Maintaining common ground
Tynemarch's Dr Jeremy Lumbers and George Heywood summarise UKWIR's common framework for capital maintenance planning
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.
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 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.
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.
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."
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