WET News

wwtonline.co.uk | JUNE 2018 WET NEWS 17 Capital maintenance comes to the fore C hange is afoot for the wa- ter utilities in England and Wales. For the last 30 years, these private companies have favoured capital invest- ment for the creation of new as- sets as the best way to achieve their service, environmental and quality targets. Looking to the future, however, new assets are likely to be the solution of last, rather than first, resort. Among the most significant reasons for this change is the decision by the water sector's economic regulator, Ofwat, that the weighted average cost of capital (WACC) in the next price review will be at the lowest level since the privatisation of water services in England and Wales in 1989. Because the water compa- nies created by the privatisation process are natural monopolies, the government of the day sought to protect customers' interests by creating the eco- nomic regulator to control water bills and set service levels. This was achieved through a system of 'comparative competition', customer, political and regula- tory scrutiny is growing. This means the water compa- nies will need to focus on the performance of their existing assets – to an unparalleled degree – to ensure regulatory compliance, while also meeting the expectations of owners and shareholders. However, there is good news for water companies that want to do things differently and embrace change. Significant efficiency opportunities exist for the water companies that can capitalise on both data and technology. Advances in both these areas are significant, affordable and offer substantial benefits. Advances in data capture and analysis and the insights that are revealed, combined with an ability to utilise and integrate technologies, will ena- ble asset optimisation and hence leverage cost efficiencies while giving greater assurance on compliance and service. Similarly, water companies that can move towards more proactive maintenance approaches and operate perfor- mance and condition-based maintenance programmes will transition from paying a cost of asset failure to a lower cost based on optimum asset inter- vention. Behavioural change will also be required, and should not be underestimated or overlooked, as water compa- nies and their partners embark on these operational and deliv- ery realignments. In terms of asset manage- ment and operation, the sector is not short of data. The deploy- ment of analytics tools can transform asset data into actionable information for smart decision making – for example, the application of tools that allow asset perfor- mance data to be combined with external data, such as weather and rainfall informa- tion. Such tools enable the iden- tification of operating condition trends that facilitate the devel- opment of new system operat- ing procedures and interven- tions to mitigate pollution risk. More sophisticated analysis of asset performance data will ena- ble water companies to get a bet- ter understanding of which are their most critical assets, and when intervention is required to keep those assets delivering opti- mum performance. Water companies are not a homogenous group and, as we head towards PR19, they are at different points along the jour- ney to make asset management and capital maintenance viable tools for delivering successful outcomes during the 2020-2025 price review period. Some have already begun to embed the necessary prac- tices and data analytics tools; others are less quick to adapt to what is likely to become the new normal. • INSIGHT ASSET MANAGEMENT The tight cost of capital set by Ofwat for PR19 will mean water companies will need to place the emphasis on maintenance and maximising value from assets, writes Scott Aitken by Scott Aitken, managing director, Black & Veatch central to which is the five- yearly price review cycle. WACC – which is the assump- tion that Ofwat makes on the cost water companies will incur in raising debt or equity to fund investment in assets – is one of the biggest building blocks in PR19, which covers prices from 2020 to 2025. Ofwat is predicting a WACC – in Retail Price Index (RPI) terms – of 2.4 per cent for PR19. This is a reduction of 1.3 per cent from the 2014 price review's WACC, and a record low for regulated utilities. Ofwat's WACC forecast for PR19 is driven by lower expectations of the market cost of debt and equity. The effect on customer bills could result in an average saving per customer of £15-£25 per year from 2020 onwards. Since privatisation, demand for water and sewerage services has proliferated as the popula- tion has grown, and water qual- ity and environmental stand- ards have become increasingly stringent. In more recent years, the need for resilience in the face of such things as climate change has added to the require- ments placed upon the water companies in England and Wales. Investing in new assets, or extending existing assets, has been the companies' favoured response, with £130 billion invested since 1989. However, concerns about the regulatory framework creating the potential for a capital expenditure (Capex) bias was among the reasons for Ofwat's shiœ to a total expenditure (Totex) price review, rather than using separate Capex and Opex for the current price review. With a regulatory determina- tion that is likely to see cus- tomer bills reduce – and a low WACC – Capex investment will need to be very carefully consid- ered and targeted. Water compa- nies will be required to fund resilient systems and ensure business processes and struc- tures are lean and efficient. At the same time there will be no decrease in the quality and service level demands placed upon them, while public,

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