Paul Conroy and Ross Crosbie of WRc Utilities explore some of the key technical challenges involved in delivering Ofwat’s final determination as well as the implications for meeting efficiency targets.

The dust is settling on Ofwat's final determination and water companies are focussing on the twin challenge of delivering the investment programme within the price limits and being ready for the next periodic review. In setting the price limits, Philip Fletcher has established something of a reputation as a performer - he combines the skills of the juggler and tightrope walker and even describes his own approach as "a balancing act".

The price limits, in effect, determine the revenue the companies can raise from consumers in order to deliver a safe and reliable supply of water and collect and treat wastewater. Ofwat positions itself in the middle of the companies, the customers, shareholders, the City, the other regulators and endeavours to ensure a ‘fair deal’ is struck. Above all, the provision of water services must be sustainable and safe.

Sustainability requires that the companies can attract investors and secure loans in order to finance their capital programme and that longer- term environmental management issues are addressed. Safety demands compliance with quality regulations and investment to safeguard security of supplies.

The value Ofwat has placed on achieving this balance amounts to an average increase in water bills of 4.2% per year, before inflation for the period between 2005 and 2010. In other words, a total average increase of £46 per household by 2010. So far, the response to the determination has been cautiously positive.

However, there are a few ‘bones of contention’. For example, the ability of the poorest of customers to pay, which is a problem exacerbated by some of the highest individual bill increases being in areas of relatively high poverty. Another key issue is that of delivery of long-term environmental sustainability, which is compounded by the associated uncertainties regarding cause and willingness to pay.

Ofwat has proclaimed the companies are now adequately funded to tackle key customer service issues but this has been tempered by an expectation that tough efficiency targets will be met. It is assumed past and future efficiency savings will offset bill increases by some £16 per household over the coming period. This article explores a selection of they key technical challenges and considers the implications for meeting efficiency targets.

Certain water companies are regularly ‘keel-hauled’ by the media and taken to task by Ofwat on the grounds they have not done enough to control leakage and prevent costly bursts on their water pipes. A number of companies have declared leakage will be reduced and this will be achieved by a combination of replacing pipes and implementing better methodologies for detecting and repairing leaks. To the layman, this sounds logical. However, leakage, as opposed to a major burst, does not occur at a single readily identifiable point. A burst, which results in loss of pressure or visible running water, is usually a result of a big fracture that breaks the back of the pipe or a catastrophic joint failure.

Cumulative effect

Leakage, on the other hand, also includes the cumulative result of all the minor seeps and undetectable leaks that are distributed across the pipe network. Estimates are made for losses on customer supply pipes but there is significant uncertainty about these values.

Consequently, it is much harder to find the source of leakage and to target specific sections of pipework for replacement. Using typical available data, the main option is expensive, large-scale replacement of the pipe stock and the hope the leaky pipes are amongst those replaced.

Dealing with leakage cost effectively can only be achieved by understanding exactly which pipes and joints are contributing to the problem. The understanding of the impact that different mains (and communication pipe) renewal options (for example, pipe-bursting, open-cut replacement) have on pipe performance also needs to be enhanced. This is a major challenge and will require a commitment to metering, monitoring and utilisation of up-to-date detection and analysis technology.

Internal foul flooding is about the worst and most distressing serviceability incident that can happen. Not only is the event itself horrendous but so is the fear that it can re-occur. Ofwat has been careful to ensure the final determination states clearly that price limits will enable companies to deal with sewer flooding, as identified in the company plans.

Ofwat considers two types of flooding – that caused by hydraulic overload and that associated with other causes (for example, blockages). Of interest is that for many of the companies, the reference is to overloaded sewers, which implies inadequate hydraulic capacity, compounded, possibly, by pumping station failure or overload. This may be a concern.

Already, companies would have been expected to have taken the ‘quick wins’, dealing with hydraulic inadequacies that were relatively easy and cost-effective to do so. The cost of dealing with remaining hydraulic issues may be much higher than anticipated. Flooding due to other causes is just as significant. Blockages and especially repeat blockages are a major issue and it is thus important to understand the causality and effects of sewer cleaning programmes on these events.

Routine preventative maintenance may have already been dropped by some companies (on the grounds it incurs a significant opex cost) but without really understanding the impact on the frequency and severity of future flooding incidents. Experts in this area feel a change in operational practice is needed, supported by a better understanding of the costs and benefits of sewer operational maintenance programmes. Some go further, insisting the industry also needs to grasp the benefits of new asset monitoring technology.

This would enable, for example, more effective responses to pumping station alarms, reducing significantly the time wasted responding to false alarms. The need to meet stiff efficiency targets is, perhaps, the major sting in the tail. There is no doubt the target is tough. Companies have already taken quick wins in terms of efficiency and reducing OPEX. Capital investment since the early 1990s has seen a significant increase in the numbers and sophistication of control and monitoring systems installed.

This has permitted enhanced levels of quality to be achieved, while keeping labour costs under control. However, how will this increased value of relatively short-lived assets impact on capital maintenance expenditure?

Additionally, many utilities have significantly altered their procurement strategies over the past five years, with the aim of delivering efficiencies. So, where else can efficiencies be achieved? Generally, companies will need a much better grasp of problem assets in terms of cause, location and cost if they are going to be able to achieve efficiency targets.

Vital statistics

There is a fundamental need to understand costs (whole-life) at the asset level. Schemes must be prioritised and cost-benefits understood, not only in terms of capital costs but also for their impacts on future OPEX and capital maintenance requirements.

Furthermore, there is a need to be able to compare investment options across the asset groups, to understand risk and whole-life costs and to do so in a consistent and equitable way. Why is this so difficult? Consider the analogy of a family on a limited budget faced with immediate needs and restricted options.

First, there is a need to increase living accommodation – the family is growing and the current resource (the house) has a limited capacity to meet the demands of the family.

Secondly, the family car is ageing and service and repair bills are escalating – this is an essential asset for getting the kids to school and the parents to work. Should it be replaced or should a major overhaul on the key components be undertaken?

How is this decision made and is there data available to support the decision making process? The first step is to identify the options, then to assess the costs and finally the benefits. The aim is to maximise the benefits of the limited budget by prioritising, while ensuring essential needs are met. This process is based on striking the right balance.

It is called ‘least cost planning’ and to be done effectively it requires a good understanding of costs and benefits. The analogy is useful, because it illustrates an approach for evaluating the needs for two very distinct asset types. It also introduces issues relating to capacity, quality of service and capital maintenance.

The solutions include additional maintenance, replacement, procuring of new assets or a combination. This is therefore a question of optimisation. It can only be done effectively by having a thorough understanding of the asset’s lifecycle and costs of ownership. This includes the costs of day-to-day maintenance (OPEX) and CAPEX associated with replacement, extension and capital maintenance.

Because the asset owner is making a decision across asset types, they need a whole-life costing approach that enables comparisons to be made. In the case of the house and the car this is not a problem – the costs and options and lifecycle data are readily available and the householder will have a detailed knowledge of the assets and all the maintenance history they need to inform the decision.

The reality for the water company is that it has a far more complex range of assets, much more limited lifecycle information and lack of an effective decision making process for multi-asset investment prioritisation. The first step in filling this gap will be the implementation of systems for capturing and analysing OPEX data and for linking this to assets at the right level to support investment prioritisation and delivery of efficiency.

Paul Conroy and Ross Crosbie are senior consultants for Asset Management within WRc Utilities.

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