The Post 2010 Environment and the Longer Term

Transcription

1 Company Commentary Part B Section B1 Key Component The Post 2010 Environment and the Longer Term Contents Executive Summary... 1 Section 1: Changes from Draft to Final... 2 Section 1.1: Material Changes in B Section 2: Achievements to Date Compared with Earlier Plans... 3 Section 2.1: Introduction... 3 Section 2.2: Security of Supply... 3 Section 2.3: Area of Water Scarcity Status... 4 Section 2.4 Capital Maintenance... 4 Section 2.5 Customer Level of Service... 5 Section 3: Assessment of the Post 2010 Environment for the Company... 7 Section 2.1 Achieving Sustainable Use of Water Resource... 7 Section 3.2: Safeguarding Drinking Water Quality... 9 Section 3.3: Ensuring a Reliable Supply of Water Section 3.4: Mitigating Climate Change Impacts Section 3.5: Enhancing Customer Services Section 3.6: Financing our Future Section 4: Managing the Risk and Uncertainty Section 5: Achieving the Right Balance for Customers Page i Section B1 The Post 2010 Environment 06/04/09, 14:12:05

2 Executive Summary This section of the business plan sets out the Company s achievements to date compared to earlier plans, assesses what the post 2010 environment for the Company could look like, identifies what the risks and uncertainties are, and how the Company proposes to achieve the right balance for customers. It highlights the significant progress that the Company has made through the granting of Area of Water Scarcity status in 2006 and delivery of its early start programme. Both of these have contributed to achieving a SoSI of 100. A high level of service continues to be delivered to customers, although this is not reflected in Ofwats OPA ranking, which has been skewed by several issues including a disproportionate impact relative to other measures, the retrospective introduction of a new methodology (SOSI), and the scalability of the performance measure across all companies. The Company s assessment of the post 2010 environment is that despite the short-term impact of the current economic downturn, there will be significant economic growth and a rising population. It also expects that there will be tightening environmental standards and this, together with the effects of climate change, will put even greater pressure on existing water resources and therefore the company s ability to supply customers. The Company has identified six themes in its Strategic Direction Statement, these flow through into this Business Plan and they identify the approach and targets which the Company will deliver post These are consistent with customers priorities. Page 1 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

3 Section 1: Section 1.1: Changes from Draft to Final Material Changes in B1 The most significant change between draft and final business plan submissions is due to the deteriorating economic situation which the country is engulfed by. This has led the Company to review areas of capital investment to identify where investment can be deferred without undue risk to service levels. For example, infrastructure renewals will continue at existing renewal rates for the period 2010 to This keeps a check on price increases but there is little risk of catastrophic failure of the pipe network in the period. Overall a thorough review has been undertaken to ensure that the post 2010 environment is managed in a manner that balances affordability with the need for investment. The changing economic pressures are reflected in the Company s outlook for the post 2010 environment. Page 2 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

4 Section 2: Section 2.1: Achievements to Date Compared with Earlier Plans Introduction The period since 2005 has been challenging for the Company. In the period 2000 to 2005 the Company installed complex treatment processes in order to ensure continued supply of high quality water. Requiring the provision of several membrane filters and advanced technology such as reverse osmosis, these complex treatment processes were necessary because the quality of the raw water that the Company relies upon had deteriorated. The full operational and cost impact of this step-up in treatment complexity was felt in the period post 2005 and allowed for in the Companys operating costs by Ofwat. The early start capital investment programme, due for completion in November 2006, was the biggest two-year programme in the Company s history. This programme was necessary in order to improve the security of supply to consumers, by providing some extra water and greater ability to move water around our networks to where it is needed at any particular time. At the same time, the Company made the first application to the Secretary of State for EFRA, to be granted area of water scarcity status, to allow it to meter as many as possible of its domestic customers on a more efficient and rapid area basis. All of this occurred during the longest, driest period in the area for over 80 years, when water resources were being stretched to meet customers needs. Nevertheless, the Company has maintained an uninterrupted supply of high quality drinking water to its customers and continues to score highly in customer surveys in respect of quality of service. Section 2.2: Security of Supply The South East of England is identified as an area of water scarcity by the Environment Agency. This means that in prolonged dry periods, or droughts, there is insufficient rainfall to recharge aquifers and consequently demand for water cannot be met. In order to mitigate the risks associated with dry periods and droughts, the early start programme involved: the construction of the Denge Security Main (approx 21km) to enable water to be transferred throughout the Companys area to the point of need, and the development of two new water resources, Buckland Mill and Bushy Ruff. The programme is complete with the exception of the Bushy Ruff resource development. Unfortunately, despite giving full support to the development of Bushy Ruff in the 2004 Price Review (PR04), subsequent investigation led the Environment Agency (EA) to decide that any abstraction there would require an equal reduction at one of the Company s other licensed boreholes within the same aquifer (i.e. no net gain in yield). Accordingly, we cannot proceed with the Bushy Ruff scheme. The Company has, however, been able to commission a new borehole at Cow Lane and completed the refurbishment of Dover Priory treatment works. Page 3 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

5 These programmes ensure that the Company has enough water available to meet customers demand in a dry year and has met its Security of Supply Index (SoSI) regulatory target of 100 in 2008/09. The situation is the subject of on-going discussion with Ofwat and the Company expects to be logged down for the unspent element of Bushy Ruff funding. Section 2.3: Area of Water Scarcity Status The Company s strategy has been to develop a twin-track approach to balancing supply and customer demand for water. This seeks to maximise reductions from cost-beneficial demand management, while providing additional water resources to avert the risks of any remaining gap between supply and demand. As it has limited opportunity to develop new low-cost water resources, the Company had previously proposed a longer-term demand management strategy that required 90% of customers to be metered by A pre-requisite for this was to obtain statutory Area of Water Scarcity status to enable customers to be metered on an area rather than individual basis. Following the grant of Area of Water Scarcity status, the Company began metering on an area basis on 1 st January The meter installation programme is ahead of schedule for the period. Nearly 16,000 meters have been installed. The Company now has a domestic meter penetration of 66% and we expect to exceed 70% by The Company believes that it can therefore revise its installation target to 96% by The Company received approval from Ofwat on 9 th January 2009 to proceed with an accelerated metering programme as from 1 April 2009 in order to achieve this revised target. To support the Company s strategy and develop its understanding of the benefit that metering can bring, it has begun a trial of a rising-block tariff, involving approximately 1,000 customers in Lydd. The tariff has two elements: a fixed volume to meet essential health and hygiene requirements; and additional unlimited volumes for discretionary or non-essential use. The former is at a tariff lower than the standard volumetric rate and the latter is higher than the standard. The early results of this trial will be available by autumn 2009, and will be used to inform the development of a revised tariff scheme for all customers during 2013/14. Section 2.4 Capital Maintenance The Company has one of the lowest below-ground asset-replacement rates in the water sector, at in excess of 300 years. Despite this, Ofwat s performance indicators suggest that the network, both trunk and distribution mains, is in a stable condition. Accordingly, the Company continued with that replacement rate in the period. It is achieving this rate. Similarly, the above-ground assets are defined as being in a stable condition, using Ofwat s performance indicators. Again, the Company continued with the rate of expenditure to maintain this level of service during the period. The rate was not achieved in the early part of the period, due to the need to divert spending to maintain operational water production at all sites during the drought. However, the Company is working to catch up with the planned pumping station and treatment works refurbishments by March Page 4 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

6 Section 2.5 Customer Level of Service The level of service being given to customers continues to be of a very high standard and one which in general the majority of customers are satisfied with. In 2007/08 the Company achieved the highest category in the DG service level indicators and is achieving the majority of the forecast in the AMP4 business plan see Figure 2. Level of Performance By DG2 - properties at risk of receiving low pressure 7 2 DG3 - supply interruptions (overall performance score) Actual DG6 - % billing contacts dealt with within 5-days DG7 - % written complaints dealt with within 10 days DG8 - % metered customers receiving bill based on a meter reading DG9 - % calls abandoned DG9 - % calls receiving the engaged tone Figure 2 The Company undertakes a bi-annual customer survey, the details of which can be found in Appendix C1.2 and C1.3. In these surveys, customers rate how satisfied are you overall with the service provided by your water company, using a scale from 1 meaning not at all satisfied to 5 meaning highly satisfied. Customer rate the service at 4.3. In Ofwat s Overall Performance Assessment (OPA) ranking, the Company s position has deteriorated from being the highest ranked in 2003/4 and 2004/5 to equal 7 th, 12 th and 19 th in 2005/6, 2006/7 and 2007/8 respectively. This is very disappointing for the Company, especially given the financial incentive in the price review associated with its ranking and the causes of the deterioration. The causes have been highlighted in the Company s June Return in recent years, but relate to the disproportionate impact of the failures (i.e. points allocation) and the scalability of the performance measure test across all companies leading to a greater impact of failure on smaller companies. Specifically, the Company has seen the following impacts: Year Performance Failure OPA Impact 2005/6 Downgrading of CCW complaints audit to Acceptable -4 points 2006/7 Single iron failure at customers tap -10 points 2006/7 6-month hosepipe restriction -3 points 2007/8 Failure to achieve SoSI of points Ofwat need to consider the following issues when determining the OPA ranking and its impact on price limits k. Page 5 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

7 i) If a company has a Water Resource Management Plan that is agreed by the EA and funded in price limits, which includes the use of hosepipe restrictions every 10 years as a measure, is it fair to penalise the company for utilising the measure? ii) iii) iv) The severity of the OPA impact is disproportionate to the performance failure. Is a single iron failure at one customers tap, or a reduction in CCW s complaint audit from good to acceptable, a greater customer service failing than a 6-month hosepipe restriction for all customers. How will Ofwat reconcile the unfairness of a CCW complaints audit that uses the same sample size for each company, regardless of the number of complaints received? For example in 2005/6 the sample size represented 18.9% of all complaints received by the Company compared to 0.8% for Southern Water Services. Clearly, the greater the sample size as a proportion of the total, the greater the probability that the poorer quality responses will be included. This is not a fair or relative comparison. How will Ofwat reconcile the unfairness of the OPI performance measure which is directly related to the number and size of water supply zones? Analysis shows that as the Company gets larger it is likely to have more zones and bigger zones, which leads to a significant dilution of the impact of a single failure. v) How will Ofwat reconcile the impact of the retrospective (2007/8) introduction, a measure which all parties knew would have the consequence of moving the Company from what would otherwise have been 2 nd place in the ranking to 19 th? Firstly, the Company s strategy was set in 2003/04 as part of the early start programme. Secondly, the Company s strategy was founded on a 3Ml/d yield from a new source at Bushy Ruff, agreed in 2003/4 with the Environment Agency. In 2006 the EA notified the Company that any gain would be required to be offset by an equal reduction at another source in the same zone. Therefore, the development was not progressed and the Company had to explore alternative options to address the SoSI score; these were completed in 2008/09. Both of these factors were outside the Company s control and yet it has suffered significantly as a consequence. Ofwats response to this matter of only considering individual aggregated impacts of greater than 1% is not robust particularly given the convergence at the top of their ranking. The removal of the WaSC s from this comparison, as is suggested in Ofwats methodology, will simply worsen the impact. Accordingly, the Company expects Ofwat to review their approach and provide further consideration of the Company s position. It should consider the contents of the Company s letter of 3 rd March 2009 on this matter. Page 6 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

