Final Business Plan Part A The Company Strategy

Transcription

1 Final Business Plan Part A The Company Strategy

2 Foreword Glas Cymru Welsh Water delivers safe and reliable drinking water and sanitation services to its customers, protecting the environment and, crucially, looking after the water industry in Wales - and the essential public service it provides - for future generations. Ever since Glas Cymru, a not for profit company limited by guarantee, took over the ownership of Welsh Water back in 2001 on behalf of Welsh Water s customers, this has been our only consideration we have no competing objectives. Our Sustainable Future This Business Plan sets out what we want to achieve over the coming five years. It makes good progress towards the goals included in Our Sustainable Future, a document we published in 2007 which sets out our long term vision for the water industry in our region. Our objective has been to make sure, as far as possible, that what we do in the coming years comprises the best possible package of outcomes and delivers a public service our customers would accept as being good value for money. Legitimacy A good understanding and acceptance of what Welsh Water plans to do and proposes to charge for the public service it provides is of enormous importance. With the legitimacy that comes from this, we can carry out our day to day responsibilities more efficiently, we can retain and attract talented and committed people into this industry and, by reducing regulatory and political risk in particular, we can keep the cost of financing Welsh Water s assets as low as possible all of which means better value for money, both for today s customers and for future generations. Planning in uncertain times In our Draft Business Plan, published in August 2008, we gave our view at that time of the priorities for the next five years, comprising an affordable first step towards the goals in Our Sustainable Future. Neither our long-term strategy nor our view of the immediate priorities has changed significantly since then. However, we have had to draw up this Final Business Plan in the context of a most challenging and uncertain economic environment, with risks to the business that we cannot control but which we must be able to react to. As a consequence, we have subjected our plans to renewed internal challenge to ensure that they deliver the best possible value for money to our customers our Board and the Members of Glas Cymru have been fully involved in this governance process. It is important that we do not over-promise in terms of what we can safely deliver in this period and that we retain flexibility to adapt our plans if circumstances change. Our overriding concern will be to ensure that we do not create additional pressure on our customers budgets at a time when they will already be under great strain. Customer bills and investment In deciding what needs to be done in the years ahead, a balance has to be struck between affordability on one hand and the quality and reliability of service on the other. The water industry everywhere is very capital intensive and Welsh Water employs a network of reservoirs, treatment works, pumping stations, and mains and sewers which has a replacement value of some 25 billion around 20,000 per household. Much of what we do day to day to deliver a high quality and reliable public service involves operating and maintaining this enormous network of often very long life assets. Network performance is therefore key to the service we give our customers as well as our ability to protect our environment from pollution. It follows that the key trade-off is between affordability and investment in our network of assets. This is why much of this Business Plan is concerned with how much we propose to invest over the next regulatory period (AMP5) and the benefits that this investment will deliver for our customers and the environment. Affordability Welsh Water s average household bill is still higher than average only because Welsh Water, with its long coastline, employs more wastewater treatment assets per customer than most other companies. Moreover, average household incomes are lower in our region than elsewhere. We have been able to mitigate this serious disadvantage through our growing customer dividend which this year is 22 per customer but keeping our bills affordable in the years ahead, especially for our least well-off customers, remains a key consideration in our plans. Water quality and public health Nothing is more important than safe drinking water. While the overall quality and reliability of drinking water supplied by Welsh Water has never been higher, we need to extend and upgrade our water treatment facilities if we are to maintain these high standards. In particular, we must deal with changes in our environment that have led to some deterioration in the quality of raw water we abstract for public water supply and respond to the emergence of new threats to the safety and quality of our drinking water. Page 1

