Strategic Management Consultants Anglian Water by benbenzhou

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									Final Business Plan 2009                                              Anglian Water
Part B3 Maintaining Service and Serviceability              Restricted - Commercial




                    Strategic Management Consultants



                    Anglian Water Final Business Plan

                                        Part B3

                  Maintaining Service and Serviceability




22/04/2009 08:39                                        Strategic Management Consultants
SMC AW FBP09 B3 v1.4.doc                Page 1 of 132                      October 2010
Final Business Plan 2009                                                                            Anglian Water
Part B3 Maintaining Service and Serviceability                                            Restricted - Commercial


Strategic Management Consultants

Part B3 – Maintaining Service and Serviceability

Draft Commentary by REPORTER

Contents

Overall structure of commentary............................................................................ 6
Summary of key points............................................................................................ 6
1           Section A – Introduction and common matters .................................... 11
1.1         Company Approach 11
1.2         Methodology 11
1.2.1       Introduction 11
1.2.2       Development of solutions (W&S) 14
1.2.3       Service measure objectives (W&S) 14
1.2.4       Process 15
1.3         Validation of forecast investment programme 17
1.4         Methodology developments since PR04 18
1.5         Future developments 18
1.6         Final plan methodology proportions 18
Planning objectives, direction and delivery ........................................................ 19
(Ofwat Sections 1 and 6) WI, WNI, SI & SNI ........................................................ 19
1.7     Background 19
Response to Ofwat guidance for Ofwat Sections 1 and 6.................................. 19
1.8   Board involvement 19
1.9   Leadership and commitment to achieving best practice 20
1.10  Integration throughout the business 20
1.11  Planning objective 21
1.12  Historic trends 22
1.13  Adequacy of capital maintenance in AMP4 22
1.14  Service indicators 22
Approach to asset management planning by sub-service ................................ 23
(Ofwat Sections 2 and 7) WI, WNI, SI and SNI .................................................... 23
1.15    Sufficiency of company commentary 23
1.16    Business as usual 23
1.17    Reporter involvement 23
1.18    Data Integrity 24
1.19    Strengths and weaknesses 24
1.20    Draft plan feedback 24
1.21    Programme breakdown summary 27
2           Section B Water Service .......................................................................... 30
Summary................................................................................................................. 30
2.1   Structure of water service commentary 30
2.2   Review of AMP4 progress to date –water service 31
Water infrastructure............................................................................................... 32
2.3     Water infrastructure breakdown summary 32

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Part B3 Maintaining Service and Serviceability                                            Restricted - Commercial

2.4         Business case by asset group - Water infrastructure (WI) 32
2.4.1       Service measures (WI) 32
2.4.2       Intervention options 33
2.4.3       Draft plan feedback (WI) 33
2.4.4       Response to Ofwat Guidance (Ofwat Section 3) WI 36
2.4.5       Ofwat requirement for reporter appraisal (WI) 37
2.5         WI programme derivation (Ofwat Section 3) 40
2.6         WI investment summary (Ofwat Section 3) 40
2.7         Scheme reviews (WI) 40
2.7.1       Exceptional WI items 41
Water non-infrastructure ....................................................................................... 41
2.8    Water non-infrastructure breakdown summary 41
2.9    Business case by asset group (WNI) (Ofwat Section 3) 42
2.9.1  Service measures 42
2.9.2  Draft plan feedback (WNI) 42
2.9.3  Response to Ofwat guidance (Ofwat Section 3) WNI 46
2.9.4  Ofwat requirement for reporter appraisal (WNI) 47
2.10   WNI programme derivation (Ofwat Section 3) 49
2.11   WNI investment summary (Ofwat Section 3) 49
2.12   Site visits 50
3           Section C – Sewerage service ................................................................ 54
Summary................................................................................................................. 54
3.1   Structure of commentary 56
3.2   Background all sewerage service assets (SI & SNI) 56
3.3   Sewerage breakdown summary 58
Sewerage infrastructure ........................................................................................ 59
3.4    Background 59
3.4.1  Frequency of failure (SI) 59
3.4.2  Service impact: flooding pathway and receptor (SI) 62
3.4.3  Service measure framework (SI) 63
3.4.4  Assumptions (SI) 64
3.5    Business case by asset group (SI) (Ofwat Section 8) 65
3.6    Structure of commentary 65
3.7    Background (SI) 65
3.8    Response to Ofwat guidance (Ofwat Section 8) SI 66
3.9    Response to Ofwat guidance: with EPR deterioration modelling (Ofwat
       Section 8) SI 67
3.10   Response to Ofwat guidance: SI deterioration not modelled (Ofwat Section
       8) 71
Sewerage non-infrastructure ................................................................................ 75
3.11   Business case by asset group (SNI) (Ofwat Section 8) 75
3.12   Structure of commentary 75
3.13   Background (SNI) 75
3.14   Response to Ofwat guidance: (Ofwat Section 8) 76
3.14.1 Structure of our commentary 76
3.14.2 SNI Background and introduction Overview of all non-infrastructure
       sewerage service asset groups (SNI) 76
3.15   Response to Ofwat guidance (SNI) – with deterioration modelling 78
3.16   SNI – by asset category with deterioration modelling (Ofwat Section 8) 81
3.16.1 Sewage treatment (with deterioration modelling) 82
3.16.2 Sludge treatment centres (with deterioration modelling) 84
3.16.3 Sewage pumping stations (with deterioration modelling) 85

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Part B3 Maintaining Service and Serviceability                                            Restricted - Commercial

3.17        Response to Ofwat guidance: SNI – deterioration not modelled (Ofwat
            Section 8) 87
3.17.1      Sewage treatment (deterioration not modelled) 89
3.17.2      Sewage pumping stations (deterioration not modelled) 91
3.17.3      Sludge treatment (deterioration not modelled) 91
4           Combined Water and Sewerage ............................................................. 94
(Ofwat Sections 4, 5, 9 and 10) WI, WNI, SI and SNI .......................................... 94
Further table commentary..................................................................................... 94
(Ofwat Sections 4 and 9) WI, WNI, SI and SNI .................................................... 94
4.1     Response to Ofwat guidance 94
4.2     Table B3.1 and 3.2 94
4.2.1   Tables B3.3 and B3.4 – base service operating expenditure 95
4.2.2   Table B3.3 and B3.4 lines 5 and 6 – revenue impacts of capital schemes
        (RICS) 103
4.2.3   Table B3.3 and B3.4 line 8 – overall compounded assumed efficiency
        improvement profile (base) 105
4.2.4   Tables B3.5 105
4.2.5   Table B3.6 106
4.2.6   Table B3.5 and B3.7 107
Specific company challenges and responses................................................... 108
(Ofwat Sections 5 and 10) WI, WNI, SI and SNI ................................................ 108
4.3     Response to guidance for Section 10 108
4.3.1   Reporter challenges (water service) 108
4.3.2   Reporter challenges (sewerage service) 112
5           Section D – Management and general ................................................. 113
5.1         Summary 113
5.2         Background 114
5.2.1       Company approach 114
5.2.2       Reporter approach 114
5.3         Response to Ofwat guidance 114
5.3.1       General 114
5.3.2       Information Technology 115
5.3.3       Reporter approach 115
5.3.4       Assumptions 117
5.3.5       Projects 117
5.3.6       Challenges 118
5.3.7       Vehicles and plant 119
5.3.8       Environment 119
5.3.9       Recreation 120
5.3.10      Laboratories 121
Challenges ............................................................................................................ 123
6           Section E – Asset management planning assessment ...................... 124
6.1         Summary 124
6.2         Background 124
6.3         The AMPAP tool 125
6.4         Reporter approach 126
6.5         Company approach 127
6.5.1       Aims 127
6.5.2       Adopted AMPAP structure 127
6.5.3       Scoring process 129

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Final Business Plan 2009                                              Anglian Water
Part B3 Maintaining Service and Serviceability              Restricted - Commercial

6.5.4    AMPAP results 129
6.6      SMC observations & conclusions 130
6.7      SMC conclusions 131
6.8      AMPAP Challenges 131




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Final Business Plan 2009                                                  Anglian Water
Part B3 Maintaining Service and Serviceability                  Restricted - Commercial


Strategic Management Consultants

Part B3 – Maintaining Service and Serviceability

Commentary by REPORTER
Overall structure of commentary
1 - Section A – Introduction and ma tters common to both services (including Ofwat
sections 1 and 2)
2 – Section B – Water service (primarily Ofwat sections 3, 4 & 5)
3 – Section C – Sewerage service (primarily Ofwat section 8, 9 & 10)
4 – Section D – Management and general
5 – Section E – Asset management planning assessment

Summary of key points

Section A – Introduction and common matters
   Overall the Compan y has made su bstantial progress and achieved a g reat deal
    in the preparation for the FBP. Anglian Water’s final business plan (FBP) for both
    infrastructure and non -infrastructure asset s will be a benchmark for futur e
    achievement. We are pleased to record the effort put in by the Company to
    resolve issues and respond to the feedback from Ofwat at the DBP.
   Our comme ntary inevit ably identifies ar eas fo r further improvement but these
    should not detract from the very co nsiderable progress made and the suitability
    of the system for investment planning throughout the period.
   Asset Plus r elies on a very large number of detailed bottom up asset       d ata an d
    observations
   The Anglian Water AMP5 final capit al maintenance plan for water, sewerage and
    M&G totals £1199m compared with the DBP figure of £1161m
   There have been substantial transfers from quality to base as a result of following
    feedback on the DBP
   Since PR04, Anglian Water has developed and introduced its Asset Plus process
    for capital maintenance planning
   The company approach using Asse t Plus meets the cost e ffectiveness objective
    of the ‘Capital maintenance planning common framework’ (CMPCF).
   The company has defin ed its ‘planning objective’ as a cost effective approach (in
    common framework terms) but based on cost benefit analysis
   A significant proportion of the AMP5 final capit al maintenance plan schemes are
    developed automatically from service and deterioration models. The re maining
    needs & solutions are manually generated
   91% of AMP5 final plan capital maintenance schemes are the subject of full risk
    assessment
   95% of AMP5 final p lan capital maintenance schemes are the subject of full cost
    benefit assessment
   Company cost models have been used to estimate 64% of the AMP5 final plan,
    8% is from bespoke cost estimates and the re maining 28% carried fo rward from


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    historic expenditure (some of which rely themse lves on unit costs and e stimated
    activity /volumes /quantities)
   4% of AMP5 final capital maintenance investment is developed from Anglian
    Water’ Economic Replacement Point Model for Domestic Water Meters.
   The company has completed a ‘short for          m’ Asset managemen t planning
    assessment that gives a useful indication of its approach.
Asset Plus
   Our understanding is that Asset Plus does not currently manage the t rade-offs
    between different asset areas. In dividual runs are required for each investment
    area and in the time available it ha s not been possible to r un a single optimiser
    run for the programme as a whole due to the scale of the analysis
   Anglian Wa ter’s aim is where possible, to mo del the optimum intervention by
    linking future asset performance, and its impact on service, to present condition
    through the expected deterioration in the absence of any intervention investment.
    Anglian Water converts the level of risk into monetary terms to reflect the direct
    and indirect costs to the Company arising from any failure
   Anglian Water sets targ ets in terms of the change in performance required. The
    change is determined relative to the expected number of failures at the end of the
    plan if no investment occurred (the pre-investment position). In using A sset Plus
    to determine the level o f investment required Anglian Water assesses the current
    number of failures and the expected number at the end of the plan per iod if no
    investment occurs, to determine the deterioration in se       rvice assuming no
    interventions. The diff erence is th e “improve ment required” to main tain stab le
    service.
   We are satisfied t    he company approach is capable of broa              dly relating
    interventions to forecast serviceability, both at a sset pipe le vel and scheme level
    where a number of separate interventions may be summated.

Sections B Water Service
   The proposed total A MP5 water service F BP programme totals £479.2m
    (excluding M&G) and this (excluding exceptionals) is 7% higher than the forecast
    AMP4 out turn
   £171.6m (3 6%) of the water service progra    mme derive s from automatically
    generated needs/solutions (£89.5m Infrastructure and £82.1m Non-infrastructure)
   £307.6m (64%) of the water service programme derives from manually generated
    needs/solutions (£140.2 Infrastructure and £167.4 Non-infrastructure)
   Only 4% of the water service programme was not assessed for risk or benefit and
    is considered ‘must do’ (of which Hartlepool is approximately 1%)
   From our examination of the company methods and assumptions supporting auto
    generated schemes ( both infra and non-inf ra), we co nclude the planning
    approach appears sound
   From our examination of the vari ous company metho ds and assumptions
    supporting manually g enerated schemes (both infra and non-infra), we again
    conclude the approach appears sound.
   We examined a number of scheme s (infra and non-infra) selected at r andom for
    more detailed examination and visit ed the non-infra sites. We found all schemes
    were based on sound risk, benefit and cost data and employed rational and clear
    links with service

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Part B3 Maintaining Service and Serviceability                   Restricted - Commercial

   Auto generated infrast ructure sch emes consider the three obvious solution
    options (replace, refurbish and flush), but tho se for non-in fra almost always rely
    on the single option of replacement with new li ke-for-like a ssets at eq uipment
    level. Man ually generated schemes mostly         consider a realistic n umber of
    different solution options.
   The company has ident ified exceptional water service sche mes totalling £56.6M
    in its FBP

Section C Sewerage service
   The propo sed AMP5 sewerage service F BP programme totals £526.2m
    (excluding M&G) which is 12% higher than the forecast AMP4 out turn
   £308.8m (59%) of the sewerage service programme derives from aut omatically
    generated needs/solutions (£87.9 Infrastructure and £221.1 Non-infrastructure)
   For SNI, aut omatically generated and automat ically costed schemes which were
    generated by reliability modelling total £221.138m 61%
   For SI, automatically generated and automat ically costed schemes which were
    generated by reliability modelling total £87.820m 54%
   £217.4 (41%) of the sewerage service programme deri        ves from manually
    generated needs/solutions (£75.401 Infrastructure and £142.0 Non-infrastructure)
   Some e xpenditure has been re-allocated since the DBP; t he items tra nsferred
    were reported as Quality enhancements in th   e DBP and are shown      in the
    company commentary as exceptional items amounting to £28.2m.