8 Section 3: Assessment of the Post 2010 Environment for the Company The future holds many challenges for the Company, but the two that feature most highly and represent its customers priorities are: ensuring a reliable supply of safe drinking water, and continuing to balance customers demand for water with the water which is available. This will need to be done in a sustainable manner. Therefore the Company needs to anticipate and respond to changes that will impact upon sustainability and the way in which service is delivered. Two significant issues that have to be addressed are climate change and the Company s impact on the natural environment. Climate change is an enormous challenge facing society. Water is at the heart of it. Climate change is already causing more erratic rainfall patterns that impact on the recharge of water resources as well as customers use. The Company will need to adapt to the impacts of climate change which are already inevitable, so that it can meet its customers water needs now and in the longer term in an environmentally-acceptable way. The Company will need to do all it can to reduce the contribution which its activities make to climate change. It will also need to try to help its customers to reduce their own impacts by way of their use of water. In particular, the Company will need to reduce its emissions of global warming gases. In the UK, the water industry is responsible for some 4 million tonnes of carbon dioxide (CO 2 ) emissions annually (1% of the UK total) and the Company contributes proportionately to this total. The Company s ability to meet the area s water needs is reliant on the natural environment that surrounds it. This is under stress from a number of sources and the Company has a part to play in ensuring its protection and enhancement where appropriate. It is expected that environmental aspirations in the Company s area will rise over the next 25 years and the task of providing an economical water supply must reflect and contribute to achieving them. These two challenges should be seen against the likelihood that customers will be better off in 25 years time at recent growth rates, their income will on average be about twice as large in real terms. Unless something changes, this is likely to mean a continuing trend towards larger houses and accompanying forms of consumption, as well as a greater ability to pay for the services they want from the Company. Section 2.1 Achieving Sustainable Use of Water Resource During the periods of drought, following below average rainfall, the output of the Company s groundwater sources are currently insufficient to meet customer demand and provide adequate reserves. Page 7 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

9 Historically during such periods the Company has had to impose supply restrictions (e.g. hosepipe bans). Such restrictions are planned to occur no more than once in every ten years. The 2006 restriction was the first since 1996 and was necessary following two dry winters and what was the longest driest period since the 1930 s. The Company is committed to the twin track approach of developing new sources in parallel with active management of customers demand. In this AMP period the Company will commission two new treatment works that will provide much needed access to additional water resources. Also, having been granted Area of Water Scarcity status by the Secretary of State, the Company has commenced a programme of compulsory metering that currently will mean 90% of its domestic customers receive a measured bill by Metering is an essential strand of the Company s twin track approach as it provides information to customers that allows them to choose how much water they use and therefore how much they pay. It is also the fairest way to pay for the service provided. Looking ahead there are three key issues that will dominate the Company s operating environment and influence the degree to which it can achieve a sustainable use of water resources. The Company operates in an area where there is likely to be significant economic growth and rising population. The government had already sanctioned major housing development in Ashford and the Thames Gateway and in July 2008 Dover was granted Growth Point status, indicating a minimum of 10,100 new houses by In the latest South East Plan, approximately 16,000 new houses have been allocated for the Company s operating area over the next 25 years, including those in Dover. In 2009 the fast rail link from Folkestone to London will be operational. There is a possibility of a third nuclear power station at Dungeness and there are plans for the expansion and regeneration of Dover Port and Folkestone Harbour and the surrounding urban area in each case. The Company expect that environmental standards will tighten and increase in number and public expectations will also rise. A review of abstraction licences under the Habitats Directive and Alleviation of Low Flows Project has recently been completed for three water sources and already the next set of investigations are being identified by the Environment Agency s Restoring Sustainable Abstraction (RSA) programme and the Water Framework Directive (WFD). The latter is a major piece of European legislation aimed at improving the quality of water in our rivers and keeping them clean. At best these are likely to confirm acceptance of existing abstraction licences but more likely they will reduce the volume of water available for supply to customers in what is recognised as a water stressed and over abstracted area. Already we are experiencing the effect of climate change with more erratic periods of rainfall, more intense rainfall and longer drier periods. This change is expected to become more severe and it will have a negative impact on existing water resources that normally re-charge through the winter months thus reducing the water available for supply to customers. There will be a need for access to a greater volume of water resource to provide flexibility in supply. Page 8 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

10 The Company s strategy to manage the impact of these three key issues is to continue its twin track approach of restraining demand and delivering additional resources. This will be carried out in an integrated manner and set out in our Water Resource Management Plan (WRMP). Further details of the proposals can be found in section B5, but the Company strategy is to progress a proactive and ambitious set of demand management activities including 96% of domestic customers by 2012 and the introduction of a tariff(s) that encourage the conservation of water. The Company will also undertake a holistic and comprehensive evaluation of its Denge source, in conjunction with the EA, to ascertain its long-term viability and funding requirements in AMP6. Section 3.2: Safeguarding Drinking Water Quality The Company attaches the utmost priority to delivering a high quality of water to all its consumers. The quality of the water leaving the treatment works is tested and samples taken from customers taps that are sent to laboratories for analysis. Testing arrangements and the results are closely monitored by the Drinking Water Inspectorate (DWI) and the Company aims for full compliance with the relevant water supply regulations. Feedback from customer surveys indicates that the vast majority of the Company s customers are satisfied with the quality of the drinking water that is provided. Looking ahead there are a number of issues to be considered. In the shorter term the Company will need to comply with a tightened standard for lead in the water supply, which will be no more than 10 micrograms per litre (µ/l) by The Company has invested in treatment to prevent lead from old pipes from dissolving into the water and tap water accordingly meets existing standards and is generally already compliant with the new standard. Consequently the Company hope to avoid extensive lead pipe replacement and expects to limit its activity to a small number of critical areas. In some parts of the Company s area (i.e. Romney Marsh) consumers very occasionally experience discoloured tap water. This is due to chalk or rust from the inside of iron pipes becoming dislodged and suspended in the water. Discoloured water is not dangerous to health but rightly customers do not like it and it drives them towards the more expensive and less sustainable alternative of bottled water. Clearly, there is a need to reduce these occurrences further through increased flushing and cleaning of the water mains in those affected areas though this uses water and the longer term solution lies in replacing the affected pipes. With climate change longer dry periods and shorter more intense, periods of rainfall, are already experienced and these in turn can result in flooding. This can lead to a greater variability in the quality of the water in the underground sources. It is anticipated that weather extremes will worsen over the next 25 years and therefore, whilst existing water treatment works are still able to provide treated water that is safe, there may be a need to install additional treatment at some locations in the future. Page 9 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

11 The Company has had discussion with DWI and have their support for two projects to help safeguard drinking water quality, including additional treatment at Denge and mains flushing to manage the impact of deteriorating raw water quality in the short term. Additionally, the Company will continue to develop and embed its source to tap Water Safety Plans and Distribution Operation and Maintenance Strategy into management systems and operational activity. There will also be work required to improve the resilience of the Company s assets and in particular to protect six sites from the risk of flooding. Further details of these projects can be found in section B4 and B6. Section 3.3: Ensuring a Reliable Supply of Water For customer to receive a reliable and continuous supply of drinking water the Company has to ensure that it has sufficient infrastructure such as treatment works, pumping stations and distribution pipes available and able to be used. This requires both capital investment and extensive maintenance activity to ensure that the infrastructure remains reliable. OFWAT monitor the level of maintenance and use indicators to assess the condition and performance of the infrastructure which they refer to as serviceability status. This is done annually and the most recent assessment indicates that the Company s below ground infrastructure (i.e. pipes) is in a stable state and its above ground infrastructure (i.e. treatment works) is stable. The OFWAT assessment of performance is based upon historical data, looking at past burst rate on pipes. It does not take account of the rate of deterioration and frequency of replacement and therefore is not a true reflection of the requirements to maintain the condition and performance in the future. The Company supports the principles of the Capital Maintenance Common Framework (CMCF) which provides a forward-looking, risk-based assessment that considers things such as age, deterioration rate and consequence of failure. Accordingly, it has used this method to assess investment requirements for the future maintenance of its infrastructure. Currently the Company replace pipes, on average, in excess of every 300 years. This rate of renewal is unlikely to be sustainable when you take into account that the pipes are currently designed to last less than 100 years. Controlling leakage is an important activity for the Company and pipe renewals help to achieve this. Therefore, any increase in the rate of pipe renewals will also help with this and may reduce leakage further. The potential impacts of climate change have been seen in recent years through drought and flooding. The Company will need to ensure that both treatment works and network pipes are resilient to such events. Page 10 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

12 The modelling that the Company has undertaken suggests that simply maintaining the status quo will result in a deterioration of its assets particularly infrastructure, and accordingly the strategy is to increase the outputs and expenditure to move closer to a circa 150 year replacement rate in the medium term. In addition to the above the Company has identified three trunk mains and two service reservoirs that are currently single point failure risks to supply with significant impact for significant elements of the customer base. Therefore, its strategy is to eliminate these risks through a mixture of duplication and replacement projects. Details of these can be found in section B3. Section 3.4: Mitigating Climate Change Impacts The water industry is responsible for approximately 1% of the carbon dioxide emissions in the UK. In the interests of sustainability the Company believe this must be significantly reduced in the next 25 years. This will require it to explore and implement strategies and policies that reduce the emissions arising from its activity. Also over 40% of CO 2 emissions in the UK come directly from what we do as individuals, for example, water use, heating, using electricity in our homes and driving. The Company must work with its customers to jointly reduce emissions and contribute to reducing the severity of climate change impacts. The government is leading us in this area, setting a target for cutting CO 2 emissions in the UK by 60% by There will be further targets set, likely to be in the Climate Change Bill, to which the Company will be required to respond. The Company is committed to reducing our emissions and will work with contractors, suppliers and customers to seek a balance between risk, benefit and cost. During AMP5, the Company will seek to reduce its CO 2 emissions through the development of its demand management proposals and through the use of more energy efficient technology as part of the maintenance programme. Also investigations will continue to explore the potential for self generation using renewable sources. Section 3.5: Enhancing Customer Services Since the water industry was privatised in 1989, the industry has made significant improvements in the service it provides. The economic regulator, OFWAT, assesses annually the level of service that each water company provides to its customers and publishes this information. This Company was the first company to achieve the highest category (i.e. good) of service delivery in all of the measures. Clearly, the Company places great importance on providing a level of service to customers that gives them the confidence that it can be trusted to deliver an essential service. Page 11 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

13 It is important that the Company does not rely on the past and that it ensures that customers expectations, preferences and willingness to pay are at the heart of the services it provides in the future. This will require more consultation with customers, clear communications and provision of information that is relevant and reliable. The ease with which customers can access information, such as their account and services that the Company provides, is also an area where improvements will be required. Presently, the Company is a monopoly provider with only limited exposure to competition. There is mounting pressure to promote further competition in the sector. The Company is fully committed to providing a source to tap service to its customers that guarantees the best service at the best price without undue cross-subsidy of groups of customers. If the introduction of further competition achieves this then the Company will welcome it. Equally, as a water service provider it will continue to develop the services it is able to offer to achieve the same. Section 3.6: Financing our Future Presently the price that customers are charged generates the income which the Company requires over the five year price review period to deliver its plans. This includes funding for long-term borrowing necessary to finance the significant capital investment that has been delivered and will be delivered in the future. There are two charging mechanisms for domestic customers. If customers do not have a meter they will pay based upon the rateable value of their property. If customers have a meter they pay for the volume of water they use at a standard volumetric rate. All commercial customers are metered. The Company strongly believes that all customers should pay for water based upon the amount they use as this is the fairest and most sustainable way. In order to do this, customers must have a meter. Over 60% of the Company s domestic customers are already metered and the Company continues to use its ability to compulsorily meter customers to ensure that all those customers that can be metered are. Customer debt has been increasing in recent years and particularly since the removal of the right to disconnect domestic customers in There are two groups of customer here; those who choose not to pay and those who genuinely cannot afford to pay. The Company has a vulnerable customer tariffs and other support mechanisms in place to help the latter but only recourse to the courts with the former. It is easy to speculate what the future could look like, but the one thing that is for certain is that customers will still want quality drinking water reliably supplied at their taps. It is envisaged that there may be change in the way companies are regulated; this could be through integration of the regulators, change to facilitate competition, or modified price setting. Page 12 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

14 For the Company s charges to be fair and sustainable in the future they should also reflect the true costs of water supply to customers. This will require the development and introduction of new charging structures that consider the health and well being of customers and reflect the increasing environmental cost that our demand for water has. Any charging structure and changes to those structures will inevitably create hardship for some customers and the Company will continue to explore how it can assist further. However, the Company believes that affordability and debt has a much wider social implication and there is a role for government to deal with this through social benefits and taxation. This would provide a safety net for those who are genuinely unable to pay. Legislative change is required to provide companies with recourse to tools such as trickle flow meters and pre-payment meters. This would help to ensure customers that can pay do so thereby reducing the money owed to companies and the burden on all those customers who do pay. Page 13 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