3 Just as important as a reliable asset network are the skills and capabilities of our people in operating and managing the network so that the safety of drinking water is always assured, and sustaining this is another of our key objectives. Asset renewal and maintenance A further feature of our Business Plan is the development of a forward looking, risk-based approach to planning asset renewal and maintenance. The aim here is to act more proactively and do what is required to keep our key assets operating reliably before breakdown and failure. Not only does this avoid service shortfalls and other problems like pollution, it is more cost efficient. But even with this greater emphasis on asset renewal and maintenance, our 25 billion network of assets will continue to get older. We are continuing to develop our asset management capabilities, as reflected in our recent successful certification under PAS55:2008, making us the only water company to achieve the most up-to-date BSi asset management specification. Environmental programme Our Business Plan will deliver a number of important statutory environmental improvements and environmental impact investigations, additional resilience against the risk of flooding and investment in new sludge treatment processes which will both improve our long term operating cost efficiency and cut our carbon footprint. The Business Plan also includes provision for tackling further serious sewer flooding risks, the worst kind of customer service failure, both through specific investment schemes and the beginning of a long term strategy to reduce the amount of surface water entering our sewerage network (SUDS). Affordable bills and a 1,356m investment programme By setting rigorous targets for further efficiency savings in future, and by continuing to finance the capital investment programme efficiently as a result of our unique not for profit ownership model, we believe we can deliver this capital investment programme and the benefits it would give for customers and the environment without the need for the average household bill to be any higher in real terms in 2015 than it is today with an average household bill of 376 (rebased to RPI), or just over 1 per day. Risks and uncertainties The very uncertain economic climate will have a significant adverse impact on our business; for example reduced demand especially from business customers, higher levels of bad debts and increased funding costs. In addition, draft proposals from government could lead to a substantial increase in our costs base; the initial proposal to increase our business rates bill alone could add some 10 a year to every household s bill. Other decisions to be taken by government and regulators could have a dramatic impact on the longer term cost to customers, such as the decisions that will be taken by the Welsh Assembly Government as to the timing and method of the adoption of private sewers by Welsh Water. Of particular significance is the proposal by the Environment Agency for major reductions to the level of water abstractions from designated rivers in South Wales, which could result in the need for some 180 million of capital investment. We will make every effort to find ways to achieve our common environmental objectives in a manner which is truly sustainable and remains affordable for our customers. Final Business Plan We believe our Business Plan represents a reasonable and sustainable package that balances affordability and service - both for today s customers and for future generations. It follows an exhaustive and detailed analysis of what really needs to be done plus extensive consultation and discussion with key stakeholders in our region. The priorities in the Plan have been derived from the results of the detailed customer research exercises that we have carried out. Given the current extremely difficult economic environment, we may need to keep these plans under review, to ensure that they remain affordable and financeable. That said, the Board of Welsh Water believe that this is a Business Plan that can be supported by customers and endorsed by other stakeholders, which will in turn mean that it can be delivered and financed efficiently. Nigel Annett Managing Director Page 2

4 Structure of our Final Business Plan (FBP) This document is organised into 11 parts plus appendices: A B C D E F G H I J K covers the Introduction and background to Welsh Water and Glas Cymru. provides an Overview of how our FBP links to our 25 year strategy document, Our Sustainable Future. provides detail of Ofwat s Price Review Process. sets out our overall approach to Developing our FBP and in particular our approach to asset strategy, which has recently been accredited as meeting the requirements of PAS55:2008. summarises our current understanding of Customer Views and priorities, explains what the plan will mean for our customers. sets out our plan for Water Supply and summarises our proposals for the AMP5 period and how these take account of our strategic objectives, our current performance and statutory obligations on water supply. sets out our plan for the Environment sewerage and wastewater treatment and follows the same structure as Part F. sets out our targets for Cost Efficiency. Here, we summarise the challenging targets we have set for further cost efficiency savings during AMP5. covers Financing and Customer Bills and explains how the plans described in Sections F and G will be financed by cost efficiency savings, customer charges and by new funds to be raised from investors. It also highlights the key risks and uncertainties we are facing. provides details of how the plan has been developed and includes a Board Statement. is a Glossary of the terms used in this document. Tables A1 to A10 are included as appendices. Page 3

5 A Introduction

6 A Introduction Background on water sector The water industry in England and Wales comprises 10 regional water and sewerage companies (the former publicly-owned Water Authorities) and 13 generally smaller companies who provide only water supply services. Together, they provide services to over 22 million households and 1.2 million shops, offices and factories. Nearly 16,000 Ml/d of water are supplied to customers, and a similar volume of wastewater is collected and treated. To deliver these services, the companies own, operate and maintain some 1,300 water treatment works (WTWs), some 640,000km of underground water mains and sewers, and some 6,400 wastewater treatment works (WwTWs). Each year, water and sewerage services cost customers over 7 billion. On average, households pay some 340 for services, but there are significant variations from one area to another and between different types of household. Most non-household customers, and over 30% of household customers, now pay for their services on the basis of metered charges. The remainder continue to pay on the basis of the rateable value of their property. Since privatisation in 1989, the industry has invested over 70 billion in maintaining and enhancing its assets. This has been financed partly from cost efficiency savings, partly from customer bills and partly from new finance provided by investors. As a consequence, the industry s debt has risen to some 27 billion from practically zero in 1989 and now accounts for over one half of the Regulatory Capital Values (RCVs) of water companies. For AMP5, the industry faces a series of new and demanding challenges. These include the upward costs pressures from power prices challenges and problems associated with the recession and economic downturn. In addressing these, companies must maintain a high quality service to reflect increasing customer expectations and the possibility of further significant increases in environmental quality standards. Welsh Water and Glas Cymru Welsh Water is owned by Glas Cymru, a not for profit company. Glas Cymru has no shareholders and does not pay dividends. All financial surpluses are reinvested for the benefit of customers. Under Glas Cymru s ownership, Welsh Water s assets and capital investment are financed by bonds and retained financial surpluses, and many day-to-day activities are carried out by specialist business partners appointed by Welsh Water following a competitive procurement process. As the following map illustrates, this makes Welsh Water unique within the regulated water sector. Glas Cymru s constitution strictly limits its purpose to that of financing water assets in Welsh Water s area of appointment and managing the business, so that high quality water and sewerage services are delivered at least cost to the customers and communities served. UK Water Industry Northern Ireland Water Scottish Water South West Water United Utilities Dŵr Cymru Welsh Water Severn Trent Water Wessex Water Northumbrian Water Northern Ireland - part of Government department Scotland - publicly owned company answerable to Scottish Parliment England - privatised 1989, 9 large companies plus 13 others Welsh Water - privatised 1989 Not for Profit since 2001 Yorkshire Water Thames Water Anglian Water Southern Water Page 5

