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PORTSMOUTH WATER
JUNE RETURN 2002
BOARD’S OVERVIEW
Chapter 1 Key Outputs and Service Delivery – Table A
1.1
Service Outputs and Performance
The relevant DG Levels of Service have been broadly maintained and all would
be classed as good in the Ofwat criteria, except DG9 which would be assessed
as acceptable as there is no ‘good’ category. In all cases the minimum service
commitments included in the monitoring plan have been achieved.
DG2 Properties at risk of Low Pressure
The Company has only 150 properties (0.05% of total properties) which receive
water pressure below the reference level of service.
DG3 Properties affected by Supply Interruptions
The overall performance score improved marginally over the past year. This was
as a result of a lower number of properties experiencing interruptions of more
than six hours and no properties experiencing interruptions of more than 24
hours.
DG4 Restrictions on use of Water
There have been no restrictions on the use of water since 1976.
DG6 Response to Billing Contacts
The Company has maintained its performance in this category with 99.6% of
billing contacts dealt with within five days.
DG7 Response to Written Complaints
All written complaints were responded to within ten working days.
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DG8 Bills for Metered Customers
Only one metered customer received an estimated bill not based on an actual
reading.
DG9 Telephone Contacts
DG9 shows a marginal improvement compared to last year and is above the
minimum service commitment contained in the monitoring plan.
1.2
Delivering the Drinking Water Compliance Programme
Progress against the Monitoring Plan
In the Monitoring Plan for 2000-2005, the Company made commitments in terms
of the following:
Lead
Good progress has been made with the installation of treatment plants for
meeting the new lead standards by December 2003. The Statement of Intent
was agreed with the DWI in April 2001, and dosing equipment was installed at
five sites by December 2001. Dosing commenced in January 2002 except at
one site which has been delayed by the difficulty in setting up a suitable
monitoring database. This has now been completed and dosing commenced in
May 2002.
At a further two sites dosing equipment has been installed and databases set up.
Dosing is due to commence, in accordance with the Statement of Intent, by the
end of June 2003.
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Cryptosporidium
Turbidity monitoring, as agreed by the Statement of Intent issued to the DWI,
was installed at all source works prior to the start of the year and has been in use
throughout the year.
Construction work in connection with the provision of a Membrane Filtration Plant
at Farlington Water Treatment Works is well under way following delays in the
receipt of planning permission from the Local Authority. The original completion
date of January 2003 has now been extended to the end of April 2003 and the
DWI have been kept informed.
Planning delays have also affected the agreed provision of a similar Membrane
Filtration Plant at Lovedean Water Treatment Works. Contract terms have been
agreed following the receipt of competitive tenders but work has yet to
commence on site. The original completion date of January 2003, as agreed in
the Statement of Intent with the DWI, is now unlikely to be before the end of July
2003. The DWI and local health professionals have been kept informed.
Abstraction of water near Site of Special Scientific Interest (SSSI)
Prolonged test pumping of the production boreholes at Newtown and Lower
Upham took place during the autumn of 2001 together with extensive
hydrogeological and environmental monitoring as agreed with the Environment
Agency.
A licence application for the provision of alternative abstraction facilities in lieu of
Hoe Pumping Station is due to be submitted to the Environment Agency shortly.
Environmental Studies
Work on the River Itchen Sustainability Study has continued in conjunction with
the Environment Agency, Southern Water Services and various other public
bodies. Funding has been agreed and groundwater modelling is well advanced.
The scope of the environmental impacts to be monitored have finally been
agreed for the Fishbourne Study. Difficulties have been experienced in obtaining
landowner agreement for the monitoring provisions, but these are now expected
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to be undertaken in 2002/03. Unfortunately this will only allow one year's data to
be assembled in time for incorporating solutions into the AMP4 submission.
Section 19 Undertakings
The monitoring undertakings in respect of total coliforms at Slindon and Lavant
Water Treatment Works were satisfactorily completed by the Company in
January 2002.
As a result of a further microbiological failure at Northbrook Water Treatment
Works during the year, the Company submitted a monitoring undertaking in July
2001 and this was satisfactorily completed in January 2002.
The Company currently has no undertakings in force.
1.3
Maintaining Serviceability to Customers
Portsmouth Water's mains network serves an area that is generally urban or
semi-urban (containing the majority of the mains network) in the south and rural
in the north. The southern part of the area also overlies the aggressive clay soils
of the Hampshire Basin, while the northern part includes the non-aggressive
chalky soils of the South Downs.
