets is broadly stable, while the types of assets failing may change as a result of changes in operational and capital maintenance strategies, the overall number of unplanned work orders should also remain broadly stable. The projected number of failures given in the table has been calculated from the average of the last two years of available and consistent data with the control limit set as the standard deviation based on these values. As per the guidance, the Company has chosen to report the absolute number of unplanned work events rather than the percentage versus planned work orders. As a result, line 23 is intentionally left blank. B3.1 - Base service output projections 3 April 2009 Page 5 of 5 Model FBP2009-ICS Final Business Plan 2009 Table B3.3 Three Valleys Water plc Water service base operating expenditure projections AMP4 2007-08 Line description Units A 1 Base year (2007-08) actuals Operating expenditure in 2007-08 £m 109.020 B 2 3 Adjustments to the base year Net adjustments to actuals Adjusted base year £m £m -0.700 108.320 C 4 5 6 7 Adjustments to post 2010 projections Special operating expenditure adjustments Adjustments associated with enhancement programmes Adjustments associated with capital maintenance programmes Adjusted operating expenditure projections £m £m £m £m D 8 9 Efficiency improvements Overall compounded assumed efficiency improvement profile (base) Base operating expenditure projection % £m 10 Total operating expenditure £m 108.320 108.320 2008-09 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 6.311 -0.011 0.640 115.260 6.819 -0.021 -0.200 114.918 6.911 -0.041 -0.294 114.896 7.857 -0.065 -0.455 115.657 8.658 -0.094 -0.615 116.269 9.041 -0.127 -0.774 116.460 9.072 -0.167 -0.935 116.290 0.00% 115.260 0.00% 114.918 1.23% 113.483 2.44% 112.830 3.64% 112.031 4.83% 110.835 6.00% 109.312 115.932 115.968 115.314 114.969 114.545 113.883 112.863 Three Valleys Water Final Business Plan Table B3.3 Water Service Base Operating Expenditure Projections Summary Actual base Opex in 2007/08 was higher than in the 2004 price determination. Principally this reflects the higher costs of power and bad debt charges which have more than cancelled out the efficiencies we have made in this period. Roughly one-third of the contribution of Opex to our first year K factor reflects rebasing of Opex in price limits to actual costs incurred. About another third of the opex contribution to K factor comes from rising pensions contributions, resulting from our most recent actuarial valuation. Some 80% of the increase recommended by our actuaries relates to ongoing contributions, reflecting rising life expectancies. About 20% is for deficit repair. We also face increases in costs originating from government and its agencies such as in business rates, abstraction charges and carbon reduction commitment. Whilst we are negotiating hard with the Valuation Office Agency for example, to reduce the effects on our Opex, ultimately these costs are outside of our management control. In 1994 Lea Valley, Colne Valley and Rickmansworth Water Companies merged to form Three Valleys Water, which in 2000 was joined by North Surrey. Since that time, the head offices of the former companies have remained in use and therefore our head office staff have been housed on split sites. In 2006, we concluded that this arrangement was no longer sustainable. We investigated the costs and benefits of relocating onto a single site, consulted with Ofwat on the regulatory implications of such a move and concluded that it would be beneficial for us and for customers for a many of our people as practical to be located on a new, single site. We knew that there would be higher charges to opex to service the lease were also convinced that this plan would bring future benefits to our employees and customers. Table B3.3 includes both the new opex charges for the leased building together with the savings budgeted, but yet to be materialised as we have not yet occupied the building. Customers will receive further benefits when the buildings are sold. Line 1: Operating Expenditure in 2007/08 This figure is taken directly from June Return 2007/08 Line 2: Net Adjustments The adjustments in this line remove atypical costs and credits. These are as reported in the commentary to Table 21 of the June Return 2007/08, as below: B3.3 - Water service base operating expenditure Page 1 of 7 3 April 2009 Three Valleys Water Final Business Plan Table B 3:3.1 Atypical base operating expenditures 2007/08 £m Finalisation of prior year bulk water account 0.30 Unfilled vacancies 0.30 Production and supply costs avoided 0.50 Head office relocation -0.10 Buncefield incident – loss of production site -0.20 DG8 performance recovery -0.90 DG8 investigations -0.60 Total -0.70 Line 4 : Special Operating Expenditure Adjustments The adjustments in this line are comprised of the following items. An explanation of each line is given below: Table B3:3.2 Base operating expenditure – special operating expenditure adjustments 08/09 09/10 10/11 11/12 12/13 13/14 14/15 Pension costs 5.328 5.171 5.300 5.362 5.837 5.900 5.965 Power costs 0.451 2.450 -0.180 0.233 0.035 -0.158 -0.347 Carbon reduction 0.000 0.000 0.136 0.273 0.413 0.555 0.697 Lease costs 0.902 1.726 1.726 1.726 1.726 1.726 1.726 One Team efficiencies -0.090 -0.510 -0.510 -0.510 -0.510 -0.510 -0.510 Supply pipe repair costs 0.022 0.037 0.053 0.071 0.093 0.118 0.147 Reduction of water supplied -0.100 -0.332 -0.406 -0.415 -0.413 -0.441 -0.469 Water Framework Directive 0.000 0.000 0.060 0.060 0.060 0.060 0.060 Water Safety Plans 0.180 0.180 0.190 0.190 0.200 0.200 0.210 Abstraction charges increase 0.000 0.130 0.432 0.757 1.106 1.481 1.481 Business rates increase 0.000 0.000 2.499 2.499 2.499 2.499 2,499 “In the name of the occupier” billing -0.382 -2.032 -2.387 -2.387 -2.387 -2.387 -2.387 Total 6.311 6.819 6.911 7.857 8.658 9.041 9.072 Pension Costs We operate two defined benefits pension schemes, the Veolia Water Supply Companies Pension Plan and the Veolia UK Pension Plan. The most recent triennial valuation of the Veolia Water Supply Companies Plan was 31 December 2007. The valuation was made on the attained age funding method using the following assumptions. • • • • • Rate of return: 6.25% pre –retirement, 5.25% post-retirement Rate of increase in remuneration : RPI + 1% Rate of pension increase: 2.75% Deficit repair period: 10 years Mortality projection based on PA00 tables B3.3 - Water service base operating expenditure Page 2 of 7 3 April 2009 Three Valleys Water Final Business Plan The most recent valuation of the Veolia UK Pension Plan was also 31 December 2007, using the attained age funding method and the same assumptions as above. These valuations have identified a funding deficit compared to the previous valuation. We have therefore included an uplift to cash contributions based on the outcome agreed with our pension scheme trustees. A copy of our actuary’s report is appended. Power costs The increase in power costs to 2009/10 reflects the costs of our current committed energy purchase contracts which expire at the end of March 2010. We have recently purchased forward about 80% of our energy purchase requirements for 2010/11 at a price about 25% lower than the prices underpinning our 2009/10 cover. This allows us to project a significant reduction in power costs in 2010. We have informed our projections beyond 2011 using current electricity forward market price quotations which are broadly flat in real terms. We have assumed that the distribution and transmission costs components of power costs will not increase in real terms to 2015. Carbon Reduction Commitment Since the draft business plan, we have received new information that allows us to reduce our valuation of the carbon reduction commitment. To build our costing we assumed that the price of carbon is £12 to 2014/15 and that our total emissions of carbon dioxide will be broadly flat. As our understanding of the commitment has improved, so has our appreciation of our risk exposure during AMP5 so that we no longer propose carbon reduction commitments as a notified item. Lease costs & One Team efficiencies These costs relate to the rent payable following relocation of our headquarters and the disposal of our existing offices in Hatfield and Bushey. The lease on our new headquarters building runs for 17 years from September 2008, but as part of the relocation we negotiated an 18 month rent holiday. Whilst cash payments do not commence until 2010, accounting rules require that we make P&L charges to recover the total expenditure over the lifetime of the lease. The operating expenditure each year is therefore 1/17th of the total lease value. We only show 6 months’ expenditure in 2008/09 because the lease started half way through the financial year. In this line of the table we have also included the net costs of outsourcing the hosting of our information technology assets. The costs of leasing and maintaining headquarters facilities are legitimate business expenses that we would expect to see reflected in price limits from 2010. As part of our relocation to our new headquarters, we have identified some posts that will become redundant. Our relocation will also reduce the costs of travelling between our existing headquarters sites and other administrative overheads such as venue hire costs. These efficiencies are anticipated under the line One Team Efficiencies. Our relocation will benefit our customers by reducing RCV by 50% of the land sale proceeds, net of costs and tax. At the time that we committed to the relocation, the housing market was buoyant and we anticipated gross land sale proceeds of around £30m. With the collapse in B3.3 - Water service base operating expenditure Page 3 of 7 3 April 2009 Three Valleys Water Final Business Plan the housing market and the difficulty for property developers to access finance for land purchase, we have reduced our valuation, such that after tax and costs, we expect net proceeds of £10m. This means that the benefits to be shared with customers are likely to be lower than we had expected when we committed to the project. The table below summarises the costs and benefits for customers from our relocation. Customers’ prices are not affected until 2010 when the gross additional opex, £2.4m per year for the new headquarters facilities is reflected in price limits. The efficiencies already identified this business plan, £1.27m reduce the effect on price limits. In the same year, current cost depreciation in price limits is reduced because impairment charges for assets that will no longer needed will have been made within this current AMP4 price control period, so AMP5 depreciation charges are lower than otherwise. The 50% benefits sharing of net land sales proceeds reduces the allowed return in price limits from 2015, and we project further efficiencies totalling £6.25m made during AMP5 in base opex re-setting for the AMP6 price control. The net present value of the net benefits for customers over the 17 year life of the headquarters lease are small but positive, £0.21m even after taking account of the significant fall in property values that has occurred since we originally committed to the project. Table B3:3.2 Net benefits for customers in price limits from headquarters re-location 10/11 11/12 12/13 13/14 14/15 AMP6 AMP7 Opex associated with new headquarters £m 07/08p (2.46) (2.43) (2.40) (2.37) (2.34) (11.70) (10.30) Change in current cost depreciation £m 07/08p 0.22 0.22 0.22 0.22 0.22 1.08 0.93 Change in allowed returns from 50% sharing of £10m net land sale proceeds £m 07/08p - - - - - 1.92 1.59 Projected efficiencies £m 07/08p 1.27 1.27 1.27 1.27 1.27 12.60 11.13 Net benefits £m 07/08p (0.96) (0.93) (0.90) (0.88) (0.85) 3.91 3.33 NPV of net benefits @ 6% £m 07/08p 0.21 Supply pipe repairs We project that the number of free supply pipe repairs we will carry out under our free repair scheme will increase proportionately with rising meter penetration which is likely to highlight more underground supply pipe leaks for attention. June Return evidence shows that in 2007/08 the average cost of a free supply pipe repair under our scheme was £367. Traffic Management Act Charges In our draft business plan we included the effects of the Traffic Management Act (TMA) that allows local authorities to introduce permit schemes to all or parts of their areas. To value the effect we calculated the number and type of permits we will require based on a typical year’s work. We considered how we might reduce the effects, by passing through some permit fees to our contractors where they are the cause of re-work for example. Since new Traffic Management Act costs are uncertain, both in value and timing, we now propose that they be dealt with as a notified item, as is the case in the current price control period. Accordingly we have not included any TMA Opex in our projection. B3.3 - Water service base operating expenditure Page 4 of 7 3 April 2009 Three Valleys Water Final Business Plan Reduction in water supplied Our water resources plan summarised in Table B5.1 projects that the volume of water we put into supply will be lower than expected at the draft plan. We estimate the marginal cost of water production and distribution to be 6.75p/m3. This line adjusts Opex for the amount by which we project water delivered to be lower than in the base year, 2007/08. Water Framework Directive We expect the Environment Agency to require us to assess catchment risks in designated protected areas to help them carry out their duties under Article 7 of the Water Framework Directive. Our projection assumes that we will require two full-time equivalent employees to carry out this extra work at an average employment cost of £30,000 per year. B3.3 - Water service base operating expenditure Page 5 of 7 3 April 2009 Three Valleys Water Final Business Plan Water Safety Plans We have identified the need for 3 full-time equivalent posts to continue implementing and progressing Water Safety Plans. In particular the amount of work has increased due to emerging contaminants, metaldehyde, clopyralid and NDMA. Abstraction Charges The Environment Agency (EA) have notified us that they expect abstraction charges to rise by 10% per year in the Thames and Anglian regions between 2009/10 and 2013/14. We have no direct management control over the level of abstraction charges. The increase relates to the combination of both SUCs and EIUCs. Since these charges are set to increase materially in real terms in the early years of AMP5, they should be allowed for in price limits. Business Rates Revaluation The Valuation Office Agency (VOA) proposes to increase our rateable value from £21m to £32m from 2010. This reflects a change to their valuation methodology. Our assumed rate poundage of £0.395 in 2007/08 prices increases business rates by over £2.4m each year in AMP5 relative to 2007/08 levels. We are currently negotiating with the VOA to try to reduce future business rates and hence limit the effect on customers’ water bills. The outcome, VOA final rateable values, will be known by the time of the final determination hence the final determinations should allow changes in business rates to be reflected in price limits. Water Efficiency Targets Ofwat are planning to impose targets for water efficiency on companies from 2010 onwards. At present, the proposals are that the assessment of compliance with the target will be based upon the level of activity by companies in specified areas. We estimate that for us to achieve the target based upon the methods proposed will result in additional costs of approximately £1.25m per year. We have a surplus of supply over demand in the critical period for AMP5 but are continuing with metering on change of occupier and leakage reduction because they are cost beneficial when the wider benefits are taken into account. We support promoting water efficiency but do not believe the additional costs are in the interest of customers at this time. We are convinced that this additional expenditure is not necessary if Ofwat take account of the wider, non-numerical, benefits that our extensive and award winning education programmes contribute to water efficiency. If this were not the case then we would expect the additional costs of meeting the targets as proposed would be include in prices. “In the name of the occupier” billing During 2008/09 we have reduced the number of properties we bill in the name of ‘the occupier’, as part of work to eliminate occupier billing entirely during 2009/10. The adjustment in this line reduces our opex bad debt provision by the amount we will no longer bill empty properties for, in the name of the occupier. B3.3 - Water service base operating expenditure Page 6 of 7 3 April 2009 Three Valleys Water Final Business Plan Line 5 : Adjustments associated with enhancement programmes The adjustment in this line reflects savings from reduced meter reading costs in cases of internal meter installation where we fit AMR meters. We project that on average, we will save £6/year in meter reading costs as AMR will allow us to take readings more easily without our having to gain access to the customer’s property. We expect there to be some savings in opex as a result of the manganese schemes and Roydon and Blackford as this will avoid customer discolouration complaints and contacts. These savings will not materialise until AMP6 when the mains cleaning work is completed. Line 6 : Adjustments associated with capital maintenance programmes The adjustment in this line reflects the reduction in numbers of mains bursts resulting from our programme of mains renewal. We expect to avoid 280 mains bursts per year by 2014/15 as a result of our planned maintenance programme and this line includes that avoided cost. As a result of our maintenance non-infrastructure pump replacement plans, we expect to replace old and less efficient pumps with new. The new pumps will be more efficient so we have included an adjustment in this line for power cost savings. B3.3 - Water service base operating expenditure Page 7 of 7 3 April 2009 Model FBP2009-ICS Final Business Plan 2009 Table B3.5 Three Valleys Water plc Water service - Base capital maintenance expenditure projections (infrastructure) AMP4 2007-08 Line description 2008-09 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 AMP6 2015-16 2016-17 2017-18 2018-19 2019-20 AMP7 2020-21 2021-22 2022-23 2023-24 2024-25 Units INFRASTRUCTURE ASSETS A 1 Capital maintenance infrastructure forecast expenditure Capital investment in raw water aqueducts, dams and impounding reservoirs £m 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2 3 Capital investment in water distribution Capital investment in management & general £m £m 32.293 0.000 36.798 0.000 35.876 0.000 38.219 0.610 39.345 0.470 38.219 0.510 38.219 0.490 38.219 0.610 37.905 0.482 37.905 0.482 37.905 0.482 37.905 0.482 37.905 0.482 4 Total infrastructure investment £m 32.293 36.798 35.876 38.829 39.815 38.729 38.709 38.829 38.387 38.387 38.387 38.387 38.387 B Capital maintenance infrastructure historical expenditure 5 Average annual expenditure (based on 6 year average 2001-02 to 2006-07) £m 24.035 24.035 24.035 24.035 24.035 24.035 24.035 24.035 24.035 24.035 6 7 8 Average annual expenditure (based on 7 year average 2001-02 to 2007-08) Difference between historic and forecast investment (using 6-year average) Difference between historic and forecast investment (using 7-year average) £m % % 25.280 61.6% 53.6% 25.280 65.7% 57.5% 25.280 61.1% 53.2% 25.280 61.1% 53.1% 25.280 61.6% 53.6% 25.280 59.7% 51.8% 25.280 59.7% 51.8% 25.280 59.7% 51.8% 25.280 59.7% 51.8% 25.280 59.7% 51.8% C 9 10 Scope for improvements in efficiency Overall compounded assumed improvement profile Adjusted projection to reflect scope for efficiency % £m 32.293 0.00% 36.798 0.00% 35.876 0.00% 38.829 0.00% 39.815 0.00% 38.729 0.00% 38.709 0.00% 38.829 0.00% 38.387 0.00% 38.387 0.00% 38.387 0.00% 38.387 D 11 12 13 Capital maintenance expenditure Gross capital maintenance infrastructure expenditure Grants and capital contributions for infrastructure maintenance Net capital maintenance infrastructure expenditure £m £m £m 32.293 0.000 32.293 36.798 0.000 36.798 35.876 0.000 35.876 38.829 0.614 38.215 39.815 1.740 38.075 38.729 0.614 38.115 38.709 0.614 38.095 38.829 0.614 38.215 38.387 0.182 38.205 38.387 0.182 38.205 38.387 0.182 38.205 E 14 15 Accounting charges Infrastructure renewals charge Closing balance sheet accrual or prepayment £m £m 33.221 7.297 35.283 8.812 35.276 9.411 35.291 9.495 35.318 9.421 35.348 9.355 35.377 9.242 35.407 9.209 33.922 13.492 33.845 17.851 33.768 22.288 38.523 38.523 38.523 38.523 38.523 0.00% 38.387 38.523 38.523 38.523 38.523 38.523 38.387 0.182 38.205 38.387 0.182 38.205 38.523 0.182 38.341 38.523 0.182 38.341 38.523 0.182 38.341 38.523 0.182 38.341 38.523 0.182 38.341 33.691 26.802 33.614 31.392 33.537 36.196 33.457 41.080 33.377 46.044 33.297 51.088 33.217 56.212 Three Valleys Water Final Business Plan Table B3.5 Base capital projections (infrastructure) maintenance expenditure Line 1 There is no expenditure forecasted on raw water aqueducts, dams and impounding reservoirs during AMP5 and AMP6. Line 2 The total gross expenditure for capital investment in water distribution for AMP5 is £192.222m equating to an average of £38.444m per annum. This expenditure is further described in sections 3.3-3.7 of B3. The total expenditure for AMP6 is forecast at £189.5m. Line 3 The total expenditure for capital investment in management & general over the course of AMP5 is £2.690m for GIS maintenance. The amounts vary each year but equate to £0.538m per annum. This investment is further explained in section 4.3.1 of B3. Expenditure on GIS maintenance is forecast at £2.410m for AMP6, and £3.090m for AMP7. Line 4: Total gross infrastructure investments in the next three Asset Management Periods are forecast as follows: Trunk mains renewal (£m) Distribution mains & proactive communication pipe renewal (£m) Other investment (£m) Investment (£m) AMP5 19.017 125.067 AMP6 19.195 125.995 AMP7 19.195 125.995 50.828 194.912 46.743 191.933 47.423 192.613 Line 5: Not requested for FBP. Line 6: The average annual expenditure based on the 7 year average 2001/02 to 2007/08 is £25.280m. Table B3.6 Base capital maintenance expenditure projections (non-infrastructure) Page 1 of 2 3 April 2009 Three Valleys Water Final Business Plan Line 7: Not requested for FBP. Line 8 : This is a calculated line. There is a difference of 54.2% between forecast investment and historical investment based on the last 7 years. This difference is due to the fact that we had a low level of infrastructure capital investment at the end of AMP3, coupled with a rise in the capital cost of works. Line 10: This is a calculated line Line 11: This is a calculated line Line 12: Total grants and capital contributions for infrastructure assets have been estimated at £4.197m or £0.840m per annum for AMP5 as further explained in B3 section 4.3.4. Line 13: This is a calculated line. Table B3.6 Base capital maintenance expenditure projections (non-infrastructure) Page 2 of 2 3 April 2009 Model FBP2009-ICS Final Business Plan 2009 Table B3.6 Three Valleys Water plc Water service - Base capital maintenance expenditure projections (non-infrastructure) AMP4 2007-08 Line description 2008-09 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 AMP6 2015-16 2016-17 2017-18 2018-19 2019-20 Units NON-INFRASTRUCTURE ASSETS A 1 2 3 4 5 6 7 Capital maintenance non-infrastructure forecast expenditure Capital investment in raw water aqueducts, dams and impounding reservoirs£m Capital investment in water distribution (non -infrastructure) £m Capital investment in water treatment works £m Capital investment in water pumping stations £m Capital investment in service reservoirs £m Capital investment in non-infrastructure management & general £m Total non-infrastructure investment £m B 8 9 10 11 Capital maintenance non-infrastructure historic expenditure Average annual expenditure (based on 6 year average 2001-02 to 2006-07) Average annual expenditure (based on 7 year average 2001-02 to 2007-08) Difference between historic and forecast investment (using 6-year average) Difference between historic and forecast investment (using 7-year average) £m £m % % C 12 13 Scope for improvements in efficiency Overall compounded assumed improvement profile Adjusted projection to reflect scope for efficiency % £m 34.838 0.00% 32.932 D 14 15 16 Capital maintenance expenditure Gross capital maintenance non-infrastructure expenditure Grants and capital contributions for non-infrastructure maintenance Net capital maintenance non-infrastructure expenditure £m £m £m 34.838 0.000 34.838 32.932 0.000 32.932 0.275 0.456 14.090 5.020 4.705 10.292 34.838 1.035 3.723 7.337 2.778 1.600 16.459 32.932 0.009 2.613 11.389 2.180 3.478 9.431 29.100 2.072 5.012 5.619 4.915 1.773 11.488 30.878 2.085 5.799 6.320 4.769 4.812 9.655 33.441 2.309 5.452 8.433 4.660 1.730 10.071 32.656 2.194 5.741 6.738 4.359 2.581 13.501 35.115 2.185 6.080 5.782 4.487 1.252 7.437 27.223 1.567 6.437 9.292 6.977 9.064 7.208 40.544 1.406 6.921 6.400 8.973 2.702 8.633 35.034 1.785 7.081 9.630 13.995 3.595 6.027 42.112 2.339 7.410 8.060 6.376 1.346 13.312 38.844 2.705 7.772 9.312 7.298 0.784 8.104 35.975 17.837 17.840 73.1% 73.1% 17.837 17.840 87.5% 87.4% 17.837 17.840 83.1% 83.0% 17.837 17.840 96.9% 96.8% 17.837 17.840 52.6% 52.6% 17.837 17.840 127.3% 127.3% 17.837 17.840 96.4% 96.4% 17.837 17.840 136.1% 136.1% 17.837 17.840 117.8% 117.7% 17.837 17.840 101.7% 101.7% 0.00% 29.100 0.00% 30.878 0.00% 33.441 0.00% 32.656 0.00% 35.115 0.00% 27.223 0.00% 40.544 0.00% 35.034 0.00% 42.112 0.00% 38.844 0.00% 35.975 29.100 0.000 29.100 30.878 0.000 30.878 33.441 2.737 30.704 32.656 0.000 32.656 35.115 0.000 35.115 27.223 0.000 27.223 40.544 0.000 40.544 35.034 0.000 35.034 42.112 0.000 42.112 38.844 0.000 38.844 35.975 0.000 35.975 Three Valleys Water Final Business Plan Table B3 : 6 – Base capital maintenance expenditure projections (non-infrastructure) Line 1 From our capital maintenance planning and optimisation process, there are no major Maintenance Non-Infrastructure capital maintenance activities planned on Raw Water Aqueducts or Dams and Impounding Reservoirs. The investment planned by our CMPT model on Source and Intake Pumping Stations has been included in line 1 for the Plan, whereas it was included in line 4 in the Draft Business Plan. This amendment was made in line with the clarification note DBP/068. We have also proportionally allocated the Pump Performance Investigation base service project to line 1, assuming a 50% allocation. The stable investment in Water Resources Facilities reflects the profile of activity over AMP5 and AMP6. Line 2 Costs were obtained using the outputs from our capital maintenance planning and optimisation process for maintaining water treatment serviceability, from the domestic meter replacement base service project, investment in our leakage monitoring and detection infrastructure, and our contribution to the capital maintenance programme for Anglian Water’s Grafham Scheme (consistent with JR08). The stable investment in Water Treatment Works reflects the activities profile over AMP5 and AMP6. Line 3 Costs were obtained using the outputs from our capital maintenance planning and optimisation process for maintaining water treatment serviceability and also from our special base service disinfection upgrade project. Membrane module replacement and GAC regeneration schemes are now included in the capital maintenance planning and optimisation process. Therefore these are not listed as separate projects. The plumb solvency control renewals project was not considered for the Plan. The Run to waste facilities scheme which was removed in the final version of the Draft Business Plan on affordability grounds, has been included for the Plan. In AMP6 the main projects are specific treatment schemes in addition to the investment from our capital maintenance planning and optimisation process for maintaining water treatment serviceability. Table B3 : 6 Base capital maintenance expenditure projections (non-infrastructure) Page 1 of 3 3 April 2009 Three Valleys Water Final Business Plan Line 4 Costs were obtained using the outputs from our capital maintenance planning and optimisation process for maintaining water pumping serviceability and also from our Pump Performance Investigation base service project (assuming a 50% proportional allocation). The new booster at Bambers Green required as part of Takeley tower scheme has also been included in this line. Line 5 Costs were obtained using the outputs from our capital maintenance planning and optimisation process (CMPT) for maintaining water storage serviceability. These include the capital investment forecast on projects generated by the CMPT on service reservoirs and water towers (replacement and major refurbishment) and also on four bespoke projects: St. George's Hill reservoir, Windmill Hill reservoir, Reservoir inspection programme (inc. cleaning & minor maintenance), and relocation of the Takeley Tower (which was reported in table 3.5 for the DBP). The investment profile shows a peak of activity in 2011/12 which corresponds to the relocation of Takeley Tower, and another in the first year of AMP6 for the replacement of St George’s Hill reservoir. Line 6 Costs include the capital investment forecast on projects generated by the CMPT on Telemetry Systems (including operating systems), Instrumentation, Control and Automation (ICA) equipment, Security Assets (maintenance), Offices and Laboratory, Depots and Workshops, mobile generators and also on IT systems (maintenance and ‘risk resilience’), Vehicles, AMP6 Preparation and Laboratory Equipment. AMP6 activity is predicted to be significantly less than that seen in AMP5. Most of the ICA equipment was reported in line 3 (Water Treatment Works) for the Draft Business Plan, but to be consistent with the RAG 2.03 it was decided to report the investment in line 6 for the Plan. Line 7 This line is calculated. Line 8 The average annual expenditure is calculated in 2007/08 prices using RPI as indicated in the Plan guidance document (based on 6 year average 2001/02 to 2006/07). Line 9 The average annual expenditure is calculated in 2007/08 prices using RPI as indicated in the FBP guidance document (based on seven year average 2001/02 to 2007/08). Lines 10 and 11 These lines are calculated. These lines show a significant increase in investment in AMP5 and AMP6 compared to the average level of investment in the previous 6/7 years. The reason is two-fold: firstly this can be explained by the relatively slow start of the AMP4 programme; and secondly, a large number of assets are beyond their optimum asset life and need to be renewed in Table B3 : 6 Base capital maintenance expenditure projections (non-infrastructure) Page 2 of 3 3 April 2009 Three Valleys Water Final Business Plan order to maintain stable serviceability to our customers. Our capital maintenance planning process has predicted that the optimum investment needed in the last two years of AMP4 to maintain the current level of service would exceed funding from the AMP4 Final Determination, and therefore we are planning to carry out these additional renewals in AMP5. The resulting investment forecast for AMP5 is in line with the investment in 2007/08 as returned in June Return 08 and with the projections for 2008/09 and 2009/10. Line 12 This line comes from Table B2 : 2. Scope for efficiencies is described in Section B2. Line 13 This line is calculated. Line 14 This line is calculated. Line 15 Grants and capital contributions: We have included the capital contributions for the possible relocation of a water tower and adjoining mains as a result of the Stansted Airport expansion in 2011/12. Costs for diversion of the mains and associated contributions have been included in Table B3 : 5. Line 16 This line is calculated. Table B3 : 6 Base capital maintenance expenditure projections (non-infrastructure) Page 3 of 3 3 April 2009 Three Valleys Water Final Business Plan Contents 1 2 Overview .......................................................................................................3 The drinking water quality programme......................................................5 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3 4 Introduction...................................................................................................................... 5 Raw water quality deterioration – Kings Walden............................................................. 6 Cryptosporidium – Chorleywood ..................................................................................... 8 Acceptability of drinking water to customers – Roydon ................................................ 10 Acceptability of drinking water to customers – Blackford.............................................. 15 Schemes included in Draft Business Plan but not in this Plan...................................... 17 Lead............................................................................................................................... 18 Metaldehyde .................................................................................................................. 19 The security emergency measures direction ..........................................20 The environment programme ...................................................................21 4.1 Introduction.................................................................................................................... 21 4.2 Methodology .................................................................................................................. 23 4.3 Upper Colne investigation and options appraisal.......................................................... 25 4.4 Misbourne options appraisal ......................................................................................... 26 4.5 Upper Ver investigation and Upper and Mid Ver options appraisal .............................. 27 4.6 Mid Rib investigation ..................................................................................................... 29 4.7 Mid Colne River and Lakes investigation ...................................................................... 30 4.8 Surface water intake fish screens ................................................................................. 32 4.9 Financial implications .................................................................................................... 32 4.10 Biodiversity .................................................................................................................... 34 4.10(i) Introduction........................................................................................................... 34 4.10(ii) Methodology .......................................................................................................... 35 4.10(iii) Further considerations....................................................................................... 36 5 Conclusions ...............................................................................................37 Tables and Tables Commentaries Table of Figures Figure B4 : 1 Raw water nitrate concentration at Kings Walden ........................................................ 7 Figure B4 : 2 E. coli results from the raw water at Chorleywood ........................................................ 9 Figure B4 : 3 Manganese in the raw water at Roydon...................................................................... 10 Figure B4 : 4 Manganese concentration in Zone 24 – Harlow.......................................................... 11 Figure B4 : 5 Manganese concentration in Zone 25 – Epping/Ongar............................................... 11 Figure B4 : 6 Number of customer complaints regarding discolouration from zones 24 and 25 ..... 12 Figure B4 : 7 Manganese concentration in Blackford Raw 1 ............................................................ 15 Figure B4 : 8 Manganese concentration in Zone 47 – Denham/Ickenham....................................... 16 Figure B4 : 9 Concentration of PFOS in Holywell ............................................................................. 18 Figure B4: 10: Environmental investigations..................................................................................... 22 Figure B4 : 11 Location of Upper River Colne .................................................................................. 26 Figure B4 : 12 Location of River Misbourne...................................................................................... 27 Figure B4 : 13 Location of the River Ver ........................................................................................... 29 Figure B4 : 14 Location of River Rib ................................................................................................. 30 Figure B4 : 15 Location of Mid Colne River and Lakes..................................................................... 31 Table of Tables Table B4 : 1 Comparison of quality capex programmes ..................................................................... 4 Table B4 : 2 Quality enhancement schemes for water treatment and distribution ............................. 6 Table B4 : 3 Draft Business Plan options for Kings Walden Nitrate ................................................... 8 Table B4 : 4 Draft Business Plan options for Chorleywood Cryptosporidium..................................... 9 Table B4 : 5 Customer contact rates for the zones supplied from Roydon (Customer Contacts per 1000 Customers)....................................................................................................................... 12 B4 – Quality Enhancements 3 April 2009 Page 1 of 37 Three Valleys Water Final Business Plan Table B4 : 6 Draft Business Plan options for Roydon Manganese ................................................... 14 Table B4 : 7 Customer contact rates for the zones supplied from Blackford (customer contacts per 1000 customers)........................................................................................................................ 16 Table B4 : 8 Draft Business Plan options for Blackford Manganese ................................................ 17 Table B4 : 10 Environment Programme Schemes............................................................................ 24 Table B4 : 11 Summary of new NEP projects with deadlines........................................................... 25 Table B4 : 12 Cost of National Environment Programme ................................................................. 33 B4 – Quality Enhancements 3 April 2009 Page 2 of 37 Three Valleys Water Final Business Plan B4 – The Quality Enhancement Programme – Drivers, Outputs and Activity 1 Overview In this section of our Final Business Plan we set out the case for enhancement investment in AMP5 to meet new obligations or requirements from drinking water, security and emergency measures and environmental regulations. We have worked with the Drinking Water Inspectorate (DWI), the Centre for the Protection of National Infrastructure (CPNI) and the Environment Agency (EA) and followed their guidelines and PR09 processes to develop a programme of asset improvements that will benefit consumers and the environment. Our plans are consistent with the water strategies and Statements of Obligations issued by Defra. Every project we propose includes measurable defined outputs, identified costs that have been challenged and verified by the Reporter, a description and monetary quantification of the benefits the project will deliver, a clearly defined timetable and implementation date and defined asset improvements and where appropriate changes to operational procedures to implement the output. Where it is appropriate we have justified inclusion of projects in our quality enhancement programme by putting forward proposals that are sustainable, low carbon solutions with benefits that exceed the costs over the long term. The drinking water programme for the Final Business Plan consists of four projects to address a rising trend in nitrate at Kings Walden, a cryptosporidium risk at Chorleywood and manganese removal at Roydon and Blackford to improve customer acceptability. There is also a need as a second phase of each of the Roydon and Blackford projects to clean the network they serve after improvements to the treatment process to prevent manganese entering the network have been implemented. Both phases have to be completed to ensure the affected customers in three water quality zones experience improvements in their tap water quality. Because there are two distinct phases to these projects dealing with both water quality compliance for manganese and customer acceptability, we continue to believe that these two projects should be considered as part of the drinking water compliance programme rather than as enhanced service levels. Our customer research and willingness to pay (WTP) experiments undertaken in 2007 and industry wide research undertaken in 2008, have shown that for safety and appearance of tap water, 78% and 58% respectively of our customers say these are their highest concerns. Taste, smell and appearance also had the highest WTP when analysed by social group and geographic area. Our cost benefit analysis shows that the Roydon and Chorleywood schemes are strongly cost beneficial. The Blackford and Kings Walden schemes are not cost beneficial although in both cases benefits partially offset the costs and they have been included in our plan due to the statutory drivers associated with the drinking water compliance programme. The security programme takes account of the continued emphasis by the CPNI through advice notes on the need to protect water assets against the potential threat from terrorism and to increase our resilience in the case of major incidents. We have considered twelve specific areas where security and resilience requirements have changed since PR04 and included nine appropriate projects to improve assets in AMP5 to meet these requirements. We did not think it appropriate to consult our customers about security. However, customers will benefit through the reduction in risk of malevolent acts creating major disruptions to water supplies. In all cases other than emergency equipment, which is marginally not cost beneficial, our cost benefit analysis shows that the security programme is strongly cost beneficial. B4 – Quality Enhancements 3 April 2009 Page 3 of 37 Three Valleys Water Final Business Plan As directed by the EA and Defra, we will use the first period of river basin planning of the Water Framework Directive (WFD) to carry out seven environmental investigations to gather data to justify further investment in solutions if required in subsequent river basin planning periods. We will also undertake nine options appraisals and one scheme for fish screens at three locations on the River Thames will be implemented following investigations and options appraisal in AMP4. We have significant concerns about the EA’s current presumptions about sustainability reductions following these investigations and options appraisals. They cover about 30% of our current groundwater abstraction entitlement and we have great doubts about the overall benefits of such environmental improvements which will ultimately be paid for by our customers through increases in water bills. In our customer research, customers showed the least willingness to pay for environmental improvements to low flow rivers. Our cost benefit analysis shows that the environment programme is not cost beneficial. The table below provides a comparison of the three separate quality enhancement programmes for the PR04 final determination, the AMP5 Draft Business Plan and the AMP5 Plan. The main change from Draft Business Plan to the Plan is a significant increase in the projected cost of the mains cleaning programmes for Roydon and Blackford. At the time of the Draft Business Plan our initial studies suggested that the amount of cleaning required for trunk mains in zones served by these sources would be limited. Completion of our detailed studies after the Draft Business Plan has shown that significant amounts of trunk main cleaning will be required. Cleaning of trunk mains requires the installation of enabling works such as valves and hydrants and temporary works to deal with the large volumes of contaminated water that will have to be discharged in a controlled way. This has inevitably resulted in a large increase in costs since the Draft Business Plan. Since the Draft Business Plan we have also decided not to include three drinking water quality schemes in the AMP5 programme at Bow Bridge and Holywell for removal of PFOS and at Berkhamsted for the removal of tri/tetrachloroethene. The EA have also increased the scope of the programme of environmental studies since the Draft Business Plan and this has also led to a cost increase. Table B4 : 1 Comparison of quality capex programmes AMP4 Final Determination (£m) 16.02 AMP5 Draft Business Plan (£m) 11.81 AMP5 Final Business Plan (£m) 22.92 SEMD 27.25 16.41 17.02 NEP 1.70 7.19 8.14 Total 44.97 35.41 48.08 Quality programme DWI B4 – Quality Enhancements 3 April 2009 Page 4 of 37 Three Valleys Water Final Business Plan 2 The drinking water quality programme 2.1 Introduction The Company is required to supply water that complies with the requirements of the water quality regulations that are in force at the time; in this case The Water Supply (Water Quality) Regulations 2000 as amended. In addition, we want to supply water that customers want to drink; the number of complaints we receive from customers about water quality is relatively low but nevertheless, we are firmly committed to responding to these and eliminating the root causes. Our proposals for water quality enhancements to treatment and distribution assets reflect these drivers and are developed on the basis of drinking water safety plans (risk assessments), customers willingness to pay and cost benefit analysis. The Company’s strategy with respect to long term changes in water quality is to manage each issue with the objective of achieving 100% compliance with the relevant drinking water quality standards. This is consistent with the approach documented in our Strategic Direction Statement, published in December 2007. The Statement highlights the increasing variability and unpredictability of raw water quality which has been taken into account in the assessment of our drinking water quality schemes. At the beginning of the preparation of the drinking water quality programme for our PR09 submission, a number of improvements had already been identified for inclusion in the programme as they were issues that we were managing day to day. In order to ensure that we identified any other potential issues a project was initiated to consider all the areas that have an impact on the quality of the water supply. The project was sponsored by the director of scientific and corporate responsibility services and the team included representatives across the business. The project had three key objectives: • to identify the improvements needed to ensure our water supply remains wholesome at consumers’ taps • to identify emerging issues that could affect water quality and ensure that any risk to human health from these issues is analysed and mitigated • to identify improvements that would increase customer satisfaction with the quality of the water supply The outputs from this work were dependent upon and complementary to the information gained from the Company’s Drinking Water Safety Plan (DWSP) specific supply system risk assessments. As a part of the project, we have reviewed the statutory drinking water quality requirements as set out in the Statement of Obligations, published by Defra in December 2007, the Principal Regulations as amended and the requirements of DWI Information Letter 2/2008 to determine the water quality enhancement programme for the next periodic review period. In addition the specific new obligations set out in the Water Supply (Water Quality) Regulations 2000 (Amendment) Regulations 2007 were also reviewed. In developing and promoting the requirements for investment, we have also taken into account our experience in identifying deteriorating raw water quality caused by a third party and the protracted response period of the legislative process before partial or full remediation is achieved. B4 – Quality Enhancements 3 April 2009 Page 5 of 37 Three Valleys Water Final Business Plan The findings of the project were that at the majority of our sites, the treatment and processes which are in place ensures that wholesome water is supplied. However, areas were highlighted where this obligation was not being met consistently or where it would not be met in the future. In order to address these issues, ten schemes relating to quality enhancements were submitted to DWI for support in March 2008. Seven of these schemes were given initial support and were included in the Draft Business Plan. After a further review of the issues following the submission of the Draft Business Plan, the Company has decided to include four of the schemes in the Plan. The issues identified in the three unsupported schemes and the three schemes included in the Draft Business Plan, but not the Plan, are being managed as part of normal business. Details of the four schemes are in the table below and they have been subdivided into the appropriate quality drivers. Costs have been updated for the Plan for the chosen solution. Table B4 : 2 Quality enhancement schemes for water treatment and distribution Sites of concern Kings Walden Chorleywood Roydon Blackford Quality driver Raw water quality deterioration Cryptosporidium Acceptability of drinking water to customers Parameter of concern Nitrate Cryptosporidium Manganese Preferred solution Capex £’000 Annual opex £’000 Ion-exchange 1613 52 UV Chemical oxidation, filtration & mains cleaning Total 285 12186 6 59 8831 22915 63 180 The additional information required by DWI as identified in the caveats included in the Preliminary Letters of Support for the four schemes was sent to the Inspectorate on 21 November 2008. The Company received Final Letters of Support from DWI for the four schemes on 12 January 2009. 