7 Welsh Water s operations The water industry is asset intensive, and we employ a large and complex network of long-life assets to deliver water and sewerage services to customers: ffoperating 62 impounding reservoirs and 82 WTWs and supplying on average 840 million litres of water every day through a 27,400km network of water mains, including 714 water pumping stations (WPSs) and 654 service reservoirs (SRVs); and ffcollecting wastewater (and surface drainage) through a 19,000km network of sewers, including 1,861 sewage pumping stations (SPSs) and 3,200 combined sewer overflows (CSOs), before it is treated at 833 WwTWs located next to rivers and along the coast of Wales. Glas Cymru s ownership has secured these essential public service assets for the long term, and the business model we have adopted ensures that they are financed and operated efficiently with the sole aim of giving our customers the best possible value for money. We also own 35,000 hectares of land, much of which has a high value in terms of nature conservation and recreational use. Unique characteristics of our operating environment There are a number of specific features of our operating environment which differentiate it from those of other companies and which play a significant role in shaping the plans set out in this document: ffthe region is the third largest amongst the water and sewerage companies, although we are only the sixth largest company in terms of numbers of customers served. Our operating area is also characterised by a relatively long coastline and a level of average rainfall which is amongst the highest; ffwhen compared with other companies, our water resources position is generally satisfactory. By contrast with water companies elsewhere in the UK, a comparatively high proportion of our water supplies come from impounding reservoirs, with relatively small volumes supplied from boreholes; ffas a result of the sparsity of the population in our region, we employ relatively more water supply assets per customer than other companies, and those assets are, on average, commensurately smaller. Although the company serves almost 6% of the industry s customers, we own and operate some 7% of the industry s WTWs and some 10% of the water mains; ffwe also experience considerable travel distances to our more remote sites and scarcity of sub-contractors in certain parts of our area; ffas with water supply, the wastewater service is characterised by a network of small assets across the area. We manage some 5% of the industry s wastewater flows, yet operate almost 6% of the industry s sewers, 14% of intermittent discharges (including CSOs) and some 13% of the WwTWs; ffsewage treatment for over half our customers has been built post-privatisation (previously there had been reliance on long-sea outfalls) and so was financed through customer bills. By contrast, sewage treatment for some inland companies was generally built pre-privatisation, with these costs effectively being financed by the tax payer and largely written-off at privatisation; and ffthe wastewater treatment standards that we are required to achieve reflect the high quality of the local environment. The standard of river quality in the region is very high, and there are a significant number of designated bathing beaches along the Welsh coastline. The number of WwTWs at which ultra-violet disinfection is provided is higher than all but one of the other water companies. As a consequence of these and other features, our costs are higher than those of the majority of other companies, and this is reflected in customer bills. Overall, we have the second highest RCV per customer and our total average household bill is some 17% above the weighted industry average bill. Further detail on our forecast bill profile for AMP5 is shown in Part I. Page 6