15 Section 4: Managing the Risk and Uncertainty The Company faces much risk and uncertainty arising from our own circumstances and the actions of others: Supply Demand Balance the Company is following an ambitious proactive demand management approach to managing the supply demand balance. The Company has selected this approach because it believes it to be both the most cost effective and sustainable solution. It should come as no surprise, given the Area of Water Scarcity status granted to the Company by the Secretary of State in March However, the strategy is heavily reliant upon customers responding to price signals and adapting their behaviour to become more efficient in their use of water. If they fail to do so, the Company would need to bring forward capital investment to develop the next most cost effective water resource. Conversely, the Final Business Plan revenue requirement assumes a mid-range output from demand management measures (i.e. 130l/hd/d). Therefore if customers reduce consumption more than this (i.e. closer to the 120l/hd/d target) the Company will be exposed to a significant reduction in revenue that will have to met from shareholder dividend. While Ofwat have introduced the new revenue-cap price-setting mechanism, the Company believes that, due to its aggressive demand management proposals, it has potential exposure beyond that envisaged when the mechanism was introduced. This risk is far greater than any other company will face and consequently it would be unfair to expect the shareholders to meet such a shortfall until Reaction to Tariff Proposals there could be a degree of negative reaction from customers and politicians to the Company s plan to introduce a rising block tariff across its domestic customer base. This may be led by concern for vulnerable customer groups, such as those on low income who are less able to pay. The Company is currently trialling the tariff, which includes a mechanism to help some of those customers, and is looking at other ways in which these concerns can be dealt with. This will include further lobbying of government to accept its responsibility and deal with water poverty through the social benefits and taxation systems. Availability of Water Resources the Company operates in an area where water resources are scarce, options are few, and the supply/demand balance is finely poised. Added to these are the potential impacts arising from climate change on aquifer recharge and raw water quality. These increase the risks to the Company significantly. Risks from the loss of existing resources, the relative failure of demand management policies, and unexpected growth are disproportionately high compared to the rest of the industry. The Company s Water Resource Management Plan (WRMP) sets out these risks and makes allowances in deployable output and headroom assessments. Operating Efficiency the Company is highly efficient but operates in a very difficult local environment that has many adverse cost implications, which are not recognised by Ofwat s efficiency modelling techniques. The risk of setting an inappropriate aggressive efficiency target for a company employing less than 100 staff is self-evident. Too high a target would lead to service failure and/or failure to provide a reasonable return on capital. The Company will continue to strive for further efficiencies and has presented robust arguments in its local factors presentation in this Business Plan. ( Section B2) Page 14 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

16 Traffic Management Act the charges associated with the implementation of this latest legislation are still particularly uncertain and unlikely to be reflected in full in the base year opex. Therefore the actual costs in the next period could be significantly different to those allowed for in base opex. Bad Debt the Company continues to experience an increasing level of household customer debt. In 2007/08 alone the amount of cash collected as a proportion of money billed deteriorated by nearly 2% and in 2008/09 this is expected to total 4%. This situation has not been helped by the removal of the right to disconnect customers which, although rarely used, was a deterrent to non-payment. Whilst the Company is making every effort to collect debt, it is likely that the current and foreseeable economic climate will cause further deterioration. The Company will continue to work with the industry and government to look at how the use of trickle flow and pre-payment meters could be used to mitigate this. Loss of Large User the Company is in the unique position of having six major commercial customers (i.e. large users) who account for nearly 25% of measured turnover, with the Company s highest single supply being the Dungeness B nuclear power station. Clearly the loss of any of these six customers would have a significant impact on the financeability of the Company. Carbon Trading - The adoption of the Carbon reduction Commitment remains unclear and its future impact on the business will depend on three factors: o o o The value of Emissions Rights tradeable permits in the market mechanism being created; The performance of industries in achieving reduction and the impact on average values; The capping mechanism of tradeable permits for Emissions Rights The water industry as a regulated body is not fully in control of its own destiny and potentially legislation could interfere with aspirations for achieving carbon reduction. Not withstanding, what is known is that provided comparative performance is achieved the recycling of revenue from CRC will at worst introduce a cash flow cost but not a debt. However, if industry performs well and the Company cannot maintain pace with the achievement of others, plus if the capping system for tradeable permits significantly increases their value, then a penalty to the Company could result, which in financial terms could be equivalent to 10%of the value of the Emissions Rights purchased. Housing Growth housing growth in the South East of England continues to be projected and some early signs that it is happening are evident (i.e. Thames Gateway and Ashford). The Channel Tunnel fast rail link (Folkestone/Ashford/London) is planned to be operational by 2009 and this is likely to increase pressure on the local market further. There is the possibility that growth could outstrip the forecasts in the WRMP and that it will require investment in new resources to be brought forward. Page 15 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

17 There is also evidence that the current buoyant construction industry in Kent and the south-east is driving construction prices higher due to skills shortages and the geographic location of the business. The full impact of the current economic slowdown is difficult to predict as many major projects are still likely to continue despite the slowdown and we believe that construction costs will remain under pressure. FRED 29 adoption of FRED 29 will increase substantially the amount of corporation tax payable by the Company, well beyond the levels expected to be allowed under Ofwat s current approach to setting allowed tax. Earthquake the Company s operating area has recently been affected by two earthquakes (April 2007 and March 2009) and Folkestone sits on the geological fault which gave rise to them. Such tremors can be expected to continue. The consequence of the first quake was a ground movement that has caused a horizontal fracture across one of the Company s boreholes. The estimated cost of repair is several hundreds of thousands of pounds. There is also a possibility that a change in the chalk aquifer has occurred, leading to rapid deterioration in raw water quality immediately after rainfall. This is currently being monitored and no provision for expenditure is included at this stage. Many of the uncertainties described result in significant elements of cost within the Company s opex or impact upon revenue. The Company is expected to absorb such cost and revenue shocks. This exposes a considerable risk to the business that serves to underline the increasing difficulty that the Company faces in balancing the need for further efficiencies against its ability to finance its activities and through the higher operational risk that investors have to allow for when determining an acceptable return on capital. Page 16 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

18 Section 5: Achieving the Right Balance for Customers Currently the Company offers a superb level of customer service, which can be seen in the low number of complaints received, and a high level of compliments, the consistent praise of Consumer Council for Water (CCW) using the Company as the benchmark for the Region and the performance against OFWAT measures over many years. Customers want a sustainable and reliable supply of high quality water and ease of contact on those occasions that they have to talk to us. The analysis of consumer feedback confirms that their overriding priority is to receive an uninterrupted supply of good quality drinking water. There is also increasing evidence that they require this to be achieved in an environmentally friendly manner. This is best demonstrated by the Willingness to Pay conclusions that indicate consumers are prepared to pay most for a reduction in CO 2 emissions, protection of river water levels and water savings measures. The feedback also indicates that there is a reluctance, or lower priority, to invest in improving service levels of normal activity, such as customer service. This indicates that in general the majority of consumers are satisfied with the service they are receiving. The conclusions about customer priorities have been used in the development of the six themes detailed in the Strategic Direction Statement and their respective targets. They are: Theme 1 Achieving a Sustainable Use of Water Theme 2 Safeguarding Drinking Water Quality Theme 3 Ensuring a Reliable Supply of Water Theme 4 Mitigating Climate Change Impacts Theme 5 Enhancing Customer Service Theme 6 Financing our Future Historically, the Company has always followed a twin-track approach to balancing supply and demand. This has meant developing new water resources in parallel with demand management activity. The Company operates in one of the driest parts of England and has limited access to good quality (i.e. low treatment cost) raw water. However, new resources were funded and developed in the current AMP period, but studies indicate that the next resource will be a desalination plant. This will be a significantly more expensive treatment works to build and operate. In anticipation of this, the Company applied to the Secretary of State and was granted Area of Water Scarcity status in March This enabled the commencement of a programme to selectively meter 90% of domestic customers by In view of the above and on-going pressure to balance supply and demand, the Company are proposing to accelerate its metering programme to achieve c96% penetration by This will provide the mechanism to introduce an innovative tariff across all domestic customers which will provide water for essential health and hygiene at a lower volumetric rate, whilst water for discretionary use will be charged at a higher volumetric rate. This is a low cost option to address the next phase of the supply demand balance and fits with the customers willingness to pay results. It will result in reduced carbon emissions and reduced impact on the water environment through reduced water use or water saving activity. Page 17 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

19 In addition to metering and the use of tariffs, the Company propose to continue to reduce leakage from the distribution mains where it is cost beneficial to do so. Consumers are very clear in their desire for an uninterrupted supply of drinking water through their taps. In the willingness to pay survey, consumers indicated that they would be prepared to pay more to maintain the current level of unplanned interruptions. Unplanned interruptions are a consequence of deteriorating assets (i.e. pipes and treatment works). Currently both are considered stable in Ofwat's serviceability assessment. In the case of the pipe network this is despite a current renewal rate in excess of 300 years. The Company has undertaken a full risk assessment in accordance with the prescribed Capital Maintenance Common Framework (CMCF) but, given the importance of balancing affordability with the need for investment, is adopting a pragmatic approach for this period that will maintain current renewal rates and service levels. Safeguarding water quality is the Company s prime focus and accordingly it has agreed with Drinking Water Inspectorate (DWI) two projects to enable this. The first is the provision of additional treatment at the Denge treatment works, where there is a deteriorating raw water quality and the second is a systematic mains flushing programme in the Denge water supply zone. Consumers have not indicated a willingness to pay more for improved levels of service. This does not come as a surprise given the consistently high standard delivered by the Company. Accordingly, there are not significant improvements proposed. The impact of the Company s proposed activities on customers bills will be a increase over the period The most recent customer survey, undertaken by Turquoise, indicated that 37% of customers would be prepared to pay 10/annum more for the plans proposed. Page 18 of 18 Section B1 The Post 2010 Environment 06/04/09, 14:12:05

20 Company Commentary Part B Section B2 Key Component Improving Efficiency Contents Executive Summary... 1 Section 1 Changes from Draft to Final... 2 Section 2 Overall Approach to Assessing Scope for Efficiency Improvements... 3 Section 2.1 Benchmarking... 3 Section 2.2 Capital Expenditure & New Technology... 3 Section 2.3 Ability to make savings... 4 Section 2.4 Nature and Extent of Fixed Costs... 4 Section 2.5 Scope for Changes to Management Structure... 4 Section 2.6 Water Service Efficiency Improvements... 5 Section Operating Expenditure... 5 Section Capital Expenditure... 5 Section 2.7 Summary... 7 Table Commentaries... 8 Appendix B2.1 First Economics Report The Rate of Frontier Shift Affecting Water Industry Costs Appendix B2.2 Special Factors Submission Page i Section B2 Improving Efficiency 09/11/10, 14:59:10

21 Executive Summary This section is largely unchanged from the Draft Business Plan, but the estimates of the scope for efficiency have been changed in the light of the deteriorating economic conditions which have arisen since the Draft Business Plan was produced. The table below summarises the efficiency factors assumed in the two plans: Activity Compounded Efficiency % FBP Compounded Efficiency % DBP Base Operating Expenditure (reduced cost) (reduced cost) Enhancement Operating Expenditure (increased cost) Capital Maintenance infra (increased cost) Capital Maintenance non-infra (increased cost) Capital Enhancement infra (increased cost) Capital Enhancement non-infra (increased cost) Capex meters (increased cost) The Company has considered carefully the findings of the First Economics report (Appendix B2.1) on efficiencies prepared for Water UK. This report concluded that the most efficient companies opex will rise by RPI + (0.0 to 0.75%) and for capex by RPI + (1 to 2%). This is because expected productivity improvements are likely to be offset by input price inflation. The company takes the view that economic conditions have changed since First Economics produced their report and that some of the capex input price increases that were projected in that report are no longer likely. Therefore the company has concluded that capex costs will be unchanged for an efficient company, and have used an assumption of 0% efficiency. The same changes to input prices also apply, to a lesser extent, to operating expenditure. We have therefore assumed a 0% continuing opex efficiency. The company believes Ofwat should take proper account of the special operating factors which affect the company as set out in Appendix B2.2. These total 1.76m in this Business Plan. If it does so, then we estimate that an accurate assessment of the company s relative efficiency will place it in Band B (upper). This would lead to a catch-up target of approximately 2.5% during AMP5 (50% of 5%) and this is the assumption that we have used. Page 1 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