2.2 Raw water quality deterioration – Kings Walden Kings Walden water treatment works is in a rural location two miles to the east of Luton. The source of the water is two on-site chalk boreholes which have an abstraction licence of 2.81 Ml/d. The treatment consists of superchlorination, a contact tank and dechlorination. In addition, there is a connection to the Company’s trunk main that moves water from our bulk supply from Anglian Water (Grafham WTW) around the Company’s area. The original reason for installing this connection was to ensure continuity of supply at times of high demand and outage of the treatment works. However, since the summer of 2007 when there was an increase in the nitrate concentration in the raw water, water from this connection has been used for blending purposes to keep the nitrate concentration in the final water below the prescribed concentration or value (PCV) of 50 mg/l. The final water then supplies a discrete local area with a population of just over 6000. Over the past fifteen years, the nitrate concentration in the raw water at Kings Walden WTW has consistently been above 40 mg/l and has shown a gradual upward trend. The source of the nitrate is believed to be the agricultural activity in the vicinity of the treatment works. A plot of the nitrate concentration over this time period is shown below. B4 – Quality Enhancements 3 April 2009 Page 6 of 37 Three Valleys Water Final Business Plan Figure B4 : 1 Raw water nitrate concentration at Kings Walden Raw Water Nitrate Concentration at Kings Walden 60 PCV Nitrate Concentration (mg/l) 50 40 NO3 30 20 10 03/07/2008 30/01/2008 09/08/2007 02/04/2007 16/11/2006 29/06/2006 14/02/2006 03/10/2005 24/06/2005 04/02/2005 09/09/2004 04/05/2004 17/10/2003 20/06/2003 07/03/2003 18/10/2002 10/05/2002 09/11/2001 06/07/2001 07/03/2001 20/10/2000 16/06/2000 04/02/2000 10/09/1999 26/02/1999 09/10/1998 05/06/1998 29/01/1998 12/09/1997 18/04/1997 26/04/1996 15/09/1995 12/05/1995 09/12/1994 26/08/1994 26/02/1993 0 Date In the summer of 2007, there was a spike in the raw water nitrate concentration which caused the water leaving the works to be above the PCV. This resulted in a nitrate compliance failure which was notified to the DWI. As mentioned above, the risk of subsequent failure has been controlled by local blending but this does restrict the source output. Following a review of the possible options, we decided that our preferred solution is to install ion-exchange treatment at the works by March 2014 in order to maintain the nitrate concentration in the water leaving the treatment works below 50 mg/l. The treatment solution proposed for this scheme has a 100% confidence in benefit as it is a proven process for nitrate removal and we have experience in operating ion-exchange plants. This solution will also be suitable for the projected rising trend in nitrate levels up to 2030. The possible solutions that were evaluated and the reasons why they were not considered appropriate are set out in the table below. This evaluation was undertaken for the Draft Business Plan to establish the solution to be taken forward for more detailed assessment and costing for the Final Business Plan. B4 – Quality Enhancements 3 April 2009 Page 7 of 37 Three Valleys Water Final Business Plan Table B4 : 3 Draft Business Plan options for Kings Walden Nitrate Treatment option Capex (£k p.a.) Opex (£k p.a.) Ion-exchange 1343 63 Discounted Reverse osmosis 1582 313 Discounted Blending - - Discounted Catchment management - - Discounted Biological removal - - Option Preferred Selection criteria A proven process which we have experience of operating. Higher capex and opex, higher energy use and more waste for disposal. Not considered viable in the long term due to absence of low nitrate water for blending. Not considered viable due to size of the catchment, no land ownership by Company and lack of effect from the change to a Nitrate vulnerable zone in 2002. No process available commercially. Our cost benefit analysis for the Plan shows that the Kings Walden scheme has £0.64 million of benefits against £2.71 million of costs making it not cost beneficial. The scheme has been included in the Plan due to the statutory drivers associated with the drinking water compliance programme. 2.3 Cryptosporidium – Chorleywood Chorleywood water treatment works is in a rural location a mile north of Rickmansworth. The source of the water is three on-site chalk boreholes which have an abstraction licence of 9 Ml/d. The treatment consists of super-chlorination, a contact tank and de-chlorination. There is also the addition of orthophosphate for plumbosolovency control. The final water is then pumped into a trunk main which goes to Bovingdon service reservoir. From here the water supplies parts of Hemel Hempstead and the surrounding area. The routine microbiological monitoring that is carried out on the raw water at Chorleywood has identified E. coli in 7% of the samples which demonstrates that faecal contamination of the raw water is occurring on a regular basis. A plot of the E. coli results from the raw water since 2002 is shown below. The graph shows a clear deterioration in the raw water quality since 2006. B4 – Quality Enhancements 3 April 2009 Page 8 of 37 Three Valleys Water Final Business Plan Figure B4 : 2 E. coli results from the raw water at Chorleywood E. coli Results from the Raw Water at Chorleywood 16 14 No E. coli / 100 ml 12 10 8 6 4 2 06/11/2008 06/08/2008 06/05/2008 06/02/2008 06/11/2007 06/08/2007 06/05/2007 06/02/2007 06/11/2006 06/08/2006 06/05/2006 06/02/2006 06/11/2005 06/08/2005 06/05/2005 06/02/2005 06/11/2004 06/08/2004 06/05/2004 06/02/2004 06/11/2003 06/08/2003 06/05/2003 06/02/2003 06/11/2002 06/08/2002 06/05/2002 06/02/2002 0 Date The existing disinfection system at the treatment works is capable of inactivating pathogenic bacteria and viruses that may be present in the water when it is contaminated but could not inactivate Cryptosporidium oocysts if they were present. At present we mitigate the risk by carrying out continuous monitoring for Cryptosporidium and analyse the sample on a weekly basis. If oocysts were detected, the treatment works would be removed from supply. However, to ensure that viable oocysts are never present in the final water, we believe it would be prudent to add ultra-violet irradiation to the disinfection process. Ultra-violet irradiation has always been accepted as an effective disinfectant and more recently has been recognised as a proven means of inactivating Cryptosporidium oocysts. The options evaluated and the reasons why the others were discounted are shown in the table below. This evaluation was undertaken for the Draft Business Plan to establish the solution to be taken forward for more detailed assessment and costing for the Final Business Plan. Table B4 : 4 Draft Business Plan options for Chorleywood Cryptosporidium Treatment option Capex (£k p.a.) Opex (£k p.a.) Ultra-violet irradiation 104 15 Discounted Membrane filtration 3864 765 Discounted Chemical coagulation & filtration - - Discounted Catchment control - - Option Preferred B4 – Quality Enhancements Selection criteria Proven treatment option with the lowest capex and opex. Eliminated on assessment of costs, energy use, membrane replacement and waste disposal. These all lead to this option having a larger carbon footprint than the proposed option. The lack of turbidity in the raw water means this treatment is unsuitable. This would lead to low level of integrity of removal of oocysts. This option would also produce more waste for disposal. No ownership of land in extensive catchment. 3 April 2009 Page 9 of 37 Three Valleys Water Final Business Plan Our Plan cost benefit analysis shows that the Chorleywood scheme has £33.75 million of benefits against £0.28 million of costs making it very strongly cost beneficial. 2.4 Acceptability of drinking water to customers – Roydon Roydon water treatment works is in a rural location, one mile west of Harlow. The source of the water is two on-site greensand boreholes which have an abstraction licence of 15 Ml/d. The current treatment consists of biological filtration for iron removal followed by superchlorination, a contact tank and dechlorination. There is also the addition of orthophosphate for plumbosolovency control. The final water is then pumped to Rye Hill reservoirs on the outskirts of Harlow, where it mixes with water from three other treatment works. These reservoirs then supply water to two water supply zones, Zone 24 Harlow and Zone 25 Epping/Ongar, which have a combined population of 130, 000. Both boreholes run continuously and, because of the local geology, they both contain very high natural concentrations of iron and moderately high natural concentrations of manganese. Generally, borehole 1 contains higher concentrations of both metals. A plot of the manganese concentration in the raw water is below. The existing biological oxidation and filtration process at the works is very effective at removing iron (for which it was designed), but is much less effective than more conventional chemical oxidation processes at removing manganese. Figure B4 : 3 Manganese in the raw water at Roydon Manganese in the Raw Water at Roydon 100 90 Manganese Concentration (ug/l) 80 70 Result value 60 50 PCV 40 30 20 10 12/11/2008 12/08/2008 12/05/2008 12/02/2008 12/11/2007 12/08/2007 12/05/2007 12/02/2007 12/11/2006 12/08/2006 12/05/2006 12/02/2006 12/11/2005 12/08/2005 12/05/2005 12/02/2005 12/11/2004 12/08/2004 12/05/2004 12/02/2004 12/11/2003 12/08/2003 12/05/2003 12/02/2003 12/11/2002 12/08/2002 12/05/2002 12/02/2002 0 Date Whilst the concentration of manganese in the final water complies with the requirements of the water quality regulations there is strong evidence to demonstrate that deposition is occurring both within the service reservoirs and distribution system. As the water passes through the supply system the soluble manganese is oxidised to the stable insoluble dioxide by the chlorine residual in the water and oxygen and this creates a dark brown or black deposit in the downstream service reservoirs and the distribution system. The presence of the deposit poses a significant risk to the quality of the water supply because of subsequent re-suspension in the distribution network when flow rates change. This leads to periodic discoloration of the water supply. B4 – Quality Enhancements 3 April 2009 Page 10 of 37 Three Valleys Water Final Business Plan Generally, the manganese concentrations found in samples taken from both the water supply zones are below the PCV but there were two routine compliance PCV exceedences for manganese in Zone 25 in 2008. This is in spite of the fact that the majority of mains in the zone were rehabilitated in AMP3 as part of a Distribution Undertaking. We believe that this is a clear indication that the situation is deteriorating and action is required to prevent further PCV exceedances. Plots of the manganese concentration in the supply to the two affected water supply zones are below. Figure B4 : 4 Manganese concentration in Zone 24 – Harlow Manganese Concentration in Zone 24 - Harlow PCV 50 45 Manganese Concentration (ug/l) 40 35 30 25 20 15 10 5 05/05/2008 05/07/2008 05/09/2008 05/11/2008 05/07/2008 05/09/2008 05/11/2008 05/03/2008 05/05/2008 05/01/2008 05/11/2007 05/09/2007 05/07/2007 05/05/2007 05/03/2007 05/01/2007 05/11/2006 05/09/2006 05/07/2006 05/05/2006 05/03/2006 05/01/2006 05/11/2005 05/09/2005 05/07/2005 05/05/2005 05/03/2005 05/01/2005 05/11/2004 05/09/2004 05/07/2004 05/05/2004 05/03/2004 05/01/2004 0 Date Figure B4 : 5 Manganese concentration in Zone 25 – Epping/Ongar Manganese Concentration in Zone 25 - Epping/Ongar 90 Manganese Concentration (ug/l) 80 70 60 PCV 50 40 30 20 10 05/03/2008 05/01/2008 05/11/2007 05/09/2007 05/07/2007 05/05/2007 05/03/2007 05/01/2007 05/11/2006 05/09/2006 05/07/2006 05/05/2006 05/03/2006 05/01/2006 05/11/2005 05/09/2005 05/07/2005 05/05/2005 05/03/2005 05/01/2005 05/11/2004 05/09/2004 05/07/2004 05/05/2004 05/03/2004 05/01/2004 0 Date Further evidence of the deposition of manganese in the distribution network is the high contact rates for customers complaining about discoloration of their water supply. In 2007, the two zones accounted for around 1000 (35%) of the customer contacts the Company B4 – Quality Enhancements 3 April 2009 Page 11 of 37 Three Valleys Water Final Business Plan received regarding discoloration and in 2008 this figure had risen to 1300 (46%). This increasing trend is in spite of the rigorous controls that are in place for operating the distribution system. A plot of the number of complaints received from these two zones is below along with a table which shows the increasing customer contact rate for discoloration for the two zones. Figure B4 : 6 Number of customer complaints regarding discolouration from zones 24 and 25 Number of Customer Complaints Regarding Discoloration from Zones 24 & 25 1400 Number of Customer Complaints 1200 1000 800 600 400 200 0 2004 2005 2006 2007 2008 Year Table B4 : 5 Customer contact rates for the zones supplied from Roydon (Customer Contacts per 1000 Customers) 2004 Zone 24 Zone 25 1.93 5.65 2005 2.38 6.41 2006 1.70 5.06 2007 2.26 14.65 2008 4.15 19.14 A review of customer contacts has shown that when customers do contact the Company with concerns about aesthetic appearance, the quality of the water they receive can be two to four times greater than the PCV for manganese. We believe that this demonstrates that customers in the two zones experience recurrent episodes of discoloration and, at these times, do not receive wholesome water. UKWIR’s report “Acceptability of Drinking Water – Willingness to Pay” highlights that customers consider discoloured water as unsafe and therefore the Company believes that the current level of risk of discoloration of the water supply in these zones is unacceptable. Our customer research and willingness to pay (WTP) study was undertaken in 2007 and is fully described in Section C1 of our Plan and in the report PR09 Cost Benefit AnalysisCustomer Preferences and Willingness to Pay prepared by ICF International who undertook this project on our behalf. Tap water quality and taste, smell and appearance (TSA) were specifically addressed in the research. 400 customers with a representative geographic and demographic split were interviewed and as might be expected in a small sample of our customer base, many of the customers had not experienced particular problems. Nonetheless the results from individual interviews with the 400 customers show B4 – Quality Enhancements 3 April 2009 Page 12 of 37 Three Valleys Water Final Business Plan relatively strong support for improvements in water quality and a clear willingness to pay for improvements. Customers interviewed were asked to identify which areas of our service is an urgent priority for improvement. Of sixteen possible choices, tap water quality was clearly the highest priority with 25.9% of respondents identifying this as their main priority. TSA was one of eight attributes we tested in our detailed customer research. The eight attributes were blocked into two groups of four with each respondent only being presented with choice tasks for one of the blocks. TSA was grouped in block A with frequency of hosepipe bans, interruptions to supply and hardness of water. Whilst in the WTP estimates water efficiency and green house gas emissions from block B had the highest WTP of the eight attributes in £/household/year at £17.78 and £16.29 respectively, TSA clearly had the highest WTP at £14.04 of the tangible customer services we tested in this experiment. It also had much more valid confidence limits at a 95% confidence interval. For the block A attributes tested, TSA also consistently had the highest WTP when analysed by social group or geographic area. In late 2008, an industry wide customer research project was undertaken to gather customers views on company’s Draft Business Plans with particular focus on value for money. 250 of our customers were interviewed. One of the questions was about which improvement would they be most concerned about if it was delayed. 74% of our customers interviewed said safety of tap water and 58% said the appearance of tap water. These were the highest and third highest percentages. When asked to give a value for money score between 1 and 5 for proposed service levels in the Draft Business Plan the average score for safety of drinking water quality was 3.38 and 3.44 for appearance, taste and smell. Similarly only 18% of customers felt that our proposals for appearance taste and smell was poor value for money. Overall we feel that these two pieces of customer research show customer support for an improvement in appearance, taste and smell, a willingness to pay and a view that our proposals represent good value for money. Most of these customers have never experienced discolouration due to manganese, we are convinced that if they had, the results would have been even more overwhelming. The statistical review of historical analysis carried out as part of our DOMS identified that Zones 24 and 25 were two of the five worst performing zones and as such were identified for site specific studies. Enhanced monitoring and evaluation of the data carried out as part of the study has shown the extent to which each District meter area (DMA) has the potential to cause discoloration. Interestingly, DMAs which have substantial lengths of MDPE or PVC mains are significant contributors to discoloured water complaints. These findings further substantiate that deposition of manganese is occurring within the distribution system and leading to discoloration of water supplies rather than this being caused by corrosion of cast iron mains. In continuing our site specific studies, cleaning exercises have been undertaken in order to confirm that the system can be effectively cleaned without causing further water quality deterioration during the process. We have also assessed the water quality in the target areas and confirmed the time required to improve the water quality. Our proposed solution is to install a new chemical dosing stage at the treatment works to oxidise the manganese and filters to remove the solid formed. The treatment solution proposed for this scheme has a 100% confidence in benefit as it is a proven process for manganese removal and we have extensive experience of it. Once the proposed solution B4 – Quality Enhancements 3 April 2009 Page 13 of 37 Three Valleys Water Final Business Plan has been installed we expect the manganese concentration in the water leaving the treatment works to be consistently below 2 µg/l (the analytical limit of detection). We are planning to complete this work by March 2012 and then we propose to carry out a systematic mains cleaning exercise in the two zones to remove the existing deposits. In Zone 24 we will clean 77.2 km of trunk mains and 308.8 km of distribution mains while in Zone 25 we will clean 94.9 km of trunk mains and 386.3 km of distribution mains. The distribution and trunk main system can be effectively cleaned using systematic flushing for the smaller diameter pipes and a combination of flushing, swabbing and drain down techniques for larger diameter trunk mains. Using site specific information we have been able to design a cleaning programme for smaller diameter mains that uses existing hydrants and washouts with a few additional fittings needed. For the larger trunk mains comprehensive designs have been carried out that consider the supply system, the hydraulic performance of each pipe (from all mains hydraulic modelling) and value engineering of options available for the removal of deposits. We have then built up an activity based programme of work for each trunk main to include the measures needed to achieve flushing velocities, safe discharge of water, access for swabbing operations etc. Using these activities a robust cost estimate based on comparable contracts carried out for other water companies has been compiled. We predict that the introduction of a treatment process to remove the manganese, together with a systematic cleaning programme to remove any manganese accumulated in the distribution network, will remove the risk of any compliance PCV exceedences in the two zones and reduce the customer contact level by around 1000 calls a year and bring the contact rates for both zones down to the Company average (0.94) or lower. In addition, this investment will enable us to improve our operating efficiency in this area and reduce the amount of water wasted due to extensive