8 B Overview

9 B Overview Welsh Water s FBP This FBP summarises our approach for the next five year regulatory period, April 2010 to March 2015 (AMP5), having taken account of customer views. The plan includes the maintenance to be undertaken, the drinking water and environmental quality improvements and service delivery targets to be met, the estimated costs of delivering the work, how it will be financed and the resulting bills our customers will be asked to pay. It provides the background and context for these proposals and explains how we have put together the package of work and associated outcomes. As a business providing an essential public service, our customers and other stakeholders will want to know that these plans comprise the right balance of priorities, ensuring that current high standards of service are maintained and that areas for improvement reflect, wherever possible, customer priorities and that they are affordable. As part of the regulatory price review process, this plan has been reviewed in detail, subjected to rigorous internal challenge and scrutiny by industry regulators and others, before being revised and updated to become the FBP. The Water Services Regulation Authority (Ofwat) will set new price limits for us (alongside all other regulated water companies in England and Wales) in November 2009, to come into effect on 1 April The FBP represents our judgment of the programme of work needed to maintain and improve the levels of service to our customers. In producing this plan, we have applied extensive cost benefit analysis to the programme, assessed customers willingness to pay for the appropriate levels of service and have taken into account of the views of our customers through a comprehensive programme of customer research. The FBP highlights the key issues and the balance between continuing high levels of capital investment - to further improve water quality and environmental quality - and their impact on customer bills. Employer of choice Financing the business Our sustainable future The formulation of our FBP has been completed within the context of achieving the objectives contained within our 25 year strategy document, Our Sustainable Future, published in November This document provided the framework within which our objectives for the AMP5 period will be delivered and this FBP is the first phase of our 25 year programme to achieve the long terms targets in a prioritised and affordable manner. The key themes of the strategy are shown around the rim of the diagram below. Whilst we continue to be true to the goals and aspirations set out in Our Sustainable Future, like all other businesses we have felt the impact of the current recession and are doing what we reasonably can to mitigate the impact the economic downturn is having on our business. Against this backdrop we have re- examined our plan thoroughly, challenging all aspects to make sure that it represents the best value for customers and continues to be affordable. However, the uncertainties associated with the recession and the deepening economic downturn inevitably mean that there is a greater need for flexibility so that we can adapt our plans if circumstances change, and we will therefore keep the position under review during these turbulent times. A ordability and value for money Looking after our assets A sustainable strategy for Welsh Water Protecting public health Meeting customers expectations Safeguarding the environment Responding to climate change Page 8

10 Protecting public health Customers can have complete confidence in the safety of their drinking water. Our biggest responsibility is to provide a safe and reliable drinking water supply to our customers at all times. We will undertake significant work at 23 water treatment works including the installation of enhanced treatment to deal with raw water deterioration and identified emerging risks, protecting water quality to some 215,000 customers at a cost of 101 million. ffimplementation of Drinking Water Safety Plans, which are subject to ongoing review, generating further major investment at 18 water treatment works, serving some 330,000 customers at a cost of almost 90 million. ffenhancing our capabilities to ensure the reliability and safety of drinking water. ffundertaking 410 km of mains renovation to improve the acceptability of water to customers. ffreducing contacts from customers regarding water quality. Safeguarding the environment In providing services for customers, we will protect the environment within which we all live - taking a holistic view of environmental impact at a local, river basin and global level. Promoting long term, low carbon solutions to improve the quality of the local environment. We will achieve this through an integrated approach, including Sustainable Urban Drainage Solutions (SUDS) and catchment management schemes. We will continue to promote water efficiency in a cost beneficial manner, for example, through the Be Waterwise initiative. fftargeting zero serious pollution incidents and a significant reduction in minor incidents from the sewerage network to some 100 a year by ffundertaking 29 investigations to evaluate the requirements of the Water Framework Directive (WFD) and other legislation to find the optimal solutions in terms of environmental impact. fffurther enhancing the already high standard of bathing and shellfish waters through investment at 14 sites, so that the number of Blue Flag beaches and marinas along our coastline remains high. ffenhancing treatment at 45 wastewater treatment works which will deliver a range of benefits, for example, reducing the level of phosphates in the river Dee. Page 9

11 Responding to climate change We will adapt our activities to deal with the potential consequences of climate change, while substantially mitigating our own carbon footprint as an effective contribution to the wider effort within Wales. Improving energy efficiency and carbon reduction measures, particularly through investment in full advanced sewage sludge digestion at 3 sites and working towards this at one extra site, making use of the methane gas produced to generate power and reduce our carbon footprint. We will also adopt measures to adapt to the impacts of climate change on our business. ffexpanding the use of low carbon wastewater treatment methods and catchment management solutions. ffseeking methods to achieve reductions of 25% in our carbon footprint by ffassessing 113 priority catchments and delivering 4 pilot schemes for SUDS thereby reducing the risk of flooding from overloaded sewers. ffdeveloping greater asset resilience to extreme weather conditions at 15 key water treatment works and pumping station sites, protecting those key assets which could be affected by flooding events or coastal erosion. Meeting customers expectations We provide services that are essential to customers, public health and the quality of the environment. We will meet customers increasing expectations, ensuring they have complete confidence in our service. Improving the performance of the water and sewerage networks. We will reduce the risk of customers suffering sewer flooding incidents caused by overloaded sewers, solving some 461 known and forecast hydraulic flooding problems, and reduce the number of properties flooded each year due to blockage, collapse or equipment failure from 120 per year to 100 per year through strategically targeted investment. ffpreserving the reliability of essential services, with very low instances of water interruptions or low pressure problems. ffusing the latest technology to anticipate and prevent service failures and to improve our customer relationship management by focusing on first time resolution of complaints. ffmaintaining at least a minimum of a 1 in 20 hosepipe ban standard. ffmeeting economic leakage targets and encouraging customers to use water wisely. Page 10