22 Section 1 Changes from Draft to Final The significant changes that have occurred since the Company s draft Business Plan are the level of efficiency proposed and the inclusion of the Company s Special factors claim. With respect to efficiencies the Company believes there is no scope for on-going efficiencies that would normally be expected from an efficient company. The operating cost efficiency proposed is in line with where the Company believes it will be Ofwat s relative efficiency assessment once it has accepted the Company s Special Factors submission. Page 2 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

23 Section 2 Overall Approach to Assessing Scope for Efficiency Improvements The Company has carefully examined all areas of its operation to identify efficiencies using a bottom up approach. This has identified specific efficiencies that will be achieved in the early years of the period. In the latter years, where it is difficult to foresee what efficiency might be available, assumptions have been used based upon historic data. The Company has also considered carefully the findings of the First Economics report (Appendix B2.1) on efficiencies prepared for Water UK. This report concluded that the most efficient companies opex will rise by RPI + (0.0 to 0.75%) and by RPI + (1 to 2%). This is because expected productivity improvements are likely to be offset by input price inflation. Having considered all of the above factors, the cumulative efficiencies included in the company strategy for the period 2010 to 2015 are: Operating Expenditure (net) -2.48% (cost reduction) Capital Expenditure Non-Infrastructure 0% (no change) Capital Expenditure Infrastructure 0% (no change) The efficiencies identified are excluding RPI The level of efficiency reduction offered is intended not to inhibit the Company s ability to continue to provide the high levels of service that customers enjoy. The Company believes that this pragmatic approach strikes a balance between customers and shareholders interests. With respect to capex efficiency the Company believes that it is already at the frontier and believes that it can manage costs in line with the price indices. Section 2.1 Benchmarking For larger companies a 3% per annum reduction would quickly translate in FTE employees and numbers reduced in the appropriate manner. For a Company employing 98 staff in 12 distinct functions this is not so simple. Issues such as critical mass, holiday cover, shift patterns and standby rotas all have an influence. For example, the Operations Centre is manned 24 hours a day, in three shifts using 7 FTE. This number cannot be reduced without affecting standards of service and yet the efficiency targets suggested by OFWAT in 2004 (i.e. 3% per annum) would result in the reduction of a FTE over AMP4. Staff represent approximately 56% of controllable costs. Section 2.2 Capital Expenditure & New Technology The review of potential efficiencies for capital expenditure is more problematic as the costs are, for the most part, not under direct management control. Efficiency is by proactive negotiation on tenders and Period Works Contracts. Page 3 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

24 Capital efficiency will be driven by technological improvements, purchasing power (where diseconomies exist for smaller scale, but complex projects) and other market forces. For a smaller water company the introduction of improved technology can prove more costly, and will require a multi-skilled workforce, rather than specialist operators, resulting in rising operating costs. This rise in operating costs can be demonstrated at Folkestone and Dover and will continue as it moves further away from simple chlorination treatment works. Due to the relatively low number of these treatment works it is not efficient to have specialists responsible for the maintenance of these plant. Therefore the introduction of this complex plant has resulted in the need to retrain existing employees and recruit employees with different skills, who command higher salaries. Section 2.3 Ability to make savings Historically, savings have been made by a reduction in headcount, however there comes a level in a smaller company where further reductions would be an unacceptable risk to the operation of the business. Section 2.4 Nature and Extent of Fixed Costs Another influence on the Company s ability to achieve operational cost efficiencies is the disproportionately high level of fixed and non-controllable costs. The fact is that fixed and noncontrollable costs comprise a higher proportion of total operating costs for smaller companies, than larger. In reality, the efficiency target can effectively double in the smaller company. In the case of the Company fixed and non-controllable costs represent approximately 53% of total operating costs. Many of these fixed costs are subject to increases above inflation, such as energy, abstraction charges, business rates and insurance premiums, which makes the target efficiency savings harder to achieve. The financial modelling does not take this into account. Section 2.5 Scope for Changes to Management Structure This is an area where companies could make further efficiencies. However for a small company, with a management team of four these opportunities are limited. For example, the Finance, Corporate Management and Company Secretarial functions are already combined under the remit of one manager. There is also a practical minimum number of management personnel needed to ensure that there is a senior decision making facility available 24 hours a day, 365 days a year, whilst servicing meetings and commitments needed to function within a regulated industry. The existing management team is at that practical level of management that is required to function. Page 4 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

25 Section 2.6 Water Service Efficiency Improvements In assessing efficiency improvements, the Company has made a series of company, and site specific decisions, on future efficiencies. The primary reason for this is concern over the modelling techniques used by Ofwat, which we believe do not take account of the specific operating conditions for the Company. Appendix B2.2 sets out the Special factors that the company believes Ofwat must use to take proper account of these conditions. The Special Factors submission identified 1.76m of additional operating costs that the Company incurs due to these conditions and which are not accounted for Ofwats econometric models. Section Operating Expenditure The budget managers and management team have given consideration to the nature and potential impact of the future efficiencies that can be achieved in the next AMP period. Initial findings suggest that future efficiencies will be smaller than those historically seen and they are proving more difficult to identify. The commentary to Table B2.2 gives more detail on the breakdown of operating costs and those that are truly within the direct control of the business. Section Section Capital Expenditure Impact of Regional Contract Prices Operating in the South East, the Company is impacted by increased contract prices when compared to the national average and even the London Weighting. Evidence of this has been acquired recently in the form of a mains renewal contract, tendered by the Veolia Water Group, for work in and around north-east London. The tenderers wanted an additional, up to 20%, on tendered rates to undertake the same work for Folkestone and Dover Water Services. This is consistent with the unit cost prices that have been presented in the Company s Cost Base submission to Ofwat. FDWS has relatively low volumes of work, which is undertaken in diffuse locations, in the most south-easterly corner of England. It is nevertheless specialist activity that requires a competent, experienced contract force. This low, diffuse, but specialist volume of work, coupled with high local demand for labour as a result of the construction of major infrastructure projects such as the Channel Tunnel Rail Link, Ashford and Thames Gateway growths points, the 2012 London Olympics, and the on-going demand generated within and around London, means that suitable contractors tend not to be based locally. Tenders received from contractors are consequently higher than the national average and on average 13% above London rates for similar work. Section Company Specific Factor The average capital expenditure for infrastructure in the three year period 2005/6 to 2007/8 is 775k in 07/08 price base. Applying an average 13% to this figure to determine the additional cost of procuring this work in the south-east corner of Kent, generates a Company Special Factor of 101k per annum. This would be in addition to any London or south east factors. Page 5 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

26 Section Capital Maintenance The majority of the infrastructure maintenance work is carried out within a Period Works Contract, or is competitively tendered. There is no scope to make efficiency savings on the existing contract and, looking forward, the scale of construction work projected for the south east will compress the capacity of the construction industry in the region. Maintenance of above ground assets tends to take the form of refurbishments or modernisations. This involves a lower level of projects but with a higher technical expertise required. Contracts tend to be let on an individual or grouped competitive basis and this work is subject to similar pressures as a result of the low volume, diffuse nature of the work required. With regards to the Company s own assessment of the likely scope for capex efficiencies therefore, the company concludes that there is no scope to outperform price indices for an efficient company for both infrastructure and non-infrastructure. This is a more optimistic view than that in the First Economics report for Efficiency Improvement. The company takes the view that economic conditions have changed since First Economics produced their report and that some of the input price increases that were projected in that report are no longer likely. Section Capital Enhancement Expenditure These schemes tend to differ significantly from capital maintenance schemes and are dealt with on an individual basis, with individual project appraisals undertaken to develop an overall strategy and cost. Whilst this process results in accurate cost estimates, these schemes also tend to occur due to technological changes or advances and are therefore subject to a greater level of risk and uncertainty. The cost of works undertaken to date in the AMP4 period on the early start programme, have all exceeded the funds allocated from the Final Determination. This supports the view that oneoff schemes limit the scope to gain efficiency through experience or economies of scale. The Company has taken the view to set the capital enhancement efficiency target in line with that set for capital maintenance at 0%. Section Metering Expenditure The Business Plan provides an opportunity to review the target efficiency assessed for the metering programme as distinct from other elements of the capital programme. Whilst, the volume of work is set to increase from around 4,000 meters per year to around 8,000 meters per year, the actual savings anticipated are limited. The size of the programme does not warrant a significant reduction in the unit purchase costs of a meter or boundary box. The programme is still likely to be consistent, in terms of when and where meters are to be installed. However as the more difficult properties have to be metered the costs will increase. Page 6 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

27 Additionally, it is likely that the size of the metering programme in the South-East of England between , will be significantly higher than it is currently. This may create shortages in the labour market and for materials (i.e. meter supplies). This may well force unit prices upwards. Section 2.7 Summary Cumulative efficiencies proposed by the Company from are: Activity Base Operating Expenditure Enhancement Operating Expenditure 0 Capital Expenditure infra 0 Capital Expenditure non-infra 0 Capital Expenditure metering 0 Compounded Efficiency % (reduced cost) Page 7 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

28 Table Commentaries Table B2.1a Operating Expenditure Out-performance in AMP4 Introduction The Company has made major strides in reducing operating costs since the start of the AMP4 period, but is now seeing operating costs rising as a direct consequence of its metering programme, increasing employment costs and rising energy prices. Block A Water Services Operating Expenditure Out-performance Significant operational savings have been achieved early in the current period but further gains are becoming progressively more difficult. The latest Ofwat efficiency assessment shows the Company in Band D (lower) for base operating costs. This implies a deterioration from the Final Determination in 2004 where the Company was challenged to achieve a catch-up efficiency of approximately 2.7% per year. As can be seen from the table, this does not reflect the excellent performance achieved by the Company so far in this period. In the period 2004/05 to , the Company expects to achieve the following outperformance: 07/08 Prices Final Determination m Actual Costs m Out-performance m * Total * This number is based upon latest forecasts. This out-performance is partially as a consequence of reduced demand which is also reflected in lower income in the period. Line 2 Line 3 Lines 4-6 This reflects the log-down of Opex associated with non delivery of the Bushy ruff scheme. Details of the values are contained in Section C5 and are consistent with the C5 tables. This reflects the log-up of Opex associated with increased AMP4 metering activity. Details of the values are contained in Section C5 and are consistent with the C5 tables.. No changes in these areas, hence zero. Page 8 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

29 Lines 7&8 Line 10 Line 11 Lines 12 Line There has been no shortfalls in meeting outputs and none are anticipated in AMP4. The Company has not been involved in a merger. These are the figures reported in June Returns. For 2008/9, the Company has carried forward the 2007/8 figures, less atypicals. For 2008/9, 46,000 has been added to the 2007/8 figure. The 46,000 represents the 39,000 assumed in PR04 for metering opex, inflated to 2007/8 prices. In addition the 39,000 of new opex projected in Table B4.3 relating to Buckland Mill and Cow Lane has been added. The Company believes that the introduction of FRS17 since the last Periodic Review has not affected the comparability of pension assumptions.. This line reflects the atypical expenditures that have been reported in June returns (appropriately inflated). The company has been on a pension holiday for one of its legacy funds during AMP4. As a result the company has reported atypical savings in previous June Returns. These savings have been excluded from Line 11 in this table as pension adjustments are dealt with in Line 4 of Table B3.3. These calculations have been carried out in accordance with Ofwat guidance PR09/04 of 18 October The Company does not qualify for additional water opex incentive revenue allowance in line 18. Because the Company does not expect to outperform regulatory expectations in 2008/09 its incremental outperformance in line 16 is constrained to 0 as set out in Annex B of the PR09/04 letter. Page 9 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