flushing activities conducted to minimise discoloration events during work on the network. We also believe there will be more opportunity to stabilise the chlorine residuals in these zones improving the taste and odour of the water supplied and ensuring microbiological compliance. The options evaluated and the reasons why the others were discounted are shown in the table below. This evaluation was undertaken for the Draft Business Plan to establish the solution to be taken forward for more detailed assessment and costing for the Final Business Plan. Table B4 : 6 Draft Business Plan options for Roydon Manganese Option Preferred Discounted Discounted Treatment option Chemical oxidation, new filters and systematic mains cleaning Biological treatment on existing filters for iron removal and chemical oxidation and second stage filtration for manganese removal. Chemical treatment in one stage mix new and existing Capex (£k) Opex (£k) 7309 59 - - 7619 65 Discounted Oxidation and membrane filtration - - Discounted Discounted Ion exchange In-situ borehole treatment - - B4 – Quality Enhancements Selection criteria A proven process with the lowest capex and opex Not considered viable due to limited capacity of existing biological filters and requirement for re-pumping to second stage, increasing costs and energy usage. Higher capex and opex. Eliminated on initial assessment of costs, energy use, membrane replacement and waste disposal. These all lead to this option having a larger carbon footprint than the proposed option. Not commercially available Not commercially available 3 April 2009 Page 14 of 37 Three Valleys Water Final Business Plan Our Plan cost benefit analysis shows that the Roydon scheme has benefit of £36.55 million against costs of £12.96 million making it very strongly cost beneficial. completency 2.5 Acceptability of drinking water to customers – Blackford Blackford water treatment works is in a rural location, close to the village of Denham. The source of the water is three on-site chalk boreholes which have an abstraction licence of 19.8 Ml/d. The current treatment consists of super-chlorination, a contact tank and dechlorination plus the addition of orthophosphate for plumbosolovency control. The final water is then pumped directly into the distribution system, supplying Hillingdon, the village of Ickenham and the surrounding area. This is our water supply zone 47 which has a population of 37,000. One of the boreholes (No 1) at Blackford contains significant natural concentrations of manganese, while the other two boreholes contain more moderate levels. The results of the samples from borehole 1 show that 20% of all samples taken are greater than 50 µg/l manganese (the PCV) and 91% are greater than 25 µg/l manganese. A plot of the manganese concentration in borehole 1 is below. Figure B4 : 7 Manganese concentration in Blackford Raw 1 Manganese Concentration in Blackford Raw 1 90 80 Manganese Concentration (ug/l) 70 60 PCV 50 40 30 20 10 20/10/2008 20/08/2008 20/06/2008 20/04/2008 20/02/2008 20/12/2007 20/10/2007 20/08/2007 20/06/2007 20/04/2007 20/02/2007 20/12/2006 20/10/2006 20/08/2006 20/06/2006 20/04/2006 20/02/2006 20/12/2005 20/10/2005 20/08/2005 20/06/2005 20/04/2005 20/02/2005 20/12/2004 20/10/2004 20/08/2004 20/06/2004 20/04/2004 20/02/2004 20/12/2003 20/10/2003 20/08/2003 20/06/2003 20/04/2003 20/02/2003 20/12/2002 20/10/2002 20/08/2002 20/06/2002 20/04/2002 20/02/2002 0 Date For supply reasons it is essential to use the water from all three boreholes. However, due to the elevated manganese concentration in the water from borehole 1, this source is never able to be run on its own. At least one of the other two boreholes is used at the same time for blending thus ensuring that the manganese concentration in the water leaving the treatment works is as low as possible. Currently, there is no manganese removal treatment. When all the raw waters are blended together the final water contains between 3 and 24 µg/l manganese. Again, whilst the concentration of manganese in the final water complies with the requirements of the water quality regulations there is strong evidence to demonstrate that deposition is occurring both at the treatment works and in distribution system. Deposits in the sampling line at the works have to be removed on a regular basis and it is the presence of these deposits that has caused the six compliance turbidity exceedences that have occurred at Blackford since regulatory monitoring began in 2004. In addition, there have been three compliance exceedences for manganese in B4 – Quality Enhancements 3 April 2009 Page 15 of 37 Three Valleys Water Final Business Plan Zone 47, one in each of 2005, 2006 and 2007. A plot of the manganese concentration in the supply to the affected water supply zone is below. Figure B4 : 8 Manganese concentration in Zone 47 – Denham/Ickenham Manganese Concentration in Zone 47 - Denham/Ickenham 100 90 Manganese Concentration (ug/l) 80 70 60 PCV 50 40 30 20 10 23/11/2008 23/09/2008 23/07/2008 23/05/2008 23/03/2008 23/01/2008 23/11/2007 23/09/2007 23/07/2007 23/05/2007 23/03/2007 23/01/2007 23/11/2006 23/09/2006 23/07/2006 23/05/2006 23/03/2006 23/01/2006 23/11/2005 23/09/2005 23/07/2005 23/05/2005 23/03/2005 23/01/2005 23/11/2004 23/09/2004 23/07/2004 23/05/2004 23/03/2004 23/01/2004 0 Date Again, the other way this issue manifests itself is the high rate of contacts from customers regarding discoloration. In 2006 there were was 2.91 contacts per 1000 customers and in 2007 there were 4.6 contacts per 1000 customers. In 2007, this zone accounted for 7% of the calls the Company received regarding discoloration. There was also a discoloration incident in Ickenham (Zone 47) in February 2003. Below is a table which shows the customer contact rate for discoloration in the zone. Table B4 : 7 Customer contact rates for the zones supplied from Blackford (customer contacts per 1000 customers) 2004 Zone 47 3.28 2005 2.20 2006 2.91 2007 4.60 2008 2.52 It is our view that this information demonstrates that the level of risk of discoloration of the water supply in the zone supplied by Blackford WTW is unacceptable and the proposed scheme would alleviate the issue. Details of customer support and willingness to pay for an improvement in appearance are set out above in the details for Roydon. The proposed solution is to install a chemical oxidation and pressure filtration system at the treatment works. The treatment solution proposed for this scheme has a 100% confidence in benefit as it is a proven process for manganese removal and we have extensive experience of it. The proposed solution could accommodate an increase in manganese concentrations if it becomes necessary. Pressure filters are proposed despite a marginally higher NPV due to the possibility to locate them at a lower level thereby reducing the visual impact of the treatment system. Once the proposed solution has been installed we expect the manganese concentration in the water leaving the treatment works to be consistently below 2 µg/l (the analytical limit of detection). We are planning to complete this work by March 2013 and then we propose to carry out a systematic mains B4 – Quality Enhancements 3 April 2009 Page 16 of 37 Three Valleys Water Final Business Plan cleaning exercise in the affected zone to remove the existing deposits. This exercise will involve cleaning 50.3 km of trunk mains and 162.7 km of distribution mains. The design of the cleaning exercises follows the same techniques adopted for Roydon where site specific studies supported by detailed modelling of the network have determined the intervention methods required with activity based costs produced. We predict that the introduction of a treatment process to remove the manganese, together with a systematic cleaning programme to remove any manganese accumulated in the distribution network, will remove the risk of any compliance PCV exceedences in the zone and reduce the customer contact from the zone to the Company average (0.94) or lower. The other options evaluated and the reasons why they were discounted are shown in the table below. This evaluation was undertaken for the Draft Business Plan to establish the solution to be taken forward for more detailed assessment and costing for the Final Business Plan. Table B4 : 8 Draft Business Plan options for Blackford Manganese Option Treatment option Capex (£k) Opex (£k) Preferred Chemical oxidation, pressure filtration and systematic mains cleaning 3066 64 Discounted Chemical oxidation, gravity filtration and systematic mains cleaning Discounted Discounted Discounted Chemical oxidation, membrane filtration and systematic mains cleaning Ion exchange In-situ borehole treatment Selection criteria A proven process with reduced visual impact on the surrounding area. 2863 64 - - - - This treatment option is likely to be as effective as the chosen option but the use of pressure filters gives us the opportunity to reduce the visual impact of the scheme will be beneficial with respect to obtaining planning permission. Eliminated on initial assessment of costs, energy use, membrane replacement and waste disposal. These all lead to this option having a larger carbon footprint than the proposed option. Not commercially available. - - Not commercially available. Our Plan cost benefit analysis shows that the Blackford scheme has benefits of £3.38 million against costs of £9.38 million making it not cost beneficial. The scheme has been included in the Plan due to the statutory drivers associated with the drinking water compliance programme. 2.6 Schemes included in Draft Business Plan but not in this Plan • There are three schemes that were included in our Draft Business Plan but after careful consideration we have decided to withdraw them from our Plan. These are tri and tetrachloroethene removal at Berkhamsted and PFOS removal at Bow Bridge and Holywell WTWs. The reasons behind our decisions are as follows: • At Berkhamsted, the concentration of tri and tetrachlorethene in the raw waters has continued to increase since our initial submission and reached levels where we needed to act to maintain output and compliance with the 10 µg/l standard. We decided that the best course of action was to initiate the GAC replacement programme and over the last six months the GAC has been replaced in all five of B4 – Quality Enhancements 3 April 2009 Page 17 of 37 Three Valleys Water Final Business Plan the contactors at the works. The cost of the work is not of sufficient materiality for ‘logging up’ so we are absorbing the costs in our AMP4 programme. • We have been carrying out routine monitoring for PFOS in the four raw waters at Holywell since the summer of 2006. Trace levels have been found in all the raw waters but the maximum concentration detected has been 0.064 µg/l, which is well below the 0.3 µg/l trigger level the Inspectorate has set for further action, and the trends for all four raw waters is flat. As this is the case, we believe that replacement of the GAC at the treatment works is not required at present. We will continue to monitor the raw water and maintain our communication with the EA and the owners of the Buncefield site. This will ensure that we are aware of any changes in the raw water quality and the ongoing work at the site, which will enable us to manage the situation. A trend graph for the raw waters at Holywell is below. Figure B4 : 9 Concentration of PFOS in Holywell Concentration of PFOS at Holyw e ll 1 Concentration ug/l 0.8 Holyw ell Raw 3 Holyw ell Raw 4 0.6 Holyw ell Raw 5 Holyw ell Raw 6 DWI Trigger concentration DWI Wholesomeness concentration 0.4 0.2 15/10/2008 15/09/2008 15/08/2008 15/07/2008 15/06/2008 15/05/2008 15/04/2008 15/03/2008 15/02/2008 15/01/2008 15/12/2007 15/11/2007 15/10/2007 15/09/2007 15/08/2007 15/07/2007 15/06/2007 15/05/2007 15/04/2007 15/03/2007 15/02/2007 15/01/2007 15/12/2006 15/11/2006 15/10/2006 15/09/2006 15/08/2006 15/07/2006 15/06/2006 0 Date • Bow Bridge WTW has been out of service since 11 December 2005, the day of the Buncefield explosion. It is currently our belief that the concentration of PFOS in the raw water at this works is likely to be similar to that found at Holywell. Over the past year, we have been working towards returning it into supply but we have encountered a number of issues which have prevented this happening. We intend to carry on with this work and expect to be able to return the works to supply in 2009. Obviously, in carrying out this work we will be mindful of the PFOS concentration in the water entering supply and will take the appropriate steps to minimise it, which may include changing the GAC. As the situation at Bow Bridge is uncertain, we do not feel it is appropriate to include the scheme in our Plan at this time. 2.7 Lead In AMP3, the Company installed a number of orthophosphate dosing plants at sites which supplied water to areas which were considered to have a significant number of properties where the lead concentration in the water could exceed 10 µg/l. Over the intervening years we have worked on optimising the orthophosphate dose so that lead concentrations in drinking water have been significantly reduced in a cost-effective manner. B4 – Quality Enhancements 3 April 2009 Page 18 of 37 Three Valleys Water Final Business Plan The sampling that we have carried out shows that currently around 98% of properties in the Company’s area have lead concentrations in the drinking water that are below 10 µg/l. The Company concurs with DWI’s view that strategic lead pipe replacement does not deliver public health benefits unless customers replace the lead pipework within their properties. As very few customers show any desire to carry out this work, the Company is not proposing a strategic lead pipe replacement programme. Instead, we are proposing to develop a strategy that will involve identifying the high risk water supply zones and then working with health protections teams and local authorities to identify vulnerable customers in these zones. In the few cases where it is required, we can then use this information to develop solutions that are appropriate to the situation. 2.8 Metaldehyde In common with a number of other water companies across the country, we have recently detected the pesticide metaldehyde in a number of our source and final waters and in some cases the concentration found has been above 0.1 µg/l (the drinking water standard). Metaldehyde is a molluscicide used to control slugs and snails. Although metaldehyde has been used for a number of years, a reliable method of detecting it in water has only been available in the last two years. It appears to be more prevalent in surface waters but it has been detected in groundwater. Removal of metaldehyde from the raw water with existing ozonation and GAC treatment is only partially effective. Investigations by WRc into alternative treatments are ongoing and we await their findings. To ensure that we are aware of any regulatory and treatment developments, we are participating in the Industry group on metaldehyde. This group recently met with the Metaldehyde Stewardship Group (MSG – a group comprising of all the UK’s manufacturers and distributers of metaldehyde), DWI, EA, Natural England, ADAS and the Pesticide Safety Directorate to discuss the issue. At the meeting it was agreed that the best way forward is for the MSG to rollout a hard-hitting campaign highlighting best practice for users with a strong “abuse it and lose it” message. This campaign is due to start in February. It is hoped that this will lead to users applying metaldehyde in much more responsible manner which will result in significant reductions in the concentrations detected in raw waters. DWI is currently assessing the regulatory position and is due to inform companies how this issue will be dealt with later in 2009. Should any treatment options become available in the future and the concentrations detected are still above 0.1 µg/l, we will look to develop and implement a programme of installation of the treatment where required and invoke the Change Protocol for logging up if appropriate in AMP5. B4 – Quality Enhancements 3 April 2009 Page 19 of 37 Three Valleys Water Final Business Plan 3 The security emergency measures direction Sub section excised from public domain version B4 – Quality Enhancements 3 April 2009 Page 20 of 37 Three Valleys Water Final Business Plan 4 4.1 The environment programme Introduction Abstraction influences on flows in many of the rivers within the Company’s supply area are a legacy of post war resource development to meet the demand for water in the new town developments and general housing growth in the Home Counties, including; Welwyn Garden City, Stevenage, Hemel Hempstead, Harlow and Luton. Many of these water resource developments recognised the potential for an impact on local river flows but at the time this was not deemed a substantive reason to prevent the licensing of abstraction. Often local concern was raised about the impact of abstraction on river flows but it has not been until the last couple of decades that low rivers flows have been seen as a priority. The Environment Agency (EA) reviews the impact of our abstractions on the local environment as part of its duty and in the light of current UK and European legislation. The National Environment Programme (NEP) has been seen to grow in size over the last four AMP periods and in addition to local drivers, now includes requirements to investigate environmental impacts under the Water Framework Directive (WFD). There is uncertainty over the potential impact the WFD will have over long term water resource planning, as highlighted in Section B5 and in the Water Resources Management Plan (WRMP). Without dedicated funding to meet any new requirements there will be a conflict between the requirements of this European Directive and the recovery of costs through the Business Planning process. The conflict between the provision of public water supply and the environmental requirements of nationally rare habitats, like chalk streams, continue to be a challenge. Managing a balance between the development of future resources and addressing the challenges of inherited environmental impacts, where there is the potential for over riding public interest of public water supply, is fundamental to our water resources planning into the future. There are significant uncertainties in future licence changes that may be required to meet the needs of both the WFD and local drivers, these are known as sustainability reductions. This produces a potential risk to our supply demand balance by reducing the amount of available water for supply. The requirement for environmental monitoring and impact assessment work in the future is key to evaluating these impacts. The implementation of the WFD is likely to increase the scope and frequency of environmental monitoring into the future, not just in AMP5, but beyond. The environmental impact of water abstraction is currently managed through the NEP as part of the company’s five-yearly environmental improvement programme which is set as part of our Asset Management Plan at the time of the periodic review. The EA are responsible for identifying which schemes are required to deliver environmental improvements and meet legislative requirements. These are then costed and included in the Plan. Historically, these have been considered part of the quality enhancements of the Plan, but in their tables, the EA has stated that the options appraisals should be considered under the supply demand heading. This has not been the case in past options appraisals we have therefore reported all costs within the quality enhancement programme to meet Ofwat requirements. The EA’s catchment abstraction management strategy (CAMS) sets out the new licensing policy for catchments throughout England and Wales. The majority of catchments within our supply area have been designated as either over abstracted or over licensed or both, meaning that there are unlikely to be further water resources available for exploiting B4 – Quality Enhancements 3 April 2009 Page 21 of 37 Three Valleys Water Final Business Plan without detrimental impact on the environment. Time limiting of licences and additional requirements stipulated on such licences for environmental monitoring mean that there will be an increasing requirement for us to undertake monitoring to maintain our licence base. Previous NEP studies have already resulted in some abstraction licence changes and a significant amount of environmental monitoring, both by the EA and us. Based on the current AMP4 investigations, the EA have advised us of confirmed sustainability Licence reductions, totalling 14.83 Ml/d (as deployable output, DO) that they wish us to consider. We are currently challenging the appointed sites and volumes as no justification or supporting information was given. The costs for covering the deficit, should these reductions be imposed, would be significant causing additional economic burden on our customers. Therefore, we believe that such reductions are not in our customer’s interest. For the AMP5 period, a programme of 17 investigations and options appraisals and 1 implementation scheme have been identified by the EA in their letter of 28 November 2008 for inclusion in our Plan at PR09. In total, 388 Ml/d of our current DO (593 Ml/d peak Licence) is to be investigated in the AMP5 period. This is 30% of our total DO. The general Locations of these investigations are shown in the Figure below. This is a significant volume of water and if these investigations indicate an environmental impact, this puts these volumes under threat from future sustainability reductions. Much of this water is locally abstracted to meet local demands. We have evaluated the total costs of undertaking these schemes to be £7.38 million. We do not believe that the scale of costs associated with this volume of water would be proportionate to the benefits gained, or affordable to our customers as was highlighted in our draft WRMP. Moreover, it needs to be taken into account that our customers have put the low flow rivers close to the bottom of their priorities as indicated by the willingness to pay survey results. Figure B4: 10: Environmental investigations Middle and Upper Ver Investigation and Options Appraisal 77.6 Ml/d at risk £1.0 million Mid Rib Investigation and Options Appraisal 8.32 Ml/d at risk £0.9 million River Misbourne Options Appraisal 23.88 Ml/d at risk Cost £0.6 million Mid Colne and Lakes Investigation and Options Appraisal 121.84 Ml/d at risk Cost £0.9 million Upper Colne Investigation and Options Appraisal 156.58 Ml/d at risk £2.4 million Thames Intakes Implementation Cost £1.6 million B4 – Quality Enhancements 3 April 2009 Page 22 of 37 Three Valleys Water Final Business Plan In AMP4, we have undertaken investigations on 66.44 Ml/d (5% of our total DO), with a resulting sustainability loss of 14.83 Ml/d. If the same ratio were to hold true, we could be looking at a minimum reduction of 87 Ml/d post AMP5. Such volumes of water will be very difficult to replace and very costly, not only in the cost of the replacement water infrastructure, but in increased operational costs and carbon footprint, as this volume of water would require large scale imports. The source of such large volumes is currently unknown, but may well require inter-basin transfers and/or desalination from a location remote from our operating area. Increased activities from water efficiency projects and demand management are highly unlikely to reduce demand by these volumes and would both be very expensive and unpopular with our customers. Such options will be considered in the options appraisals to be undertaken in AMP5 for specific sources and groups of sources. The cumulative effect will be critical. In our preliminary cost effectiveness analysis work for Ofwat and reported on in the dWRMP, we investigated the consequence of losing 221 Ml/d and this came up with a mix of demand management, leakage reduction and resource development at a total cost of £2.1 billion. It is unclear to us that the cost-benefit of undertaking the AMP5 investigations/options appraisals has been properly investigated, as they could lead to the requirement for significant reductions in DO and hence costs to customers. We have estimated the cost of these investigations and options appraisals to be £5.8 million (see Table B4: 11). Any future sustainability reductions will be enacted through the statutory process, taking into account the impact on the security of supply to customers and would only be enacted once this had been secured. The exact mechanism of funding for any such future reductions remains unclear, but we assume these are to be met by compensation from the EA under sections 52 and 61 of the Water Resources Act 1991 as modified by the Water Act 2003, funded from the EIUC charges that are now part of the abstraction licence charge. There are a number of areas for which funding will be required to overcome the impact of costs associated with such reductions in deployable output and not all of these will be required at the same time. They include the cost of capital works to allow replacement water to reach the affected area to maintain local security of supply and increases in future operational costs (including the effect on carbon emissions). There will also be impacts of the change in asset value due to abandonment or lower utilisation as we will be left with stranded assets, for which our customers have already paid, and the bringing forward of investment to meet the growth in demand that would otherwise not be required. Therefore, any reductions will result as additional cost to our customers either through direct capital schemes or increases in licences thus operational costs or both. The irritation of our customers will then be expected as they have expressed their low willingness to pay for low flow rivers through the willingness to pay survey. 