12 Looking after our assets Our long-term asset planning will ensure the continuation of enhanced standards for the benefit of future generations, at the lowest whole life asset cost. Delivering process improvements across the business by developing our 25 year programme using our Strategic Investment Planning System (SIPS). SIPS meets the requirements of the asset management Common Framework and will help us make more informed, long term asset planning decisions. It will tailor our capital maintenance and investment expenditure to obtain the best possible value for customers into the future. ffimplementing our long-term asset strategies and processes, which have recently been awarded the PAS55:2008 BSi asset management specification. ffsupporting economic development in our area through investment in our assets. ffundertaking major refurbishment at 4 of our largest wastewater treatment works at a cost of 28 million. ffaddressing the environmental problems caused by unsatisfactory intermittent discharges at 15 sites. ffundertaking 129km of sewer rehabilitation to reduce service failures associated with poor condition sewers. Financing the business We will minimise the burden of financing costs on our customers for years to come by offering a high credit quality to long-term investors. We will continue to pursue benefits from our business model and internal cost efficiencies for the benefit of our customers, whilst efficiently delivering our 1,356 million capital programme during AMP5. We have now reduced our operating expenditure by some 10% since in real terms. fftargeting gearing at around 70% and an A grade corporate credit rating. fffocusing on value for money for customers through the efficient delivery of services and investments - achieving operating efficiencies of a further 21 million by ffundertaking innovative financial strategies to keep down the cost of borrowing for the benefit of our customers. ffmaintaining flexibility in our investment delivery plans to respond to adverse developments in the economic climate, without compromising essential customer and environmental services. Page 11

13 Employer of choice The best people will be proud to work for us because of the quality of service the company provides, the opportunities we offer and the safe environment within which we work. Supporting our people through a major process change, with some 73 million to be invested during the second phase of our IT Enabled Change (ITEC) programme. This will allow us to further develop our core business processes with a view to achieving and maintaining improved efficiency and high quality customer service. ffmaintaining a highly skilled workforce to manage key assets and the business infrastructure, committed to delivering high quality customer service. ffimproving the technical skill base of the workforce through targeted development programmes. ffproviding a safe working environment having obtained OHSAS (2007) accreditation. ffcontinuing to develop our unique business model by working with best in class partners so that we are able to share best practice in the way we deal with our customers and drive efficiency. Affordability and value for money Our customers will regard the services we provide as affordable and good value for money, with a range of help targeting customers who struggle to pay. Affordability will always be a top priority for us. Average household customer bills in 2015 will be no higher than they are today, having allowed for changes in the RPI. With environmental quality, service and reliability improving at the same time, customer value for money will improve significantly. We will also seek to develop innovative win win tariffs that will benefit some of our more disadvantaged customers whilst helping to keep our cash collection costs down. ffworking with government to ensure that they fully understand the impact on our customers bills of legislative and policy changes, such as the adoption of private sewers, the implementation of the Traffic Management Act and possible major increases in the level of business rates. ffrigorously pursuing internal cost savings to deliver efficiencies across our operations. ffworking with others to develop new and innovative ways to assist customers with payment difficulties, reflecting the prevailing economic climate. ffmeasuring domestic and business customer satisfaction with value for money through regular customer research. Page 12