30 Table B2.1(b) Capital Expenditure Out-performance in AMP4 The Company proposed an early start programme that involved the construction of the Denge Security Main (approx 21km) to enable water to be transferred throughout its area to the point of need, and the development of two new water resources, Buckland Mill and Bushy Ruff. This project had the full support of the Environment Agency (EA) and was funded in the Price Review 2004 (PR04) Final Determination. The completion of the project would have moved the Company from a negative SoSI (Security of Supply Index) score to a maximum of 100. Unfortunately after subsequent investigation of the impact on the aquifer, the EA confirmed that any abstraction from the Bushy Ruff borehole would require an equal reduction at one of the Company s other licensed boreholes within the same aquifer (i.e. no net gain in yield). Therefore, whilst the remainder of the project has been completed, Bushy Ruff borehole development has not progressed. This situation is the subject of on-going discussion with Ofwat and the Company, and Ofwat s log up/log down response following the draft position confirms this. The Company disagrees with some of Ofwat s figures presented in their document. The Company s commentary on these is contained in Section C5. Ofwat have supported the Company s log up application and these costs are included in the B2.1a and B2.1b tables. The Company has caught up with its mains renewal outputs and is on track to deliver the 16.5km as per the monitoring plan. It also expects to be in a pre-payment position due to higher costs of procurement. During the early part of the period, the Company s Period Works contractor walked away from the contract on the basis that they were losing money. They required between 30% and 50% uplift to continue. The second highest tendered price at the time the contract was let, was approximately 20% higher. Consequently, the Company delayed the programme and has been tendering jobs in smaller packages at prices that are typically higher, up to 15%, than the original Period Works contract and higher than those assumed at PR04. The number of pumping stations/treatment works refurbished during the period is currently behind schedule. The reason for this is that the Company chose to delay the programme during the drought to maintain operational outputs from all production sites. The programme has subsequently been accelerated and the Company expects to deliver the required outputs. During the period the Company has made good progress with the new water resource investigations and is expecting to conclude these by the end of the period. In the period 2004/05 to 2009/10 the Company aims to achieve the following (excluding IRE): Final Determination ( m) Actual Costs ( m) Out-performance ( m) Page 10 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

31 Final Determination ( m) Actual Costs ( m) Out-performance ( m) * * includes approved log-up expenditure on metering Line 2 Line 3 The decrease is due to the log-down for Bushy Ruff. Details of the values are contained in Section C5 and are consistent with the C5 tables. The changes are due to the log-down for Cow Lane Extension, Broad Oak study and the log-up associated with the additional meter installation programme. Details of the values are contained in Section C5 and are consistent with the C5 tables. Lines 4-11 No changes in these areas, hence zero. Line 12 These numbers are taken from the following sources: Historic Data: Data is taken from June Returns, Table 35: The calculation is line 26, less lines 4 & 21; this gives the capital programme spend net of grants and contributions and excluding infrastructure renewal expenditure. These figures are in their JR reported year and have been inflated by RPI to generate values in 07/08 price base. Forecast Data for Years 4 & 5: The calculation uses the following lines from the Pr09 Tables: Sum of : B3.6 Line 16 Net CM non infra expenditure post efficiency and less contributions B4.3 Line 8 Water Qual (non infra post efficiency) B4.3 Line 18 Water Qual (infra post efficiency) B5.2 Line 12 SDB (infra post efficiency) B5.2 Line 22 SDB (non infra post efficiency) Less SDB Contributions: B5.2 Line 23 Requisitions B5.2 Line 24 Grants B5.2 Line 25 Infra Charges B5.2 Line 26 Compensation The numbers are already in 07/08 price base so have not been altered. Page 11 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

32 Table B2.2 Water Service Efficiency Improvements Introduction The Business Plan does not appear to accept a single aggregate judgement for the completion of this table. However, given the small size of the Company, and therefore the lack of specialist knowledge in the area of econometric modelling, it was felt that this was the only approach available to us. Ofwat Efficiency Rankings The published efficiency rankings have shown the Company moving from Band D to Band D (lower) during AMP4 for opex. This is despite the significant out-performance so far this period as demonstrated in Table B2.1(a). A consistent feature of the various analyses has been the apparent modest performance of companies operating in Kent which seems attributable to lack of recognition of local factors and the impact over many years of major infrastructure projects such as: the Channel Tunnel construction; Channel Tunnel Rail Link; Ashford and Thames Gateway growth points; and the London Olympics This factor has removed contracting capacity in the county and impacted on the availability of several segments of the labour market in which the water industry competes. Any econometric analysis must make proper recognition of these local factors. The Company has experienced this in several areas, most recently with employment costs and contracting premiums. Recent recruitment for supervisory and management staff has seen increases in excess of 20% to attract experienced and skilled staff to the area. Contractors have indicated in a recent group procured tender for mains renewal that they required up to a 20% surplus, above London rates, to work for Folkestone and Dover Water Services. The Company is aware of the gap between the efficiency frontier and its own performance in terms of operating costs. The Company s analysis shows that there are three factors that contribute towards this gap which are summarised as follows:- i) Geographic and Aggregation of Costs : The Company believes that both the geographic location and size of Company are key factors not properly accounted for in Ofwats Relative Efficiency assessment. It is important to note that the frontier company for (Southern Water) operated across the counties of Hampshire, West Sussex, East Sussex, Kent and the Isle of Wight. The Competition Commission investigation into the merger of Vivendi Water UK Plc and First Aqua (2002) provided a unique analysis of the performance of Southern Water on a disaggregated basis because of the possibility that a remedy for the proposed merger would be the sale of a new company based on the Southern territory in either Hampshire or Kent. Page 12 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

33 It is a fact that the disaggregation of the 2001/2 Southern operating cost revealed its performance ranged from A++ in Hampshire to Band C on the Isle of Wight with Kent placed in Band B. In other words, to match the best performance in the Industry, Folkestone & Dover would need to match Band B since unexplained variables prevented the best performing company (Southern) from matching its own performance elsewhere in the region. Further it is understood that this data, which was provided to the Commission, was shared with OFWAT. It is also worth noting, for the purposes of this exercise, that the definition of Southern (Kent) consisted of the two separate and detached zones known as Medway and Thanet. It is the Company s belief that the operating cost performance of Thanet (which more closely matches, and adjoins, Folkestone & Dover) was in fact more expensive than Medway. It is perhaps not surprising to find that in 2006/07 two other companies that operate in Hampshire are Band A ranked companies Company Specific and Local Factors : It is absolutely apparent that there are a series of specific and local factors which need to be taken into account in determining the Company s relative efficiency ranking. These factors are discussed in detail in Appendix B2.2. ii) The Company is extremely concerned that Ofwat is only prepared to consider factors that are a cost impact of greater than 1% of the Company s turnover. On the basis of the Company s allowance in PR04 this would equate to approximately 200k, or 2.5% of opex, being excluded from the assessment. Given the range of the efficiency bands this could be crucial to a Company such as Folkestone and Dover Water Services. Efficiency Gap : the gap can only be assessed accurately after recalibrating the frontier comparator to its geographic performance and then comparing the performance of Folkestone & Dover after making appropriate allowance for company specific factors. In addition both opex and capital maintenance efficiencies should be reviewed in parallel, due to the absence of capitalisation of management and overheads which would otherwise leave the Company with stranded costs if a downturn in capital spending occurred. Block A Base Operating Efficiency (Base) The last review period saw the Company faced with ambitious efficiency targets of approximately 3% per annum, and through the hard work of all employees these targets have been met in the early part of the AMP4 period. However these targets have become increasingly difficult to achieve towards the end of the quinquennium. It is the Company s belief that future efficiency gains will be small in comparison to those previously seen. Page 13 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

34 The management team has reviewed all base operating costs and identified specific areas of the business where savings could still be made. These include: Outsourcing / shared services with Veolia Group Companies Reduced water demand Absorb new opex through improved working practices The management review has confirmed that manpower is not an area for further reduction if customer service levels are to be maintained. The belief is clearly that man power levels are at critical mass when issues of work volume and staffing cover are considered. While reviewing the potential to make additional savings it became obvious that the pool of controllable costs available was becoming smaller as demonstrated in Table below: Table Controllable Costs Restated Opex 2007/08 m Base year per June Return Atypicals Bulk Supply Standing Charge (SEW) No control 377,373 Bulk Supply Minimum Volume (SWS) No control 146,766 Business Rates No control 1,181,040 Abstraction Charges No control 367,442 Ofwat Licence Fee No control 34,530 Power Limited control 856,918 Bad Debt (normalised) Limited control 356,188 Telephone Services Limited control 91,209 Insurances Limited control 120,415 Management Fee No control 318,383 Controllable Costs 4.27m As this demonstrates, out of a total opex of 8.120m, only 52.6% is truly controllable, therefore any efficiency imposed by Ofwat on total operating costs translates into an even higher efficiency target on those truly controllable costs. Controllable costs are detailed in Table below: Page 14 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

35 Table Breakdown of Controllable Costs 000 % Labour 2, Materials and Consumables Hired & Contracted : Operational Scientific Management IT Transport Other Total Controllable Costs 4, Non-Controllable Costs The analysis above highlights that there is a significant value of costs that, although classified as controllable by OFWAT, are outside the direct control of the FDWS Management. The Reservoir financial model applies the efficiency targets to all operating costs thus making any opex efficiency target virtually twice as big for the costs to which it can be applied. This is further compounded by the fact that many of these non-controllable costs rise at a higher rate than inflation, for example EA charges, business rates and insurance premiums. The company has tried to account for the most significant of these items in Table B3.3. Block B Operating Expenditure Efficiency (Enhancement) The Company has assessed that on-going efficiency should be at the same level as for base opex. However, there will be no catch up since the new opex is recently priced using the best cost information available. Block C Block D Block E Block F Capital Maintenance Expenditure Efficiency (Infra) Capital Maintenance Expenditure Efficiency (Non-Infra) Capital Enhancement Expenditure Efficiency (Infra) Capital Enhancement Expenditure Efficiency (Non-Infra) Page 15 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

36 The Company has also considered carefully the findings of the First Economics report (Appendix B2.1) on efficiencies prepared for Water UK. This report concluded that the most efficient companies capex will rise by RPI + 1 to 2%. This is because expected productivity improvements are likely to be offset by input price inflation. The company takes the view that economic conditions have changed since First Economics produced their report and that some of the capex input price increases that were projected in that report are no longer likely. Therefore the company has concluded that capex costs will be unchanged for an efficient company, and have used an assumption of 0% efficiency. Page 16 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

37 Appendix B2.1 First Economics Report The Rate of Frontier Shift Affecting Water Industry Costs SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 17 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

38 Appendix B2.2 Special Factors Submission SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 18 of 17 Section B2 Improving Efficiency 09/11/10, 14:59:10

39 Company Commentary Part B Section B3 Supporting Information Maintaining Service and Serviceability Contents Executive Summary 6 Section 1 Changes from Draft to Final 9 Section 1.1 Material Changes in B3 9 Section 1.2 Response to Ofwat feedback and challenges 11 Section 2 Service Summary: Planning Objectives, Direction and Delivery 13 Section 2.1 Stakeholder Engagement 13 Section Customers 13 Section Consumer Council for Water 16 Section Regulators 16 Section 2.2 Strategic Direction 16 Section 2.3 Serviceability Approach 17 Section 3 Approach to Asset Management Planning 20 Section 3.1 Overview and Background 20 Section 3.2 Historical Analysis 26 Section Infrastructure Assets 26 Section Non-Infrastructure Assets 27 Section Cost of Failure 28 Section 3.3 Forward Looking Analysis 28 Section Regulatory Measures 28 Section Infrastructure Assets 29 Section Non Infrastructure Assets 29 Section 3.4 Identification of Asset Needs 29 Section Current Performance 29 Section Interventions 29 Section Cost-Benefit Analysis 30 Section 3.5 Cost Estimation Approach 30 Section 3.6 Quality Assurance and Review 32 Section 4 Business Case by Asset Group 34 Section 4.1 Infrastructure Assets 34 Section Water Distribution Trunk Mains 34 Section Water Distribution Distribution Mains 52 Section Water Distribution Communication Pipes 71 Section 4.2 Non-Infrastructure Assets 79 Page i Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

40 Section Summary of Non Infrastructure 79 Section Water Distribution (non-infrastructure) Revenue Meters 79 Section Water Treatment Works 86 Section Water Pumping Stations 103 Section Service Reservoirs 107 Section Service Reservoirs - Hills Reservoir Second Cell 113 Section Management & General (non-infrastructure) 123 Section 4.3 Links with Other Parts of the Business Plan 126 Section 4.4 Balance of Risk and Customer Affordability 126 Section 4.5 Programme Delivery 128 Section 5 Table Commentaries 132 Section 6 Appendices 140 Page ii Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