4.2 Methodology The 17 schemes and one implementation are shown in Table B4 :10 below. These have a combination of biodiversity (BAPw1) drivers, sites of special scientific interest (Iw3) drivers and Water Framework Directive (WFD) drivers. There are some differences between the final NEP schemes and those notified and detailed in our draft business plan. Some of the initial schemes have been excluded, some components of the initial ones have been classified as ‘uncertain’ and one new scheme (Upper Ver investigation) has been added. In addition, the scope and requirements of some of the projects has been expanded and clarified from those available for the draft plan. A comparison of these for clarification is given in Table B4 : 10. B4 – Quality Enhancements 3 April 2009 Page 23 of 37 Three Valleys Water Final Business Plan The output from this programme of work will predominantly be in the form of environmental impact assessment reports which will be signed off by the EA as complete. They have also requested that we undertake one implementation project, the installation of fish screens on our river intakes at Egham, Wraysbury and Iver, again based on the work undertaken during AMP4. Table B4 : 9 Environment Programme Schemes Draft Business Plan Final Business Plan Scheme / river basin district – waterbody name Upper Colne investigation Upper Colne investigation Scheme / river basin district – waterbody name Upper Colne investigation Upper Colne investigation BAPw1 Upper Colne investigation Upper Colne investigation RSA-THNE-51/13 BAPw1 R. Stort Invest OUT RSA-THNE-28/11 BAPw1 Misbourne Post ALF investigation Misbourne Post ALF investigation Misbourne option appraisal (Misbourne) RSA-THNE-28/16 BAPw1 RSA-THNE-28/17 BAPw1 Mid Ver investigation Upper Ver investigation Mid Ver investigation Upper Ver investigation Combined as one options appraisal (Ver) RSA-THNE-49/07 BAPw1 Mid Rib investigation Mid Rib investigation Mid Rib investigation (Rib – Buntingford to Latchford) and options appraisal (classified as uncertain) THEN 38/06/01 lw3 Site unique ID / water body ID Driver RSA-THNE-28/03 BAPw1 RSA-THNE-28/15 BAPw1 RSA-THNE-28/14 RSA-THNE-28/19 RSA-THNE-28/02 RSA-THNE-28/08 lw3, BAPw1 lw3, BAPw1 BAPw1 Roydon investigation 1 Mid Colne Lakes investigation Mid Colne investigation River Chess investigation Scopes Combined as one investigation (Upper Colne) and options appraisal (classified as uncertain) Out Mid Colne Lakes investigation Mid Colne investigation Combined as one investigation (Mid Colne) and options appraisal (classified as uncertain) Out WFD water bodies AP13, Lee to Luton Hoo WFw3 AP3, Upper Colne WFw3 AP6, Lower Rib WFw3 GB106038033300 WFw3 GB106038033310 WFw3 GB106038040110 WFw3 GB106039029820 WFw3 GB106039029840 WFw3 GB106039029850 WFw3 GB106039029870 WFw3 Thames – Lee to Luton Hoo Thames – Upper Colne Out Thames – Upper Colne Thames – Lower Rib Thames – The Old Bourne Thames – River Beane Thames – River Beane Thames – River Colne Thames – River Colne Thames – River Colne Thames – River Chess Mid Rib Combined with (Upper Colne) investigation above Combined with (Rib – Buntingford to Latchford) investigation above Out Thames – River Beane Thames – River Beane Thames – River Colne Thames – River Colne Thames – River Colne B4 – Quality Enhancements Solved through AMP4 therefore no invest / Options App Solved through AMP4 therefore no invest / Options App Combined with (Upper Colne) investigation above Out 3 April 2009 Page 24 of 37 Three Valleys Water Final Business Plan GB106039029920 WFw3 Not included BAPw1 Fish screens Thames – Upper Ver Fish screens New investigation (Upper Ver) Implementation The projects shown in Table B4 : 8 include both the ‘certain’ schemes and those classified as ‘uncertain’ as the options appraisal will depend on the outcome of the investigations. We have included these in the Plan as we anticipate they will be required. It is the stated intention of the EA that these options appraisals are undertaken, where necessary, within the AMP5 period. We have reservations about whether this is realistic, particularly for the Colne schemes as they potentially involve such large volumes of water. However we have used the same costing methodology to assess these, which accounts for an additional £1 million, and included them in the Final Business Plan. For the purpose of the Final Business Plan we have amalgamated these schemes into catchment projects which are summarised in the Table below. The deadlines for these projects are also indicated. This gives five projects in total, plus the fish screens implementation project following on from studies in AMP4. Table B4 : 10 Summary of new NEP projects with deadlines Project name Project name Deadline Investigation 31 March 2014 Options appraisal 31 March 2015 Misbourne Options appraisal 31 March 2012 Upper Ver investigation Upper and Mid Ver options appraisal Investigation 31 March 2013 Upper Colne Mid Rib Risk (Ml/d) 156.58 Cost (£m) 1.9 0.5 23.88 0.6 0.7 77.6 Options appraisal 31 December 2013 Investigation 31 March 2013 Options appraisal 31 March 2014 Mid Colne River and Lakes Investigation 31 March 2014 Options appraisal 31 March 2015 Fish screens Implementation 31 March 2013 Total 0.3 8.32 0.6 0.3 121.84 0.7 0.2 n/a 1.5 388.22 7.3 The rearrangement of the completion dates, using experience gained from the evolution of AMP4 projects between the draft and the final Plan, and new provisions added in the stage plans by the EA has resulted in the reassessment of the costing of the individual components of the scope. The changes have been applied uniformly to all the projects, according to their stage plans specifications and have been detailed in Section 4.10 below. 4.3 Upper Colne investigation and options appraisal This is an investigation into the impact of our groundwater abstractions in the Upper River Colne on river flows, under a biodiversity (BAPw1) driver. The Colne receives a significant proportion of flow from chalk groundwater and is defined as a chalk river, which is listed as a priority habitat under the UK Biodiversity Action Plan. For the purpose of this study, the Upper Colne has been defined as the reach of river from the ephemeral source at Colney Heath, south of Hatfield, to upstream of the Gade confluence to the west of Watford and the area is illustrated in Figure B4 : 8. The EA have undertaken an initial restoring B4 – Quality Enhancements 3 April 2009 Page 25 of 37 Three Valleys Water Final Business Plan sustainable abstraction programme (RSAp) investigation on the Upper Colne and have identified that there is a potential impact from our abstractions on flows in the River Colne. A total of 13 sources have been identified for investigation with a total peak licensed capacity of 316.64 Ml/d and a drought peak Deployable Output (DO) of 156.58 Ml/d and a normal peak DO of 168.58 Ml/d. The findings from this investigation will therefore have the potential to significantly influence availability of our water resources into the future. Figure B4 : 11 Location of Upper River Colne The investigation will include a hydro-ecological assessment of the current conditions, reviewing historic studies and collecting new environmental monitoring data to establish current conditions. It is anticipated that the work will require groundwater modelling, pumping tests at our sources and land use assessments. This work has been costed based on our experience of undertaking similar AMP3 and AMP4 investigations of other catchments. This new investigation includes a much greater number of sources, including those of strategic importance and will therefore be a much larger piece of work than those investigations undertaken to date. There are also three WFD investigations identified for the Upper Colne. This has been included in the Upper Colne investigation with costs limited at present to the assessment of the abstractions on meeting good ecological status (GES), as we have been provided no specific details by the EA. 4.4 Misbourne options appraisal The River Misbourne is a chalk river that rises at the village of Great Missenden and flows to the southeast to meet the River Colne at Denham, a distance of 28km. Its general location is shown in Figure 9. This scheme has been identified under a biodiversity (BAPw1) driver as it is defined as a chalk river which is listed as a priority habitat under the UK biodiversity action plan. B4 – Quality Enhancements 3 April 2009 Page 26 of 37 Three Valleys Water Final Business Plan Three of our sources at Great Missenden, Amersham and Chalfont will be included in these investigations. They have a peak licensed volume of 28.41 Ml/d and a peak DO of 23.88 Ml/d (normal and drought). Low flows in the Misbourne were investigated by us during AMP1 and also by Thames Water and the EA. An implementation scheme followed, including infrastructure work and an 8 Ml/d reduction in public water supply (PWS) abstraction from our sources at Amersham, Great Missenden and Chalfont. A further reduction in abstraction was implemented by Thames Water at the head of the Misbourne. A licence variation and operating agreement was completed in AMP3 for our Misbourne Group of sources with a time limited licence variation also secured for an equivalent 8 Ml/d increase in the Blackford Group of sources in the Mid-Colne (see RSA-THNE-28/02 Mid Colne and RSATHNE-28/19 Mid Colne Lakes investigations below). Whilst it is accepted that the reduction in abstraction in the Misbourne Valley has been a success and has improved low flows, the River is considered to still suffer from low flows and a further reduction in abstraction may be required. A scheme has been put forward by the EA for options appraisal. This scheme will therefore involve reviewing all the studies to date and looking at options and the cost benefits of implementing a further reduction in abstraction at Great Missenden, Amersham and Chalfont. This work has been costed based on the AMP4 options appraisal work on the River Gade. Figure B4 : 12 Location of River Misbourne 4.5 Upper Ver investigation and Upper and Mid Ver options appraisal The EA have added a new investigation to the original list that was given to us for the draft business plan. This requires an investigation on the Upper Ver. The driver for this scheme is the WFD for water resources investigations to help deliver good ecological status. Studies undertaken in the 1980s concluded that low flows were attributable to an increase in groundwater abstraction within the catchment. Groundwater abstraction was reduced at B4 – Quality Enhancements 3 April 2009 Page 27 of 37 Three Valleys Water Final Business Plan Friars Wash Pumping Station (28/39/28/0130) from 15.9 M/d to emergency use only in 1993. Current investigations have concluded that the Ver continues to suffer from low flows. The objective of the investigation is to quantify the impact of our abstractions on the upper reaches of the river. The abstractions associated with this part of the river are Redbourne, Friars Wash and Kensworth Lynch, which operate under an emergency operation agreement, as mentioned above. The total peak licensed volume of theses sources is 27.27 Ml/d and the drought and normal peak DO is 25.11 Ml/d. The impact assessment will include desk study, hydro-ecological monitoring and review of the Vale of St Albans Groundwater Model. The costing of the components of the investigation was completed using our AMP3 and AMP4 experience of similar studies. This investigation focuses on the upper reaches of the river and it should precede the options appraisal, which focuses on the upper and lower reaches. Thus the results of the investigation can be taken into account when assessing the different options for achieving good ecological status. The options appraisal for the Upper and Mid Ver has been included under a biodiversity (BAPw1) driver as it is defined as a chalk river which is listed as a priority habitat under the UK Biodiversity Action Plan. We have seven sources in this catchment that have a cumulative DO of 52.49 Ml/d and a peak licence of 62.5 Ml/d. These volumes include the Upper Ver investigation volumes. This scheme put forward by the EA requires options appraisal of both the Upper and Middle Ver, covering a reach of the river 13.2km in length. The objective of the project is the identification of an appropriate scheme to improve the flow regime within the River Ver from its Source to Verulam Park (St. Albans) to enable the enhancement and establishment of the characteristic habitats, plants and animals of chalk streams, and to establish a sustainable abstraction regime within the catchment to support the above objective. The new abstraction regime needs to be designed to redress the impact on the local environment resulting from the present abstraction regime. This work has been costed based on the AMP4 options appraisal work on the Gade. The EA has separated the investigation and the options appraisal into two schemes with two stage plans but for the purposes of the Plan we approach them as one project. B4 – Quality Enhancements 3 April 2009 Page 28 of 37 Three Valleys Water Final Business Plan Figure B4 : 13 Location of the River Ver ● Kensworth Lynch 4.6 Mid Rib investigation The River Rib has been classified as a chalk river, despite exhibiting flow characteristics of a flashy boulder clay catchment. The scheme has been included under a biodiversity (BAPw1) driver as it is defined as a chalk river and as such listed as a priority habitat under the UK Biodiversity Action Plan. The Rib upstream of the hamlet of Latchford has been identified as potentially being affected by abstraction and is shown in Figure 11. This investigation will look at the impact of our Chipping, Standon and Hare Street Pumping Stations, with a total peak licensed volume of 11.82 Ml/d and drought and normal peak DO of 8.32 Ml/d on flows in the Upper/Mid Rib. The investigation will require us to undertake hydro-ecological monitoring, which we have costed based on experience gained in similar projects undertaken during AMP3 and AMP4. The EA have identified a reach of 12.3km to be investigated. The River Rib has been recorded by the EA as suffering from low flows during summer months and drought conditions, resulting periodically in the headwaters and tributaries running dry. This affects the biological potential of the river with available habitat subsequently reduced to isolated pools. B4 – Quality Enhancements 3 April 2009 Page 29 of 37 Three Valleys Water Final Business Plan Figure B4 : 14 Location of River Rib 4.7 Mid Colne River and Lakes investigation The Mid Colne River for the purpose of this scheme is defined as the River Colne from the confluence with the Gade to confluence with the Misbourne, a length of approximately 8km. This reach of the Colne is linked with the water of the Grand Union Canal and also the Middle Colne Lakes. The Middle Colne Lakes are a series of 18 water bodies formed from historic gravel extraction along the valley floor. The Colne is classified as a chalk stream and has therefore been allocated a BAPw1 driver. The EA have undertaken an initial restoring sustainable abstraction programme (RSAp) investigation on the this area and have identified that there is a potential impact from our abstraction at Chorleywood, Batchworth, Mill End, Stockers, Springwell, West Hyde, Northmoor, Blackford and Ickenham on both river flows and lake levels. These abstractions have a total peak licensed volume of 146.14 Ml/d and a peak DO of 121.84 Ml/d (drought and normal) and include the 8 Ml/d transferred from the Misbourne catchment as part of the earlier implementation of the Misbourne ALF scheme. The lakes are used for a variety of recreational purposes including angling and sailing, as well as having local and national importance in terms of their biological interest. There is one site of special scientific interest (SSSI) in the reach to be investigated, the Mid Colne Valley SSSI which includes Allen Lake and Broadwater and covers an area of 2.3km2. This scheme is therefore also allocated an Iw3 driver due to the SSSI designation. B4 – Quality Enhancements 3 April 2009 Page 30 of 37 Three Valleys Water Final Business Plan Figure B4 : 15 Location of Mid Colne River and Lakes The Ickenham source has been out of service for a number of years due to contamination from the adjacent New Years Green Landfill site. The designation of this site through Part IIA would allow the installation of suitable treatment, under the polluter pays principle. To date, neither the local authority (who operate the site) nor the EA have classified this land as contaminated. We have long believed that the EA should use its powers to designate the site and break the current stalemate and move towards resolving this problem. Due to its location away from the valley floor, this source is considered to have limited impact on the area of interest (River Colne and Lakes), and would thus benefit flows in the Middle Colne if it could be returned to service by changing the pattern of abstraction. The EA’s RSAp investigations concluded that a relationship exists between abstractions to the north of the SSSI site and upstream lakes and the River Colne. The report however concluded that for the River Colne there was insignificant data to determine the impact of groundwater abstractions on flows between Batchworth and Denham. Further investigations undertaken by the Environment Agency in 2007 as part of an annual review of abstraction licences in the area have concluded that there is a potential relationship between, or a potential for abstractions to negatively influence lake levels and river flows. The investigations have concluded that a further monitoring programme needs to be developed to gain to gain a better understanding of the hydrology / hydrogeology and the B4 – Quality Enhancements 3 April 2009 Page 31 of 37 Three Valleys Water Final Business Plan requirements of the lakes and the River Colne and to assess any potential improvement measures. 4.8 Surface water intake fish screens We have also included a scheme for the installation of fish screens on our surface water intakes. This follows on from a programme of detailed investigation and options appraisal carried out in conjunction with Thames Water under the AMP4 NEP. This scheme required us to investigate the extent of fish entrainment in the public water supply surface water intakes of the Lower Thames. The conclusions of the project were that it was desirable to screen all river intakes on the Thames to minimise the entrainment of fish fry. A series of different screen types were tested to determine the most effective at keeping entrance velocities below that which would harm juvenile fish, whilst maintaining maximum operational flexibility. Hydrolox travelling screens were determined to be the most suitable and were recommended for installation at Sunnymeads, Egham and Chertsey. The consultants who undertook the studies have costed the civil works involved with purchase and installation of these screens and made allowances for post installation monitoring to demonstrate their effectiveness (Jacobs 2008). These costs total £1.56 million. 