As a result of this situation, some 31% of the mains network comprises cast iron
or unprotected steel mains laid in aggressive soils. This increases the risk and
frequency of mains bursting.
Over the last 12 years, the Company has therefore pursued a policy of renewing
approximately 1% of its infrastructure asset base each year. The great
proportion of such renewal schemes comprises old cast iron mains with a higher
burst frequency.
It was found that the initial effect, in the first two years of this policy, was to
reduce the number of bursts from 308 per 1000km in 1990/91 to a reasonably
steady level of between 160 and 250 per 1000km in subsequent years, the
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actual number being influenced by the effect of climate (e.g. very cold or very
hot, dry weather causing ground movement and mains fracture).
The Company employs a policy of renewing mains at approximately 1% of the
network per annum. Over the last 12 years this policy has resulted in the burst
frequency being maintained at a steady level which the Company believes
vindicates its policy.
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Chapter 2 Expenditure and Financial Performance Measures - Table C
2.1
Total Expenditure
2.1.1 Total Operating Expenditure
The Company has incurred £0.139m of additional costs due to new obligations
for Cryptosporidium monitoring which were not allowed in the 1999 price
determination.
Compared to the base year, the provision for bad debts and debt collection costs
has increased by a total of £0.155m. The increase in costs has been shown as
an enhancement to service levels in the JR tables, as this was not allowed in the
projection of base operating expenditure at the last price review.
Cost savings have been principally achieved in employment costs through the
non-replacement of retirees.
2.1.2 Capital Expenditure
A summary of the capital expenditure programme relative to the Determination is
as follows.
Determination
£000
Base Service Infrastructure Renewals
Base Service Non-infrastructure
Quality Enhancements
Supply/Demand Balance
Total
2.1.3 Infrastructure Renewals
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Actual
£000
PORTSMOUTH WATER
JUNE RETURN 2002
The underspend on infrastructure renewals has been caused primarily as a
result of efficiencies and by the poor performance of our mains renewals
contractor who was unable to provide work of a sufficiently high standard. The
need to address these problems diverted some manpower away from productive
work with the result that the activity level could not be achieved. For the current
year 2002/03, the Company has appointed a new contractor to carry out a 3-year
renewals contract, commencing in the summer of 2002.
The Company considers that, given the fact that the leakage targets continue to
be met and that the burst rates per km of main remain relatively stable, it may be
appropriate to review the activity planned at the time of the 1999 Determination.
This may result in less expenditure than that incorporated in the Determination,
but it will be above the levels in 2000/01 and 2001/02.
2.1.4 Non Infrastructure
The additional expenditure is mainly as a result of a carry over of two projects
from 1999/2000 which, at the time of the Determination, had been expected to
be complete, together with a scheme unforeseen at the time of the AMP3
programme in respect of the replacement of a roof membrane at Nelson Service
Reservoir.
The Company considers that, although capital maintenance expenditure is lower
than the CCD charge for the Report Year, in the long term there is broad
equivalence between the two elements.
2.1.5 Quality Enhancements
There are three principal reasons for the underspend.
(i)
There were delays in achieving planning permission for the Farlington Membrane
Filter Plant (DWI Scheme No. 899). This has been resolved and the contract
was let in December 2001, with completion now due in April 2003. This late start
did, however, result in an underspend in 2001/02. There have also been
substantial delays in obtaining planning permission for the Lovedean Membrane
Filter Plant (DWI Scheme No. 898). These are currently being resolved but this
resulted in the allowed expenditure for 2001/02 not being achieved.
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(ii)
The Determination in 1999 included the replacement of lead communication
pipes to help achieve compliance with the 2013 lead standard of 10µg/litre. The
Company now believes that this will be achieved by water conditioning with
Orthophosphoric acid, and the DWI has accepted the Company’s lead reduction
strategy and have issued a Statement of Intent covering the agreed capital
programme.
(iii)
A further scheme included in the 1999 Final Determination was the replacement
of the Hoe Pumping Station source, as required by the Environment Agency.
The expenditure on this scheme has been delayed by the significant additional
test pumping required by the Environment Agency. Test pumping is now
complete and the options for progressing this scheme are being considered.
