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The Topic: Totex UTILITY WEEK | 11TH - 17TH DECEMBER 2015 | 13 T he RIIO and AMP6 regulatory frame- works for utility companies has started to remove the separation between capex and opex, opening the door to consid- ering total expenditure (totex). And with it we are starting to see a quiet revolution. Capex spend remains favourable because it increases corporate asset value. However, the new totex regime encourages companies to trade off between capex and opex over the whole life of a solution. Enhanced asset risk and condition decision frameworks are being adopted to optimise cost, risk and performance. The totex regime is enabling companies to bring alternative solutions in to play: • In the water sector, for example, spending money to persuade farmers to change their practices in the use of chemicals on crops that end up in water courses. • Across the utility sector, companies are increasingly buying IT in the form of cloud- based solutions (funded as a service through opex) rather than the traditional model of owning and implementing the solution. With the new regime comes a greater incentive to shi from "spend as much capital as possible" to "invest capital as quickly and efficiently as possible to deliver outcomes sooner". Leading utilities are deploying new and innovative ways of delivering programmes of work, drawing on the benefits of lean construction, offsite manufacturing and building information management. So why is the revolution quiet? Like any major change, it takes time for people to accept and adopt new ways of working. There are also practical constraints, such as opex-funded interventions typically being a poor substitute for capital replacement when measured against asset risk and safety reduction. We expect to see a step change in the next regulatory period. The coming 12 months gives companies the opportunity to assess their initial learning of totex and build in to future business plans for maxi- mum advantage. Stephen Wardle, Adrian Chapman and Mark Turner EY Investor view: We are just as the beginning of what will be a revolution for companies Electricity transmission: RIIO-T1; began in April 2013 and will run for eight years; will feature a mid- period review – the initial consultation was launched in November 2015; a decision on whether the review is required will be made by April 2016; any potential changes to the price control will be consulted on in July 2016; any changes will be implemented from April 2017. Gas Distri- bution: RIIO- GD1; began in April 2013 and will run for eight years; will feature a mid- period review – the initial consultation was launched in November 2015; a decision on whether the review is required will be made by April 2016; any potential changes to the price control will be consulted on in July 2016; any changes will be implemented from April 2017. Electricity distribution: RIIO-ED1; began in April 2015 and will run for eight years; a mid-period review is set to be held and is expected in 2018; any changes will be implemented from 1 April 2019. Water: PR14 began in April 2015 and will run for five years; there is no mid-term review, although there will be a review of the non-household price controls in 2017 ahead of market opening. KNOW YOUR PRICE CONTROLS Value for money • This is one of the main drivers behind the shi to totex. It aims to encourage lifetime cost think- ing and getting better value for money for the companies, and ultimately their customers, over the lifetime of an asset. This is particularly important with financially chal- lenging price control periods under way. Sustainability • Having the flexibility to choose more opex solutions under the totex regime will allow for more sustainable developments to be made. A prime example of this is catchment management within the water sector, whereby collaborative working to ensure the environment is able to cater for the needs not only of the water companies, but the other abstractors as well. This will also help to boost the resilience of the sectors because they will be able to position themselves better for changing future pressures. Innovation • With the greater freedom to spend their money on delivering solutions, utilities are able to seek out new ways to achieve their goals. The innova- tion drive is boosted in the energy sector by Ofgem allocating funds for innovation projects under the RIIO price control regime. Tax reporting • Despite opex and capex disappearing from the regulator's vocabulary for the most recent price controls and both morphing into totex, things remain divided in the view of HMRC because the forms of investment are taxed in different ways. Future Water Association chair Alastair Moseley says this means "it's just not as simple as saying we will switch from one approach to the other". Cultural change • The shi away from thinking about capex and opex solutions will not happen overnight, accord- ing to British Water director Paul Mullord. He says the previous way of doing things has been "ingrained" into engineers and operations directors. "That culture may be different to what we've had in the past. It is going to take a long time to get the change to happen." PROS AND CONS OF TOTEX "Things are radically, radically different to the way they were before." l Professor Anthony Conway, former United Utilities executive director and director of the Water Industry Forum Getting totex right In a recent report Water Sector Innovation & Perceptions of Totex (see "Water sector wary of innova- tion" overleaf), experts at built asset consultancy Arcadis set out five easy steps to getting totex right. They include: > Adopt both an asset and business centric approach > Create a robust data and cost model > Define end-to-end opex model, roles and responsibilities > Pilot the solution for different asset and work types > Ensure the financeability of the plan To download the full report, go to: utilityweek.co.uk