14 C The Price Review Process

15 C The Price Review Process Regulatory review of price limits In common with other water companies in England and Wales, we operate under a tight regulatory framework. Ofwat, the economic regulator, is responsible for setting limits on the prices that companies can charge their customers and for monitoring overall performance. The Drinking Water Inspectorate (DWI) is responsible for safeguarding drinking water quality. The Environment Agency (EA) oversees the environmental performance and regulates abstractions from rivers and reservoirs, discharges of cleaned wastewater from WwTWs and storm water discharges from overflows on the sewerage network to rivers or the sea. Every five years, Ofwat carries out a Regulatory Price Review to set an upper limit on the amount water and sewerage companies in England and Wales can charge their customers. The last Review, covering the five years to March 2010, was completed in November The final approved plans need to reflect the requirements imposed by legislation and government policy. Because the required standards for water quality and environmental quality are set by government, the Welsh Assembly Government (WAG) has an important role in setting the context for our plans. Timetable and process The remainder of the AMP5 Regulatory Price Review process falls into 3 phases: Phase 1: August 2008 to April 2009 Evaluation of the DBP Following the submission of Draft Business Plans (DBPs), a process of detailed evaluation and debate took place. At an industry level, Ofwat, in late 2008, publicly set out the issues arising from the plans (including their view of the draft capital investment proposals that companies had submitted) and, jointly with other stakeholders, carried out research into customers views on these plans. In December 2008, Ofwat published its draft baseline ratios as part of the Capital Expenditure Incentivisation Scheme (CIS). In the same month, WAG launched its Social and Environmental Guidance to Ofwat and in March 2009 published its Strategic Policy Position Statement on Water. Phase 2: April to November Setting Price Limits On 7 April 2009, all companies will have submitted and published their FBP to Ofwat. This will reflect the outcome of the debate in Phase 1 and the Guidance provided by government. The Ofwat price-setting methodology will be applied to calculate the maximum levels of customer bills that will need to be charged to enable the plan to be financed. On 23 July 2009, Ofwat will publish its Draft Determination of the price limits it expects to set for companies in AMP5. During autumn 2009, companies will be given the opportunity to make representations on these draft price limits, and other stakeholders will be consulted more widely. Ministers will also be given the opportunity to review their decisions on the quality improvement programmes. Phase 3: November 2009 to April Final Determinations On 26 November 2009, Ofwat will publish its Final Determination of price limits for all companies. The new price limits will come into effect on 1 April 2010, provided we accept the regulator s decision. In the event that we do not accept the regulator s determination, it can be referred to the Competition Commission for re-consideration. Until the Commission has made its decision (likely to be in the second half of 2010), the original final determination stands. Ofwat's price-setting methodology Ofwat is required to set price limits such that an efficient water company can "finance its functions". At regulatory reviews, Ofwat sets price limits so that projected revenues are sufficient to cover: ffefficient operating costs; ffefficient capital maintenance costs; and ffa return on capital i.e. a real return on the Regulatory Capital Value (RCV). These price limits take the form of RPI plus (or minus) a K factor. An allowance is made for total capital investment each year of the regulatory period and this sum, net of what is allowed in revenues for capital maintenance, is added to the RCV each year. Our RCV on 31 March 2008 was 3,529m. This was based on the value of Welsh Water following privatisation in 1989 plus net capital investment since that date, updated every year in line with RPI inflation. The RCV is financed by investors. Page 14

16 Ofwat uses statistical models to assess relative efficiency and make assumptions for cost efficiency savings when setting allowances for operating and investment costs. Our approach to efficiency is outlined in Part H. As part of Ofwat s developing methodology and approach to periodic reviews, a new CIS mechanism to incentivise companies to submit optimal investment plans has been introduced and will be factored into the Final Determination. The cost of capital is based on "an assessment of the real post-tax weighted average cost of debt and equity for an efficiently financed stand-alone listed water and sewerage company. The regulated water and sewerage sector is expected to continue to be "cash negative" over the course of AMP5, because of continuing large capital investment programmes. This means that companies need to be able to raise new finance from investors in order to finance their capital investment programmes. Ofwat has indicated that it will work closely with credit rating agencies with the aim of maintaining credit ratings comfortably within the investment grade envelope. Glas Cymru financing model Glas Cymru has a unique capital structure with the following characteristics: ffglas Cymru is a company limited by guarantee - it exists only to provide water and sewerage services to our customers; ffsecuring long-term financing and reducing financing costs are the key to lower bills; ffglas Cymru s strategy is to deliver a secure, long-term credit quality to investors; and ffwhere effective, using competitive outsourcing to maximise operating efficiency. programme. By funding our assets with long term, low risk bonds, Glas Cymru has reduced our cost of finance. This financing efficiency saving is being used, in the first instance, to build up "financial reserves" to insulate ourselves and our customers from any cost "shocks" (such as the effects of the uncertain economic environment), and also to improve credit ratings, so that our cost of finance can be reduced still further in the years ahead. Once "financial reserves" reach the optimal level, around 30% of RCV, a growing proportion of annual savings from efficient financing can be returned to customers either in the form of customer dividends or as additional investment to deliver high priority service improvements. Decisions on the treatment of these savings will be taken by the Board of Glas Cymru following conclusion of the review. One of the major credit rating agencies, Standard and Poor s, announced at the end of 2007 that they had upgraded both Glas Cymru s Class B bonds (to A from A-) and Class C bonds (to BBB+ from BBB). This offers an opportunity to borrow further funds at more attractive rates of interest, even in the sort of difficult market conditions that currently exist. The upgrade also helps achieve one of Glas Cymru s core financial objectives to have an A grade corporate rating from all of the major ratings agencies and differentiates Glas Cymru from the rest of the sector, which has recently seen negative credit rating action. However, access to certain attractive funding options, which we were able to use during the AMP4 period, are no longer possible due to the recent deterioration in the capital markets, and in the current economic climate this may have an impact on future financing costs. Together, these help deliver improved value for money to customers for the services they receive. In May 2001, Glas Cymru completed one of the UK's largest corporate bond issues to finance the acquisition of Welsh Water and to fund our continuing capital investment Page 15