2.1.6 Supply/Demand
The underspend on the supply/demand balance category is mainly the result of
the late start to the Southern Water bulk supply. Although construction work on
the bulk supply to Southern Water has not yet started, substantial progress on
the technical and financial issues has been made. Heads of Agreement have
been agreed between the two companies in respect of financial and operational
matters. The Company will need an abstraction licence variation at one of its
sources and a submission to the Environment Agency will be made in July 2002.
The Environment Agency are likely to take up to one year to determine the
application. It is expected that construction will commence in 2003 with a likely
commissioning date of December 2004.
2.2
Current Cost Accounts – Profit and Loss
The comparison of the Company’s revenues and costs with the 1999
Determination for this year is as follows (in money of the day and using actual
inflation).
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2001/02
Determination
£M
Actual
£M
Turnover
Opex (excluding Infrastructure Renewals)
Infrastructure Renewals
CCD
Current Cost Operating Profit
The principal reason for the improvement in current cost operating profit relative
to the Determination is the difficulties explained above with the mains renewals
programme. The infrastructure renewals charge is based on the non-application
of FRS15 and is therefore actual expenditure.
Turnover was also significantly in excess of the Determination number, which
was mainly the result of higher measured water income and higher income from
rechargeable works in the year, compared with the Determination. The
Company does not consider these increases to be indicative of a longer-term
trend and they are thought to be more as a result of one-off factors in the Report
Year.
The Company's tax charge for the previous year was reduced by a credit of
£1.2m in relation to the tax returns for 1997/98 and 1998/99. The Inland
Revenue accepted that certain elements of treatment works refurbishment
should have 100% capital allowances. This had not been assumed in the tax
accrual for those years. The charge for this year is more in line with 'normal'
expectations and now incorporates the deferred tax element in accordance with
FRS19.
As a consequence of the increase in the tax charge, the post tax return for the
year as shown on line 10 of Table C has reduced to 8.38%.
Total dividends paid and proposed by the water company amount to £4.967m.
Future dividends will reflect the Company's lower cost of capital and new balance
sheet structure.
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A net cash inflow before management of liquid resources and financing of
£3.834m was generated, after funding the capital programme for the year. The
cashflow resulted mainly from lower capital expenditure and dividend payments
made in the year and also from the high level of capital contributions for mains
on new developments. The long-term fixed borrowing of £15m was repaid as
part of the capital restructuring that took place during the year.
A £10m short-term loan was provided by South Downs Limited to provide finance
in the short term until the Company secures long-term index linked financing
which is expected in June 2002.
The gearing level shown on Table C does not reflect the true position following
the issue of new debt early in the 2002/03 financial year.
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Chapter 3 Key Supporting Information - Table D
3.1
Capital Works Activity
3.1.1 Above Ground
The Company completed its programme of major pumping station
refurbishments in 2000/01. The only pumping station which has not been
refurbished is at Hoe which is planned for closure in 2003 as part of the
Environment Agency's National Environmental Programme.
Capital Works activity was largely in connection with the installation of seven
orthophosphoric acid dosing plants and major civil works on the Farlington
Membrane Filtration Plant, as well as test pumping and monitoring in connection
with the production boreholes being provided for the Hoe Replacement Scheme.
3.1.2 Below Ground
At the commencement of the year a new period contractor was appointed with
the expectation that the previous year's shortfall in mains renewals activity would
be recovered. Despite the initial good intentions, productivity was not maintained
and a total of 25.58 km (last year 23.20 km) of mains were laid. As a result of a
number of problems, the contract is not being renewed and a three-year
agreement has been formulated with another new contractor.
Activity for the remainder of the quinquennium will be higher than the 2001/02
level in an attempt to achieve at least 30km per annum. Given that the leakage
targets continue to be met and that burst rates remain stable the short-term
shortfall for 2000/01 and 2001/02 is not expected to have any long-term impact
upon serviceability to customers.
During the course of the year, the Company completed the final stage of the
installation of strategic meters which will enable better prioritisation of leakage
detection activities.
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3.2
JUNE RETURN 2002
Water Resources, Supply and Demand
The Company submitted its Water Resources Plan Annual Review 2001, in
which it revised a number of its key assumptions which had been used for
AMP3:





The demand associated with a 15 Ml/d bulk supply to Southern Water
Services
Revised property and population data from local authorities
Pessimistic outcomes to the current sustainability studies
The effect of lower numbers of customers opting for a meter
Less optimism for the effect of water efficiency measures
As a result of these revised assumptions there is a possibility of a
supply/demand deficit between 2004/05 and 2009/10.
