Preparing a substantial asset base for an unpredictable future

The fundamental need for longer term thinking dominated discussions at the Utility Week 2021 Water Industry Asset Management Conference hosted in Birmingham.

A new regulatory period began in April 2020 that heralded the start of AMP7 but no sooner had business plans gone live than talk turned to what will come next. For PR24 Ofwat said the focus will be on longer term planning and described each five year business plan as a building block within 25-year strategies.

Speaking at the event Aileen Armstrong, senior director at Ofwat, kicked off discussions by underlining the need to set business plans within longer term thinking.

Armstrong says both wastewater and drainage, and, water resource management plans (WDMP and WRMP) only cover parts of companies overall business but Ofwat wants to see long term strategies that cover the whole of the business.
This would, she says, bring far greater clarity to future price reviews as well as offer confidence for customers and stakeholders about strategy, investment and how costs will be spread between customers to ensure intergenerational fairness.

However, the regulator believes a long term strategy alone will not be the answer. Armstrong says plans that can be adapted were essential because none of us can predict the future as a global pandemic brought into sharp focus.

“For PR24 we want adaptive planning to be at the core of all parts of every companies business plan,” Armstrong says and adds that planning as such would let companies carry out long term strategies even if there’s unexpected challenges and plan for investments at the most beneficial point.

“We often a lot about aging assets but age isn’t a reliable indicator of asset health,” Armstrong says before explaining that the key thing for Ofwat is to make sure money is spent wisely and asset health is maintained so companies must ensure they are tracking the best measures for health.

With that in mind, Ofwat coordinated establishing an asset management maturity assessment, which sets out plans for long term asset health, will be a tool to share best practice, and is a way to assess if and what improvements are needed to boost asset management.

Developing direct procurement for customers

Direct procurement for customers (DPC) was introduced at PR19 as something the regulator is keen to see more of on future reviews. Direct procurement means water companies can competitively tender for third party companies to design, build, test and operate assets. “We’re in the early stages of delivering this and looking at how to better support delivery, so were looking to enhance the long term view of major projects,” Armstrong says.

She explains that asking companies to increase their focus on the long term should provide a pipeline of upcoming investments to potential investors not just for the next five-year period but over the next 25-years. This longer term view of investment needs will provide more time to assess needs, costs and options for investments to aid efficient procurement. Ofwat is exploring ways to encourage greater engagement with the process and believes bidders will grow increasingly familiar with the DPC process overtime, which will be beneficial to future price reviews as processes can be standardised through best practice.

Real change for real challenges

Preparing for the sector’s long term challenges and goals will require a step change in how all participants work, Armstrong says. “Real change will be needed for how companies do things, we can’t keep pouring concrete to deliver the scale of change needed at an affordable cost but also to meet the sectors net zero targets.”

The role of better quality data and harnessing it to its full potential will help identify any problems with networks or assets earlier, which will reduce the need for later, more costly interventions and is something the regulator is pushing for both household and non-domestic water companies.

Views from the day

Lisa Gahan, regulatory director at South West Water – one of three companies that qualified for fast-track status at PR19 – spoke about making investment decisions under long term uncertainty. She set out the company’s approach that begins with data and uses a framework of measures relating to customers and the environment against which all decisions are assessed.

Gahan explains why the monitoring and measuring framework is important because it feeds into plans and long term strategies to ensure the value of outcomes and strategic objectives are considered in every decision made.

Echoing Armstrong’s view on flexibility, Gahan says in the face of tougher regulations, strengthening public views and mounting costs it takes flexibility to get the balance right for investment.

“When we make a decision we measure it and can understand the value in terms of outcomes and strategic objectives,” Gahan explains. “Nothing will get into the business plan that hasn’t been through one of our planning tools.” South West’s process of continual reviewing and re-adapting lets the company identify and understand the impacts of its actions.

A key focus for many in the sector, including South West, is around legitimacy and building trust with customers and stakeholders.

Public trust has been at the heart of Bristol Water’s mission since it was established 175 years ago, a milestone that regulatory director Iain McGuffog reminded delegates of. Communication and engagement around all asset decisions is essential, McGuffog says, especially when there are decisions to be made about trade-offs.

Molly Horsley, senior leader at Scottish Water echoes that sentiment. She says Scottish Water’s approach was to take every decision “as if customers are in the room” to make everyone accountable for decisions and the interplay or trade-offs that may be necessary.

Another recurring theme was collaboration. Lila Thompson, chief executive of supply chain body British Water praises the level of collaboration that was seen through the pandemic and urges that it must continue if sector goals are to be achieved such as net zero by 2030.

She says clarity in companies individual net zero plans was essential to make it clear the role the supply chain can play. This is something British Water has been tracking within those plans to understand what is needed and what solutions companies are seeking that suppliers could assist on.

Sewer overflows on the agenda

No event would be complete without a mention of combined sewer overflows and this was no different: Asked about how much of a curveball the Environment Act and its attention on reducing harm from combined sewer overflows (CSOs) would be, Gahan said there was a worry but communicating with customers was key. She says South West’s message was that it would make “slow and steady” progress to move away from CSOs but warned that heavy attention on CSOs could be detrimental to other important issues.

Thompson reiterated that public attention was unlikely to fade from its “unprecedented” level of engagement seen in recent months so managing fats oils and greases would likewise keep rising up the agenda.