4.9 Financial implications As the above programme of work is a regulatory requirement imposed by the EA, we have not considered an option to ‘do nothing’. Information gathered through the NEP will support future time-limited licence applications by the Company, as well as helping to identify the impact of implementation of the WFD through the River Basin Management Plans. Without these studies we will be open to uncorroborated challenge from the EA, Natural England and local interest groups, without the ability to robustly protect public water supplies. The investigations and options appraisals have not been subject to a cost benefit analysis, as this is not considered appropriate at this stage as the options are not yet defined. We have no details on the EA’s cost benefit of undertaking these investigations. Cost benefit analysis was carried out for the installation of fish screens on the Thames by the EA for PR04 and also by Jacobs as part of the AMP4 investigation. The overall benefit of screening would include the potential of the river system to recover quickly from shock after a fish kill event as surplus fry would be available within the system to replenish downstream areas. Understanding the financial loss of 31% of adult equivalent fry at the Lower Thames sites was beyond the scope of the AMP4 study but it has been asserted by the EA that the full economic value of the Thames freshwater and migratory fisheries amounts to many millions of pounds sterling per annum (Jacobs, 2008). Opportunities to make a significant difference to carbon emissions through this work are limited due to the nature of these investigations. In general, any reductions in deployable output from these groundwater sources would require the import of additional water from further afield, thus with the likelihood of increasing carbon emissions, and dependant on the source of that additional water, even higher emissions. Where options appraisals are also to be carried out consideration will be given to the carbon footprint. B4 – Quality Enhancements 3 April 2009 Page 32 of 37 Three Valleys Water Final Business Plan The costs of undertaking this new programme have been derived using a unit cost basis. The projects have been broken down into a standard series of work activities following discussions on details of the scope with the Thames Region, North East Area office of the EA. Each activity was then costed, based on our experience of undertaking the National Environment Programme in AMP3 and AMP4 and then divided by the relevant driver (e.g. per km length of river or Ml/d in flow terms, or number of man days to complete a task) to produce a unit cost. The work activity associated with each scheme was then identified and the relevant unit cost and driver applied to derive new schemes totals. A summary of these are shown in Table 10 below. As noted above, costs were taken from the AMP4 consultants report for the implementation of the fish screens project. Table B4 : 11 Cost of National Environment Programme Peak licensed volume (Ml/d) 'Uncertain ' options appraisal costs (£k) Scheme ref Scheme name Driver RSA-THNE-28/03, 14, 15 Upper Colne BAPw1 156.58 316.64 RSA-THNE-28/11 Misbourne Upper Ver and Ver Options Appraisal BAPw1 23.88 28.41 WFw3 BAPw1 52.49 62.5 669 BAPw1 8.32 11.82 617 248 Iw3 BAPw1 121.84 146.14 704 231 GB106039029920, RSA-THNE-28/16, 17 RSA-THNE-49/07 + AP6 lower RibGB106038033360 RSA-THNE-28/02, 19 AP3 Upper Colne; GB106039029820, GB106039029840, GB106039029850 AP6 Lower Rib; GB106038033360 Mid Rib Mid Colne River & Lakes WFD Upper Colne WFD Lower Rib, River Rib Thames Fish Screens Investigat ion costs (£k) 'Certain' options appraisal costs (£k) Peak DO value (Ml/d) 1887 Implemen tation costs (£k) 503 Linked scheme WFD Upper Colne 597 365 WFD Lower Rib WFD Upper Colne WFD Upper Colne WFD Mid Rib BAPw1 1562 Total Costs Total 388.2 % of Total DO 592.8 3876 961 982 1562 7381 30.40 Many of the schemes require us to undertake signal tests at each source to identify any impact on adjacent river flows. This will need to be undertaken at particular times of the year and will result in significant periods of additional outage. We have assumed that these outages can be temporarily managed within our existing resource base without incurring costs for additional imported water. The deadlines given in Table B4 : 8 make this a very challenging issue. A programme of work has been produced, but will be dependant on the ability to remove specific sources from supply, which may not be possible for a variety of operational reasons. Should funding for these schemes not be approved, then clearly they will not be undertaken. Our cost benefit analysis shows that the NEP has benefits of £0.66 million against £6.82 million of costs make it not cost beneficial. The programme has been included in the Plan due to the statutory drivers associated with the environment programme. B4 – Quality Enhancements 3 April 2009 Page 33 of 37 Three Valleys Water Final Business Plan 4.10 Biodiversity 4.10(i) Introduction From 1 October 2006, all public authorities in England and Wales have had a Duty under Section 40 of Natural Environment and Rural Communities Act (NERC) 2006, to have regard to the conservation of biodiversity in exercising their functions. The Act extends to all public authorities, including water companies, the biodiversity duty of Section 74 of the Countryside and Rights of Way Act (CROW) 2000. Section 51 of the NERC Act also related to invasive non-native species which where present may require control. Through the Convention on Biological Diversity (CBD), the UK agreed to reduce significantly the current rate of biodiversity loss by 2010 including a reduction in the threat of invasive nonnative species. The International Plant Protection Convention also states that parties should prevent the introduction and spread of plant pests. Defra published guidance in 2007 to raise the profile and visibility of biodiversity, clarifying existing commitments with regard to biodiversity and to make it a natural and integral part of policy and decision making. These requirements are reiterated in the Defra Statement of Obligations (December 2006) which states that undertakers need to take account of these duties in their Business Plans (PR09). This is further supported by Natural England’s response to Ofwat’s draft forward programme 2007/08 to 2009/10 (7 February 2007) which states that water company strategic direction documents should include an indication of how they intend to meet biodiversity obligations. These duties should not represent a significant financial burden, but Defra recognise in their guidance that there may be a need for additional expenditure in cases where authorities are not meeting current statutory commitments. These biodiversity requirements are also related to national policy including PPS9 Biodiversity & Geological Conservation (ODPM 2005), Strategic Environmental Assessment, Environmental Impact Assessment and Appropriate Assessment (Conservation of Natural Habitats). Defra’s guidance document suggests a systematic approach to fulfilling these duties to avoid any negative effects on biodiversity, to seek to reduce or mitigate such impacts, and incorporate opportunities for biodiversity enhancement into policy. It also identifies a requirement to develop corporate biodiversity objectives, developing and utilising a Biodiversity Action Plan and suggests the use of an Environmental Management System. The importance of incorporating and implementing appropriate policies within Asset Management Plans and Procurement Strategies is also highlighted. By improving environmental performance opportunities to demonstrate cost savings and improved efficiency can be explored. It is anticipated that additional monitoring requirements will be introduced following the planned review of guidance in 2009. It is expected that the requirements applicable to managing biodiversity will recognise the following: • Code of Practice for Conservation Access and Recreation (CAR) Water Industry Act • Birds and Habitats Directive • Biodiversity strategy for England • Countryside and Rights of Way Act • Health and safety B4 – Quality Enhancements 3 April 2009 Page 34 of 37 Three Valleys Water Final Business Plan • Government targets for sustainable development • Veolia Environment and Veolia Water polices on biodiversity. In order to maintain, improve and consistently manage our sites in line with our duties under Section 40 of the NERC Act 2006 we have included an annual cost of £152,000 for the period 2010-15. This is for site work including hydrological survey, the development of water level management plan, ecological surveys, site interpretation, wetland habitat creation and reed bed restoration. This will reflect priorities and issues identified in WRMP, SEA as well as local and regional biodiversity action plans. 4.10(ii) Methodology The Company has landholdings in the region of 613ha and of this, 213ha falls under a designation from English Nature and is identified by a local authority as a site with wildlife importance with a responsibility to maintain and enhance habitats and species. Failure to manage these sites to the standards required can lead to enforcement action and prosecution. In addition to this a number of landholdings lie within the Chilterns and Surrey Hills Area of Outstanding Natural Beauty (AONB) or are adjacent to sites with a statutory designation. There are different approaches to managing biodiversity for fixed and temporary sites. All fixed sites have been subject to a site risk ranking. The purpose of these assessments is to determine the significant issues on sites so that inspection timetables and management objectives can be agreed. Temporary sites include those where infrastructure replacement work is undertaken in areas of high ecological value. Our GIS system is used to help identify these sites and an Environmental Impact Assessment carried out as part of the design phase of any new scheme. The management regimes on these sites are determined by a site ecological management plan. These plans are in various states of detail and complexity and, for a few sites, are managed in partnership with the local Herts and Middlesex Wildlife Trust (HMWT). Sites that have active involvement from stakeholders, including the voluntary and charitable sectors, tend to have a more detailed plan. This allows for additional or matched funding to be sourced, to increase the amount of habitat management work on a site. Development of site plans will be site dependant, but will include hydrological surveys, water level management, ecological surveys and monitoring, site interpretation, wetland habitat creation, reed bed restoration, tree management, grassland management, enhancing access, management of recreation and marginal habitat restoration. Capital works will be required to enable some of these activities to proceed. The deployment of an environmental management system (EMS ISO 14001) at our sites during 2008, provides an opportunity to further integrate biodiversity into the overall management objectives for these sites. The purpose of an EMS is to identify and evaluate the environmental impacts associated with activities and to agree action to mitigate or manage the most significant. The scope includes an assessment of the impacts on the local environment and recognition of the presence of any protected habitats such as adjacent woodland, wetland etc. Objectives and targets are then established to mange the most significant impacts and opportunities, this could include anything from changes to the grass cutting regime to the development and enhancement of micro-habitats etc. Increasing awareness and understanding of the need for management of biodiversity are providing internal and external drivers. For us to fully implement our policy we need to be able to clearly demonstrate our position in this area. B4 – Quality Enhancements 3 April 2009 Page 35 of 37 Three Valleys Water Final Business Plan Biodiversity is a global issue. Financial institutions are pressurising extractive and construction companies to demonstrate that appropriate consideration has been taken for management and enhancement of biodiversity before funding can be agreed. The ‘cost’ of damage to habitats in terms of compensation, remediation, and reputation damage is appearing on balance sheets. The UNEP (United Nations Environment Programme) proposes best models for taking account of and addressing biodiversity at the planning stage so that risks can be managed. While it is accepted that we are unlikely to participate in construction projects on this scale, the premise remains the same. Increased stakeholder awareness and knowledge mean that any project in the public domain has to be able to justify the work, especially if it taking place in sensitive landscapes and that any action has to be consistent within the company. We are taking water out of the environment and could be considered an extractive company. The Water Resources Plan Management (WRMP) and its accompanying strategic environmental assessment clearly identifies the enhancement of biodiversity as being one of the core objectives. There needs to be a clear mechanism for ensuring a consistency of approach across the company to demonstrate how this is being monitored and delivered. Costs for remediation and reputation repair can be as large as investment costs. It is imperative to understand what may be present and what action may be needed to ensure damage is limited before any physical work takes place. This means that planning for capital work will take longer- especially if seasonal surveys are needed. Climate change has been a focus of attention. This is especially applicable to the water industry as many of the physical manifestations are around too much or too little water in the environment. This needs to be carefully addressed in biodiversity management planning and in communication with stakeholders. Biodiversity offers opportunities to improve reputation and shareholder value. Consequently, there is a need to recognise and respond, taking informed decisions that deliver conservation (biodiversity) and potentially business benefits. The additional funding is required to carry out our obligations in maintaining and indeed improving the Estate. A series of key biodiversity principles are to be agreed, deployed and action taken that will consistently manage biodiversity across all sites, fixed and temporary. This will reflect priorities and issues identified in WRMP, SEA, local and regional biodiversity action plans. Failure to demonstrate a cohesive and coordinated approach to biodiversity management is a risk to reputation, finance and regulatory compliance. 4.10(iii) Further considerations The impact of doing nothing will be seen in a number of areas. This includes the natural environment, cost of remediation, cost of reputation damage and cost of enforcement action or prosecution. Our land holdings have to be managed to maintain or enhance habitats in order to provide the optimum conditions for a diversity of species to flourish. The option of no intervention will mean that the dominant vegetation of the area will encroach and diversity will be lost. The identification of the optimum level of intervention and management in balance with our operational needs will need to be provided by outside experts. We have statutory obligations to manage our land holdings to the Code of Practice for Conservation, Access and Recreation as well as comply with national and European B4 – Quality Enhancements 3 April 2009 Page 36 of 37 Three Valleys Water Final Business Plan directives. To achieve the standards required to maintain the designation, investment in habitats is needed. For a deteriorating habitat, Natural England can undertake work and then charge the landholder for the costs. Such action was threatened in the 1990s for the management of the wet meadow at Wraysbury. There are also associated financial costs including unplanned costs for putting things right should damage be caused to habitats or species. Reputation with local authorities, customers, local interest groups could be adversely affected making it more difficult to gain acceptance with other initiatives and projects. For example, perceived or actual damage to a wetland habitat would make the promotion of water efficiency more difficult. The water industry is recognised as a leader in biodiversity management, especially those companies with significant landholdings in the less urban parts of the UK. Reputation damage that could affect the whole industry could lead to deterioration of relationships. Opportunities to make a significant difference to carbon emissions are limited, however, there may be opportunities to make use of the company assets to increase biodiversity and indirectly reduce carbon dioxide emissions. Further work is needed to explore the option for using some sites to grow bio fuel. This can range from coppiced wood to miscanthus grass. The market for bio fuels is increasing and small scale rotational cropping may be an opportunity – providing there is a suitable market close by. Other impacts are likely to be identified on a project by project basis. This may include opportunities to use local materials and plants for landscaping etc. Management/enhancement of the environment may improve our carbon footprint. Costs have been estimated using a priced document that was provided by Herts and Middlesex Wildlife Trust specifically for proposed work and consultancy works at Stockers Lake. Additional costs have been derived from previous experience and work on a pro-rata basis. Our cost benefit analysis shows that the biodiversity programme has benefits of £0.32 million against costs of £0.68 million and it is therefore not cost beneficial. The programme has been included in the Plan due to the associated statutory drivers. 5 Conclusions This section of the Plan has demonstrated the need for investment in AMP5 through compliance programmes for the following:• Investment of £22.9 million in four schemes to maintain drinking water quality compliance and to improve acceptability of drinking water at customer’s taps. • Investment of £17 million in nine areas of activity to protect water assets against the potential threats from terrorism and to increase resilience in the case of major incidents. • Investment of £8.1 million for seven environmental investigations, nine options appraisals and implementation of one scheme for fish screens at three sites. It also includes necessary investment to enhance biodiversity. B4 – Quality Enhancements 3 April 2009 Page 37 of 37 Model FBP2009-ICS Final Business Plan 2009 Table B4.1 Three Valleys Water plc Water service - Quality enhancement outputs and activity AMP4 2007-08 2008-09 AMP5 2010-11 2009-10 2011-12 2012-13 2013-14 2014-15 Line description Units A 1 2 3 Water treatment works improvements Quality improvements completed by number of works Quality improvements completed by design flow Other improvements (including SEMD) by site number nr Ml/d nr 1 9.10 0 1 9.00 0 2 37.10 55 1 9.10 0 0 0.00 0 0 0.00 3 2 17.80 0 1 19.80 0 B 4 5 6 7 8 9 10 11 12 Water distribution system improvements Quality improvement work - Distribution mains relining Quality improvement work - Distribution mains renewal Quality improvement work - Distribution mains cleaning Quality improvement work - trunk mains relining Quality improvement work - trunk mains renewal Quality improvement work - trunk mains cleaning Lead communication pipes replaced/rehabilitated under quality Lead communication pipes replaced/rehabilitated under other categories Total lead communication pipes replaced/rehabilitated km km km km km km nr nr nr 0.0 0.0 0.0 0.0 0.0 0.0 0 1,999 1,999 0.0 0.0 0.0 0.0 0.0 0.0 0 1,680 1,680 0.0 0.0 0.0 0.0 0.0 0.0 0 1,800 1,800 0.0 0.0 0.0 0.0 0.0 0.0 0 1,800 1,800 0.0 0.0 0.0 0.0 0.0 0.0 0 1,800 1,800 0.0 0.0 347.5 0.0 0.0 86.0 0 1,800 1,800 0.0 0.0 428.9 0.0 0.0 111.2 0 1,800 1,800 0.0 0.0 81.4 0.0 0.0 25.2 0 1,800 1,800 C 13 14 Water service environmental improvements Number of environmental investigations completed Environmental improvements completed by number of sites nr nr 1 0 2 0 5 0 0 0 1 0 3 3 3 0 2 0 Three Valleys Water Final Business Plan B4 : 1 – Water service – quality enhancement outputs and activity Line 1 The Company had five quality improvement schemes in AMP4. The Chipping WTW nitrate scheme was completed on time in September 2006 and the Kensworth Lynch pesticide scheme was also completed on time in March 2008. The Hatfield bromate scheme was completed in June 2008, slightly behind schedule while the Offley Bottom WTW scheme is on target to be completed by the due date of March 2010. The North Mymms WTW bromate scheme was originally due for completion in March 2008 but our investigation into finding an alternative to the contaminated source at Essendon did not identify a viable source, and this has led to an inevitable delay in completing the project. In 2007 the Company investigated other options and identified a proposed solution at the end of the year. This involves obtaining a long term non-consumptive licence for the pump and treat system dealing with bromate pollution in the aquifer at the Hatfield source so that the Essendon source can continue to be used, albeit at a lower flow; obtaining a long term discharge consent from Thames Water for the treated wastewater produced from the interception pumping; obtaining amended abstraction licences from the Environment Agency (EA) for East Hyde and Wheathamstead sources to allow an increase in abstraction by 4 Ml/d and introduce the borehole at Shenley into beneficial use. A new Undertaking was signed at the beginning of 2008 and this work is due to be completed by March 2010. Four water quality schemes have been proposed for AMP5. All have been subject to risk assessment using the Company drinking water safety plan methodology and supported by the DWI. Two are for the installation of manganese removal treatment at Roydon WTW and Blackford WTW. While water leaving both these treatment works complies with the standard for manganese (50 µg/l), the manganese that is present deposits in the distribution network. This deposit can then be re-suspended by changes in flow which results in customers receiving discoloured water. There have been a number of discoloration incidents in the zones supplied from these works. The customer contact rates for discoloration in these zones are the highest in the Company’s area. The area is highlighted for discolouration in the DWI Chief Inspector’s 2007 report. Following completion of the installation of the treatment process at each of the works, a mains cleaning programme in the affected zones will be undertaken. Both these schemes will make a real improvement to the acceptability of water to customers. There are proposals for one scheme driven by deterioration in the quality of raw water which is nitrate removal treatment at Kings Walden WTW. The nitrate concentration in the raw has been increasing slowly over recent years but there was a step jump in the summer of 2007 which resulted in a PCV exceedence for nitrate in the zone supplied from the works. Currently, the situation is being managed through controlled blending but this results in reduced output from the works and is not a long term sustainable solution. Finally, a scheme is proposed for upgrading the current disinfection system at Chorleywood WTW. The results from the raw waters at this site show that E coli have been present in 7% of the samples. Whilst the disinfection process at this works is sufficient to remove bacteria, the presence of E coli indicates an increase in the risk of Cryptosporidium oocysts being present. The Company believes it prudent to add ultraviolet irradiation to the disinfection process. This is an effective disinfectant and proven treatment for the inactivation of Cryptosporidium oocysts. B4 : 1 Quality enhancement outputs and activity Page 1 of 4 3 April 2009 Three Valleys Water Final Business Plan The planned timetable for these schemes is given below. In putting together this timetable, the Company has assessed the risks and prioritised the schemes using its drinking water safety plan methodology. Date 2010/11 2011/12 2012/13 2013/14 2014/15 Scheme Roydon – manganese removal Build Blackford – manganese removal Build Kings Walden – nitrate removal Chorleywood – disinfection upgrade Mains cleaning Mains cleaning Build Build Line 2 The flows are associated with the schemes described for line 1 above. Line 3 We have 55 reservoir sites which had security work identified for AMP4. This security work will be completed during year 2009/10 for each of these reservoir sites. We have 83 water treatment works all of which have security projects planned for them in the AMP5 period. We have no plans to carry out security work on any of our service reservoirs during AMP5. Three of these water treatment sites will have work resulting from the ‘Designated Site Additional Requirements’ project and these will be completed during 2012/13. The remaining 80 water treatment sites will have work resulting from the ‘combined operational security project’. This project is within our proposed ‘overlap programme’ as it continues into the AMP6 period. The project will be delivered in phases at each of the sites in order to ensure the minimum of operational disruption. As a result completion of any sites will not be achieved until towards the end of AMP5. The information supplied in line 3 of Table B4 : 1 has changed from Draft Business Plan for the following reasons. • At the Draft Business Plan stage the identified sites incorrectly included reservoirs as part of the AMP5 programme when these sites will be completed in the final year of AMP4. • The approach to project delivery for PR09 will result in completion of individual sites