41 List of Tables Table 1 AMP4 and AMP5 Base Investment 7 Table 2 Summary of Cost for the Company s proposed AMP5 Capital Maintenance Strategies 8 Table 3 Draft to Final Business Plan Material Changes 10 Table 4 Summary of Serviceability Reference Levels 18 Table 5 Summary of Business Cases 19 Table 6 Summary of Data Quality for Key Systems 24 Table 7 Summary of Cost Estimating Approach for Base Programme 32 Table 7 Trunk Mains Inventory Summary 36 Table 8 Inventory Analysis of Potable Water Trunk Mains 36 Table 9 The Company s Trunk Mains Burst History (1998 to 2007) 37 Table 10 Trunk Mains listed by highest risk 43 Table 11 Trunk Mains listed by greatest consequence 44 Table 12 Trunk Main Cost Effectiveness Analysis 45 Table 13 Capital Costs for TP28 Solutions 48 Table 14 Capital Costs for TP03 and TP04 28 Solutions 49 Table 15 Scoring of Benefits for Trunk Main Strategy 51 Table 16 Trunk Main CBA Results 51 Table 17 Trunk Main CBA Sensitivity Results 51 Table 18 Expenditure for Trunk Main Investment 52 Table 19 Mains Survival Model Validation Results 63 Table 20 CAPEX for each proposed distribution mains renewal strategy 67 Table 21 OPMs for Distribution Main Replacement Strategy 68 Table 22 Distribution Mains Renewal CBA Results 69 Table 23 Distribution Mains Renewal CBA Sensitivity Results 69 Table 24 Expenditure for Distribution Mains Renewal 70 Table 25 Leakage Capitalisation 70 Table 26 Communication Pipes Inventory (base data) at November Table 27 Communication Pipe Intervention Options 74 Table 28 Communication Pipe Strategies NPV analysis 75 Table 29 Communication Pipe Forecast Activity and Cost 75 Table 30 OPMs for Communication Pipe Strategies 76 Table 31 Communication Pipe Strategies - CBA Results 76 Table 32 Annual Meter Replacements by Age 81 Table 33 Average Failure Rates for Revenue Meters by Age 83 Table 34 Meter Replacement Forecasts Costs 84 Table 35 Meter Replacement Forecasts Costs 85 Table 36 Expert panel attendees 89 Table 37 Severity Levels defined for Coliform & Plate Counts service area 91 Table 38 Number of failure modes in each asset group 92 Table 39 Selected consequences of Failure of RO filter element 93 Table 40 Failure rate sensitivity - 10 highest failure modes by change in AMP5 Capex 96 Table 41 Sensitivity analysis results 100 Table 42 Water Treatment Works - CBA Results 101 Table 43 Water Treatment Works Historic and Forecast Expenditure 102 Table 44 Water Pumping Stations - CBA Results 105 Page iii Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

42 Table 45 Water Pumping Stations Historic and Forecast Expenditure 106 Table 46 Service reservoirs data and observations Error! Bookmark not defined. Table 47 Transition probability matrix for service reservoirs Error! Bookmark not defined. Table 48 Service Reservoir - CBA Results Error! Bookmark not defined. Table 49 Service Reservoirs Historic and Forecast Expenditure Error! Bookmark not defined. Table 50 Hills 2 nd Cell Summary of Whole Life Cost Analysis Error! Bookmark not defined. Table 51 Hills 2 nd Cell Summary of Considerations for Intervention Options Error! Bookmark not defined. Table 52 Hills 2 nd Cell Capital Costs of Site Options Error! Bookmark not defined. Table 53 Scoring of Benefits for Hills Second Reservoir Error! Bookmark not defined. Table 54 Hills Second Cell Strategy CBA Results Error! Bookmark not defined. Table 55 Trunk Main CBA Sensitivity Results Error! Bookmark not defined. Table 56 Summary of Balancing Of Risk and Affordability Key Decisions and Intervention Changes 127 Table 57 Summary of Capital Delivery Strategy 131 List of Figures Figure 1 Willingness to Pay for service improvements from status quo 15 Figure 2 Company Organisation chart 20 Figure 3 Asset Management Approach 21 Figure 4 Asset Development of Asset Management Plans 22 Figure 5 Internal Issues Process 25 Figure 6 Distribution Mains Serviceability and Expenditure 27 Figure 7 Treatment Works and Resource Serviceability and Expenditure 28 Figure 8 Treatment Burst Forecast for Distribution Mains Intervention Options 30 Figure 9 Analysis of Trunk Mains by Age and Material 37 Figure 10 Burst Rate for Trunk Main by Material 38 Figure 11 Distribution Main Serviceability and Expenditure 38 Figure 12 Trunk main process model 41 Figure 13 Trunk Main Risk and Burst Forecast Fit with Planning Objective 47 Figure 14 Distribution Mains by Age and Material 55 Figure 15 Historic Burst Trend 56 Figure 16 Analysis of Mains Failure Type 56 Figure 17 Mains Replacement History and Forecast for AMP4 57 Figure 18 Water Distribution Serviceability and Expenditure 57 Figure 19 Current Business Process for Distribution Mains Replacements 60 Figure 20 Burst Forecasts for Distribution Mains Intervention Options 65 Figure 21: Historical Activity - Communication Pipe Replacement * 72 Figure 22 Forecast Communication Pipes Failure Rate by Strategy 74 Figure 23 Communication Pipes Replacement Historic and Forecast Activity 77 Figure 24 Communication Pipes Replacement Historic and Forecast Capital Expenditure 78 Figure 25 Meter Stock By Age and Manufacturer 81 Figure 26 Meter Failure Rate by Volume Passed (all Meters) 82 Figure 27 Meter Failure Rate by Volume Passed (up to 2100m 3 ) 82 Figure 28 The Company s Revenue Meter Failure Trend 83 Figure 29 Meter Replacements by Intervention Strategy 84 Figure 30 Comparison of Historic and Forecast Replacements for the Chosen Strategy 86 Figure 31 Historic spend versus serviceability for treatment works 88 Page iv Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

43 Figure 32 Example of a trapezoidal cost distribution 94 Figure 33 Comparison of expert panel and OWMS failure rates for Ultraviolet equipment 95 Figure 34 Comparison of expert panel and OWMS failure rates for Orthophosphate equipment 95 Figure 35 Forecast interruptions with no proactive interventions 97 Figure 36 Forecast of interruptions risk under differing maintenance strategies across all sites 99 Figure 37 Comparison of historic and predicted expenditure on treatment works (including amounts planned for the remainder of AMP4) 103 Figure 38 Historic spend versus serviceability for pumping stations 104 Figure 39 Comparison of historic and predicted expenditure on pumping stations (including amounts planned for the remainder of AMP4) 106 Figure 40 Historic spend versus serviceability for service reservoirs Error! Bookmark not defined. Figure 41 Expected condition of a service reservoir with age Error! Bookmark not defined. Figure 42 Variation in discounted annual cost of refurbishing reservoir with ageerror! Bookmark not defined. Figure 43 Comparison of historic and predicted expenditure on service reservoirs (including amounts planned for the remainder of AMP4) Error! Bookmark not defined. Figure 44 Plan of Feasibility Options Error! Bookmark not defined. Figure 45 Overview of IT maintenance and enhancement process 124 Figure 46 Overview of the Telemetry, SCADA & Communications System 125 Figure 47 Capital Delivery Process 129 Page v Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

44 Company Commentary Part B Section B3 Supporting Information Maintaining Service and Serviceability Executive Summary The Company has developed clear business cases for AMP5 interventions through the application of risk based approaches with customer service central to the assessment of risk. The plan presented demonstrates that the cost effective planning objective has been applied and that the Company will continue to deliver the high levels of customer service already experienced by customers and deliver stable serviceability for infrastructure and non infrastructure assets. As presented in the draft plan there are two particular areas which represent significant risk to customer service and serviceability; these are trunk mains and the existing Hills service reservoir. The Company has greatly developed these business cases since draft and undertaken detailed feasibility studies on the intervention options. The final plan presents robust and clearly argued business justifications, founded on risk to customer service and that meet the cost effective planning objective. In addition, the interventions are also shown to be cost beneficial. The interventions to address these significant risks are the trunk mains solutions to TP28, TP03 and TP04 and the Hills reservoir 2 nd cell. These interventions are significant investments; the key drivers are: Trunk main TP28 is the primary feed for Folkestone and supplies 18,000 properties in the town which represents 24% of the Company s customer base. The likelihood of trunk main failure is increased by the fact that the trunk main is running along a geological fault line. Earthquakes are frequent with the earthquake of 2007 being widely reported while smaller events are more common. The latest event was on the 3rd March 09 and registered 3.0 on the Richter scale. (A technical note prepared by Atkins and summarising recent seismic activity in the region is contained in Appendix 2). The ongoing risk to service and serviceability for such a large number of customers is unacceptable. The intervention option selected, which is to provide an alternative feed to the Folkestone zone by way of 800m network link and pumping station for the final plan is fully endorsed by the Board. The intervention also provides secondary benefits as a solution to the Paddlesworth supply risk presented in the draft plan, which has now been removed as a separate intervention as it is contained in the TP28 solution. The trunk mains TP03 and TP04 are the two highest risk trunk mains in the Company. They are the only remaining pre 1980s UPVC mains which have a significantly higher failure rate than other materials; TP04 also has a history of bursts. The operation of the Denge Security Main, an AMP4 strategic investment to provide a reliable alternative supply of water to the Denge zone, results in increased operating pressure for these mains and the likelihood of failure is thus increased. Further, the Denge Security Main is the only alternative supply of water to the Denge zone in the event of loss of supply from the Denge source. The increased risk of failure of TP03 and TP04 when the Denge Security Main is called to operate presents a risk of service failure to 6,500 properties which have no alternative means of supply. This is an unacceptable risk for customers. Page 6 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

45 The intervention included in the base programme is like for like replacement of these mains and is fully supported by the Board. The Hills reservoir also supplies 24% of the Company s customers in Folkestone, via the trunk main TP28 and an additional 6,500 properties when the Denge Security Main is operating. The reservoir was constructed in 1924 and inspections in 2000 and 2008 have highlighted the need for extensive maintenance to the joins which are at the end of their life. The reservoir is also located on a geological fault and it is important that intrusive assessments are undertaken to understand the structural condition of the reservoir. The reservoir cannot be isolated for the period of time for this work to be undertaken without significant risk to customer service and serviceability. The Company has undertaken a detailed feasibility study between draft and final to develop the most cost effective intervention. This work has reduced the capital cost by 4m between draft and final. The intervention to address this risk is fully supported by the Board. These interventions are essential in AMP5 to ensure that the unacceptable risks to service and serviceability are appropriately managed. The interventions also represent large standalone investments in AMP5 and the Company believes these should be regulatory outputs and that they qualify as Exception Items under the definition provided by Ofwat. Through the draft to final development, the Board has continually challenged the programme to ensure that it correctly balances customer affordability with ensuring significant risks to service inherent in the current asset base are addressed and that overall service and serviceability can be maintained. The large standalone interventions described above have made this process particularly important. As a result of the challenges a number of investment areas identified at draft have been reduced or removed from the final business plan, where the risks to service and serviceability can be managed in AMP5 through operational means. Examples of this are the reduction of the main renewal programme from the preferred and more cost beneficial programme of 5km/yr to a 3km/yr programme and the decision to manage operationally the run to waste and turbidity risks at specific treatment works. These changes have reduced investment by over 3m. The Company has also undertaken extensive validation of the modelling approach for treatment works, pumping stations and service reservoirs, refined the approach to risk allowances for interventions and undertaken detailed feasibility studies on key interventions. The overall result is a reduction in capital investment between draft and final of 12.8m. Comparing the AMP5 programme (pre-efficiency and with Exception Items separately identified) with the AMP4 determination shows relatively small increases on like for like investment areas. m (07/08 pb) AMP4 AMP5 IRE MNI Sub Total IRE Exceptional Items 3.9 MNI Exceptional Items 7.5 Sub Total 11.4 TOTAL Table 1 AMP4 and AMP5 Base Investment Page 7 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

