Water & Wastewater Treatment

WWT July 2019

Water & Wastewater Treatment Magazine

Issue link: https://fhpublishing.uberflip.com/i/1131895

Contents of this Issue


Page 14 of 43

www.wwtonline.co.uk | WWT | JULY 2019 | 15 However, totex may not be as embed- ded in the new regulatory regimes as it might be. Delegates cited a specific issue with PR19, where enhancement schemes have been assessed on the basis of capital expenditure only, without allowances be- ing given for operational costs – an issue that has bene raised with Ofwat and is expected to be addressed in the forthcom- ing dra• determinations. What challenges do utilities face in embracing totex? While the economic regulators Ofgem and Ofwat have led the drive for totex think- ing, utilities businesses are still operating in a framework that is not entirely sym- pathetic. Accounting rules in particular remain a challenge. Capital expenditure such as that on a new asset is depreciated – discounted from the balance sheet over a number of years – whereas operational expenditure comes straight off the annual profit. Moreover, even where costs such as new technology systems or refreshes are classified as capital expenditure, they are depreciated over much shorter periods of time than traditional long-life assets, making them less attractive from an ac- counting point of view. As one delegate said: "Whilst we're in a totex environ- ment, in terms of your profit and loss, you've still got to keep your overheads down." Water companies face a further, unique, challenge in the form of their quality regulators – the Environment Agency and the Drinking Water Inspec- torate. Delegates cited these regulators as taking a 'zero tolerance' approach to failure and consequently making it dif- ficult to innovate. They also cited several examples where Environment Agency regulation defined specific outputs at specific sites, rather than replicating the outcome-based approach now favoured by Ofwat. As one delegate put it: "We have made progress [towards totex] not because of the regulator, but in spite of the regulator." With affordability riding high on the policy agenda, how are utili- ties prioritising their investment on asset maintenance and capital programmes? Delegates revealed that in some instances, they are having to 'sweat the assets', getting maximum life out of every piece of kit by prioritising maintenance over the capital expenditure required to build new assets. This approach is supported by new technologies that facilitate condition- based monitoring – rather than have a rolling programme of maintenance based on the age or usage of an asset, utilities SPONSORED BY View from the chair: totex, or not totex? By Ellen Bennett, content director, Utility Week Seven years ago, totex was the biggest buzzword in the business – this was before 'innovation' was on everyone's lips, and long before most people had even heard of today's Labour leader Jeremy Corbyn with his headline-grabbing policy to renationalise the nation's energy and water companies. As the water and network industries prepared for PR14 and RIIO1, the introduction – or extension – of totex in the regulatory system was big news, with utilities keen to explore the approach but o en worried about their ability to deliver. Fast-forward to today, and we don't hear so much about totex. There could be two reasons for this change. Could it be that utilities have fully embraced totex, realised its benefits, and embedded it so deeply in their culture that they no longer need to talk about it? Or could it be that the 'totex' box has, on the surface, been ticked, and utilities have moved on the newer buzzwords? This was the question I put to delegates at the round table, and the answer was unexpected – and in fact, challenged the grounds of the question itself. Rather than a binary approach – totex, or not totex – it seems that the industry has moved on to a point where the question of totex has been absorbed in the much bigger issue of whole systems planning. That is to say, it's no longer just about whether to build a new asset or come up with another solution; rather, it's a question of looking holistically at the infrastructure system, cross-vector, and determining the best solution. It's a complicated picture, throwing up questions about who will govern a multi— vector system, and whose role it is to drive it forward. While Government has been struggling with the Brexit-induced leadership vacuum, delegates name-checked the increasingly influential National Infrastructure Commission, chaired by Sir John Armitt, as having both the nous and the political clout to come up with the right solution. With the commission currently investigating regulation in utilities, watch this space. are able to target their maintenance spend on assets that most urgently require it. While this is a logical approach, it does create difficulties, because service must never be compromised – and delegates acknowledged that incidents such as last year's Beast from the East highlighted what they tactfully called "resilience gaps". What is the role of the supply chain in delivering a totex culture? As utilities move away from the tradition- al approach of 'fix on fail' to condition- based monitoring, the skills required to run the network are changing. A network filled with sensors requires data and tech- nology specialists to capture, interpret and act on the data they produce. For one delegate, this promoted the question: "Going forward, how much do we ask the supply chain to step into this?" Traditionally, the supply chain has built assets for utilities. Totex thinking, coupled with the emergence of new and more com- plex technologies, inevitably drives a major shi• in this relationship. As the manage- ment of utilities becomes more complex, the supply chain is stepping into new service models whereby a supplier might, for exam- ple, build, operate and maintain an asset on an ongoing basis. Delegates added that a particular benefit of the supply chain in this context is its ability to share learnings across com- panies and across sectors – "that's much more difficult to do if you're operating in a silo." What role has innovation funding played in driving the adoption of totex? Delegates from the energy networks sector agreed that innovation funding has been critical in allowing them to experiment with different approaches and drive a totex culture within their businesses. The example of Project Freedom was cited – a collaboration between Western Power Distribution and Wales and West Utilities, investigating multi-vector solu- tions to domestic heating. The learnings form such innovation projects are shared between the networks – and with other stakeholders – as a condition of the fund- ing, encouraging a collaborative approach to innovation. It's a different story in the water indus- try. As one delegate noted, making refer- ence to benchmarking in the regulatory system: "We've been set up to compete against each other, and now we're being asked to collaborate, and there's a tension there." While Ofwat has traditionally been resistant to the idea of dedicated innova- tion funding, it has recently indicated that it may be changing its position on this.

Articles in this issue

Links on this page

Archives of this issue

view archives of Water & Wastewater Treatment - WWT July 2019