commencing towards the end of the AMP5 period and continuing into AMP6. Line 4 The Company does not have any distribution mains relining work for quality planned in AMP4 and does not envisage having any in AMP5. Line 5 The Company does not have any distribution mains renewal work for quality planned in AMP4 and does not envisage having any in AMP5. B4 : 1 Quality enhancement outputs and activity Page 2 of 4 3 April 2009 Three Valleys Water Final Business Plan Line 6 The Company does not have any distribution mains cleaning work for quality planned in AMP4. The work detailed in AMP5 is the cleaning work that will required in the zones supplied from Roydon WTW and Blackford WTW once the improvement works discussed in Line 1 above have been completed. Line 7 The Company does not have any trunk mains relining work for quality planned in AMP4 and does not envisage having any in AMP5. Line 8 The Company does not have any trunk mains renewal work for quality planned in AMP4 and does not envisage having any in AMP5. Line 9 The Company does not have any trunk mains cleaning work for quality planned in AMP4. The work detailed in AMP5 is the cleaning work that will required in the zones supplied from Roydon WTW and Blackford WTW once the improvement works discussed in line 1 above have been completed. Line 10 The Company’s current orthophosphate dosing programme ensures compliance with the current 25 µg/l standard and the future 10 µg/l standard of 99.5% and so it is not envisaged that a lead communications pipe replacement programme will be required for AMP5. Further improvement in compliance would need a lead pipe replacement programme. Line 11 We replace a proportion of our lead pipes in conjunction with our leakage control programme and other reactive maintenance activities. We have included an estimate of the number for each year in this line. Line 12 This line is calculated Line 13 Eight investigations and options appraisals were identified for the AMP4 period. One investigation and options appraisal has been completed to date (Thames Surface Water Intakes 4TW000008) and a further two schemes the Gade (4TV910401) and the Rib (4TV910501) are close to completion awaiting final comments from the Environment Agency. Three schemes (River Mimram, River Beane and Hughenden Stream) will be completed by March 2010. The two Habitats Directive schemes are being led by the Environment Agency and will be completed by March 2010. B4 : 1 Quality enhancement outputs and activity Page 3 of 4 3 April 2009 Three Valleys Water Final Business Plan 3TV910101 3TV910201 Beane Aston to Watton at Stone Mimram- source to Digswell Invest/Opt Invest/Opt BAPw1(1) BAPw1(2) Completion date 31/03/2010 31/03/2010 4TW000008 4TW922401 Thames Surface Water Intakes Hughenden Stream Invest Opt BAPw1(2) BAPw1(3) 31/03/2008 31/03/2010 4TV910501 4TV910802 Rib-Thundridge to River Lee confluence South West London Water Bodies Invest/Opt Invest/Opt BAPw1(4) Hw3(3) 31/03/2009 31/03/2010 4TW911001 4TV910401 Lee Valley SPA Gade to Bulbourne - Piccotts End Invest/Opt Opt Hw3(3) BAPw1(2) 31/03/2010 31/12/2008 Reference Scheme name Type Driver AMP5 A programme of four investigations, five options appraisals and one implementation have been identified for inclusion in PR09 (letter from EA 28 November 2008). For the purpose of the Business Plan we have amalgamated these into catchments as shown in the table below, to ensure a holistic approach to both local driver investigations and those with WFD drivers. Confirmation of the proposed scope of biodiversity action plan (BAP) and SSSI (Iw) driver schemes was also received from the EA in an e-mail dated 1 December 2008. New deadline dates were received from the EA in an e-mail dated 27 November 2008. Scheme ref Project name Project name Deadline Investigation 31 March 2014 Options appraisal 31 March 2015 RSA-THNE-28/03, 14, 15 GB106039029840 GB106039029850 GB106039029820 Upper Colne RSA-THNE-28/11 Misbourne Options appraisal 31 March 2012 Upper Ver investigation Upper and mid Ver options appraisal Investigation 31 March 2013 RSA-THNE-28/16, 17 GB106039029920 Options appraisal 31 December 2013 RSA-THNE-49/07 GB106038033360 Mid Rib Investigation 31 March 2013 Options appraisal 31 March 2014 RSA-THNE-28/02, 19 Mid Colne River and lakes Investigation 31 March 2014 Options appraisal 31 March 2015 Fish screens Implementation 31 March 2013 Risk (Ml/d) Cost (£m) 1.9 156.58 0.5 23.88 0.6 0.7 77.6 Total 0.3 8.32 0.6 0.3 121.84 0.7 0.2 n/a 1.5 388.22 7.3 Line 14 We are planning to install fish screens at Egham, Sunnymeads and Chertsey by 31/03/2013 based on the recommendations from the AMP4 investigation (Thames Surface Water Intakes 4TW000008). The line entry reflects the number of sites. B4 : 1 Quality enhancement outputs and activity Page 4 of 4 3 April 2009 Model FBP2009-ICS Final Business Plan 2009 Table B4.3 Three Valleys Water plc Water service - Quality enhancement expenditure projections AMP4 2007-08 2008-09 2009-10 AMP5 2010-11 2011-12 2012-13 2013-14 2014-15 Line description Units A 1 2 3 4 5 6 Capital enhancement expenditure - non-infrastructure assets Completion of the previous AMP quality (water service) programmes (non-infra) Completion of the previous AMP environmental quality (water service) programmes (non-infra) New drinking water quality programme (non-infra) New environmental quality (water service) programme (non-infra) Other new enhancements inc. SEMD and resilience (non-infra) Water service quality programme (non-infra) – pre-efficiency £m £m £m £m £m £m 13.638 0.244 0.000 0.000 0.000 13.882 3.929 0.048 0.000 0.000 0.000 3.977 7.095 0.501 0.000 0.000 0.000 7.596 0.000 0.000 1.523 2.531 1.938 5.992 0.000 0.000 3.052 1.957 3.169 8.178 0.000 0.000 4.376 1.685 3.207 9.268 0.000 0.000 3.273 1.158 4.425 8.856 0.000 0.000 1.034 0.813 4.278 6.125 7 8 Overall compounded assumed improvement profile (capital enhancement non-infra) Total – water service quality enhancement programme (non-infra) % £m 13.882 0.00% 3.977 0.00% 7.596 0.00% 5.992 0.00% 8.178 0.00% 9.268 0.00% 8.856 0.00% 6.125 B 9 10 11 12 13 14 15 16 Capital enhancement expenditure - infrastructure assets Completion of the previous AMP quality (water service) programmes (infra) Completion of the previous AMP environmental quality (water service) programmes (infra) New drinking water quality programme (infra) Water quality mains renovation programme (infra) Lead communication pipe replacement/rehabilitation (infra) New environmental quality (water service) programme (infra) Other new enhancements inc. SEMD and resilience (infra) Water service quality programme (infra) – pre-efficiency £m £m £m £m £m £m £m £m 4.917 0.000 0.000 0.000 0.000 0.000 0.000 4.917 -0.117 0.000 0.000 0.000 0.000 0.000 0.000 -0.117 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2.999 0.000 0.000 0.000 0.000 2.999 0.000 0.000 4.829 0.000 0.000 0.000 0.000 4.829 0.000 0.000 1.830 0.000 0.000 0.000 0.000 1.830 17 18 Overall compounded assumed efficiency improvement profile (capital enhancement infra) Total – water service quality enhancement programme (infra) % £m 4.917 0.00% -0.117 0.00% 0.000 0.00% 0.000 0.00% 0.000 0.00% 2.999 0.00% 4.829 0.00% 1.830 C 19 20 21 22 Quality enhancement operating expenditure Completion of the previous AMP quality (water service) programmes (opex) Completion of the previous AMP environmental quality (water service) programmes (opex) Overall compounded assumed improvement profile (base) Water service - quality enhancement additional operating expenditure for AMP4 £m £m % £m 0.201 0.000 0.00 0.201 0.267 0.000 0.00 0.267 0.409 0.000 0.01 0.404 0.421 0.000 0.02 0.411 0.409 0.000 0.04 0.394 0.409 0.000 0.05 0.390 0.409 0.000 0.06 0.385 23 24 25 26 27 28 29 New water treatment quality programme New water distribution quality programme New environmental quality programme Other new enhancements inc. SEMD and resilience (opex) Sub-total - water service quality enhancement additional operating expenditure – pre-efficiency Overall compounded assumed improvement profile (opex enhancements) 2009 water quality enhancement additional operating expenditure £m £m £m £m £m % £m 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.00% 0.000 0.000 0.000 0.000 0.000 0.000 0.00% 0.000 0.356 0.000 0.071 0.007 0.435 1.23% 0.429 0.363 0.000 0.102 0.025 0.490 2.44% 0.478 0.432 0.000 0.133 0.028 0.594 3.64% 0.572 0.558 0.000 0.164 0.089 0.812 4.83% 0.772 0.570 0.000 0.195 0.190 0.955 6.00% 0.897 30 Total - water service quality enhancement additional operating expenditure £m 0.000 0.201 0.267 0.834 0.889 0.966 1.162 1.282 0.000 0.000 0.000 Three Valleys Water Final Business Plan Table B4 : 3 – Water service – Quality enhancement expenditure projections Line 1 The entries in this line reflect expected completion of the PR04 drinking water quality enhancement programme (non-infrastructure). 2007/08 is consistent with JR08 and 2008/09 and 2009/10 reflect the latest forecasts from our project accounting system. Line 2 The entries in this line reflect expected completion of the PR04 environmental quality enhancement programme (non-infrastructure). 2007/08 is consistent with JR08 and 2008/09 and 2009/10 reflect the latest forecasts from our project accounting system. Line 3 For AMP5 we have final support from the DWI for four water quality schemes. The schemes are Kings Walden Nitrate Removal, Roydon Manganese, Blackford Manganese and Chorleywood UV. The costs in this line are the totals for the non-infrastructure element of each scheme in AMP5. Line 4 Details of the National Environment Programme (NEP) for AMP5 advised by the EA are described in the main B4 commentary and in the table commentary to table B4.1. Schemes have been costed on a catchment basis to ensure a holistic approach to both local driver investigations and those with WFD drivers. In addition to the NEP costs detailed above, expenditure is required to maintain, improve and consistently manage our sites in line with our duties under Section 40 of the NERC Act 2006. This will reflect priorities and issues identified in our DWRMP, SEA, as well as in local and regional biodiversity action plans. An annual cost of £152,000 for the period 2010-15 has been included. This is for site work including hydrological survey, the development of water level management plan, ecological surveys, site interpretation, wetland habitat creation and reed bed restoration. Line 5 The entries in this line for the final years of AMP4 reflect expected completion of the PR04 SEMD and resilience quality enhancement programme (non-infrastructure). 2007/08 is consistent with JR08 and 2008/09 and 2009/10 reflect the latest forecasts from our project accounting system. These schemes only have costs associated with non-infrastructure assets. Full details of both programmes are detailed in the main commentary. Line 6 This line is calculated and is the sum of lines 1 to 5 Line 7 B4 : 3 – Quality enhancement expenditure projections Page 1 of 4 3 April 2009 Three Valleys Water Final Business Plan This line comes from table 2.2 line 19 Line 8 This line is calculated using lines 6 and 7 Line 9 The entries in this line reflect expected completion of the PR04 drinking water quality enhancement programme (infrastructure). 2007/08 is consistent with JR08 and 2008/09 and 2009/10 reflect the latest forecasts from our project accounting system. Line 10 The entries in this line reflect expected completion of the PR04 environmental quality enhancement programme (infrastructure). 2007/08 is consistent with JR08 and 2008/09 and 2009/10 reflect the latest forecasts from our project accounting system. Line 11 The work detailed in AMP5 is the network cleaning work that will be required in the zones supplied from Roydon and Blackford once the improvement works listed in line 3 above have been completed. The need for this work has final support from the DWI. Line 12 The Company does not have any water quality mains renovation schemes planned in AMP4 and does not envisage having any in AMP5. Line 13 The Company does not have any lead communication pipe replacement/rehabilitation schemes planned in AMP4 and does not envisage having any in AMP5. We currently anticipate that existing plumbosolvency treatment will allow us to achieve 95% compliance with the 10µg/l standard coming into force in 2013. Some lead pipes will continue to be renewed as part of infrastructure maintenance. Costs for this are included in Table B3 : 5. Line 14 There are no infrastructure costs associated with the schemes listed in line 4. Line 15 There are no infrastructure costs associated with the schemes listed in line 5. Line 16 This line is calculated and is the sum of lines 9 to 15. Line 17 This line comes from Table B2 : 2 line 16 Line 18 This line is calculated from lines 16 and 17 Line 19 B4 : 3 – Quality enhancement expenditure projections Page 2 of 4 3 April 2009 Three Valleys Water Final Business Plan The Company has AMP4 quality (water service) programmes (opex) which have not already been completed. The operating costs in this line which will recur in the future are the sum of two security schemes, five quality schemes and five SEMD schemes. The security schemes are AMP4 Designated Site Projects and AMP4 Reservoir Security Projects. The quality schemes are Nomansland New Source, Kensworth Lynch Pesticides, Shenley Pumping Station, Essendon Bromate Replacement and Offley Bottom Nitrate. The SEMD schemes are Stonebridge Booster, Batchworth Heronsgate Boosters, Boxted Boosters at Hunton Bridge, Rowley Lane Booster and Rye Hill. Line 20 The AMP4 environment programme was for studies and has no associated opex. Line 21 This line comes from Table B2 : 2 line 4 Line 22 This line is calculated being the sum of lines 19 and 20, with the percentage in line 21 applied. Line 23 These costs are the operating expenditure costs associated with the schemes listed in line 3. Line 24 The Company does not have any new water distribution quality schemes planned in AMP4 and does not envisage having any in AMP5. Line 25 Because it consists of studies and investigations, no opex costs associated with the National Environment Programme have been identified at this stage. Opex costs have been included for biodiversity management; to maintain, improve and consistently manage our sites in line with our duties under Section 40 of the NERC Act 2006. This will reflect priorities and issues identified in our DWRMP, SEA, as well as in local and regional biodiversity action plans. This is for site work including hydrological survey, the development of water level management plan, ecological surveys, site interpretation, wetland habitat creation and reed bed restoration. Line 26 These costs are the operating expenditure costs associated with the schemes listed in line 5. These operational costs are identified within the B4 main commentary Line 27 This line is calculated and is the sum of lines 23 to 26. Line 28 This line comes from Table B2 : 2 line 9 Line 29 B4 : 3 – Quality enhancement expenditure projections Page 3 of 4 3 April 2009 Three Valleys Water Final Business Plan This line is calculated being line 27 with the percentage in line 28 applied. Line 30 This line is calculated and is the sum of lines 22 and 29. B4 : 3 – Quality enhancement expenditure projections Page 4 of 4 3 April 2009 Three Valleys Water Final Business Plan Contents 1 2 Overview of our supply-demand strategy............................................................ 2 Basis to our supply-demand balance strategy .................................................... 6 2.1 2.2 2.3 3 Background ..................................................................................................................... 6 Supply-demand balance and underlying studies ............................................................ 7 Steps in our supply-demand strategy............................................................................ 10 Supply side of the water balance........................................................................ 11 3.1 Level of service for Water Available for Use ................................................................. 12 3.2 Deployable output ......................................................................................................... 15 3.3 AMP4 programme of studies......................................................................................... 21 3.3.1 River Hiz .................................................................................................................... 22 3.3.2 Ashwell Springs ......................................................................................................... 23 3.3.3 River Mimram and Beane.......................................................................................... 23 3.3.4 Other sites ................................................................................................................. 23 3.4 Water Framework Directive........................................................................................... 23 3.5 Review of climate change impacts for the Final Business Plan.................................... 24 3.6 Outage........................................................................................................................... 25 3.7 Summary of imports and exports .................................................................................. 27 3.8 Other threats to our resource base .............................................................................. 27 3.9 Supply side forecast ...................................................................................................... 28 4 Demand side of the water balance ..................................................................... 30 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 5 6 Population and household forecast............................................................................... 30 Per capita consumption forecast ................................................................................... 31 Non-household demand forecast .................................................................................. 33 Leakage......................................................................................................................... 35 Water efficiency............................................................................................................. 36 Metering......................................................................................................................... 37 Headroom...................................................................................................................... 38 Demand side forecast ................................................................................................... 42 Baseline supply-demand balance and sensitivity ............................................. 45 Strategy for maintaining the supply-demand balance ...................................... 47 6.1 Least cost water resources strategy ............................................................................. 47 6.2 Investment in new regional resources........................................................................... 49 6.3 Leakage......................................................................................................................... 50 6.4 Metering and seasonal tariffs ........................................................................................ 50 6.5 Metering cost benefit analysis ....................................................................................... 51 6.5.1 Justification for metering strategy ............................................................................. 53 6.6 Water efficiency strategy ............................................................................................... 54 6.7 New development costs ................................................................................................ 55 6.8 Supply-demand studies................................................................................................. 56 6.9 Final supply-demand strategy ....................................................................................... 58 7 Expenditure implications of our supply-demand strategy................................ 60 Tables and Tables Commentaries B5 – Maintaining the Supply-Demand Balance Page 1 of 60 3 April 2009 Three Valleys Water Final Business Plan B5 – Maintaining the Supply-Demand Balance This section describes our strategy for maintaining the supply-demand balance. We have taken account of Ofwat general guidance that this section of the company submission should be divided into two sections however, in order to improve the readability of our supply-demand assessment; we have divided the overall section into logical subsections in order to show how demand and supply components are built up and assessed. After an Overview and explanation of the basis for our supply-demand strategy, subsections 3 and 4 deal with the supply and demand components. Subsection 5 describes our baseline supply-demand assessment. Finally subsections 6 and 7 explain our strategy and expenditure for maintaining the supply-demand balance for AMP5 and in the longer term. 1 Overview of our supply-demand strategy Our strategy for maintaining the supply-demand balance is based on our revised Draft Water Resources Management Plan. This was published in January 2009 with our Statement of Response to representations received on our initial draft plan. We are committed to a ‘twin track’ approach to managing the supply-demand balance and demonstrated this during AMP4 with an investment programme of improvements in resource utilisation coupled with increased supply capacity. We also introduced a compulsory ‘change of occupier’ metering programme for domestic properties. In our Draft Business Plan we used our current activity as the starting point for assessing the supply demand balance. This was wrong and led us to propose an aggressive street by street compulsory metering programme. For our Final Business Plan we have taken into account information and feedback received from stakeholders and regulators and changed our plans starting from an ‘optant only’ meter baseline in order to determine the least cost of balancing supply-demand. As shown in Figure B5 : 1 below, we do not need to invest in supply or resource schemes until 2026 when demand plus headroom1 exceeds final planning Water Available for Use (WAFU). 