Sewerage
   We would highlight,    and Anglian Water has confirmed, that there is n         o
    expenditure included in B3 (Maintaining service and servi ceability) for AMP5 to
    address sewer flooding caused by inadequate hydraulic capacity.

Sewage Treatment Works
   At the review meeting the need for a ‘turn-down’ factor for STW was discussed .
    At the time Anglian Water was reviewing the options available and we challenged
    the company to set out the factors t hat were used, the calculation to d erive the
    adjustment and the ba sis for the calculation including any a ssumptions made in
    or implied by the approach adopted
   Anglian Water carried out a manual review of STW schemes identified by Asset
    Planning and added 18 solutions at a total value of £16.8m that were constrained
    into Investment Manager
   Anglian Water has inclu ded the delayed AMP4 scheme at Leighton Lin slade a t
    £15,219k as a constrained input to Investment Manager.

Sludge
   The Company explained that there are constraints available for sludge but non e
    have been applied (ie set) for the bi osolids programme. Th e required output for
    ‘biosolids compliance’ is “satisfa ctory disposal”. The sludge driver constraints
    could not b e applied because the mix of asset s and inter-dependence between
    STWs and sludge created a number of modelling problems.
   A combined analysis has been undertaken for sludge and sewage treatment and
    expenditure allocated between the two investment areas.


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Part B3 Maintaining Service and Serviceability                    Restricted - Commercial

Sewage pumping stations
    For sewage pumping stations          Anglian Water’s risk based a     ssessment
     demonstrates that marginal cost exceeds marginal benefit at the point where the
     risk based expenditure is £104m. Optimal investment is determined by the
     inflection po int on a gr aph of reward 1 against expenditure modelled over the
     AMP5 peri od. Expenditure at th is level is clearly out of step wit h AMP4
     investment at £43,302k, by a facto r of approximately 2.4. The modelled 140%
     increase ca nnot be supported as evidence of the need for an immedi      ate ste p
     change in e xpenditure. Instead the Company p roposes to phase in the required
     additional expenditure per AMP period (£61.3 07m) over f our AMP period (20
     years) £15,330 per AMP or £1.02m pa.


Historic expenditure
    The total infrastructure expenditure on the sewerage service which is based on
     historic spe nd is £75,4 01k (46% o f the total o f £163,221k). We con sider this
     proportion to be substantial but not outside reasonable bou nds. At the time of
     the DBP we argued th at the expe nditure fell outside the risk based approach.
     Anglian Water has gone to consider able effort t o link th is investment to service.
     The company has linked the risks a ssociated with failing to make the investment
     with service measures. We accept that this is an impro vement compared to the
     draft busine ss pla n. I t has demonstrated that in most ca ses the investment is
     justified on cost benefit grounds; however so me of the assumptions required to
     link investment to service are subjective.

Section D – Management and general
    Investment i n M&G a mounts to £193.6m comp ared to the forecast for AMP4 of
     £199.2
    The Compa ny has tak en a detailed bottom up approach to the pl anning of
     management and general reported within capit al maintenance. Expe nditure in
     each of the main investment areas has mostly been identified at the pr oject level.
     A detailed approval process is in place und er the ausp ices of the Strategic
     Delivery Group (SDG) which acts under delegated powers from the Board.
    Key develo pments within IT durin g AMP2 may now be due for replacement
     including th e enterprise resource p lanning syst em (SAP) f irst implemented in
     1998, PC renewal and the outsou rcing of IT services. Recent invest ment has
     included substantial enhancements to SAP a        nd the mo ve to establish the
     Operational Manageme nt Centre a s part of a wider business transf       ormation
     project.
    The Company has faced the following key issues:
      managing its carbon foot-print
      choosing when to leapfrog technology developments
      progressive withdrawal or replacement of BT guarantees for se           rvices,
       technologies and protocols (eg PSTN service for the last mile to telemetry out-
       stations as performance guarantees are for voice and BT will not cover data)
      re-alignment of the electromagnetic spectrum.




1
    Reward = Benefits - Costs

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Part B3 Maintaining Service and Serviceability                   Restricted - Commercial

Section E – Asset management assessment
   The following points    refer to the UKWIR Asset management planning
    assessment process ( AMPAP) an d Ofwat’s Asset management assessment
    (AMA) that followed the DBP
   Although we are not aware of any specific reporter guidance, the company asked
    SMC to provide commentary on its AMPAP self-assessment
   The company reports its findings in Appendix 1 of its Part B3 commen tary, and
    our observations are recorded in Section E of this report
   We observe the company has not employed t he UKWIR spreadsheet tool wit h
    potentially hundreds of component entries; but has used a pragmatic ‘short-form’
    grouping of: High level areas, components an d sub-services, and no weightings
    have been applied
   The Anglian Water self-assessment contains few direct references to the detailed
    UKWIR evidence document. However, we have checked a small random sample
    of examples and in each case found the reported scores appear appropriate
   Anglian Water has effe ctively conducted a ‘redu ced’ self-assessment combining
    AMPAP and AMA approaches
   The AMPAP and AMA scoring me thods are n ot entirely coincident. We believe
    this has ca used the company to score itself arguably low in some instances
    where it has aimed to satisfy the AMA requirement to ‘e xceed expe ctations’ in
    order to achieve a sco re of 5. It is not entire ly clear whose expectations ar e
    referred to, but we believe Anglian Water has assumed Ofwat
   We conclud e the Anglian Water a ssessment scores g enerally appear realist ic,
    and are in some cases perhaps cau tiously low. Howe ver, we believe t he scores
    reflect the unlikely event that any co mpany would in reality ‘exceed exp ectations’
    and score five in all categories.




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        Final Business Plan 2009                                                      Anglian Water
        Part B3 Maintaining Service and Serviceability                      Restricted - Commercial


1       Section A – Introduction and common matters
1.1     Company Approach
        Anglian Water has base d its PR09 Final Business Plan (F BP) capital maintenance
        proposals o n the Asset Plus syste m it employed at DBP. This sect ion discusses
        those aspects of Asset Plus common to both the water and sewerage services.

        Anglian W ater has e mployed Asset Plus           to provide a capita l maintenance
        programme that aims to ensure levels of service are maint ained throu gh the pla n
        period. It uses asset level deteri oration models and site level reliab ility models
        wherever possible to mo del risks to service. It has the cap ability to alt er the levels
        of service, which may either be im proved or allowed to de teriorate, where justif ied
        by cost benefit/willingne ss to pay. There are no proposal      s in the pla n to allow
        service deterioration and this is consistent with customer research.

        Anglian Water’s approach has been developed to align with industry-wide initiatives
        such as Capital Maintenance Planning – the Common         Framework (CMPCF -
        UKWIR) and take account of Asset Management Planning and Assessment Process
        (AMPAP – UKWIR).

        For the FB P, Anglian Water has carried-out an AMPAP assessment of its over all
        approach to asset management planning, and reports its f indings in Appendix 1 of
        the Part B3 company commentary. Anglian Water asked SMC to review its AMPAP
        assessment, and we include our observations in Section E of this commentary.

1.2     Methodology

1.2.1   Introduction
        Anglian Water’s objective is to understand the impact on service of any failure of the
        company’s assets. Historically the com pany, and much of the industry, has used
        condition information to determine the time for asset replacement.

        Anglian Water’s aim is where possible to model the optimum interventi on by linking
        future asset performance, and its impact on service, to present condition through the
        expected deterioration in the absence of any intervention investment. Anglian Water
        converts the level of risk into monet ary terms to reflect the direct and indirect cost s
        to the company arising from any failure. In essence:

        Risk (£) = (probability of asset failure) x (probability of that failure affecting service) x
        (cost consequence of failure)

        We note a ll needs (including pr oposals for Supply de mand bala nce, Quality
        Enhancements and ELOS) are pa ssed throug h the Asset Plus optimiser, then
        carried through, where cost beneficial or constrained in, to the investment plan.

        Anglian Wa ter intends to explore the possi     bility of usi ng ‘Asset Plus’ in an
        operational sense in the future, and expects to make incremental improvements fo r
        future Periodic Reviews.

        The company approach distingu ishes between infrastructure and non -infrastructure
        assets and between the water and sewerage services. It furt her divides between its
        deterioration/risk model based approach (employed where ver possible) and the
        manually generated assessments of investment need based on appraisals, hist oric

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expenditure and estima tes or quot es. We no te the asse ssment of p re and post
intervention risk, and the links betw een asset failure and the probability of its eff ect
on service ( service impact modellin g), are common features of both a pproaches.
The same process is followed for water and sewerage.

Solutions b ased on risk models      assume most asset s a t equipment level are
replaced with like for like new equivalent items ( concrete structures are assumed to
be refurbished) For manually       modelled solutions individual policie s determine
whether particular plant items are refurbished or replaced – for example level control
equipment is always replaced rather than refurbished.

Fundamentally, whether solution s are aut omatically modelled or manually
generated, the AW risk-based approach seeks to assess in virtually all cases the:
   Probability of asset failure
   Probability that asset failure will affect service
   The consequence of that service failure
   Direct costs to Anglian Water of such failure
   The associated indirect costs (social, environmental and carbon)

We firstly provide a generic overview of the AW process, an d then follo w with fuller
descriptions and specific examples for both water and sewerage.

The following diagram i s an SMC a ttempt to provide a simplified explanation of the
AW maintenance planning approach, and show how Asset Plus interacts with other
elements of the company systems.

Most compo nents of the diagram are self evident, but it is perhaps helpful to note
‘optimisation rules’ comprise for example:
   NPV discount rate
   Externality values (e.g. carbon)
   Planning horizon
   Programme constraints (e.g. total value, output performance etc)

We also not e the company refers to the four lower process boxes in our diagram
(AW cost models, risks/solut ions databas e, optimiser and portfolio of plann ed
interventions) as the ‘Investment manager’.




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Final Business Plan 2009                                                                             Anglian Water
Part B3 Maintaining Service and Serviceability                                             Restricted - Commercial




                         SMC Simplified view of Anglian Water’s planning process


                                                                        Asset data warehouse:
                                   Specific asset
                                      surveys
                                                                            Underground: G Technology

                                                                            Above ground: SAP




                                             Asset Plus:
                                                                                       Asset              Deterioration
                                                                                 configuration &             models
         AWS                                                                     links to service
         Operations &
         Asset Planning:

                                                                 Manually generated:                   Auto generated:
         Needs
                                                                   Risks/solutions                      Risks/solutions




          Specific external
             cost data
                                                     AWS Cost Models                     Database of all risk/solutions fully
                                                                                                       costed

         Internal cost data



                                                    Optimiser:
                                                           Operates at scenario level on snapshot of risks/solutions

                     Optimisation
                           rules


                                                          Portfolio of planned interventions prioritized by cost benefit




                                                                            No                            Programme:

Implementation of mandated
        schemes                                                                                             Examined for service

                                                             Satisfactory?                                   risk and affordability

                                       Yes




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1.2.2   Development of solutions (W&S)
        As mentioned earlier, most solutio ns aut omatically derived from risk models are
        based on t he direct r eplacement of the failed equipment level asset with an
        equivalent capacity unit. The e xception is con crete struct ures that are assumed
        refurbished. However for manually generated interventions Anglian Water uses first
        principle assessments of options suitable to satisfy ident ified need s. For the se
        manually developed solutions it is usual to develop a range of different options each
        carrying sp ecific cost s and final risk pos  itions for co mparison in Investmen t
        Manager. T he optimum solution for the replacement of do mestic water meters was
        assessed in AW’ Economic Replacement Point Model for Domestic Water Models.

        Solutions a cross all investment areas are effectively derived from th            e following
        sequence of steps:
           Identify asset need (from risk models or specific assessment)
           Develop solution options
           For all nee ds and so lutions - a ssess pre and post intervention risks f or each
            applicable service measure
           Develop all direct costs (capital, operating, failure etc)
           Develop all indirect costs (social, environmental and carbon)
           Create snapshots of needs and solutions for optimisation in scenarios
           Define optimisation rules for scenario
           Examine the opportunity to group interventions for efficient delivery
           Adjust for other programmes if applicable

        We understand the above process also applies to enhancement investment areas.