The Company is involved in two stakeholder groups in the CAMS process: the
East Hampshire and the Arun & Western Streams CAMS which cover 85% of
the Company's abstraction capabilities. Both CAMS are due to be completed by
April 2003 and many of the management units incorporating the Company's
sources are assessed as 'over-abstracted' or 'over-licensed'.
The Company is shortly due to submit its peak licence variation for the
Eastergate group of sources in order to support the bulk supply to Southern
Water Services.
The Company’s long-term supply option is the potential development of the
Havant Thicket Water Storage Reservoir for which preparatory work will be
needed during AMP4.
The Company's calculation of the Economic Level of Leakage was accepted by
Ofwat in 2001 and the Company again met its leakage target in 2001/02.
The Company continues to offer free supply pipe repairs and subsidised
replacements despite them being uneconomic.
'Save-a-Flush' cistern
displacement devices are available free on request and are provided at water
butt sales. A water butt sale was held in Swanmore, Bishop's Waltham, in 2001,
where 600 water butts were sold; a further sale is due to be held at Bognor Regis
in 2002.
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The Company's Water Efficiency Plan was accepted by Ofwat during 2001.
The number of optional meters installed in 2001/02 is below the figure assumed
in the Final Determination. A number of the optants are registered as sprinkler
users and the Domestic Consumption Monitor continues to provide the Company
with valuable information regarding water use. Interestingly, meter optants
continue to have a higher level of per capita consumption than unmeasured
households; this is believed to be due to low occupancy/high rateable value
properties opting to transfer to the measured tariff.
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Chapter 4 Efficiencies
4.1
Capital Expenditure
4.1.1 Capital Enhancements – Quality and Supply/Demand
In the next two years the major quality schemes will be the Membrane Filter
Plants at the Farlington and Lovedean Treatment Works. In the price
determination Ofwat allowed expenditure of £x.xm on Farlington and £x.xm at
Lovedean (both in May 1999 prices), after deduction of 18.4% for efficiency
gains. The Company believes that project outturns will be lower than forecast
and that capital efficiencies will be made. The Company also believes that there
will be efficiencies due to the installation of orthophosphoric acid dosing plants
rather than lead communication pipe replacement in order to achieve the lead
standard. These efficiencies have not yet been recognised in JR Table 35B
because the works are not completed.
The expenditure in the supply/demand balance area related to new mains
development and metering, and no significant efficiencies were achieved due to
the small number of low value projects. The unit cost of installing meters was
broadly in line with the Determination.
4.1.2 Capital Maintenance – Non infrastructure
In our response to the draft determination we stated that it would be difficult to
achieve efficiencies in the early years of the quinquennium because most of the
projects to be completed in this time were well advanced. This has turned out to
be the case and no efficiencies have been recorded.
4.1.3 Capital Maintenance – Infrastructure
The efficiency target included in the price determination was 1% per annum. The
Company has achieved reductions in the unit cost of mainlaying over the last two
years which amount to 8%.
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4.2
JUNE RETURN 2002
Operating Efficiencies
The efficiency target included in the price determination was 1.4% per annum. In
2001/02, the Company achieved efficiency savings of 2.4% of base operating
costs, largely through natural wastage of staff. Whilst the Company will continue
to seek efficiencies, it is progressively harder to reduce manpower (which
represents 40% of operating costs), and the level of savings achieved in 2000/01
and 2001/02 cannot be assumed to continue.
The actual base operating costs used in the calculation of efficiency exclude the
increase in the charge for bad debts and debt collection costs over and above
1998/99 levels. The costs relating to this notified item have been included in
Table 35A of the JR as an enhanced level of service. Cryptosporidium
monitoring costs are also excluded from actual base operating costs, and are
included in new quality obligations.
4.3
The Relationship of Efficiency and Outputs
The Company is committed to the proper maintenance of its assets. None of the
savings have been made in respect of operating and capital costs at the expense
of outputs.
Although it is likely that expenditure on infrastructure renewals in the AMP3
period will be below the allowance in the Determination, we do not believe that
this will have a long-term effect on service to customers.
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Chapter 5 Competition
The Company has lodged an indicative access price with Ofwat and will be submitting
its revised access code in August 2002.
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BOARD ENDORSEMENT
I confirm that the Board of Portsmouth Water Limited have reviewed and endorsed
this Overview
N.J. ROADNIGHT, MANAGING DIRECTOR
13 June 2002
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