46 Table 2 provides detailed breakdown of the Base investment for AMP5. Asset Category Water Distribution: Trunk Mains Water Distribution: Distribution Mains Water Distribution: Communication Pipes Planning Objective Cost effective stable serviceability; maintain risk at start of AMP5 levels Cost effective stable serviceability Cost effective stable serviceability Intervention Selected Network for TP28, Replacement of TP03, TP04 3 km/yr renewal strategy Maintain stable leakage Repair on fail and replace BPE, Fe and Cu on fail AMP5 Capex, k (2,604)* 3,897 AMP5 Opex in 2014/15, k 17 5, Infrastructure Total 10, Revenue Meters Water Treatment Works Water Pumping Stations Service Reservoirs Management & General Cost effective stable serviceability Cost effective stable serviceability Cost effective stable serviceability Replace on fail Optimal Interventions from modelling 4, ,238 0 Cost effective 1,537 0 stable serviceability Hills 2 nd Cell 4,642 0 Cost effective stable serviceability 3,379 0 Non Infrastructure Total 18,057 0 Base Programme Total 28, Table 2 Summary of Cost for the Company s proposed AMP5 Capital Maintenance Strategies * The TP28 solution is part infrastructure, part non infrastructure. The non infrastructure value in contained in brackets, the other value is the infrastructure element. Page 8 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

47 Section 1 Section 1.1 Changes from Draft to Final Material Changes in B3 Between draft and final the Company has undertaken significant work on the Business Plan to address the challenges made by Ofwat and internal challenges from the Board. The most significant areas of change are: Managing the programme to provide an appropriate balance between customer bill increases and risk. Managing the risk operationally of run to waste and turbidity at treatment works, plus network meter replacements has resulted in approximately 1m of investment that was included in the draft business plan being managed operationally by the Company for the final business plan. Additionally, the reduction in mains renewal from the preferred strategy of 5km/yr to 3km/yr has reduced investment by 2.3m. These reductions have enabled the bill impact to customers to be balanced against operational risk. Development of the robustness of key business cases presented in B3 including clear planning objectives for each business case, plus revisions to all sections to address feedback from the AMA scoring process. Detailed validation and sensitivity testing for the Water Treatment, Pumping Station and Service Reservoir non infrastructure business cases. This has resulted in over 7.7m reduction between draft and final. Detailed feasibility studies on interventions options for trunk mains and Hills 2 nd cell, this has resulted in: o o A reduction of 4m on the solution to Hills 2 nd Cell; The solution to trunk main TP28 being integrated with the Hills to Paddlesworth solution which therefore, no longer requires a separate solution in the final business plan and saves over 500k. The overall programme between draft and final has reduced by over 12.8m. The following table highlights the material capital investment changes between draft and final business plans. (As the table only highlights material changes, not all business cases are included. The totals are for the whole B3 programme and are not the sum of the above.) Page 9 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

48 Asset Category Water Distribution: Trunk Mains Water Distribution: Hills to Paddlesworth Supply Water Distribution: Distribution Mains Draft Intervention Selected Replacement of, TP28, TP03, TP04 Network improvement 5 km/yr renewal strategy Maintain Leakage AMP5 Capex, k 4,971 Final Intervention Selected Replacement of, TP28, TP03, TP04 AMP5 Capex, k 6,501* 290 None 0 6,353 Not inc. 3 km/yr renewal strategy Maintain Leakage 5,221 Infrastructure Total 12,095 10,535 Water Distribution: Network Meters and Control Valves Water Distribution: Hills to Paddlesworth Supply Water Treatment Works Water Pumping Stations Service Reservoirs Proactive maintenance Network improvement Run to Waste; UV and Turbidity Monitoring schemes Maintaining Stable Serviceability Maintaining Stable Serviceability Maintaining Stable Serviceability Hills Second Cell 100 None None None 0 12,122 1,198 2,600 8,676 Maintaining Stable Serviceability Maintaining Stable Serviceability Maintaining Stable Serviceability Hills Second Cell Comment Design development and more detailed cost estimating Solution integrated with TP28 solution Revised strategy to balance programme 936 Included as per AMP4 4,377 1,238 1,537 4,642 Non Infrastructure Total 29,344 18,057 Capital Maintenance Total 41,439 28,592 Table 3 Draft to Final Business Plan Material Changes To be managed operationally to balance programme Solution integrated with TP28 solution To be managed operationally to balance programme Sensitivity and robust validation conducted on modelling approach resulting in reduced investment necessary to deliver stable serviceability across all three asset classes Design development and more detailed cost estimating * The solution to TP28 includes 2,604k of non-infrastructure costs that are reported in this line, are not included in the Infrastructure total but are included in the Non Infrastructure total. Page 10 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

49 Section 1.2 Response to Ofwat feedback and challenges This section highlights the key challenges presented to the Company by Ofwat and a summary of the Company s response. Where appropriate references are made to further details provided as part of the Company s overall submission. The key messages are taken from the following documents and meetings: Company Specific Feedback on Draft Business Plan (28 th October 2008); Capital Expenditure for : draft baseline (19 th December 2008); and the meetings held with Ofwat on 4 th November 2008 and 4 th February The feedback and meetings with Ofwat have been constructive and valuable to the process of developing the final business plan and assisting the Company in focusing its response to key issues. In summary, the key issues raised by Ofwat in relation to Maintaining Service and Serviceability are: 1. Clarity of planning objectives and compelling justification and articulation of benefits to customers in serviceability terms, particularly for the trunk mains solutions and Hills 2 nd cell; 2. Extent of un-validated expert judgements for the water treatment works, water pumping stations and service reservoir business cases and the lack of differentiated business cases for these asset groups; 3. Robustness of cost estimates and use of 20% risk allowance; and 4. Size of the programme and balancing priorities and risk. The Company s response to these challenges is: 1. The Company accepts that the planning objectives were not clearly stated in parts of the draft plan. This has been addressed for the final plan and these are summarised in Table 5 as well as being presented for each business case. While the draft business plan largely relied on cost benefit assessments to justify proposals, the final business plan demonstrates that the proposed AMP5 interventions deliver stable serviceability and are cost effective. The trunk main and Hills 2 nd cell interventions are proposed to mitigate key risks to service and serviceability. The risk-based approaches used by the Company are clearly grounded in assessing the risk to customers and are supported by customer priorities. Where appropriate these interventions have been tested using the cost benefit analysis. The details for each Business Case are presented in Section In the draft business plan the Company recognised the need to provide further validation and sensitivity testing of the water treatment works, water pumping stations and service reservoir business cases. This has been undertaken by identifying the key parameters driving the modelling results (for example failure rates, durations and impacts, and unit costs of asset replacement and refurbishment) and then subjecting these parameters to comparison with Company data, peer reviews and internal challenge. The change in the investment costs between draft and final highlighted above is largely a function of this validation process. Secondly, a range of sensitivity analyses have been undertaken on the results which clearly demonstrate that the model is providing stable results; the range of the investment costs resulting from the sensitivity analysis is consistently less than the change in input parameters undertaken for the sensitivity analysis. This is detailed in the appropriate business cases in Section 4.2. Page 11 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

50 3. As proposed in the draft business plan, the scope and cost estimates for key intervention options have been refined between draft and final, particularly in regard to the trunk main and Hills 2 nd cell options where the Company has invested in detailed design optioneering and cost estimating before selecting the preferred solution. This development work is explained in the relevant business cases. Unit costs used for the business planning investment are consistent with the unit costs used to derive the cost base submission and historic costs where future interventions are similar to historic interventions. Where this is not the case unit costs have been developed using cost consultant data based on industry rates. An individual risk register has been developed for all schemes over 1m and the risk allowance used in the cost estimate modelled using a P80 value from a Monte Carlo approach. Where appropriate, schemes below 1m have used an average risk allowance from the above modelling. The Company is confident that the cost estimating approach used for the final business plan is robustly linked to historic unit costs where possible, is clearly auditable and consistent with estimating standard practice. An overview is provided in Section 3.5 and full details contained in Section C5. 4. Ofwat has significantly challenged the size of the Company s investment programme and its balancing of risk and the impact on customer bills. Between draft and final business plans, the Company has discussed each area of investment with the Executive Management Team and the Board and reviewed the priorities necessary to deliver high quality customer service and stable serviceability. As identified in Section 1.1 above, this has resulted in the Company accepting greater levels of risk in key areas such as mains renewal and run to waste facilities on treatment works in order to enable key interventions to proceed that will deliver long term reductions in service risk to customers. In addition, through careful design development an alternative solution to trunk main intervention for TP28 is included in the final business plan that delivers secondary benefits to the Paddlesworth risk, as well as being a significantly lower cost solution to that proposed at draft. Section 4.4 provides a full commentary on the balancing of the programme and risk across the whole business plan. Page 12 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

51 Section 2 Section 2.1 Service Summary: Planning Objectives, Direction and Delivery Stakeholder Engagement The Company has a policy of engaging with its customers and stakeholders to inform the direction that the Company takes. This includes customer surveys, undertaken at six-monthly intervals with a mixture of customer service and proposed service change questions, feedback collected through the Company s website, writing to local councils, stakeholder workshops, Business Plan meetings and steering group meetings. The Company also employed ICF International to conduct a domestic customer research project which included a detailed willingness to pay survey. Stakeholders opinions were incorporated into the Strategic Direction Statement. This describes the Company s vision for the next 25 years and is discussed further in 0. Evaluation of the Company s Overall Performance Measures, in conjunction with the objectives set out in the Strategic Direction Statement, has helped to target investment and produce the solutions which are proposed in this plan. Section Customers Ongoing Customer Consultation The Company consults with customers every six months using business as usual surveys. Questions remain fairly typical unless there is a proposed change in service. In recent surveys, questions have focussed on assessing customer support for metering. Two surveys have been completed prior to the draft stage of the business plan and the results of a third survey have been incorporated into the final business plan. In addition, Ofwat undertook customer surveys between draft and final and customer views arising from these surveys have also been included in the Company s decisions. The results of all of this have led the Company to prioritise its investment requirements. More information on this can be found in Section C1. The Strategic Direction Statement is discussed in 0. The Company accounted for customer preferences and has used the willingness to pay figures in the cost benefit analysis for its draft and final business plans. Feedback from draft was received about how happy customers were with the Company s interpretation of their preferences. This has been taken into account and any changes are presented in this plan. With regard to maintaining service and serviceability, the key messages from customers are: 87% of customers identified maintaining a supply of high quality tap water as their highest priority; and 55% of customers were willing to pay more to maintain the service levels proposed in the draft business plan with 37% prepared to pay 10/annum more. The Company believes that both these pieces of evidence provide clear statement of customer support for maintaining the current levels of customer service and serviceability in the future. Page 13 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

52 Willingness To Pay (WTP) Survey In advance of the draft business plan the Company employed ICF International to conduct the detailed qualitative research, piloting, survey implementation, data collection and data entry roles for the domestic customer research project. ICF International, in conjunction with Accent Market Research, used a survey to judge customers willingness to pay through selected scenarios in which bills were changed as a result of changes in the level of service received. In total, 0.6% of the Company s customers have been surveyed, which is believed to be a high proportion compared with other companies. To determine the structure of the survey, a series of internal workshops and stakeholder focus groups were used to identify measures to be discussed with customers. Eight of the Company s 15 company survey questions were selected to be used as subjects of the survey and resulting customer interviews. (The survey report is contained in Appendix 1.) Through the survey, customers were able to value service against specific service-related measures, enabling customers views to be compared in the same context as business drivers. They were also able to select their priorities for service, which included environmental impacts as well as serviceability measures. The survey was initiated with the selected attributes and was sense-checked by a pilot study, consisting of 101 face-to-face customer interviews. From the respondents of the survey, a further 492 were selected for interviews. Interviewees were run through a selection of choice cards, where they could choose to select the status quo or to select a change in service, which would result in a consequential change in bills. ICS used this preference data to model scenarios and assign willingness to pay figures to the individual attributes (see Figure 1). The application of the WTP results to the cost benefit analysis is presented in Section C8. In addition to the willingness to pay data, the survey collected a variety of information on the respondents attitudes on water services, as well as their use of water. The survey also collected a variety of socioeconomic information to be used for determining the degree to which the sample of respondents matched the characteristics of the general population in the region. High level results of the willingness to pay project can be seen in Figure 1. Page 14 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