        Anglian Water compiles a list of      possible solutions to  make avail able to the
        Investment Manager. Some solutions are ge nerated aut omatically (e.g. those for
        individual pipe lengths from risk models) and others generated manually (e.g.
        specialist n on-infrastructure assets and M&G). For each solution th    e optimiser
        considers:
           The current and the increasing risk over time in the absence of any intervention
           The cost of the proposed solution
           The cost of failure
           The benefits of the solution
           The post-solution risk position.

1.2.3   Service measure objectives (W&S)
        At our re view the co mpany presented an analysis of historic service measures
        reported in t he June Ret urn on which it intend s to base it s target service measures
        for 2014-15. The targ et measure s are those the company believes must be
        achieved to deliver stable serviceability.

        We note th e measures selected a nd the targe t levels ado pted for tho se measure s
        have a critical inf luence on the o verall investment programme. Th erefore the


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        company h as defined its ‘plann ing objective’ as a cost effective approach (i               n
        common framework terms) but based on cost benefit analysis.

        Infrastructure
        Pipe failure are bursts on the water service; blockages, collapses and bursts on the
        sewerage service. The company u ses modelling to predict the numbe r of failures
        and assess their impact. For sewerage, Anglian Water maps the ‘pathway’ (ie the
        course the sewage takes) and ‘receptor’ (the property, area or watercourse finally
        affected by the sewage) to assess the       service impact of bursts and collapses in
        terms of pollution and internal/external flooding.

        We note Anglian Wate r does not anticipate committing capital to infrastructur e
        schemes b ased sole ly on modelled data he ld in Asset Plus, or t he resulting
        optimised investment programme, without ca rrying out f urther appr aisal. For
        sewerage - CCTV inspection, for example, would form part of the development of a
        capital solution.

        Non-Infrastructure
        Anglian Water has carried out three stages of activity to en able a proportion of its
        non-infrastructure maintenance sch emes to be automatically modelled for the plan.
        This is referred to in the earlier diagram as ‘asset configurat ion and links to service’
        and comprises the following:
           Deterioration curves were developed by consult ants for ‘eq uipment level’ asset s
            (e.g. pump, motor, val ve etc) taking account of Anglian Water’s o perational
            experience of likely equipment life and failure/repair histories for different items of
            equipment. We note that Weibull t ype deterioration curves have been adopted
            using a variety of curve shape coefficients to b est represent specific e quipment
            deterioration character istics, and calibrated to reflect Anglian Water ’s exper t
            opinion and actual data.
           The company then runs a Monte Carlo simulation to lin k the otherwise complex
            possible combinations of equipment failure to service failure. This takes accoun t
            of site conf iguration de tails (e. g. d uty standby or single item etc), to model
            different co mbinations of coin cidental equipm ent failure s and estab lish t heir
            effects on the process (e.g. pumping station, treatment works element etc).
           Expert judg ement was used to determine the effects on service resulting from
            each proce ss failure mode. This was done t hrough a series of wor kshops to
            obtain a series of appropriate “Process rules”.

1.2.4   Process
        Asset Plus progressively selects solutions fro m a ranked list to restore the risk
        profile to a position that is better th an the pre- solution risk. In order to achieve this
        at least cost it is conceivable that t here are lesser benefits from replacing the third,
        fourth or subsequent piece of equipment that o perates in parallel with other identical
        equipment. The methodology is d esigned to assess the marginal benefits. Fo r
        example, the reduced benefit may be becau se the works as a whole is judged
        capable of operating with one item/stream out of service.

        Reward/benefit:
        Asset Plus calculates cost/benefit b y evaluating the ‘reward ’ asso ciated with each
        solution. F or example three solutions are evaluated for e ach infrastr ucture need :
        reline, repla ce or clean (jet & flush). Reward, rather than b enefit, is used and the



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solution that delivers the maximum ‘reward’, within specified constraints, is selected,
where:
                              Reward = Benefit - Cost

The expected cost of failure for each pipe     length or piece of equipment is
determined by multiplying the e xpected service failure frequency b         y central
tendency costs for each ‘service impact’. This is effectively the benefit side of the
above equation.

The benefit is evaluated in monetary terms. T he clean-up costs are evaluated as
avoided costs and adde d to the be nefit determined by willi ngness to p ay (WTP).
Only Anglian Water’s private (direct) costs of clean up are evaluated as avoided
costs: the cost of emergency repairs, customers’ clean-up and insured costs are not
included in this analysis.

We note 95 % (by value ) of the AW AMP5 overall capital maintenance programme
has been subject to fu ll co st bene fit analysis including externality co sts ( social,
environmental and carbon)

Optimiser
Individual schemes ca n be constrained in,       or exclud ed from the optimise d
programme, and we note 15% (by value)            of the AW AMP5 o      verall capita l
maintenance programme has b        een constr ained directly into th  e final pla n.
Otherwise, the optimiser selects the combination of schemes that delivers maximum
reward. Overall investment limits can be set for an investment area or sub-set or fo r
the programme as a whole and as explained later, target service meas ures can be
set.

The Optimiser can also select schemes to meet particular service measures. Our
understanding is that pr oposed investment can be increased or decrea sed and the
resulting change in pe rformance against service measures can be modelled.
Similarly th e target performance against in   dividual service measu res can be
specified and the optimiser will select schemes that deliver the target level most cost
effectively.

We asked the company how         Asset Plus determined long-term most economic
solutions that include appropriate replacement periods for ICA and M&E assets. We
were shown that an essential input to the system ensures solution elements are
identified as either: ICA, M&E or civi l assets, which are then automatically replaced
at appropriate periods in the 25 year NPV a       nalysis. We note the replacement
periods assumed are:
   ICA - 7 years
   M&E - 15 years
   Civil – usually 50 years

We are satisfied the process satisfactorily assesses and compares long term overall
costs.

Scenarios:
We specif ically examin ed the AW approach t o scenario s during our review and
include more detailed S MC observa tions in the commentary for C5. However, the
following notes summari se the reasons for optimising at scenario level and how the
different scenarios are combined to form the preferred plan.

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      Asset Plus contains many thousands of Needs and Solutions and we understand it
      would be impractical (in computing time and complexity) to optimise the entire 2 5
      year programme in one session.       The comp any has accordingly d eveloped the
      concept of ‘Snapshots’ where ma nageable components of the programme are
      separately optimised, t hen later combined into a preferr ed plan. The process
      optimises ri sks, solutions and a ssociated tot al cost s o ver a 25-year period.
      Scenarios are based on a ‘snapshot’ of needs and associat ed solutions, and could
      for example comprise all ‘water service non-infra structure’ solutions. The snapshot
      approach can also be used to h elp make comparisons with histor ic spend for
      specific elements of the overall programme.

      The company can select different outputs from scenario optimisations, for example:
         A programme of all AMP5 cost beneficial solutions
         A programme of AMP5 solutions to maintain service levels
         The most cost/beneficial AMP5 programme of           solutions f or a state d maximum
          cost.

      For each scenario, the company ca n consider programme cost, the predicted effect
      on service, the degree of cost/ben efit and ma ke comparisons with historic spen d
      and service.

      Links to historic data
      The Asset Plus system does not at this stage employ a direct link between historic
      trends in expenditure a nd historic p erformance. We do not believe the company is
      readily able to link the two and therefore able to challenge historic data in the wa y
      that Ofwat appears to envisage. However, we are satisfied that historic expenditure
      data are employed in costing models, and th e company t akes accou nt of historic
      trends in performance and serviceability.

      During the development of Anglian Water’s risk models for gravity sewers and water
      mains, the company kept back a proportion of the dat a and u sed 80% of th e
      available data in its stat istical analysis. It was a ble to validate the relationships that
      were derived against th e remaining portion of t he whole dataset. With less data for
      sewage rising mains t he whole d ataset had to be used to derive t he expected
      frequency of failure, having already established the principle for gravity sewers.

      A key point of interest is the exten t to which Anglian Wat er is able t o predict th e
      actual assets (i.e. pipe lengths or it ems of equipment) in which it inten ds to invest.
      The company has confirmed that it does not commit capital expenditure without
      further investigation o f the actual, as distin    ct from modelled, co ndition and
      performance.

1.3   Validation of forecast investment programme
      At our revie w of the An glian Water’s DBP we commented it would be h elpful if past
      “performance” could be correlated with historic investment in some asset areas. We
      note that for the FBP, the company commentary contains additional information that
      specifically demonstrates links with appropriate historica l investment, highlighting
      where and why the future is expected to be different.

      We challen ged Anglia n Water to explain how it ensu    red an overall optimal
      programme was obtained when it combined the outputs of a number of different
      scenarios. We were told the com pany initially determine d appropriat e levels of

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      expenditure for each separate scenario by considering remaining risk to service and
      proposed e xpenditure compared with historic and custo mer’s willin gness to p ay.
      The different scenarios were then simply summated to obta in the final programme.
      The company accepts this        could theoretically lead to   a sub-optimal overall
      programme where sch emes in one scenario could perha ps be inclu ded at the
      expense of others in a different scenario th    at might be marginally better valu e.
      However, the company believes the level of pot ential sub-optimality is unlikely to be
      material because consistent judgements are applied to the different sce narios, and
      solutions are prioritised by cost ben efit meaning schemes at the margin will tend to
      have lower impact.       We agree t hat any su b-optimality resulting fr om scenario
      summation is unlikely to be material.

      We further challenged the comp any to e xplain why it s AMP5 programme i s
      effectively limited by pragmatic jud gement based on histor ic expenditure compared
      with an unconstrained value driven programme. The co mpany believe s this could
      either be because previous programmes were insufficiently funded, or because the
      guidance fo r assessing benefits is somewhat g enerous, being relatively new. We
      agree with this latter explanation.

1.4   Methodology developments since PR04
      Following th e Final Det ermination at PR04, the company undertook    an in depth
      review of its approach t o asset management. Building upon the asset management
      approaches developed for PR04, it has introduced its Asset Plus approach to asse t
      management planning as described earlier.

      The approa ch is forward looking; it balanc es costs, benef its, service p erformance
      and risk, an d we judge it to meet the principle s of the common framework. Th e
      company te lls us Asse t Plus is alr eady being used for      day-to-day i nvestment
      planning in the busine ss. However, the syste m is relativ ely new, so there is no
      history of using Asset Plus in a ‘business as usual’ context.

1.5   Future developments
      The company is considering the        addition o f refurbish ment options for non           -
      infrastructure assets, and the analysis of historic trends within Asset Plus.

1.6   Final plan methodology proportions
      The company has base d 48% of its overall AMP5 maintenance plan e xpenditure on
      risk models. For non- infrastructure asset s th ese models create a single solutio n
      option based on like-for -like rep lacement (or refurbishment in the ca se of concrete
      structures) at equipment level. For infrastr      ucture asse ts, up to three options
      (replace, refurbish or jet/flush) are generated.

      For the automatically generated infrastructure element of its plan, Anglian Water has
      developed relationship s between pipe attribute s and histo ric failure s to develop
      failure prob abilities. T he relationships have b een developed from Anglian Wate r
      data by co nsultants a pplying ‘evolutionary polynomial regression’ technique s.
      Service Failures have been mod         elled using flood route mapping and tracing
      techniques to identify interrupted properties.

      For the automatically generated non-infrastr ucture element of its p lan, Anglian
      Water predicts asset deterioration rates using Weibull curves. These curves predict
      increasing probability of asset failure with time, a nd were developed by consultant s
      in discussion with experts in the business. In addition, the company has modelled
      the likelihood and impact of service failures resu lting from failing assets or groups of

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      assets. We are satisfied good practice has been applied to take account of different
      characteristic rates of deterioration expected for different types of asset, by adopting
      different shape coefficients and cu rve lengths. However, we note the deterioratio n
      curves are relatively new so there has       been limited opportunity for validation or
      sensitivity tests to be carried out; also no assets have been assigned        a minimu m
      life. However, we are satisfied th is is unlikely to materi ally affect the proposed
      AMP5 capital maintenance programme, and we support the AW on going plan to
      improve the calibration and therefore robustness of its deterioration assumptions in
      line with actual failure data over time.

      43% of the AMP5 pro gramme is manually g enerated from specific maintenance
      needs where the proba bility of failu re, the like lihood this wi ll impact ser vice and the
      consequent impact on service, are all ascerta ined. This po rtion of the programme
      generally contains several solution options for each risk/need.

      4% of the AMP5 programme i s developed from Anglian Water                      ’s Economic
      Replacement Point Model for Domestic Water Meters.

      The remaining 5% of    the overall AMP5 maintenance       programme comprise s
      schemes where no risk/benefit analysis has be en carried out, for example some of
      the schemes in Hartlepool.

      Planning objectives, direction and delivery
      (Ofwat Sections 1 and 6) WI, WNI, SI & SNI
1.7   Background
      Anglian Wat er’s overall planning ap proach to b ase mainte nance aims to optimise
      the long term whole life cost and benefit of reducing un     acceptable risks, whil st
      taking account of the need to maintain stable service levels and consider customer’s
      willingness to pay.