1 Headroom is a planning margin included to allow for a range of risks and uncertainties in the future. Including this margin means we can plan with a higher confidence in accommodating variations in what actually happens in the future. B5 – Maintaining the Supply-Demand Balance Page 2 of 60 3 April 2009 Three Valleys Water Final Business Plan Figure B5 : 1 Dry year critical period baseline supply-demand forecast with ‘Optant only’ metering Normal Year Demand Dry Year Demand Demand Plus Headroom Final Planning WAFU 1300 1250 Million litres per Day 1200 1150 1100 1050 1000 950 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 900 Financial Year Ending When investment is eventually required, it is dominated by supply side measures to increase resources. In following a least cost approach we would therefore cease to invest in demand management measures, other than optant metering for AMP5. However, we have concluded that it is sensible to continue our current compulsory ‘change of occupier’ metering programme and make further reductions in leakage because: • it provides continuity of our demand management strategy and policy • less water will be removed from the environment means less impact on water bodies • it is compatible with long term indications of strategy for CAMS and the WFD • it secures a sustainable approach to the supply-demand balance as it uses less energy and emits less carbon • it is compatible with Government policy as Future Water strongly advocates water metering and demand side policy. • it enables fair means of charging and promotes equity in the eyes of customers saving water through metering and water companies ‘doing their bit’ in reducing leakage • metering provides opportunities for the use of tariffs in the future for customers to make their own choices, and • customers who cause damage through high consumption will pay proportionately to the cost of the damage. We are therefore proposing a ‘demand side’ strategy for our Plan because of the wider benefits that we know this will deliver for our customers and the environment and because of the threats to our resource base that will begin to evidence themselves in the next ten years but which we have not been able to take account of in our water resources planning. B5 – Maintaining the Supply-Demand Balance Page 3 of 60 3 April 2009 Three Valleys Water Final Business Plan The total cost of the supply-demand programme is £68 million. Our supply-demand strategy is as follows. • We will continue our compulsory domestic ’change of occupier’ metering programme throughout AMP5 as this is justified when considering the ‘wider benefits’ of metering. We will also work with our customers with a view to switching to ‘street by street’ metering when customer acceptability is improved. This programme will achieve 90% metering by 2030. • We will maintain our ‘demand led’ supply-demand strategy by managing leakage so that it continues to reduce after 2010 at the same rate (-2 Ml/d) that we have achieved during AMP4 so that we will achieve further reductions of 10 Ml/d during each of the AMP5 and AMP6 investment periods. • We will develop, evaluate and explore new metering technologies and related services which may be of value to our customers. This will help us to define our specifications for metering technology and our metering policy for AMP6. • We will make best use of our existing water resources by improving and enhancing availability and protecting them from pollution and flood risk. • We will maintain our efforts promoting the efficient use of water with our customers. We will work with Ofwat to ensure appropriate recognition is given to our education and communications programmes towards water efficiency targets. • We will continue with our ‘water neutral’ AMP4 strategy which means no overall increase in distribution input. This is achieved by balancing demand reductions arising from our leakage and metering policies with growth in demand. • We will investigate new methods of measured charging – particularly using advanced metering technologies – to encourage more efficient use of water, particularly when demand is high and resources are stressed. • We will continue to work closely with our customers and other companies to ensure that, where necessary, we will be able to invest in new water resource capacity at the appropriate time should metering, pollution, climate change or sustainability reductions threaten the supply-demand balance. • We will persuade customers, through trial and phased implementation, of the effectiveness and benefits of seasonal tariffs and advanced metering technology. We will also investigate new methods of future charging so as to encourage more efficient use of water, particularly at times of greatest stress. • We will maintain a programme of studies, working with other water companies, to ensure we can bring forward investment in new resources should metering and other measures not reduce overall demand sufficiently and/or should the effects of climate change be more rapid than expected. We will also be able to respond to reductions in our resources to meet the demand for water from our customers. Our Plan’s supply-demand balance forecast for critical period is shown in Figure B5 : 2. B5 – Maintaining the Supply-Demand Balance Page 4 of 60 3 April 2009 Three Valleys Water Final Business Plan Figure B5 : 2 Dry year critical period final planning water balance Normal Year Demand Dry Year Demand Demand Plus Headroom Final Planning WAFU 1300 Million litres per Day 1250 1200 1150 1100 1050 1000 950 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 900 Financial Year Ending Taking account of all the changes indicated above, our forecast demand plus headroom trend line remains below the final planning WAFU line at 2035. This means that we will not need to develop any new water resources until after 2035 due to the fact that overall, our distribution input will remain stable until beyond 2025 with reductions in demand balancing the impact of growth compared with 2010. However, we will continue to appraise changes in demand and resource conditions and reassess and re-evaluate our position every five years in accordance with the business planning cycle. Managing demand is good for sustainability. It avoids additional impacts on the water environment or the production of more greenhouse gases as we will be able to use less energy to pump water. But there is uncertainty about whether demand reductions resulting from leakage control, metering and behaviour changes will be permanent. We expect to work with Ofwat to ensure we can reflect this balance of risk in our finances. We believe this prudent and comprehensive strategy will ensure that we can supply enough high quality water to satisfy all the needs of our customers until 2035 and plan longer term to meet future requirements. B5 – Maintaining the Supply-Demand Balance Page 5 of 60 3 April 2009 Three Valleys Water Final Business Plan 2 Basis to our supply-demand balance strategy This section considers the background to our supply-demand strategy. Following a description of our company and the underlying relationship of the supply-demand balance we outline the steps that we have taken in deriving our supply-demand strategy. 2.1 Background We provide public water supplies to 1.26 million households - a population of 3.2 million in the Home Counties to the North and West of London. The area includes a number of north London Boroughs and extends into urban and rural parts of Essex, Hertfordshire, Bedfordshire, Surrey and Buckinghamshire. A map of our operating area is shown in figure B5 : 3 below. We operate in an affluent, economically-dynamic area that is characterised by a significant number of internationallyimportant construction projects (such as sporting sites for the 2012 Olympics, Crossrail, Heathrow expansion) and a vibrant service sector close to London. Figure B5 : 3 Outline map of the Three Valleys Water operating area B5 – Maintaining the Supply-Demand Balance Page 6 of 60 3 April 2009 Three Valleys Water Final Business Plan Sixty percent of our water is from groundwater. We have 250 boreholes spread across North London and the Home Counties. Groundwater is contained in the underlying porous rock, predominantly chalk. A number of our abstractions from groundwater have environmental constraints on them, to prevent local damage during droughts. Forty percent of our water is from rivers, notably the River Thames. Our abstractions from the Thames are limited only by total volume. The underground aquifer is rich in water resources from rainwater that falls on the Chiltern Hills and is stored within the fissures and pore matrix of the chalk. However, the very porosity that makes chalk a valuable storage medium makes it vulnerable to pollution. So we must do what we can to protect these resources from pollution by third parties. When we cannot do so, we are obliged to install often costly and complex treatment to deal with these problems (if that is possible at all). The chalk aquifer also supports river flows throughout the Chilterns, which are a unique habitat of international importance. Chalk streams are naturally low in summers following low winter rainfall and have a tendency to dry up altogether in dry summers. These low flows can be worsened by our abstraction and this is particularly noticeable at times of severe drought. We will continue to operate our sources in a responsible way to minimise these effects and their environmental consequences. Making best use of our water resources also means ensuring that we can move water around our area to the places where it is needed. Population growth is likely to be most likely in those parts of our area where water resources are the scarcest and we will therefore have to be able to move large quantities of water from one part of our operating area to another. Over the past two decades we have built a water grid in our area of supply. This means we can optimise the energy and cost of transferring water from areas of surplus to where it is needed. Our grid will need to be enhanced and expanded by more trunk mains and by increasing inter-connectivity to transfer treated water to customers in the east of our region where population growth will be highest. We also have a number of resource links with our neighbouring water companies that allows us considerable flexibility in meeting peak demand. 2.2 Supply-demand balance and underlying studies The underlying relationship of the supply-demand balance may be expressed as: Deployable output + safety margin to offset asset unavailability (outage) ≥ Consumption + system use + safety margin for uncertainty and risk (headroom) ‘Deployable Output’ (DO) is the water which we have available from our sources to put into distribution and ‘system use’ is operational use and leakage. If the relationship does not hold good at any point up to 2035, then the plan should identify the least cost combinations of investments and other actions that will be required in order to restore a positive balance. It is politically and practically important that adequate safety margins should be built into any water resources plan. While these have costs, it is not wise to try to run a water supply system with only just enough resources and we believe the public would not expect us to do so. The base year for analysis for our Plan is 2007/08. We also assume ‘business as usual’ up to 2009/10, that is, that investment programmes and expenditure patterns from the Periodic Review in 2004 (PR04) will continue unchanged up to the start of the new plan. B5 – Maintaining the Supply-Demand Balance Page 7 of 60 3 April 2009 Three Valleys Water Final Business Plan Thus the new Plan is based on the previous plan, but with all aspects reviewed and addressing the new challenges that have been identified. Although our DWRMP has a planning horizon of 25 years we have looked beyond that in order to assess the impacts of climate change (at 2050 and 2080). Similarly, although we have set out our plans and strategy taking into account our forecasts for supply and demand over a planning horizon of 25 years, we will be able to review and update these plans at subsequent periodic reviews and indeed annually in our returns to Ofwat and the Environment Agency. Underpinning our Water Resources Management and Final Business Plans supplydemand submissions are a number of detailed technical studies, including forecasts of the amount of water available to meet the demand of our customers. The results have been combined to assess any actions needed to maintain security of supply. The relationship of the study elements are shown in figure B5 : 4. A series of reports has also been prepared for the water resources plan and business plan. These are listed in Table B5 : 1 below. Table B5 : 1 Schedule of supporting technical reports Final Water Resources Management Plan technical reports Deployable Output (summary report) Deployable Output surface water works Outage assessment Climate change Housing forecast Population forecast Metered occupancy Micro-component base year and forecast Commercial demand forecast Minor components Options appraisal (including optioneering model) Headroom Cost benefit analysis of metering B5 – Maintaining the Supply-Demand Balance Page 8 of 60 3 April 2009 Three Valleys Water Final Business Plan Figure B5 : 4 Schematic diagram of supply-demand studies B5 – Maintaining the supply-demand balance 3 April 2009 Page 9 of 60 9 November 2010 Three Valleys Water Final Business Plan 2.3 Steps in our supply-demand strategy Our Strategic Direction Statement (SDS) was published in December 2007 and we proposed an accelerated compulsory metering programme to address expected supplydemand challenges from 2010. We published our Draft Water Resources Management Plan (DWRMP) for stakeholder consultation in spring 2008. This identified the actions that we need to take to ensure that we can supply our customers with the water they need over the next 25 years to 2035. Through the Water Resources Management Plan (WRMP) planning process we examined our operating environment in detail and considered a wide range of factors. These include climate and lifestyle changes, the condition of our rivers and groundwater, pressures for more housing, population changes and our customers’ expectations of us in terms of the standard of the services we provide. Our DWRMP forecast an improved supply-demand balance for the planning period to 2035 due to improvements in operational performance and investment in supply capacity. However, we maintained the metering strategy from our SDS in view of the longer term threats to our resource base and to maintain security of supply to our customers. A reduction in leakage was not included in our DWRMP because of the anticipated drop in demand from enhanced metering. We consulted upon our DWRMP until the end of August 2008 and received 36 representations. That month we also submitted our Draft Business Plan to Ofwat. The supply-demand strategy included in the Draft Business Plan was consistent with our initial DWRMP. The compulsory ‘street by street’ metering programme proposed in the Draft Business Plan was based on it being cost-effective in comparison to a policy baseline of continuing the compulsory ‘change of occupier’ metering programme approved at PR04. We proposed an accelerated metering programme in order to increase the safety margin for security of supply in the face of future risks and threats – such as reductions in our abstraction licences. This was also consistent with a request from the Environment Agency to achieve a metering penetration of 90% by 2015. However, as we operate in an area of ‘serious water stress’ we did not believe this was practically achievable and proposed to achieve the 90% figure by 2020. In view of the enhanced metering programme, further demand management measures were not required and our Draft Business Plan proposed to maintain a flat leakage profile. We responded to representations and carried out an economic appraisal reflecting an optant only meter baseline in order to determine the least costly way of balancing supplydemand. No supply-demand investment is required during AMP5 and our long term least cost investment programme comprises a majority of resource development schemes after 2026. The least cost approach to balancing supply and demand in the long term would constitute a ‘supply side’ strategy. In view of our supply surplus during AMP5, a positive cost benefit is required for Ofwat to agree funding through prices for any supply-demand capital investment, such as for further metering. However we have better argued our position in preparing our final supplydemand submission. This takes account of the wider benefits of metering and leakage and propose a continuing ‘demand side’ approach to managing supply compared to the ‘supply side’ approach of the least cost strategy. B5 – Maintaining the supply-demand balance Page 10 of 60 3 April 2009 Three Valleys Water Final Business Plan We have revised our supply-demand strategy for our Final Business Plan and have reduced the pace of the programme of compulsory metering to match market conditions. We now predict achieving a meter penetration of 90% by 2030. We have also reinstated further reductions in leakage at the rate of -2 Ml/d for AMP5 and AMP6 in view of the wider benefits of leakage reduction. Representations on our DWRMP were collated and incorporated into our Statement of Response to Representations Received (Statement of Response) which we prepared and submitted to the Secretary of State for the Environment, Food and Rural Affairs in January 2009. Our Statement of Response was accompanied by publication of a revised DWRMP detailing the changes that have been made to our initial plan which was published in April 2008. Our amended DWRMP is largely consistent with our Final Business Plan although we have further reduced our non household demand forecast in light of the deepening recession which has also affected outturn meter numbers for the last two years of AMP4. 3 Supply side of the water balance The supply side of the water balance comprises water availability to meet demand for water at our stated level of service. This is calculated by first assessing the quantum of resource that is available from the environment taking account of treatment constraints, network constraints and historical performance of our water resources compared to our operating level of service. This is known as Deployable Output (DO). An adjustment is then made to DO to allow for planned and unplanned maintenance and repair of assets known as Outage. A further adjustment is then made to allow for the effects of climate change over the next 25 years. The resulting combination of DO, Outage and climate change impacts is known as Water Available for Use (WAFU) and this is shown diagrammatically below. Figure B5 : 5 Supply forecast including climate change Deployable Output - Outage = Water Available for Use (WAFU) 1200 1150 Millions of litres per day 1100 Climate Change 1050 1000 950 900 Approx. 27 Ml/d Loss of deployable output in drought year between 850 2010 and 2035 800 Uncertainty (shaded) included in Headroom 750 B5 – Maintaining the supply-demand balance Page 11 of 60 2040 2039 2038 2037 2036 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 No Sustainability reductions 700 3 April 2009 Three Valleys Water Final Business Plan 3.1 Level of service for Water Available for Use Our current levels of service are currently 1 in 10 years for a hose pipe ban and a drought order for restriction of non-essential water use and 1 in 20 years return period for a drought order which could suspend abstraction licence or low flow agreements and introduce other measures. A hosepipe ban is a measure to secure water supplies in a drought event. Hosepipe bans are preceded and supplemented by calls for voluntary reductions in use. Records of groundwater hydrographs are not available prior to the 1970s and operational borehole water levels and local demand data are not available for the period before telemetry data was routinely archived in the early 1990s. It is therefore not possible to directly compare operational borehole performance with long term hydrological records and in order to examine the robustness of the current Level of Service for restrictions on use of water a surrogate relationship is required. To achieve this we have compared the history of droughts, actual restrictions events and a long term sequence of rainfall. Reviewing the available information on historical events, even though our stated levels of service as are 1 in 10 years return period for hosepipe bans, the reality of such restrictions has actually been at 1 in 15 years. Events that resulted in restrictions on the use of water are as follows: • Three Valleys Water PLC (TVW), (Rickmansworth Water Company and Lee Valley Water) implemented a hosepipe ban in 1976, but evidence2 indicates this was at the behest of Thames Water Authority in, the incumbent regulatory authority in order to reduce abstraction from the River Thames and although this was not justified by the prevailing local supply-demand situation. • After operating for 14 years without water restrictions in 1991 we imposed restrictions on hosepipe use because of the very low rainfall in the period 1989/91. • In 1992 the drought continued and a drought order was approved for restrictions on the non-essential use of water although implementation was limited to voluntary measures. • Then after a further 13 years, in 2006 which saw the most recent restrictions on hosepipe use, we imposed a hosepipe ban on out customers on 3rd April 2006 which remained into force until 18 January 2007. • In 1997, although the hydrological conditions were indicative of a drought period, no hosepipe ban was introduced. The above sequence of events corresponds to a one in 10 frequency of hosepipe restrictions. Had we imposed restrictions in 1997, then the frequency of restrictions over this period of record would have been 1 in 8. The frequency for non-essential use drought orders is greater than 1 in 20. As there are no recorded events for drought orders on emergency abstraction or rota cuts then the frequency for these is greater than the time series in question so at least 1 in 30 years. Our supply-demand balance is dominated by groundwater behaviour as our surface water resources are unaffected by drought events. In order to assess the longer term periodicity of the conditions that require a hosepipe ban and other levels of service related events, 2 Verbal report from Robert Simpson past Managing Director of Rickmansworth & Uxbridge Water Co and 1976 Annual Reports for R&UWCo and Lee Valley Water. B5 – Maintaining the supply-demand balance Page 12 of 60 3 April 2009 Three Valleys Water Final Business Plan groundwater levels and rainfall records have been reviewed. Within our area, reliable groundwater hydrographs are only available from the early 1970s onwards, and so also do not give a longer term picture. The hydrograph for Therfield Rectory however indicates that the periods of hosepipe ban correlate to periods of low groundwater levels. These low groundwater levels are in turn caused by low rainfall periods, particularly winter rainfall, which contribute to maintaining water levels during the following summer. Generally, if one low rainfall period occurs, water levels can recover quickly, but if two successive periods occur, then the next groundwater recession period starts from a lower base level than previously and thus causes water levels to decline much further than normal. 1992, 1997 and 2006 were periods of multiple year rainfall events and therefore this indicates an approximate correlation of multiple year rainfall events relating to levels of service. Figure B5 : 6 Groundwater hydrograph for Therfield Rectory – 1972 to 2008 Measured water level mAOD LTA mAOD 100 95 mAOD 90 85 80 75 HPB 1976 HPB + DO 1991/92 HPB 2006 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 70 We currently use Meteorological Office Rainfall records in the form of MORECS data, which give weekly values for a variety of meteorological parameters. This data is available from 1962, thus is inadequate for long-term statistical analysis. A long-term rainfall data set has been obtained for Oxford, from 1853. Comparisons have been undertaken, which demonstrate that this is consistent with the MORECS data for our area since 1991, particularly in relation to the recharge season rainfall from September to April. Accordingly, the Oxford rainfall sequence provides a vehicle to consider the frequency of low rainfall events and in turn an approximation for the return event of restrictions on supply. The Oxford rainfall data set was subjected to a number of sta

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