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16 | 12Th - 18Th SEpTEmbEr 2014 | UTILITY WEEK Policy & Regulation Market view Top tips for totex efficiency Key strategies can ease the transition to managing water sector investment under a totex regime in AMP6, says Ken Gedman. D uring its consultation for PR14, Ofwat proposed that a total expenditure approach to delivering wholesale busi- ness plans would address the perceived bias towards capital expenditure, even when oper- ational solutions might be cheaper and better. The regulator's key motivation is to protect consumer bills and encourage innovation in the delivery of high-value water services. The perceived capex bias exists because capex benefits companies' regulated asset value and key financial ratios. In previous AMPs, opex and capex efficiency have been assessed independently, with capex outper- formance incentivised through the capital incentive scheme. Ofwat's desire is to incentivise compa- nies on a totex menu approach, varying rewards for outper- formance against levels of risk appetite. Working with a number of clients, in preparation for AMP6, has led MWH to identify seven key enablers for a totex-efficient environment: • Organisational structure – align organi- sational structures on an end-to-end and geographic basis to enable more effec- tive decision-making and budgetary accountability; • Business culture – this must be based on a common understanding and sense of purpose. Employees across all directo- rates and functions must be given a clear vision, understand the imperative and feel empowered to drive totex-efficient operations; • Supply chain – the supply chain needs to be mutually incentivised to deliver services at lowest totex. Supply chain partners, who traditionally have paid to build assets, need to see how they will be rewarded for optimising existing assets and drive efficiency through long-term investment in innovation; • Performance data – measuring asset per- formance and presenting the data in a meaningful way will enable more effec- tive totex decision-making. Moving away from disparate data sets to an enterprise- wide approach will enable a more holis- tic view, including visualisation of how assets are performing in concert and what needs to be done to minimise risks and service disruption; • Financial understanding – as with per- formance data, the ability to measure financial impacts and activity-based costs is essential to balance and trade risk with efficiency. In previous AMPs, companies have established a good understanding of cost base for capex. Companies need to enable a better understanding of opex, at more granular lev- els, to make totex- effective decisions and establish their 'cost to serve'; • Operating phi- losophy – operating assets will demand a more dynamic mindset. Totex will require a move away from a 'set-point' mentality to one that is responsive to changing operating con- ditions, system demands and sustained asset optimisation. Fundamental to real- ising totex efficiencies will be improved financial and asset performance data; • Customer behaviour – encouraging cus- tomers to use less water and be mindful of what they flush and dispose of down the sink can lead to lower treatment and asset maintenance costs. Sustained, tar- geted campaigns to encourage better cus- tomer behaviour and awareness of how their actions affect their bills will have a considerable impact on totex efficiency. One of the greatest challenges of AMP6 will be altering water company mindsets from a focus on asset creation to achieving asset optimisation. The effort required to achieve this change, with companies moving from different maturity points and at differ- ent speeds, should not be underestimated. Ken Gedman, regional lead for the water sector and strategic planning and analysis, MWH Global Analysis Demystifying abstraction Defra answers common questions about its plans for abstraction reform. When will the reformed system be in place? We are aiming to implement the reforms in the early 2020s. How would new abstractors gain access to water in the reformed system? In a catchment where there was available water, a prospective abstractor could apply to the Environment Agency for a specific volume to abstract. If there was no available water, they would have to enter the market to buy access to water from other abstractors. Would compensation be paid for changes to abstraction permissions? No, but abstractors will be given notice. Would all catchments have low flow con- trols in the reformed system? Yes; it would function only at very low flows. Would groundwater abstraction permis- sions be subject to low flow controls? Not in most cases. However, in areas where groundwater stores can fluctuate quickly and impact neighbouring surface waters imme- diately, we have proposed that groundwater abstractions are regulated. How would consumptiveness be defined? Abstractors who can measure the water they return locally to a river should be able to pro- vide this evidence to the Environment Agency or Natural Resources Wales. If their measured consumption differs from the standard esti- mate, their charges would be adjusted. Would abstractors have to trade with other sectors in the reformed system? No. It would be up to abstractors to decide if they wish to buy or sell access to water. This could be with abstractors within their own sector or in different sectors. Would abstractors who invest in water storage be able to sell water they collect? Yes. A water company could invest in a res- ervoir in one part of the catchment and the water could be sold to other abstractors. Is our electricity supply vulnerable to reductions in water availability due to climate change? No. Less than 20 per cent of electricity gen- eration in England and Wales depends on freshwater availability. The majority of this is in areas where freshwater availability does not seem to be at risk from climate change. "One of the greatest challenges of AMP6 will be altering water company mindsets from a focus on asset creation to achieving asset optimisation"