      We comment on the ov erall AW planning approach and systems in this section and
      discuss any sub-service specific elements in Sections 2 (water) and 3 (sewerage)

      Response to Ofwat guidance for Ofwat Sections 1 and 6

1.8   Board involvement
      We have obtained our view of AW Board in volvement from: our Part B3 revie w
      meetings, our general knowledge of company management and specific elements of
      Appendix 1 of the company commentary.

      In summary we observe:
         The company has a Director of Asset Management
         The PR09 Executive Co mmittee provides papers to the Operating Executive and
          to the Anglian Water Services Limited Board – as well as copies to th e Anglian
          Water Group plc Board. The limited company board itself reports to, and informs,
          the Group Board.
         The PR09 Executive Committee is chaired by the CEO o       f Anglian W ater and
          meets at least every two months, and more frequently as required
         The PR09 Executive Committee comprises the finance directors of Anglian Water
          Services Limited and Anglian Water Gro    up plc, th e Regulation, Asset


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           Management and Cu stomer Service Directors together with the PR09
           programme manager and the Chief Operating Officer of Anglian Water Services
          The focus of the Committee is th e resolutio n of issues r aised by th e Periodic
           Review Group, this enables issues to be raised to Board level if necessary
          The Periodic Review Group mee ts weekly and comprises: The directors of
           Regulation, Finance  and Asset Management, head      of Strate gic Asset
           Management, PR09 Strategy Mana ger, PR09 Programme Manager, Strategic
           Investment Managers (W&S) the Cost Manager and others as appropriate
          The Regulation Directo r of Anglian Water produced a         paper, reviewed and
           updated at recent Board meetings that explained Ofwat’s re quirements for sign-
           off and individual director declarations. Appendices to the pa per explain how the
           Board has satisfied it self “with regard to the Final Busin ess Plan” and contain
           confirmation statements required from the Board.
          Individual parts of the plan have been signed        off by the director respo nsible to
           ensure quality procedures have been met
          All sections of the final plan have been signed-off by the director in charge of plan
           development and thereafter by          the Directors of Reg     ulation and Asset
           Management before seeking Board approval.

       We are therefore entirely satisfied the Board h as had substantial inpu t to both th e
       planning process and the final plan.

1.9    Leadership and commitment to achieving best practice
       Our appraisal of the commit      ment to company asset management p               olicies and
       strategies shows:
          The policy of   maintaining (or improving) levels of service, is widely an        d
           consistently understoo d by all    staff we h ave encountered in t        he asset
           maintenance planning process
          A satisfacto ry level of resource allocated to asset data collection             and the
           development of risk based maintenance modelling
          Considerable commit ment to the consideratio n of social, environme ntal and
           carbon costs in company planning models since PR04
          Full support for the Asset Management Planning Assessment Process (AMPAP).

       The company has demonstrated significant co mmitment to achieving best pract ice
       in relation t o the UKWIR ‘Common Framework for Capital Maintenance Planning ’
       and its approach to cost benefit analysis.

       We conclude the company has enjoyed e ffective leadership and made considerable
       commitment to achieving best practice regarding asset maintenance planning.

1.10   Integration throughout the business
       We can confirm that although there are necessary detail differences, the overall
       approach to assessing the risk of a sset failure and thus service, is common across
       the water and sewerage services for both infrastructur     e and non-infrastructur e
       assets. In addition, all so lution opti ons (whether automatically or manually
       generated) are then subject to a common optimisation process.

       We conclude there is a high level of consistency throughout the business regarding
       the AW app roach to asset manage ment planning and cost estimation. Howe ver, at

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       the time of our review, the Asset Plus sy stem was not being used t o monitor capital
       implementation and automatically capture sche me completi ons to revise business
       risks. We understand the company proposes to develop these features before the
       start of AMP5.

1.11   Planning objective
       The AW business objective is to provide stable serviceability to its custo mers based
       on historic trends using cost benefit to optimise investment.

       We spent much time at our DBP review seeking to clarify the objective used and the
       extent to which it aligns with the Capital Maintenance Planning Common Framework
       (CMPCF). The CMPCF clearly identifies that a choice is to be made between th e
       cost benefit and cost effectiveness objective.

       Earlier we stated the company obtai ns different outputs from scenario optimisations,
       for example:
          A programme of all AMP5 cost beneficial solutions
          A programme of AMP5 solutions that just maintain service levels
          The most cost/beneficial AMP5 programme for a stated maximum expenditure

       In each case the company is able to consider: pr ogramme cost, the predicted effect
       on service, the degree of cost/ben efit and ma ke comparisons with historic spen d
       and service.

       We challen ged the company to e xplain exact ly how it s elects a preferred final
       maintenance programme of scheme solutio ns f rom its sce nario output s. We were
       told that for each programme component scenario:
          Schemes that are not cost beneficial or not risk assessed but deemed ‘must do’
           (approx 15% of total CM by value) are constrained into the final programme
          The remainder of the FBP capital maintenance programme is built by selecting
           the most cost beneficial combination of sche mes predicted to be capable of
           maintaining service levels
          If this is de emed unaffordable co mpared with historic e xpenditure, then fewer
           cost beneficial schemes are considered for a particular scenario
          Then summate the components

       In our com mentary on the Anglia n Water D BP we exp ressed some uncertaint y
       regarding how different elements of cost (capital,          opex, ca rbon, social,
       environmental and failu re) were used in the       optimiser and which costs were
       subsequently carried forward to t he planned programme. We challenged th             e
       company to clarify this for the FBP, and ensure that the AW maintenance planning
       approach ta kes account of the effe cts of: carbon, socia l a nd environmental cost s
       and customer’s willingn ess to pay, only in the sense of prioritising ele ments of its
       programme and deciding which schemes should be include d in the final plan. We
       are now sa tisfied the scheme co sts ta ken f orward into the AMP5 programme
       correctly exclude these externality costs.

       We are satisfied the AW planning approach uses cost benefit analysis to determin e
       the least co st programme of activities which will maintain existing service. The
       existing ser vice level is established from historic levels a chieved and uses both
       internal and Ofwat serviceability indicators.

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       This means the compa ny approach meets the cost e ffectiveness obje ctive of the
       ‘Capital maintenance planning common framework’ (CMPCF).

1.12   Historic trends
       The Asset Plus system does not at this stage employ a direct link between historic
       trends in ex penditure and historic p erformance. However, we are satisfied histor ic
       expenditure data are employed in cost models. In addition, we are satisfied the
       company h as analysed historic tre nds in both expenditure and service, then use d
       the information to infor m its final AMP5 plan by setting rules for th e Asset Plu s
       optimiser.

1.13   Adequacy of capital maintenance in AMP4
       Please see specific commentary later in the water and sewerage sections.

1.14   Service indicators
       We are satisfied the ind icators used by the company to measure service and inform
       future maintenance requirements, are suitable.

       The company has ident ified several service ind icators for u se in its forward looking
       risk based approach in addition to those used by Ofwat. Some of these are already
       reported in the June Return but may or may not be employed by Of wat to monitor
       serviceability. A review of each could perhaps usefully be the basis of a separate
       club contra ct. The Co mpany also disti nguishes between its service performance
       indicators listed below and asset performance indicators (eg bursts).

       Sewerage
       As an industry there is some uncertainty as to what the se rviceability measures for
       many aspects of the sewerage service shou ld be. We have identified the following
       indicators used by the company:

       The company uses the following indicators to assess service benefit:

       Wastewater
       Sewerage: Infrastructure
          Number of incidents - sewer blockages
          Number of incidents – sewer collapses
          Number and severity of pollution incidents
          Areas externally flooded
          Properties flooded

       Sewerage: Non-infrastructure
          Wastewater compliance (per failure) for BOD 5 , ammonia and SS
          Pollution incidents (category 1 and 2)

       Water
       Water: Infrastructure
          Supply interruptions
          Number of incidents - discolouration

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   Number of incidents - taste & odour
   Number of incidents – white water
   Water – flooding

Water Non-infrastructure
   Number of interruptions to supply
   Number of cryptosporidium failures
   Number of PCV incidents
   Number of aesthetic, taste and odour incidents
   Number of macroinvertebrate incidents
   Number of discharge consent failures
   Number of gas escapes
   Number of chemical spillages

Approach to asset management planning by sub-service




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2     Section B Water Service

      Summary
         The proposed total A MP5 water service F BP programme totals £479.2m
          (excluding M&G) and this (excluding exceptionals) is 7% higher than the forecast
          AMP4 out turn
         £171.6m (3 6%) of the water service progra    mme derive s from automatically
          generated needs/solutions (£89.5m Infrastructure and £82.1m Non-infrastructure)
         £307.6m (64%) of the water service programme derives from manually generated
          needs/solutions (£140.2 Infrastructure and £167.4 Non-infrastructure)
         Only 4% of the water service programme was not assessed for risk or benefit and
          is considered ‘must do’ (of which Hartlepool is approximately 1%)
         From our examination of the company methods and assumptions supporting auto
          generated schemes ( both infra and non-inf ra), we co nclude the planning
          approach appears sound
         From our examination of the vari ous company metho ds and assumptions
          supporting manually g enerated schemes (both infra and non-infra), we again
          conclude the approach appears sound.
         We examined a number of scheme s (infra and non-infra) selected at r andom for
          more detailed examination and visit ed the non-infra sites. We found all schemes
          were based on sound risk, benefit and cost data and employed rational and clear
          links with service
         Auto generated infrast ructure sch emes consider the three obvious solution
          options (replace, refurbish and flush), but tho se for non-in fra almost always rely
          on the single option of replacement with new li ke-for-like a ssets at eq uipment
          level. Man ually generated schemes mostly         consider a realistic n umber of
          different solution options.
         The company has ident ified exceptional water service sche mes totalling £56.6M
          in its FBP

2.1   Structure of water service commentary
      It should be noted that the followin g Ofwat sections are co vered in the preceding
      Section A:
                  Ofwat section 1 - Planning objectives, direction and delivery
                  Ofwat section 2 – Approach to asset planning by sub-service

      This se ction of our commentary covers Ofwat section 3 (b usiness ca se by asset
      group) and is structured as follows:
         AMP4 performance to date
         Business case by asset group - Water infrastructure (WI)
           WI Service measures
           WI Response to draft plan feedback
           WI Response to Ofwat guidance
           WI Programme derivation
           WI Investment summary
           WI Scheme examples examined



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         Business case by asset group – Water non-infrastructure(WNI)
           WNI Service measures
           WNI Response to draft plan feedback
           WNI Response to Ofwat guidance
           WNI Programme derivation
           WNI Investment summary
           WNI Scheme examples

         Water service challenges

2.2   Review of AMP4 progress to date –water service
      We have    reviewed t he compa ny’s water service maintenance investme            nt
      performance indicators so far in AMP4 and summarised our findings in t he following
      table.

      Summary comparison of Ofwat AMP4 water service performance indicators

      AMP4 performance compared with PR04 FD:
          Service indicator          2005-06            2006-07             2007-08
                                     Plan    Actual     Plan    Actual      Plan    Actual
          DG2 Props at risk of low   1,150   653        1,075   689         1,000   651
          pressure
          DG3 Unplanned supply       2,523   5,492      2,523   1,488       2,523      588
          interruptions > 12 hrs
          Mean zonal compliance      0.3     0.2        0.3     0,2         0.3        0.3
          for iron (%)
          Leakage                    216     214        213     202         211        209
          Burst mains per 1,000              139                123                    112
          km
          % of determinations at             0.02               0.03                   0.04
          WTW containing
          coliforms
          % of bacteriological               0.05               0.05                   0.06
          samples at Service Res’
          failing


      Ofwat, in a letter date d 12 Augu st 2008, confirmed its assessment of Anglian
      Water’s serviceability as ‘stable’ for both sub services.

      Anglian Water has achie ved an average of 125 bursts per 1 ,000 km during the first
      three years of AMP4, and this co mpares favourably with the average of AMP1,
      AMP2 and AMP3, of 146 bursts per 1,000 km.

      The key indicators f      or non-infr astructure service ar e the per centage of
      determinations leaving WTWs          containing coliforms an d the per centage of
      bacteriological samples at service reservoirs failing the standard. In b oth cases the
      average performance so far in AMP4 is sub stantially better t han the average of the
      three previous AMP pe riods, altho ugh there appears to be a very slight upward
      trend in the last three years.

      Our appraisal of the planned and achieved water service outputs suggests the
      company a ppears to h ave carried out sufficie nt capital m aintenance to maintain


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        stable serviceability in both water s ub-service areas so far during AMP4. However,
        the company needs to ensure it controls its bacteriological results going forward.

        We understand the Anglian Water AMP4 wat er service out turn expenditure is
        forecast to be:
                                Infrastructure      £187M
                                Non-infrastructure  £207M
                                Total               £394M




2   1




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3   Section C – Sewerage service

    Business case by asset group (SI and SNI)
    (Ofwat Section 8)

    Summary
    Section C Sewerage service
       The propo sed AMP5 sewerage service F BP programme totals £526.2m
        (excluding M&G) which is 12% higher than the forecast AMP4 out turn
       £308.8m (59%) of the sewerage service programme derives from aut omatically
        generated needs/solutions (£87.9 Infrastructure and £221.1 Non-infrastructure)
       For SNI, aut omatically generated and automat ically costed schemes which were
        generated by reliability modelling total £221.138m 61%
       For SI, automatically generated and automat ically costed schemes which were
        generated by reliability modelling total £87.820m 54%
       £217.4 (41%) of the sewerage service programme deri        ves from manually
        generated needs/solutions (£75.401 Infrastructure and £142.0 Non-infrastructure)
       Some e xpenditure has been re-allocated since the DBP; t he items tra nsferred
        were reported as Quality enhancements in th   e DBP and are shown      in the
        company commentary as exceptional items amounting to £28.2m.



