Maintaining common ground

Tynemarch was commissioned by the UK Water Industry Research (UKWIR) to develop

an improved common framework for capital maintenance planning (CMP) by the UK

water industry. The final report was presented in May.

The common framework is based on the analysis of risk (specifically the probability

and consequences of asset failure) and encompasses an economic approach which

allows the trade-off between capital and operational cost options to be considered.

This enables an economic level of capital maintenance (CM) to be identified

with due regard to the costs associated with asset failure and (where appropriate)

the value placed by customers on service improvements.

The following concepts form the basis of the framework:

• capital maintenance should normally be justified on the basis of current

  and forecast probability and consequence of asset failure,

• ‘consequences’ are expressed as direct or indirect impact on service and

  company costs,

• ‘service’ is defined as service to customers and the environment (including

  all relevant third parties and regulatory requirements),

• service is assessed using suitable indicators, building on the approach

  applied by Ofwat at the 1999 Periodic Review

• there is a need to demonstrate a least-cost approach to Opex versus Capex

  and proactive versus reactive maintenance,

• an integrated system approach is required to assess direct and indirect

  impacts on customers and the environment.

The common framework can be viewed as having eight principal components which

are covered below. The common framework moves away from previous general water

service providers (WSP) practices based on a simple conversion of condition

and performance grades into remaining asset lives.

Planning objectives

There are two possible objectives that can be applied generally or vary with

service areas:

1) to provide steady or improving service to customers and the environment

at minimum cost to the WSP.

2) to provide the level of service to customers and the environment which represents

an economic balance between the value of the service provided and the associated

costs to the WSP.

Serviceability indicators

Serviceability indicators remain a central element of the common framework.

The current serviceability indicators are of two types:

Service indicators which measure directly or indirectly the service being

provided to customers and the environment – the set of service indicators

should ideally cover all areas of service, understood in this context to encompass

all regulatory requirements and to include service to customers, the environment,

third parties in the community and health and safety obligations to the public

and company employees. The development of improved indicators must be seen as

an ongoing task extending beyond the current review cycle and are the subject

of a current Ofwat consultation with the industry.

Asset performance indicators which reflect performance of an asset or group

of assets in fulfiling its intended function –

it is proposed WSPs are not required to maintain a stable or improving trend

in asset performance indicators, provided that any deterioration can be shown

to be consistent with the economic provision of service in the long term.

Proposed modifications and additions to the current set of serviceability indicators

have been provided for consultation and are included in the final report.

It is recognised no set of indicators can fully reflect all aspects of water

services, and that WSPs may at times need to present a case for CM expenditure

based on their own indicators or on broader arguments regarding the avoidance

of a future deterioration in service to customers and the environment, including

compliance with regulatory requirements. It is recommended that such approaches

are discussed with the Regulator at an early stage.

Forecasting of service to customers and environment

The common framework extends the approach used at PR99 in that the assessment

of historical service is to be complemented by the forecasting of future service,

taking account of the impact of proposed CM and operational changes.

It is generally accepted that inadequate CM will eventually lead to some form

of asset failure. Within the common framework, CM is to be justified on the

basis of the expected future impact of such failures on service and on WSP costs,

i.e. the current and future probability and consequences of asset failure.

Asset observations

The probability and consequences of the failure of a given asset will depend

on various attributes of the asset, termed here the ‘asset observations’. These

observations may include anything that is known or can be measured, judged or

estimated regarding the asset and its operation, environment and performance,

and which is useful for estimating the probability and/or consequences of failure.

Whilst many of their component observations will continue to be important,

the current grading systems for condition and performance assessment are not

considered to provide a suitable long term basis for asset observations within

the common framework.

The framework does not prescribe specific asset observations since WSPs have

differing views and experiences regarding the relationship between various asset

observations and the probability and consequences of failure.

Identifying the intervention options

Having estimated future service, it is necessary to identify a range of intervention

options to be considered for use in meeting the chosen planning objective. These

should include both CM schemes and operational changes, with appropriate phasing

and timing variations.

Costs and value

All intervention options considered should be costed taking full account of

capital costs, changes in operational cost and any expected savings in the costs

which result from asset failure (eg. clean-up costs, compensation payments and

the additional costs of reactive maintenance).

Where the cost-benefit planning objective is being applied, there is a further

requirement to take account of the value of any resulting improvement in service

to customers and the environment, which will usually be quantified on the basis

of customer surveys. To allow comparison of capital and operational interventions,

all costs and benefits are to be evaluated as present values using an appropriate

discount rate and planning horizon.

Selection of optimal interventions

The interventions which are required to meet the chosen planning objective are

identified using an appropriate decision-support algorithm, based on an assessment

of the comparative costs and benefits of each option.

Interventions may be included within the optimal selection on the basis of

the expected cost savings which would result in the absence of any service benefits.

Where the least cost interventions involve increases in operating costs, these

will need to be taken into account in Ofwat comparative efficiency assessments.

The common framework Process

The overall process envisaged by the framework is illustrated in figure 1. This

should not be viewed as prescriptive and WSPs are encouraged to work at an appropriate

level of detail and make adaptations where required to reflect their individual

circumstances, whilst adhering to the broad principles of the framework

The common framework is intended to provide sufficient flexibility to allow

considerable variation in the analysis undertaken, according to the importance

of the asset area, the size of the WSP and the availability of suitable data.

It was recognised that the framework should neither limit the opportunities

for companies to gain competitive advantage through innovative methods nor fetter

the regulator in his price determination.

Pilot implementation

Three water and sewerage companies and one water only company undertook a pilot

trial of the framework each focussing on different asset types. Included in

the project was the assessment of the trials using a reporter in the same manner

as is undertaken on behalf of Ofwat for a Periodic Review. The feedback from

the companies was positive as indicated by the following: “The common framework

for CMP provides a logical and well-structured methodology … which complies

with the needs of MD161.”

“[The company] was able to fulfil all of the steps and produce an asset

plan for the asset set studied.”

“[The company] believed that the framework in essence is what all good

companies should be undertaking…”

“The general principles of the model are aligned with the asset management

approach that is being implemented within the company.”

Concluding remarks

The presentation to the industry and regulators was well received and companies

are looking to develop plans for working within the framework for AMP4. The

framework should help the industry move to a more soundly-based identification

of the need for capital maintenance for both PR04 and the longer-term, within

a process agreed with Ofwat.

The forward-looking risk-based aspect of the framework will encourage consideration

of the optimal balance between proactive and reactive maintenance as well as

Opex and/or Capex solutions, and assist in achieving agreement regarding the

economic level of capital maintenance