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UTILITY Week 11th December

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The Totex UTILITY WEEK | 11TH - 17TH DECEMBER 2015 | 11 TOTEX THE TOPIC T he move to a total expenditure, or totex, regime was first suggested by Ofgem in March 2008 when the energy regulator launched its RPI-X@20 review. From this comprehensive review of the previous regula- tory regime, which had endured since priva- tisation in 1989, emerged the RIIO (revenue= incentives+innovation+outputs) model. Part of this change in approach saw the old operational and capital expendi- ture model – where funds were allocated and accounted for separately – become totex. Totex was first used in the electricity distribution network price control DPCR5 (2010-15) but it was central to RIIO, which came into force first for electricity transmis- sion in April 2013 and then gas transmission the following year. Water regulator Ofwat's shi to totex was confirmed in July 2013 with its final PR14 methodology, and also came into effect this April. The main driver behind the change is to remove the perceived bias towards capital expenditure. "Intuitively totex is the best solution because it is the lowest cost over the whole life of the asset," says British Water director Paul Mullord. "It should open the door to more adult discussions about the real cost of doing things and that some things which It is the whole-life cost of an asset that is crucial, not just the initial outlay may on the face of it may be less attractive may be more attractive when you look at it from a totex angle." Ofgem says totex will "deliver long-term value-for-money network services for exist- ing and future customers" and will make the companies "indifferent" as to whether it presses ahead with a capex or opex solution. The water regulator states that the shi will "enable companies to make a return for spending wisely on operations, rather than just assets". However, there is an argument that says totex is a "red herring", as claimed by Thames Water head of strategic business planning Sarah McMath. She says it is the shi to an outcomes-based approach by the regulator that gives the companies the freedom to choose the more suitable – and cost effective – solution. Northern Gas Networks operations manager Richard Hynes-Cooper states that the innovation 'I' in RIIO has been an important factor in new solutions being used and developed by gas networks. But he also says that this goes hand-in-hand with totex, because the new structure grants the utility companies the freedom – and financial returns – to use opex spending, rather than capex and building a new asset. That is what the regulators wanted to achieve. Totex is the new mechanism, introduced in PR14 in water and the RIIO price controls in energy, for planning and reporting capital and operational spend. Historically, regulated companies planned and reported their infrastructure spending in two separate tranches: capital expenditure and operational expenditure. However, this led to a perceived bias toward capital investment even when operational solutions might be cheaper and offer better long-term value to customers and the environment. A totex mechanism combines both capital and operational expenditure into a single pot. The objective of totex is to achieve the optimum combination of capital, operational and wider interventions in a particular set of circumstances in order to deliver required outcomes. WHAT EXACTLY IS TOTEX? Capex Opex Totex

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