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Sewerage
    We would highlight,    and Anglian Water has confirmed, that there is n         o
     expenditure included in B3 (Maintaining service and servi ceability) for AMP5 to
     address sewer flooding caused by inadequate hydraulic capacity.

Sewage Treatment Works
    At the review meeting the need for a ‘turn-down’ factor for STW was discussed .
     At the time Anglian Water was reviewing the options available and we challenged
     the company to set out the factors t hat were used, the calculation to d erive the
     adjustment and the ba sis for the calculation including any a ssumptions made in
     or implied by the approach adopted
    Anglian Water carried out a manual review of STW schemes identified by Asset
     Planning and added 18 solutions at a total value of £16.8m that were constrained
     into Investment Manager
    Anglian Water has inclu ded the delayed AMP4 scheme at Leighton Lin slade a t
     £15,219k as a constrained input to Investment Manager.

Sludge
    The Company explained that there are constraints available for sludge but non e
     have been applied (ie set) for the bi osolids programme. Th e required output for
     ‘biosolids compliance’ is “satisfa ctory disposal”. The sludge driver constraints
     could not b e applied because the mix of asset s and inter-dependence between
     STWs and sludge created a number of modelling problems.
    A combined analysis has been undertaken for sludge and sewage treatment and
     expenditure allocated between the two investment areas.

Sewage pumping stations
    For sewage pumping stations          Anglian Water’s risk based a     ssessment
     demonstrates that marginal cost exceeds marginal benefit at the point where the
     risk based expenditure is £104m. Optimal investment is determined by the
     inflection po int on a gr aph of reward 2 against expenditure modelled over the
     AMP5 peri od. Expenditure at th is level is clearly out of step wit h AMP4
     investment at £43,302k, by a facto r of approximately 2.4. The modelled 140%
     increase ca nnot be supported as evidence of the need for an immedi      ate ste p
     change in e xpenditure. Instead the Company p roposes to phase in the required
     additional expenditure per AMP period (£61.3 07m) over f our AMP period (20
     years) £15,330 per AMP or £1.02m pa.


Historic expenditure
    The total infrastructure expenditure on the sewerage service which is based on
     historic spe nd is £75,4 01k (46% o f the total o f £163,221k). We con sider this
     proportion to be substantial but not outside reasonable bou nds. At the time of
     the DBP we argued th at the expe nditure fell outside the risk based approach.
     Anglian Water has gone to consider able effort t o link th is investment to service.
     The company has linked the risks a ssociated with failing to make the investment
     with service measures. We accept that this is an impro vement compared to the
     draft busine ss pla n. I t has demonstrated that in most ca ses the investment is


2
    Reward = Benefits - Costs

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          justified on cost benefit grounds; however so me of the assumptions required to
          link investment to service are subjective.

3.1   Structure of commentary
      This section of our commentary is structured as follows.
         Background
         Sewerage infrastructure (SI)
           SI modelled by risk based approach with deterioration modelling
           SI extrapolated from    historic spend (AW term this “manually assessed
            expenditure”)
         Sewerage non-infrastructure
           SNI modelled by risk based approach with deterioration modelling
           SNI e xtrapolated from historic sp end (AW t erm this “manually a          ssessed
            expenditure”)

3.2   Background all sewerage service assets (SI & SNI)
      Within both infrastructu re and non-infrastructur e the following sub-divisions have
      been used by the Company:
         Introduction
         Context to our plan
         Investment planning
         Our investment plan

      We have not adopted the same sub-divisions but retaine d the Ofwat section s in
      order ensur e a comple te response to Ofwat guidance a nd to be sure that ou r
      response can be found:
         Section 7 A pproach to asset mana gement planning by su b-service (considered
          above)
         Section 8 Business case by asset group is considered         in this section – we
          consider infrastructure investment (with det erioration modelled) followed by
          infrastructure investmen t extrapolated from hist oric spend (Anglian Water refers
          to this as ‘manually assessed expenditure’)
         Section 9 Further Commentary (considered below).

      Anglian Water has divided its approach between the following asset classes.
         Modelled infrastructure investment at:
            - Gravit     y sewers
            - Pumped         sewers
         Infrastructure investment not usin g deteriorati on modellin g (for manholes, se a
          outfalls and balancing lakes)
         Modelled non-infrastructure investment at:
            -      sewage treatment works
            -      sludge treatment works
            -      sewage pumping stations.
         Non-infrastructure investment not using deterioration modelling:

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      -      sewer structures (ie non-infrastructure) – nil expenditure
      -      sewage treatment works
      -      sludge treatment centres
      -      sewage pumping stations




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      The following tables make comparison with the DBP, SDS and expenditure planned
      in AMP4.

      Capital Maintenance (Base Service)
      Wastewater
      Investment area                                                  DBP          Reallocated       Revised since         FBP
                                                                                    since DBP         DBP
      Infrastructure and non-                                          516.5                                                526.2
      infrastructure

      Investment area                                                  AMP4         SDS               DBP                   FBP
                                                                       Planned
      Infrastructure and non-                                          469.2        526               516.5                 526.2
      infrastructure


3.3   Sewerage breakdown summary
      For the sewerage service, the following diagram summarises the AMP5 programme
      breakdown by value according to: risk assessment, scheme generation, scheme
      cost source, cost/benefit assessment and whether optimised or constrained into the
      programme:


                                                                             Schemes         Scheme cost        Cost / benefit        Optimised or
                                                       Risk assessed
                                                                             generated         source           assessment           constrained in
       Wastewater Capital Maintenance AMP5 Programme




                                                                             59% Auto         66% Costs
                                                                             Generated       obtained from
                 £526,205m (excluding M&G)




                                                                                             Cost Models
                                                                                                                                      83% Selected
                                                                                                                   95% Cost            by Optimiser
                                                         95% Risk
                                                                                                                    Benefit
                                                         Assessed
                                                                                                                   Assessed




                                                                                              7% Bespoke


                                                                          41% Manually
                                                                           Generated
                                                                                            27% Costs from
                                                                                             Historic Costs                              17%
                                                                                                                 5% Not Cost         Constrained In
                                                        5% Not Risk
                                                                                                                   Benefit
                                                         Assessed
                                                                                                                  Assessed




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4     Combined Water and Sewerage
      (Ofwat Sections 4, 5, 9 and 10) WI, WNI, SI and SNI


      Further table commentary
      (Ofwat Sections 4 and 9) WI, WNI, SI and SNI
      We provide below brief comments in relation to salient pieces of guidance an     d
      specific co mmentary on the data t ables where judged app ropriate. At the time of
      our detailed review meetings tables had not been finalised.

4.1   Response to Ofwat guidance
      The company is required to provide any additional commentary (not covered in the
      previous sections) needed to fully explain its business plan for maintaining service and
      serviceability. The reporter shall provide an appraisal of any additional company
      commentary. In doing this, the reporter shall include its views on the impact or
      materiality of the issues raised by the company.
      This section shall also be used to provide specific commentary on the data tables.

      The Company has provi ded high level comment ary in the e arlier sections. We are
      not aware of material issues being raised by the Company in this section.

      Resilience
      If the company is proposing to change the level of maintenance to improve the level of
      resilience, the reporter shall provide a professional appraisal of the company's use of
      future climate predictions to inform their proposals. The reporter shall verify that the
      company has set out the investment associated with improving the level of resilience

      The company’s proposals to addre ss resilience have been considere d in both P art
      B5 and B6 and are presented in Part B6.

4.2   Table B3.1 and 3.2
      The reporter shall challenge the company's specified reference levels to ensure that the
      levels sought by the company can be linked back to its asset observation data, customer
      preferences. The reporter shall also challenge the suitability of the control limits.

      The final choice as to whether to accept the Of wat control limits had no t been made
      by the Company and the control limits were not available to us at the time we carried
      out our review.

      Its programme has bee n planned to include only investme nt which has the highest
      net benefit in order to maintain the Com pany’s service measure framework stable.
      A key assumption is the link between the company’s service measures and Ofwat’s
      serviceability indicators and the requirement to keep Ofwat’s serviceability indicators
      within the st ated control limits. The overall programme may be subject to a ceiling
      on investment (affordability constr aint) but th e most net-beneficial schemes are
      selected wit hin that con straint. We challenged the company's specifie d reference
      levels and control limits, and were told the company does not propose t o challenge
      the Ofwat control limits and refere nce levels set out in the ‘Draft CI   S Baseline’
      document.


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        The reporter shall verify the consistency between the outputs stated in tables A2 and A3 and
        B3.1 and B3.2

        We have ch ecked the consisten cy between the tables and can confirm that the key
        elements are consistent.

4.2.1   Tables B3.3 and B3.4 – base service operating expenditure
        Anglian Water has inclu ded a numb er of special operating expenditure adjustments
        in line 4 of each the tables B3.3 and B3.4. T   hese are detailed in th e Compan y
        commentary – not in the tables.

        The areas of additional expenditure are:
           Pensions contributions to support the defined benefit scheme
           Business rates on both water and sewerage service properties
           Permit fees to be charged by loca l authorities as a result of imple menting the
            provisions of the Traffic Management Act 2004
           EA charge increases on abstraction and discharges
           Employers’ national insurance contributions
        In addition, t he Company has includ ed an incre ase above the JR09 level of energ y
        costs that reflects increases to the ‘non-wholesale’ cost element of electricity pricing.
        The operating expenditure related to enhancement programmes has be en included
        in lines 5 of the tables.
        Compared to the DBP, no claims have bee            n made for increasing bad debt,
        responsibility for pri vate sewers, accounting se paration for competition, the carbon
        reduction commitment scheme CRC, or for additional workforce training.
        We have reviewed th e areas identified in t he Compan y comment ary and th e
        supporting information the Compan y has pro vided and we consider the information
        submitted to have been thoroughly analysed and reliable.

        Blocks A and B

        Confirm or otherwise that the net adjustments to actuals are appropriate in order to provide a
        view of the normal ongoing expenditure of the company. If the company has not provided
        detail on how these have been calculated then the reporter shall provide this information.

        Line 2: net adjustment to base year opex
        The entries are taken from tables 21 and 22 of the JR08 – exceptional items,
        together with the commentaries to t hose tables, which give the atypical items. Th e
        two items p rovide the adjustment for this line on each of tables B.3. 3 and B3.4.
        Exceptional items are zero for bot h services. Atypical ite ms are as given in the
        commentaries to tables 21 and 22. We checked and confirm that the se had been
        correctly transferred to the FBP tabl es. The adjustments are therefore as shown in
        the table below.

        Water service                                    Sewerage service

        JR08 Table 21                  135.253           JR08 Table 22                 193.199

        Atypical                         (1.600)         Atypical                        (3.500)
        Exceptional                       0.0            Exceptional                      0.0

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Adjusted total B3.3            133.653           Adjusted total B3.4           189.699


Block C Adjustments to post 2010 projections
Discuss with the company the nature of the adjustments included in lines 4 to 7 of table B3.3
and B3.4 to determine the appropriate division of duties between the auditor and the
reporter, to make the best use of their expertise. Either the reporter or the auditor should
review each adjustment.
For the adjustments being reviewed by the reporter, he should confirm that any requests for
special operating expenditure adjustments made by the company are fully explained, that
supporting information is robust and, where appropriate, forecasts are consistent with
information submitted in June returns, regulatory accounts and with business plan revenue
forecasts.

Line 4 Special opex adjustments
Pensions
The costs here are solely the costs of ensuring the ability to pay pensions under the
Company’s defined benefit (DB) pe nsion sche me that was closed to new entrants
on 31 Marc h 2002. The scheme is known as the Anglian Water Pension Scheme
(AWPS). Employer contributions int o the def ined contribution (DC) scheme, which
replaced the AWPS for new entran ts, are simply an on-cost to normal employment
costs. We noted that t wo thirds of the fund’ s l iabilities are for pension ers already
retired.

At AMP4 t he determination allo wed annual service costs, which        are compan y
contributions to current employees who joined the sche me before it closed, of
around £20m per year. This service charge must, under the accoun ting standar d
FRS17 (31 March 2006) reflect the NPV of benefits earned by employees during the
period. An glian Water explained t hat whereas the FRS1 7 standard represents a
reasonable calculat ion of the charge to opex,    its assumptions are different (life
expectancy and discoun t rates) fro m those used in the triennial valua tions of the
fund. The se valuatio ns are considered a better tool for estimating the ca sh
contributions required by the scheme to meet all its liabilities.

We asked whether the service charge was e          ntirely for t he DB sch eme and we
understand that for simplicity, and to express all pension costs on a cash basis, the
service ch arge figures quoted include the         cost of t     he standar d employer
contributions for the current DC scheme as well. No increase in base operating cost
is sought in relation to the defined contribution scheme.