17 D Developing our FBP

18 D Developing our FBP Overall approach This is our plan and, as part of an internal quality assurance programme, it has been subject to rigorous challenge, with our Board and Members of Glas Cymru being fully involved in the governance process. It has also been reviewed against the key strategies set out in our 25 year strategy document. We believe that this is an integrated plan, balancing the needs to guarantee safe drinking water, to achieve the highest standards of customer service and to protect the environment, all within a framework of ensuring that bills are affordable. To achieve this, we have where necessary, reallocated investment to AMP6 and beyond in line with our 25 year strategy. The plan highlights the material issues and identified risks of which we are aware or can reasonably predict. We have sought to identify customer preferences through a programme of customer research. The investment programme has been prioritised through the application of cost benefit analysis. Our aim has been to incorporate innovative solutions which will help deliver outputs in a sustainable way. Our approach to developing this FBP reflects the following key considerations: ffwe provide a key public service, crucial for public health and for the protection of the environment. The business of providing safe and reliable drinking water supply and effective collection and treatment of wastewater is a serious undertaking that cannot be compromised. Our responsibilities extend equally to future customers as well as to today's customers; ffcustomers are at the heart of our plan. Whilst much has been achieved and the vast majority of our customers continue to receive a reliable and acceptable service, in a number of areas our performance falls short of the standards customers expect. Wherever possible, our FBP aims to deliver improvements to service that are of highest priority to our customers whilst meeting higher standards to comply with EU and other legislation or government policy; ffin the period there is a requirement for significant investment to maintain and upgrade assets in order to deliver to our customers the service that they expect and ensure public health is protected at all times. The approach used to determine the best value plan uses cost benefit analysis combined with forward looking deterioration models and optimisation across all service areas. This method, coupled with analysis of our customers Willingness to Pay, allows us to identify the interventions necessary to maintain or improve service both over the AMP5 period and also the longer term. The increase in maintenance investment over the AMP5 period continues a steady increase in investment in this area over AMP4. The need to address asset deterioration arises where this deterioration is likely to result in detriment to the level of service received by customers or our impact on the environment. This continued investment in the asset base is critical in order to maintain the service offered to customers over AMP5; ffour current performance against statutory, regulatory and other measures of performance is generally very good, and in nearly all cases compares well with the best performers in the sector. Since 1989, the sharp improvement in standards has been achieved through a large and sustained investment programme alongside better working practices and step change improvements in cost efficiency (see Part H). Our starting position is to ensure that current high standards are maintained and the known shortfalls and known risks are addressed; ffbecause of our operating environment and the investment programme that has been financed since privatisation, our bills are still higher than average despite the growing customer dividend. In addition, disposable household incomes in our region are lower than elsewhere, at around 88% of the average for England and Wales. Our financial modelling indicates the average household bill will not be any higher, in real terms, in 2015 than it is today; f tf hrough our competitive procurement strategy, we have sought to secure from the marketplace the best available combination of cost efficiency and quality of service for each distinct activity across the business and in this way demonstrate the overall cost efficiency of the business; ffwe must always satisfy our important asset stewardship responsibilities and that the very large and complex network of assets is maintained in good condition for the benefit of future generations; ffwe are committed to delivering a business plan which is truly sustainable, balancing social and environmental objectives and making sure that we undertake our activities responsibly. For example, we will undertake modelling and investigations in our river catchments that allow us to explore cost effective and sustainable solutions such as the removal of phosphorous at source at Llangorse Lake, thus avoiding the need for expensive chemical dosing at the nearby WwTW; Page 17