The objective of the investment ma nager is to ensure that the fund is able to pa y
pensions t o all existin g and potential pensione rs, but in circumstances where the
fund is deemed insufficient by the scheme actuary, the Company is obliged to make
up the ba lance. At AMP4, the determination allowed a           deficit cat ch up of an
average of £10.7m for each year of AMP4.

The total final determination for the five years was £150.7m (£99.9 m service and
£50.8m catch up contributions). Actual cash co ntributions by the Company over the
period will have totalled £80.4m for service and £65.2m for deficit catch up – a total
of £145.6. These figures include the current year budget and the forecast for 2009-
10. In resp onse to our question, Anglian Water stated that the reduction in service
costs compared to the FD was because of:




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     A reduction of service b enefits – the rule of 85 has been eliminated. This stated
      that anyone whose service with the company in years added to their age reached
      85 could retire on full pension
     A reduction to inflation increments – the maximu m increase in annual sa laries is
      RPI+1%, which therefo re flows through to the employer’s pension contributions.
      With RPI decreasing the cost increase to the fund decreases.

In fact the service costs over the period will have declined by a total of £19.5m offset
by significa ntly larger deficit catch up payments, includ     ing a doubling of the
contribution projected f or 2009-10 up to £20.5m. Note th at the cash service cost
payments al so include employer c ontributions to the defined contrib ution scheme,
for which of course there can be no deficit.

The deficit f unding at AMP4 was intended to recover 50% of the deficit over 1                2
years, with the rate set at £10.7m on average per year.

The triennial valuation in 2005 appeared satisf actory thanks to market recovery in
from 2003 b ut poor again in 2008 for well-rehearsed reason s. At March 2008, the
valuation produced an actuarial fun d deficit of £200m (revi sed again in December
2008 to £480m and with a further formal valuation required by the scheme trustees
at March 2009), which is now the b asis of the Compan y’s claim for additional deficit
funding.

Anglian Water considers it must ensure this deficit at the March 2008 valuation of
£200m is re funded in n o less than 12 years because the actual deficit is so much
larger now and because the Pensions Regulat or sets a g uideline of 10 years for
deficit re covery. The actuarial calculation of t he annual cost of th is funding for
AMP5 is shown in the Company commentary and below:

    £m                         2010-11      2011-12       2012-13    2013-14         2014-15
    Additional deficit catch      9.5          9.2           8.9        8.5             8.2
    up above that allowed
    during AMP4

We checked with Anglia n Water that the AMP4 actual deficit funding payments at a
forecast average for AMP4 of £13.04m per year would be superseded by the new
calculation of the deficit funding for AMP5. It confirmed that at each periodic review,
the actuaria l valuation is reviewed and a new calculat ion of the nece ssary deficit
catch up is made if applicable.

The Company commentary gives de tails of the actuarial valuation. Accor ding to the
commentary, the factors considered have both negative and positive impacts on the
valuation:
     Negative: yields; mortality; post retirement investment return; cash commutation.
     Positive: changes to the swap yiel d curve; reti rement age s; promotional salary
      increases.

These are each covered briefly in the commentary. In addition ther e has been a
change of investment strategy sin ce 2005 to reflect the increasing proportion o f
actual pensioner liabilities compared with people not yet retired. This is reflected in
the switch in composition of the fun d from a majority of equity holdings t o a majority
of bond holding – thou gh unfortunately that swing has be en further a ccentuated by
recent equity valuations.

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Anglian Water also states that service contributions need to be increased in AMP5 –
from 15.3% to 21.2% of basic sala ry in line with the actuarial valuation at March
2008. However, the increase of £3 .7m per year on a pro jected base level of £16m
per year tot alling £19.7 m is no hig her than the service costs funded at AMP4 o f
£20m on average. This is in co ntrast to a tot al deficit ca tch up now claimed of
£19.6m on average compared to £10.2 for AMP4. In summary:

Average contributions over period £m                AMP4 FD           AMP5
Service contributions                                 20.0             19.7
Deficit catch up (total)                              10.2             19.6
TOTAL                                                 30.7             39.3

We reviewed the actuarial valuation update (AON Consulting, February 2009) from
December 2008, which confirms the net liabilitie s at the month-end s of March,
September, November and December 2008. The March 2008 net liability is quoted
as £199.8m. The repor t also conf irms the future service contributions required to
fund the future benefit accrual for  active members and expenses as 21.2% of
salaries.

Business rates
Business rates on water properties are expected to double by the end of AMP5 and
on wastewa ter sites they are expec ted to increase by 40% . These increases add
£26m and £7m respectively to the annual opex burden of the two services.

Water service
Anglian Water’s advisers have estimated the b asis on which the Valuations Office
Agency (VOA) will set business rates. A central team that uses forecast profit as the
driver sets the rates u sing a methodology that is relativ       ely transparent. Past
revenues and costs are taken from Tables 23 and 21 of the JR to determi ne profit in
past years. The revenues and co sts are projected to the e nd of AMP4 2009-10 and
the costs taken from the last available data, that is 2007-08. From these data a profit
or ‘divisible balance’ is calculated, which forms the basis for the revised valuation.

We asked why the VOA projected revenues do not assu me and incr ease in d irect
costs. Anglian Water re plied that it is both an increase in revenue and an assumed
decline in its costs that causes the increase in profits on which the rates are based.

We asked why the VOA would not take the Company’s o wn projections. Anglian
Water said that the process was on e that was well established, the Co urts consider
satisfactory and that is based on comparable information over time.

The formula for the divisible balan ce is Regulated revenues less tota l opex, IRC,
non-infra repairs to rateable assets, depreciation of non-rateable asset s, and rates.
The ‘tenant’s share’ of this balance is taken as 35% and deducted from the balance.
We understand that this percentage is part of a standard formula, which attempts to
define a notional rent that would be payable to a landlord for the use of the property.

Once the new rateable value is esta blished, the actual rates are calculated from the
poundage a nd a sliding scale that produces gr adual build up to the new level.
Anglian Wat er has assu med that the poundage is 44.4p in the £1 (i.e. a factor of
0.444), which is the existing level inflated by RPI. This assumption may be modified
by Government.

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We reviewed the derivation of the new rateable value from a spreadsheet giving the
relevant JR data over the three year s from 2005-06 to 2 007-08 and two years’
projected data. We understand that this is a formal draft valuation from the VOA.

We also examined the spreadsheet calculations of the expe cted actual r ates based
on:

Calculation sequence                                                                  Rates
                                                                                       £m
Divisible balance as calculated by the VOA                                          178.672
Less Tenant’s share at 35%                                                          (62.535)
Total rateable value                                                                116.137
Maximum liability @ 44.4p/£                                                          51.504

Base liability from AMP4 projection to 2009-10 and deflated to 2007-08 prices        27.209
With transition relief – amount payable in 2010-11 at +12.5%                         30.610


Transition r elief in creases existing rates fr om t he first year of AMP5 onwards at
12.5%, 17.5%, 20% and 25%. In           the first year, 2010-11, the rates charge will
therefore be £30.610. At the point where the increase from transition relief raises
the rates above the new ma ximum liability, the maxi mum liability comes into force –
this is calcu lated as 2013-14, which will therefore be £51.504m. In        this year the
uplift of 25 % over the prior year w ould have produced r ates, derived from the
previous valuation of £53.950m.

Waste Water
The determination of n ew rates for Sewerage Service sites is more difficult t                o
predict. The individual offices are responsible, rather than the central office tha           t
determines the business rates for the water service.

Anglian Water presented us with a sample of the list of approximately 900 sites. UK
property consultants Ki ng Sturge h ave forecast the liability for each site . Rates are
essentially set on the current valua tion of properties as a combination of the land
and constructions costs. The basis f or the increase overall is therefore t he increase
in land prices together with construct ion cost over the five ye ars since the last rates
were set. The analysis has banded sites by size and applied the increase. The local
offices have not provid ed any info rmation or i nsight into t heir method ologies; we
understand that Ofwat has been unable to facilitate the pr ovision of information to
help with planning assumptions.

We asked if the current economic environment had been taken into account for
these valuations. Anglian Water said that whether the VOA would take any changes
since March 2008 into account was not at all clear and that they are under n           o
obligation t o do so. March 20      08 had seen peaks in both land prices and
construction costs, but since that ap peared to be the valuation date; it was likely the
VOA would take both as the basis for its calculations un      less central govern ment
stepped in to reduce the resulting increases.

Both the wa ter and wastewater service fin al valuations will be too la te for the FBP
submission. Water is expected in Ma y and wastewater around Oc tober. The
poundage and the details of transitional relief are expected in Nove mber and it is

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questionable if thi s w ill al low ad equate time to be        included in        Ofwat’s fin al
determination.

No details of the consultants’ calculations wer e available at the SMC audit. We
understand that the forecast of construction costs is based on national data and that
the underlying formula for determining the ‘ren tal’ of the sites is the same as in
previous valuations. The assumptions made by the consultants are in any case only
their estimates as no VOA methodology is available.

Energy
The major difference fr om the draf t business plan is that energy costs have bee n
forecast by component – wholesale and non-wholesale.          Wholesale prices are
subject to market forces. Non-wholesale prices are tran smission elements of the
price – by the grid co mpanies and the regio nal distribut ion network operators –
controlled by the regulator. Wholesale cost s in AMP5 are n ow expected to be th e
same as the 2008-09 base year. However t         he non-wholesale fixed costs ar e
expected to increase by £3m per year from 2008-09, because:
   Fixed price contracts have held overall prices down until now
   Ofgem controls the transmission e        lements and has allowed increase           s above
    inflation

Almost all of Anglian Water’s e nergy requirements for 2009-10          have been
purchased and the tot al cost of power will be higher in 2 009-10 than in 2008-09
because a number of contracts w ere conclud ed when prices were high in the
summer. Wholesale costs are expected to fall back to 2008-09 levels from 2010-11
onwards but non-wholesale (fixed) costs w ill increase by £3.3m from the beginning
of AMP5.

Ofgem regulated non-wholesale prices are forecast to increase by £2.7m in 2008-09
and by £6.0m per year in 2010-11 to 2014-15. This assumption by An glian Water is
based on th e Bergen Energi study and the und erstanding that the curr ent five-year
electricity network regulation period runs out in March 2010. Ofgem’s publicat ions
on DPCR5 – the next period indica tes large cost increases for electricity distribution
companies, which are thought likely to lead to permitted cost pa ss through t o
consumers.

We reviewed a spreadsheet showing the calculation of the increments given in the
Company commentary in Table 3 .13 Energy Cost increa ses 2007-08 t o 2014-15.
The detail on the fixed cost element that Anglian Water ha s forecast t o the end o f
AMP4 is below.

                                 2007-08       2008-09     2009-10       2010-11       2011-12
                                                                                       forward
Fixed costs                      15.35         18.20       18.76         19.47         21.55
Annual increment                               2.85        0.55          0.71          2.08
Increment over 2007-08                         2.85        3.41          4.12          6.20
(shown in commentary table)

No further increase has been forecast from 2011-12 as no information is available.

SMC has b riefly looke d at the Ofgem document (Ofgem Price Control Revie w
December 2008) and agrees that forecast increases are large The DNOs are


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planning a significant increase in t heir capita l. We note O fgem’s comments in its
summary stating:

“The DNOs (distribut ion network o perators) ar e planning a signif icant increase in
their capital investment programmes for the next control period. We will be
challenging the DNOs very hard on their cost f orecasts. H owever, it is like ly that
customers will see an increase in their distribution charges from 2010.”

However, SMC is not in a position to offer an informed opinion.

Traffic Management Act 2004 (TMA) – Permits
The TMA ac t allows loca l authorities to charge ut ilities for the time spent occupying
roads. It also allows p enalties to be imposed for overru ns. Anglia n Water has
assumed that it will have to pay ch arges fo r pe rmits, but th at it shou ld not include
penalty costs as part of the FBP since these are within the control of management.

The plan assumption is that there will be 95% coverage of affected traffic sensitive
roads by 2010-11. This will be because 100% of authorities implement the scheme
and that 30% coverage of roads by June 2009 will rise to 70% by April 2010. This is
based on discussions with all local authorities in the region.

Non-sensitive roads in categories 3 and 4 are excluded – this is a change since the
DBP when all roads were assumed to be aff        ected. We understand that some
councils are already ab out to imple ment t he charges from the start d ate in April
2009.

In order to assess the likely costs, the Compan y has analysed its workload during
2007-08 and assumed that the work volume a nd distribution is the same in each
subsequent year. The Company has made fu rther assumptions on the proportion of
different types of jobs to be charged to capex and opex.

                           Opex    Capex
                            %        %
 Water service              30       70
 Waste water                40       60
 DS, Metering                0      100

The permit fees per job assumed are consistent throughout the region at:

Major                      £345
Standard                   £130
Minor                      £65
Urgent                     £60

Anglian Water has used major works unit co sts of either £225 or £345. We queried
some of the major work s cost of £3 45 as this a ppeared somewhat hig her than that
noted in other areas. Howe ver, we have si nce checke d with the permit fees
guidance issued by the Departme nt for Tr ansport in July 2008, which gives the
maximum charge for major activity as on traffic sensitive roads as:

Provisional Advance Authorisation £105
Major activity           £240
Total permit cost – major works                    £345


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We note th at the fees are intende d to be co st reflective w ithin the a ct but that th e
above guidance is non-statutory. We have no evidence from any local authorities in
the Anglian Water region whether they intend to charge t he maximu m suggested
above or le ss, but proposed fees from Kent County Coun cil are sligh tly lower for
some elements.

In response to our question, Anglian Water said that it had u sed £345 as the permit
fee for Major Works in Carriageway T ypes 1, 2 and S (traffic sensitive) as this is the
sum of the Provisional Advance Au thorisation fee £105, plus the Major Activity Fe e
of £240. F or Major Works in Carr iageway Types 3 and 4, the unit r ate is in th e
model is £2 25, which is the Provisional Advance Authorisation fee of £75 plus th e
Major Activity Fee of £150. In addit ion, the Company has assumed the maxi mum
fee levels in the cost     model because the Ke nt scheme proposal an d the TFL
scheme pro posal both have fees near the maximu m. It has not in cluded any
additional cost for variation charges, which would be up to £45 per time.

The analysis of the work has be en carried out for each authority in the region. This
has identified the number of jobs b y type of impact (as def ined in the legislation as
major, standard, minor, urgent) and by t ype of work (developer services, repair and
maintenance, wastewater, metering , alliance). The number of jobs summed across
all 19 local authorities and is multiplied by the r elevant permit fee to d erive the tot al
cost.

The total number of job s includes a dditional co nsequential job volumes estimated
as:
   5% of non-Major jobs require additional operations
   75% of non-Major and Alliance jobs require first time reinstatement
       75% of non -Major jobs (not requirin g first time reinstatement) involve hard
       top re-instatement
   For minor jobs a 15% a bort rate is added to reflect addition al cost of a second
    permit being required.

The total costs are split between opex and capex as in the table above.

We reviewe d the spreadsheets for the authorities and the summary to tal. We did
not examine any source data producing the number of job s. The calcu lations at th e
level we reviewed appear exhaustive and thorough.

EA Service Charges
The Environment Agency has published its proposed (indica tive) price increases fo r
abstraction permits for the AMP5 pe riod. In the Anglian region, the increase is 10%
per year each year for t he period for abstraction and varying percentages of 3.7% in
2009-10 and 3% in 2013-14 for discharge consents. These costs were not included
in the DBP as the information was only received in November 2008.

The water charges include bot    h the sta ndard unit           charge (SUC) and th           e
environmental improvement unit charges (EIUC).

The FBP f orecast pro duces an increased cost per year in 2014-15 of £7.0m.
Anglian Wat er has incre ased it s 20 08-09 budg et cost s by 3.7% for discharge fees
and 10% for abstraction and continued the increases, in real terms, for each year of
AMP5 according the EA ’s proposals. The in crease on ba se opex for each year is
shown for both services in the Company commentary.

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        According t o the Company there are no offsetting factor  s to the ch arges. The
        charges have been inde xed back to 2007-08 an d are quote d by the EA as nominal
        so that the FBP contains the charg es less RPI – e.g. 7.5% rather than the nominal
        10%.

        Employer’s National Insurance contributions
        The pre-budget report in November 2008 introduced a further 0.5% onto employers’
        national insurance charges. This item is included in the FBP as a sal ary cost item
        and is additional to the DBP. The impact is £0.5m per year.

        Bad debts
        Anglian Water makes the case in its commentary to maintain bad debt as a notified
        item in view of the e conomic un certainty an d potentially serious impact on it s
        customers’ ability to pay water bills – or reluctance once aware that not paying i s
        effectively an option if they are in financial difficulties.

        Private Sewers
        The impact of the legislation change is not clear. Anglian Water explains its situation
        in the commentary.

        Regulatory environment
        Anglian Wa ter comme nts on the uncertainty of the           costs of prepa ring for the
        competitive environment envisaged by Ofwat.

        Carbon Reduction Commitment Scheme
        No change to the cost base is assumed in the FBP.

        Workforce Training
        Given the e conomic situation, no additional co sts are inclu ded in the FBP, unlike at
        the DBP in which up-skilling was considered important.

4.2.2   Table B3.3 and B3.4 lines 5 and 6 – revenue impacts of capital schemes (RICS)
        When requests for special opex are related to changes in base capital maintenance
        expenditure, quality expenditure or supply demand expenditure the reporter shall ensure that
        the adjustments have been assessed robustly, and are not just in relation to the level of
        capital expenditure.

        There are no adjustments associated with e nhancement of capital maintenance
        programmes. In resp onse to our question a bout carbon emission r eductions in
        AMP5 shown on Table C8.3 and C8.4, Anglian Water stated that these are energy
        maintenance projects, which are to maintain the level of energy consumption at
        current levels. Through their lifeti me assets deteriorate and will co nsume more
        energy. Thus there is no opex saving and        without these actions, costs would
        increase.

        Additions to base opex from enhancement programmes have been made as shown
        below (cumulative opex), which we obtained from a summary spreadsheet from the
        Company.




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£k           AMP4          2010-11   2011-12     2012-13   2013-14     2014-15     Total
             From                                                                  cumulativ
             base                                                                  e opex
             2007-08
Table B3.3
Quality      2,083         98        683         1,232     1,460       1,673       7,229
SD           1,108         2,707     3,521       4,525     5,621       6,796       24,278
LoS          -             -         25          25        -           -
Total        3,191         2,805     4,229       5,782     7,081       8,469       31,557


Table B3.4
Quality      10,362        13        -375        2,929     5,917       8,919       27,765
SD           1,868         335       1,168       4,533     5,314       6,694       19,912
LoS          59            23        72          121       185         249         709
Total        12,289        371       865         7,583     11,416      15,862      48,386

The total capital programme in AMP4 will be about £1.9bn of which opex increases
from enhancement programmes are about 2.8% of the capex. A ratio of about 2.7%
will apply to AMP5 gi ven that the total addition al AMP5 op ex above (AMP5 less
base to end AMP4) is around £64m on a capex programme of about £2.3bn.

SMC can confirm that t he derivation of opex h as not been simplistically taken as a
percentage of capex. The opex costs have been derived at a h igh degree of
granularity for every ind ividual option fed into the optimising engine of Asset Plus.
We have reviewed an d explained this approach in various parts of our overal           l
commentary in considerable detail.

Anglian Wa ter explained the qualit y assurance work carried out on t he unit co st
data. In total three iterations of the costs used in the FBP h ad taken place. Those
responsible for providing costs to Asset Plus had also run checks th at what had
been sent w as the same as the costs that ha d been sent. The cost data across the
asset progr amme was output to large spreadsheets on which it was easy for the
experts in each field t o make sense c hecks of the dat a items and the relative
magnitudes. Any queries were f           ed straight back to t he solution managers
responsible for the Asset Plus sche mes who could either explain the qu ery or make
corrections to the cost inputs.

Anglian Water showed SMC the spreadsheet data. Although these contained larg e
volumes of data, it was relatively e asy to compare project s on the la rge format
printouts.

The owners of each work stream of t he plan are required to sign off the final version
for inclusion in the FBP. A senior manager wi th extensive experience in the PR
process also made high-level checks of the programme elements.

Comments on the unit cost inputs are as follows:
   Power costs were consistent across all areas of the business
   Labour costs were take n from internal data. Unit costs we re in the form of
     hours per activity for which the labour was fully costed hourly rates
   Chemical costs were taken from contracts in force in September
   Biosolids were the actual costs for the specific transport routes for each site
   Tools and materials costs were estimates from local managers

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               Meter reading – standard unit rates were used for the logging up costs
               Purchase agreements were generally taken as mid-year costs for 20 08-09
                for indexing back to 2007-08


4.2.3   Table B3.3 and B3.4 line 8 – overall compounded assumed efficiency
        improvement profile (base)
        We confirm that we checked that    the efficie ncy factors in line 8 of each tab le
        corresponds with table B2.2 and B2.3 and that the resulting opex had been correctly
        calculated post efficiency.

4.2.4   Tables B3.5

        Line 1 of Table B3.5
        Raw water aqueducts dams and impounding reservoirs
                Investment Area            FBP           DBP     Reallocated     Revised        FBP
                                          Table                  since DBP        scope
                                           and                                    since
                                         Line Ref                                  DBP
                                                         (£m)        (£m)          (£m)         (£m)
         WI
         Raw water aqueducts, dams
         and impounding reservoirs       B3.5 A1     14.961      0.000           4.040        19.001
         WNI
         Raw water aqueducts, dams
         and impounding reservoirs       B3.6 A1     0           0               11.95        11.95

        The averag e forecast expenditure for the last three years of AMP4 is £40.5m, the
        average an nual forecast expenditure for AMP5 is £2.992M, and the AMP5 total is
        planned to be £19M. This         significant increase is driven mainly by shoreline
        improvements at: Pitsfo rd, Grafham and Rutland impounding reservoirs together
        with further work at Rutland; these four schemes alone accounting for £12.3M.

        Line 2 of Table B3.5
        Water distribution
         Investment Area                 FBP         DBP         Reallocated     Revised      FBP
                                         Table                   since DBP       scope
                                         and                                     since
                                         Line Ref                                DBP
                                                     (£m)        (£m)            (£m)         (£m)
         Water Infrastructure
         Water distribution              B3.5 A2     201.457     0.000           9.224        210.681

        The average forecast expenditure for the last three years of AMP4 is £38M, the
        average annual foreca st expenditu re for AMP5 is £42 .1M, and the A MP5 total is
        planned to be £210M.




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4.2.5   Table B3.6

        Line 1 - Raw water aqueducts dams and impounding reservoirs
         Investment Area                   FBP         DBP          Reallocated     Revised      FBP
                                           Table                    since DBP       scope
                                           and                                      since
                                           Line Ref                                 DBP
                                                       (£m)         (£m)            (£m)         (£m)
         WNI
         Raw water aqueducts, dams
         and impounding reservoirs         B3.6 A1     0            0               11.95        11.95

        At the DBP the company planned no non-infrastructure expenditure in this category,
        and reported zero historical spend.

        Line 2 - Water distribution (non-infra)
         Investment Area                   FBP         DBP          Reallocated     Revised      FBP
                                           Table                    since DBP       scope
                                           and                                      since
                                           Line Ref                                 DBP
                                                         (£m)           (£m)          (£m)         (£m)
         Water distribution (non infra)    B3.6 A2     63.882       0               -5.521       58.361


        The company is foreca sting the need to invest a total o f £58.361M in AMP5 for this
        line, averaging £11.7M per annum. This co mpares with an average of £6.93M per
        annum for the first three years of AMP4, a 68% increase.

        Table B3.6
        Line 3 - Water treatment works
         Investment Area                   FBP         DBP          Reallocated     Revised      FBP
                                           Table                    since DBP       scope
                                           and                                      since
                                           Line Ref                                 DBP
                                                       (£m)         (£m)            (£m)         (£m)
         Water Treatment Works             B3.6 A3     157          7.377           -2.257       162.12

        The company is forecasting the ne ed to invest a total of £1 62M for wat er treatment
        works in AMP5 a veraging £32.4M per annu m, and this compares closely to the
        average of £33.8M per annum for the first three years of AMP4.

        Proportional allocation
        The reporter shall verify that all forecast expenditure relates to base service only.
        The Compa ny has not practiced      any proportional allo cation but we have not
        identified any areas where we might be able to quantify the impact of this oversight.

        The reporter should verify that the company has correctly allocated any expenditure allowed,
        both historic and forecast, for 'advanced maintenance element' in accordance with RAG 2.03
        in its analysis of historic expenditure and the planning for future expenditure. The reporter
        should explain any inconsistencies in the company's approach to cost allocation in
        accordance with RAG 2.03 that materially affect expenditure plans




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        We have not identified any specific adjustments by the Company in resp onse to this
        requirement affecting either historic or forecast expenditure. In ou     r view some
        adjustment would be most readily identifiable in relation to the water service for
        completion of the former Section 19 programme. The Section 19 programme most
        probably did have maint enance benefits; where any such benefit is not r ecognised,
        if future maintenance expenditure is based on historic levels a shortfall is likely. We
        are not aware of an equ ivalent investment programme that might have given rise to
        the same effects for sewerage infrastructure.

        Expenditure reported in the June Return
         The reporter shall verify that all historic expenditure within each asset group (stated within
         the commentary in section 3 and 7) matches the expenditure reported in the June returns.
         Where there are discrepancies the reporter shall ensure the reasons are explained.

        We have not been able to track expenditure by asset group back to ex penditure in
        the June Return as it is not reported at that level of detail.

        Grants and contributions
         In Block E, the reporter shall comment on company projections for grants and contributions
         for capital maintenance, particularly where a company is projecting significant changes in
         the level of grants and contributions during AMP5.

         The investment activity assumptions underlying this table should be the same as those
         reported in tables A4 and A5.

        So far as we have bee n able to id entify activit y assumptions in this ta ble are the
        same as those reported in Part A.

4.2.6   Table B3.5 and B3.7
         B3.5 and B3.7 Block E, the reporter shall comment on whether the basis of calculation for
         the infrastructure renewal charge is reasonable and consistent with the method of
         calculation used in the regulatory accounts

        So far as we are aware the basis of the calculation of IRC is consiste               nt with the
        method used in the regulatory accounts.