19 ffthe DBP included an investment of 32m for the adoption of private sewers (excluding lateral drains and private pumping stations). Although we have been instructed not to include this investment in the FBP we have proposed a phased and prioritised process for adoption of private sewers by Welsh Water which we believe would minimise the cost of this change to water customers in general, whilst maximising the benefit to those households worst affected. Such an approach would be consistent with the position of the WAG as set out in their Strategic Policy Statement. It should be possible to finalise the details of this process in time for the resulting additional operating costs and investment to be taken into account in Ofwat s Final Determination later this year; ffboth Ofwat and the Department of Environment, Food and Rural Affairs (DEFRA) are undertaking reviews of competition in the sector. We support competition where it delivers better outcomes for our customers as a whole, through lower prices or improved services. However, we are concerned that options for the large-scale restructuring of the water sector, as promoted by Ofwat for example, would bring little benefit to customers in practice and could result in materially higher customer bills, if they were to undermine long-term investor confidence in the sector; ffwe will continue to focus on developing innovative approaches right across our business which will have a significant positive impact on our ability to deliver a high quality service to our customers. Our aim is to be at the forefront of innovation by having highly skilled and committed staff, working with best in class partners and implementing a major IT Enabled Change programme (ITEC). This will deliver a step change improvement in our core business and, as such, improve our day to day efficiency and especially service levels for our customers; ffthe likely longer term environmental impact of climate change is a huge challenge for everyone. We are committed to playing our part in preparing for its effects by having in place adaptation and mitigation measures that will allow us to maintain reliable and safe levels of service in the event of more variable and extreme weather patterns, as well as reducing our overall carbon footprint. This will involve investigating greater use of low carbon technologies and reducing the volume of surface water entering our sewers and drains; ffwe have a key part to play in providing the water supply and sewerage infrastructure necessary to support sustainable economic development in each of the communities we serve. We are committed to ensuring the continued development of the economy of Wales and maintaining and enhancing the infrastructure to facilitate this; and ffwe have undertaken a significant amount of research to understand the views of customers on the services we provide and those areas where we can improve. This information has been used to ascertain customers Willingness to Pay for further service improvements. Further details are contained in Part E. Asset Management Plan Because of the capital intensive nature of the water industry, much of this FBP is concerned with explaining what work needs to be carried out to maintain and improve our network of assets. It is mainly the scale of capital investment programmes that determines changes to customer bills in the water and sewerage sector. The proposals set out in this FBP have been prepared following a detailed assessment of our assets and our performance against all the regulatory and other measures that we and others use to judge performance in meeting statutory and other responsibilities. We have assessed the possible capital investment required to deliver the objectives set out in this FBP in five key areas: fftackling known service shortfalls and known asset deficiencies; ffrisk assessed asset maintenance; ffservice improvements of highest priority for customers; ffdelivery of quality improvements; and ffasset resilience to flooding events and the impact of climate change. The service targets that we aim to achieve have been driven by our long term strategy of ensuring no deterioration in service and, where customers have told us that our current performance needs to be improved, they have been set to move towards the levels customers expect us to achieve at a rate for which they are willing to pay. Our analysis has revealed that targeted uplift in maintenance is required in some areas in order to deliver the optimum level of service. The level of maintenance required in AMP5 is a total of some 918m compared to a level of 675m during AMP4, a 36% increase. Page 18

20 Approach to asset management planning In developing an asset planning system, we have embraced the forward looking, risk based principles of the common framework, which means that we are well placed to make more informed, long term asset planning decisions over the next 5 years and beyond. Long term, evidence-based maintenance of our assets is critical to delivering good service to our customers and in protecting the environment. It is equally important to ensure that we achieve best value from our expenditure when we create new assets or maintain existing ones. The attainment of PAS55:2008 accreditation (which is a stringent process of assessment that benchmarks best practice for asset management) will ensure that our asset management is systematic and co-ordinated to a defined specification. PAS55:2008 certificate Our approach also aligns with the UKWIR (United Kingdom Water Industry Research) AMPAP, a methodology for self-assessment of asset management planning. This is a process for determining the most efficient point at which to make a capital maintenance intervention, based on detailed forecasts of asset performance. To support our asset management and planning approach we have developed a number of strategic asset planning tools including the following: ffwe have built upon the Maintenance Optimisation (MO) techniques (used to inform the AMP4 maintenance programme) to produce our Strategic Investment Planning System (SIPS), which uses detailed information relating to our asset base to assist us in constructing a cost effective asset management plan. SIPS was used to aid production of the DBP and this has been further refined for the FBP. Numerous improvements have been made to the system, the analyses and the data which has helped in the production of the FBP; and ffwe use deterioration models to support forecasting of service levels, with and without intervention. These models were developed by WRc and are considered to be industry leading approaches and are based on analysis of our data sets. We have drawn on robust cost models and have established a Unit Cost Database (UCD) to inform scheme cost projections. The investment programme takes account of service to customers, cost effectiveness and budget (bill impact) constraints. Having been subjected to cost and scope challenge and sensitivety checking the plan has been refined and developed into one that offers best value to our customers. Major willingness to pay studies have also been completed with the results being fed into comprehensive cost benefit analysis, as appropriate. Our assessment of the carbon emissions associated with the relevant individual schemes has been incorporated into SIPS to prioritise investment and undertake cost benefit analysis. By driving improvements in asset management capability, as demonstrated through AMPAP and PAS55:2008, we will not only invest in our assets at the optimal point, but will also continue to drive efficiency improvements in the business in such areas as power and chemical consumption in particular. Page 19