        Where a basis for calculating IRC other than the 15 year period (2005-2020) is used, the
        reporter shall comment upon the validity of the company’s reasons for such a policy. Where
        companies have used the period 2010-2025 the reporter shall confirm with the company
        whether it has taken such a long-term view within the regulatory accounts.

        The Company has used a fifteen year basis for the calculation of IRC.

        Where line 13 does not equal the sum of line 11 and line 12, the reporter shall note this in his
        commentary, and include an explanation of why this is the case.

        There are no entries in Line 12 Grants and Contributions for inf       rastructure
        maintenance and therefore Line 13 does equal t he sum of lines 11 and 12 (which is
        zero).




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        Specific company challenges and responses
        (Ofwat Sections 5 and 10) WI, WNI, SI and SNI

4.3     Response to guidance for Section 10
            The reporter shall set out all specific challenges made to the company and the
            corresponding outcomes.

4.3.1   Reporter challenges (water service)

        Draft plan
        At the DBP review we challenged the company as follows:
            We challen ged the co mpany to te st the sensitivity of its model for determining
             optimum meter replacement age
            We challenged the co mpany to d emonstrate to what exte nt its Asset Plus asset
             management system could be co nsidered ‘b usiness a s usual’ in t he water
             service
            We selecte d two inve stment categories at r andom: mai ns replace ment and
             leakage, and challenge d the comp any to e xplain in each case, the degree of
             validation it had carried out using comparisons with recent historic out turn costs
            We challenged the company to e xplain how i t had decided its Reference levels
             and Control limits for service indicators – and to show they were robust.
            We challenged the company to explain how it linked pro posed service reservoir
             expenditure in AMP5 to service and serviceability.

        Final plan
        During our FBP review we further challenged the company as follows:
        Ref.           Status      Challenge and outcome
        Ch.1           Resolved    Service Indicators – Reference levels & Control limits
                                   We challenged the company to explain how it had decided its
                                   Reference levels and Control limits for service indicators – and to
                                   show they were robust.
                                   From a brief examination of the AW process and assumptions, we
                                   observe the company’s proposals appear soundly based on AW
                                   quality data up to JR09 (i.e. the calendar year 2008)
                                   AW provides an enhanced explanation (compared with DBP) of its
                                   approach to each indicator in Appendix 2 of its commentary. We
                                   note the company has followed the latest FBP guidance.




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        SMC AW FBP09 B3 v1.4.doc                  Page 108 of 132                             October 2010
Final Business Plan 2009                                                           Anglian Water
Part B3 Maintaining Service and Serviceability                           Restricted - Commercial

Ref.        Status         Challenge and outcome
Ch.2        Resolved       Like for like replacement or refurbish
                           We challenged AW to explain the process by which its
                           maintenance programme has been examined to identify where
                           assets would realistically be refurbished (rather than replaced with
                           new – for example very large pumps, compressors etc)
                           Also to indicate to what extent its final programme has been
                           influenced by this activity.
                           The company explained that it was retaining the same process it
                           used at DBP to replace with new in all auto generated WNI
                           schemes, believing this to be appropriate for a high granularity
                           analysis.
                           Although some very large items of equipment would in reality be
                           refurbished, and auto generated schemes comprise 74% of the
                           WNI plan; we believe the AW assumptions will not cause a
                           material difference.

Ch.3        Resolved       AMP5 Plan – affordability
                           We challenged the company to explain its process and reasoning
                           for deciding the level of its final water service plan, taking account
                           of:
                            Initial optimiser output programme including all cost beneficial
                               investment
                            Historical investment (e.g. AMP4 forecast out turn) and the
                               level of service achieved
                            Customer affordability
                           The company referred us to an extract of its commentary to Part
                           B6 (Customer service and service enhancements).
                           In summary the AW ‘willingness to pay’ survey deduced:
                            33% of customers wished to see no increase in bills
                            The average household customer was prepared to see annual
                               bill rises of between £53 and £115 for specific service
                               improvements
                            The average commercial customer even more
                            Most (just) customers preferred smooth changes in bills
                           We note the surveys were completed before the current economic
                           downturn, and wonder if the findings remain safe.
                           We are unsure the above observations answer the Ofwat
                           question.




22/04/2009 08:39                                                    Strategic Management Consultants
SMC AW FBP09 B3 v1.4.doc                  Page 109 of 132                              October 2010
Final Business Plan 2009                                                           Anglian Water
Part B3 Maintaining Service and Serviceability                           Restricted - Commercial

Ref.        Status         Challenge and outcome
Ch.4        Resolved       Scheme solutions selection in final plan
                           We challenged the company to explain exactly how it selects a
                           preferred final maintenance programme of scheme solutions from
                           its scenario outputs. We were told that for each programme
                           component scenario:
                            Schemes deemed ‘must do’ (approx 5% of total cost) are
                               constrained into the final programme
                            The remainder of the FBP maintenance programme is built by
                               selecting the most cost beneficial combination of schemes
                               predicted to be capable of maintaining service levels
                            If this is deemed unaffordable compared with historic
                               expenditure, then less cost beneficial schemes are considered
                               in the particular scenario
                            Then summate the component scenarios


Ch.5        Resolved       Which costs taken forward into programme
                           We challenged the company to clarify how different elements of
                           cost (capital, opex, carbon, social, environmental and failure) were
                           used in the optimiser and which costs were subsequently carried
                           forward to the planned programme.
                           We are satisfied the AW maintenance planning approach takes
                           account of the effects of: carbon, social and environmental costs
                           and customer’s willingness to pay, only in the sense of prioritising
                           elements of its programme, and deciding which schemes should
                           be included in the final plan.
                           We are also satisfied the scheme costs taken forward into the
                           AMP5 programme correctly exclude these externality costs.

Ch.6        Resolved       Pro-active and reactive household meter replacements
                           We challenged the company to demonstrate the basis of the two
                           different costs for pro-active and reactive household meter
                           replacements and to explain the reason for the significant
                           difference.
                           The company explained pro-active meter replacement is carried
                           out at whole street level, thus enabling multiple installations per
                           site visit.
                           Whereas, reactive installation usually means single meters at
                           different isolated locations with only ne or two installations per site
                           visit and considerably greater travel time & cost.
                           We note the company has re-visited its meter costing for the FBP
                           and usefully disaggregated installation costs for different
                           circumstances.
                           We are satisfied the FBP metering costs have been clearly
                           explained.




22/04/2009 08:39                                                     Strategic Management Consultants
SMC AW FBP09 B3 v1.4.doc                  Page 110 of 132                               October 2010
Final Business Plan 2009                                                          Anglian Water
Part B3 Maintaining Service and Serviceability                          Restricted - Commercial

Ref.        Status         Challenge and outcome
Ch.7        Resolved       Generalised assumptions
                           We challenged the company to explain any generalised
                           assumptions in its optimisation process, and assess their
                           materiality.
                           AW also asked to comment on the feasibility of testing the
                           sensitivity of individual capital investment proposals in the FBP to
                           small variations in input data or key assumptions. OM5 refers
                           We are not aware of any generalised assumptions in the AW
                           optimisation process beyond the ‘repair or refurbish’ issue
                           discussed in the second line of this table.
                           We are satisfied no material general assumptions are made.

Ch.8        Resolved       Size of AMP5 WNI programme
                           We challenged the company to justify its WNI programme at
                           around £150M, if (as it seems to say in its DBP) 90% of the
                           benefits can be obtained from an £80M programme
                           We were told the range of WNI investment considered was from
                           £60M to £240M and an AMP5 programme containing all cost
                           beneficial schemes would total £240M. So the company first
                           looked at why the future might be different (e.g. maintaining the
                           many M&E assets installed in the early 90s) then compared its
                           proposals with historic on a comparable basis.
                           Finally the company made the strategic decision to limit the
                           increase compared with AMP4 to 15%, and this led to the figure of
                           £157M for treatment works.

Ch.9        Resolved       Service reservoir maintenance
                           We challenged the company to clarify the driver(s) for an increase
                           in service reservoir maintenance, and explain the relationship to
                           service.
                           We were told:
                            Site security costs have been removed and the FBP fig for SR
                               maintenance is £8.6M (was £8.7 at DBP)
                            The company considers the future to be little changed from the
                               recent past and explained the AMP4 out turn forecast at DBP
                               was incorrect.
                            The key service driver is considered to be coliforms, and the
                               company showed us a curve of compliance against cost based
                               on company data. We observe that to achieve 95%
                               compliance requires an investment of £8.6M (as in the FBP
                               plan)
                           We are satisfied the AW approach is sound and the AMP4
                           expenditure at DBP was incorrect.




22/04/2009 08:39                                                    Strategic Management Consultants
SMC AW FBP09 B3 v1.4.doc                  Page 111 of 132                              October 2010
        Final Business Plan 2009                                                            Anglian Water
        Part B3 Maintaining Service and Serviceability                            Restricted - Commercial

4.3.2   Reporter challenges (sewerage service)
        SMC has challenged t he company in a large number of                  areas; the following is a
        sample of detailed challenges.

        Ref.        Status         Challenge and outcome
        Ch.10                      SNI MODELLED
        Ch.11       Resolved       Table B3.2
                                   Please can you provide a copy of Table B3.2 and support for
                                   output projections
                                   Full plan since received
        Ch.12       Resolved       Support for ‘turn-down’
                                   At the review meeting the need for a turn-down factor for STW
                                   was discussed, please can you set out the factors that were used,
                                   the calculation to derive the adjustment and the basis for the
                                   calculation (including any assumptions made or implied).
                                   Spread-sheet received
                    Resolved       Non-infrastructure
        Ch.13       Resolved       Expenditure on non-infra on the sewerage system
                                   Please confirm nil expenditure on sewer structures (ie non-
                                   infrastructure) as expenditure only reported on STW, sludge and
                                   SPS
                                   Confirmed
        Ch.14       Resolved       Unit cost used for fencing / roads
                                   Please clarify the basis of the unit cost estimates used for roads
                                   and fences
                                   AW cost models
        Ch.15       Resolved       STWs with descriptive consents
                                   Please clarify whether expenditure on STWs with descriptive
                                   consents falls outside the risk based approach and where it is
                                   reported?
                                   All falls within STW modelled totals
        Ch.16       Resolved       Odour
                                   The expenditure was retained in the supporting document we
                                   reviewed although some of the requirement has since been re-
                                   assessed and reported under Part B6 Consumer service strategy
                                   and changes in service
                                   Please clarify
                                   The expenditure relates to the maintenance of existing
                                   installations as distinct from investment in first time installation of
                                   odour control at new sites which is reported under Part B6
                                   Customer service strategy and service enhancements
                                   INFRASTUCTURE
        Ch.17       Resolved       Support for benefits assessment of manual entries
                                   Please provide details of the Asset Plus run for the manual entry
                                   investment; snapshot ref and summary outputs.
                                   Supplied




        22/04/2009 08:39                                                      Strategic Management Consultants
        SMC AW FBP09 B3 v1.4.doc                  Page 112 of 132                                October 2010
      Final Business Plan 2009                                                         Anglian Water
      Part B3 Maintaining Service and Serviceability                         Restricted - Commercial

      Ref.        Status         Challenge and outcome
      Ch.18       Resolved       Proactive jetting programme
                                 Please confirm whether Anglian Water had a proactive jetting
                                 programme in the past and if so over what period and at what
                                 cost?
                                 Anglian Water has included investment in reactive jetting and
                                 preventative jetting in know problem areas only. For the DBP
                                 Anglian Water trialled an approach to generate automatically
                                 additional jetting in areas where forecast probability justified
                                 preventative jetting. Anglian Water is in the process of developing
                                 this risk based approach.
      Ch.19       Resolved       TMA
                                 TMA adds £0.13 per m to jetting and CCTV (total £170k) for
                                 “manually” estimated investment; please can you confirm that this
                                 is the extent of TMA costs for manual inputs
                                 Emergencies on gravity sewers £18,246k
                                 Emergencies on rising mains £10,759k
                                 Manholes £209,490k
      Ch.20       Resolved       SI Current and forecast number of collapses and bursts
                                 Please would it be possible to provide the EPR equations and
                                 estimate of their range of uncertainty for the number of bursts and
                                 collapses plus support for the graph showing the forecast number
                                 of collapses and bursts.
                                 Equations provided, uncertainty range not possible in the time
                                 available
      Ch.21       Resolved       Pension deficit calculations
                                 Resolved
      Ch.22       Resolved       Energy increases from fixed costs
                                 Resolved
      Ch.23       Resolved       TMA permit charges relative to DfT guidance and other areas
                                 Resolved
      Ch.24       Resolved       EA charges
                                 Resolved
      Ch.25       Resolved       Opex from enhancement calculations
                                 Resolved
      Ch.26       Resolved       Opex reductions on maintenance
                                 Resolved




5     Section D – Management and general
5.1   Summary
      The Comp any has taken a detailed bottom up approach to the planning of
      management and general reported within capita l maintenance. Expenditure in each
      of the main investment areas has mostly bee n identified at the project level. A



      22/04/2009 08:39                                                   Strategic Management Consultants
      SMC AW FBP09 B3 v1.4.doc                 Page 113 of 132                              October 2010

								
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