53 Hardness of water Unplanned interruptions > 6hrs Water safety (technical quality) Attribute Taste, smell, appearance & odour Hosepipe bans > 3months River water levels Water savings through efficiency measures Annual Greenhouse Gas emissions /household/year Figure 1 Willingness to Pay for service improvements from status quo Figure 1 is representative of customers stated preferences in the willingness to pay survey. This has helped the Company to prioritise investments based on customer opinion and has informed the Company s Strategic Direction statement. For example, the highest willingness to pay figures were tied to Greenhouse Gas emissions and this is reflected in the Company s Strategic Direction Statement as noted targets to reduce energy carbon use by 1% each year until 2020, at which point the Company also intends to obtain 20% of its energy from renewable resources. Results of the project have also influenced the development of the capital maintenance programme. For example, reduction in CO 2 emissions has led to a continued focus on the reduction of leakage and the need for efficient pumping plant. Maintaining the low number of mains bursts and plant failures also addresses customers focus on the reduction of unplanned interruptions to supply. Aesthetic water quality also scored highly with customers and consequently the Company is proposing investment in order to prevent discolouration incidents (see Sections B4 and B6). The Company fully recognises that these surveys took place before the recession and credit crunch and, therefore, that there is some uncertainty about the validity of the results in the current Page 15 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

54 economic climate. While the Company has not re-commissioned further surveys, two points are important. Firstly with regard to the business cases presented to maintain service and serviceability, these are based soundly on cost effective planning objectives, not on cost benefit grounds; where the cost benefit of interventions has been assessed this has been undertaken to provide additional supporting justification and to meet Ofwat requirements. Secondly, as described in fully Section C8, the cost benefit analysis has been subject to a number of sensitivity cases including willingness to pay results and these results are valuable in the context of changes to customers economic circumstances. Section Consumer Council for Water CCWater is invited to participate in the Company s Steering Group for Water Efficiency and Metering Strategy. This group was established when the Company was awarded its Water Scarcity status and meets quarterly. In addition, the Company is currently trialling a stepped tariff programme in Lydd, which CCWater is closely monitoring. CCWater audits the Company annually and is also invited to customer-based workshops run by the Company. The Company has kept CCWater informed of its proposals through a series of quadripartite meetings (including the Environment Agency and Drinking Water Inspectorate), with the most recent meeting being held on 24 th February Whilst supportive of the strategy presented and the need for investment to maintain service levels of customers, they were concerned at the likely impact to customer bills and particularly the affordability for those on lower incomes. The question of affordability is important, and the Company s approach to balancing risk to customer service and affordability is presented in Section 4.4. Section Regulators The Company regularly meets with its regulators in a variety of forums. Ofwat has been engaged at all stages of the development of the Business Plan and these meetings have been constructive and valuable for the Company in developing its business plan. The Water Efficiency and Metering Strategy Steering Group include the EA, Defra, Ofwat and Waterwise as members. The Company is also part of the Water Resources in the South East Group, which is led by the EA to develop regional solutions in the context of the SE water companies Water Resource Management Plans. Workshops led by the Company to collect customers opinion on its Strategic Direction Statement and Water Resource Management Plans have also included Ofwat, CCWater, the EA, DWI, Kent County Council and District Councils. The Company has been involved with the auditing of the Folkestone Water Cycle Strategy, which is led by Defra. The Company has discussed the development of its plans at regular intervals with the Quadripartite Group which includes the EA, CCWater, and DWI as members. At the quadripartite meetings there has been strong support from all regulators present for the Company s proposals. The demand led strategy for supply demand was particularly supported with the recognition that maintaining existing service levels becomes more critical as in the future the impact of failures will affects more customers. Section 2.2 Strategic Direction In 2007, the Company prepared a Strategic Direction Statement, setting out the main water supply issues anticipated in its area for the next 25 years and its approach to managing these. This Page 16 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

55 statement was based on consultations with customers, local authorities and regulatory bodies; thus incorporating stakeholder views into the Company s long term strategy. The Board was heavily involved in the creation of the Strategic Direction Statement objectives, as well as those contained in the Water Resource Management Plan, and endorses them fully. The Strategic Direction Statement is an expression of the Company s future vision, which is: To be a sustainable water supplier, exceeding stakeholder expectations through continuous improvement. The Strategic Direction Statement is summarised into six main objectives, principally identified during customer surveys, willingness to pay studies and stakeholder engagement. The main objectives include maintaining a reliable, safe supply of water whilst providing services in a sustainable and environmentally-friendly manner. In the next 25 years, the Company is planning towards: 1. Achieving a sustainable use of water resources. 2. Safeguarding Drinking Water Quality. 3. Ensuring a reliable supply of water 4. Mitigating Climate Change impacts 5. Enhancing Customer Service 6. Financing the future These six themes run throughout the business, providing a basis for the long-term strategic vision and formal business objectives of the company and are also followed through into the structure for setting employees personal targets. The Company s asset management process supports this by utilising a network of primary and supporting asset systems to ensure that a good quality, reliable service is provided to customers. The Company strives to maintain its infrastructure in a way that balances the risk of failure against additional cost to customers and has therefore planned to focus investment on maintaining a stable level of serviceability in AMP5. The feedback from the Environment Agency, Drinking Water Inspectorate and Natural England has been particularly supportive of the Company s Strategic Direction Statement. It has been described as ambitious and an industry leader in its drive to achieve a sustainable water supply. Customers were also supportive with over 94% agreeing that water conservation is a priority and that paying fro water according to the amount used is the fairest way. The Strategic Direction Statement will be reviewed by the Board and customers will be updated with progress. It is intended that the Strategic Direction Statement will be republished every five years, unless there are significant policy changes in the intervening period, to update customers. Section 2.3 Serviceability Approach The Company s serviceability is measured by Ofwat, which awards a status to the Company based on the trending of its data. According to Ofwat, serviceability in Water Infrastructure is stable. Water Non-Infrastructure serviceability is also assessed as being stable in 2007/08, following two previous years of improving serviceability status. There has been relatively little change in the Company s serviceability in recent years; burst figures are low, at below 100/1,000 km per year, leakage is below the regulated Ofwat target and mains renewal is steady, if low (the current replacement rate leads to an asset life of greater than 300 years). Page 17 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

56 In the draft business plan the Company proposed serviceability reference levels and control limits which Ofwat have either supported or, in a number of cases, increased. The Company accepts these changes and the reference levels and control limits for AMP5 are therefore: Serviceability Indicator Reference High Low Infrastructure Total Bursts (nr) Interruptions > 12h (nr) Iron mean zonal compliance (MZC %) DG2 Pressure (nr) Non Infrastructure WTW Coliforms (%) Service Reservoir Coliforms (%) Turbidity (Nr) Enforcements (incident nr) Unplanned maintenance (nr) Table 4 Summary of Serviceability Reference Levels The business plan has been developed in alignment with these reference levels and the Company is currently planning investment based on the Common Framework cost-effective objective to allow it to maintain stable serviceability. The Common Framework provides a method for companies to estimate their future capital maintenance requirements to meet two possible objectives: 1. A cost effective objective, appropriate for providing steady service, to be used to justify base service provision; 2. A cost benefit objective, appropriate for justifying a changed level of service in terms of targeted serviceability. General guidance on cost benefit analysis is provided in Section C8 of the business plan information requirements. Although it has adopted the cost-effective objective in developing the AMP5 Capital Maintenance plan, the Company has tested the predicted investment requirements based on cost-benefit principles as Ofwat has asked to see that investment is still cost-beneficial. An overview of the proposed expenditure can be found in Table 5. Mains renewal is currently at a very low rate of approximately 3km/year and although serviceability is not seen to be declining in the short-term, the Company s risk profile is steadily increasing and increasing mains renewal is seen as part of the long-term investment strategy to manage the risks associated with an aging asset stock. More information can be found in Section 4.1, Infrastructure Assets Business Case. Page 18 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

57 Asset Category Planning Objective Infrastructure Water Distribution: Trunk Mains Water Distribution: Distribution Mains Water Distribution: Communication Pipes Non Infrastructure Water Distribution Revenue Meters Water Treatment Works Water Pumping Stations Service Reservoirs Management & General (noninfrastructure) Cost effective stable serviceability and maintain risk to service stable at start of AMP5 levels Cost effective stable serviceability Cost effective stable serviceability Cost effective stable serviceability and risk to service stable Cost effective stable serviceability Cost effective stable serviceability Cost effective stable serviceability and risk to service stable Cost effective stable serviceability Table 5 Summary of Business Cases The proposed strategy have been focussed on customer and stakeholder priorities, as expressed through customer and stakeholder consultation, willingness to pay surveys and the Strategic Direction Statement. Investment has also been prioritised into areas where there is significant risk to serviceability and customer service. The following Section explains how the Company has done this. The overall balancing of the plan is discussed further in Section 4.4. Page 19 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

58 Section 3 Section 3.1 Approach to Asset Management Planning Overview and Background The Company s overall approach to asset management is described in graphical form in Figure 3 below. Figure 4 expands the process for developing asset management plans. As the Company is relatively small in size, the Head of Capital Investment and Asset Management is also a member of the Executive Management Committee, which approves all capital investment and is thus involved in asset management decisions. It is through this position that integrated asset management strategies and policies are set and implemented. Communication between departments is also aided by the small size of the Company and there are weekly meetings between asset management and operations teams to ensure that information is circulated efficiently. The Head of Capital Investment and Asset Management also attends all Board meetings and, therefore, provides a key linkage between the Board the execution of asset management in the organisation. The high level organisation chart in Figure 2 shows this structure. The small size of the Company and its asset base allows problems to be identified, trends to be highlighted and rapid feedback to be disseminated and communicated throughout the structure. There are robust monthly reviews from an operational perspective. For example, leakage, turbidity and plumb solvency profiles are tracked monthly and progress is monitored in the EMC monthly meetings. The Executive Management Committee also tracks water quality samples, downtime on site, customer complaints and customer contacts. An example report is provided in Appendix 3. BOARD Managing Director Head of Corporate Services Head of Operations Head of Capital Investment and Asset Management Head of Customer Services, Finance and Regulation Asset Manager Project Managers & Support Figure 2 Company Organisation chart Page 20 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

59 INVESTIGATE PLAN DELIVER OPERATE Data Data Operations Assist Asset Performance Investigations Collate Asset Needs Inform Strategic Direction Inform Asset Management Plans Inform Scheme Definition Inform Scheme Programme Operate Assets Maintain Assets Record Data Record Asset Needs Data Data Data Data Capital Investment & Asset Management Investigate Asset Performance Data Data Develop Strategic Direction Develop Asset Management Plans Consult Ops. Programme Schemes Deliver Schemes Customer Services Consult Customers Inform Strategic Direction Inform Asset Management Plans Customer Contact Data Inform Operations Record Data Data Finance & Regulation Consult Stakeholders Inform Strategic Direction Inform Asset Management Plans Data CIMS Oracle OWMS HI- AFFINITY NIAD GIS Problems Register Figure 3 Asset Management Approach Page 21 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

60 DEVELOP ASSET MANAGEMENT PLANS Asset Data and Historical Analysis Forward-Looking Analysis Asset Needs and Intervention Options Asset and Serviceabilty Failure Assessment Cost- Performance Assessment (opex, Reactive Maintenance, etc.) Historical Performance Summary Build and Verify Asset Performance Models Assess Probability, Consequences and Costs of Failures Forecast Service Identify Asset Needs Identify Intervention Options Cost-Benefit Analysis (Whole-Life) Investment Optimisation Investment Review and Challenge Maintenance Activity Assessment Industry Benchmarking Figure 4 Asset Development of Asset Management Plans Page 22 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

61 Data Holding Infrastructure asset data, including asset performance data, is held by the Company s Geographical Information System (GIS). GIS allows spatial analysis of asset and customer data. Likewise, the equivalent Non-Infrastructure data is held in the Company s Non-Infrastructure Asset Database (NIAD). Operational activity relating to all asset types is handled by the Company s Operational Works Management System (OWMS). This is related to financial information to analyse operational expenditure. Capital activity is held by the Capital Investment Management System (CIMS). This incorporates a risk register and statements of need to analyse the need for investment (See Issues Register and Process). In addition to the asset databases held by the Company, a customer database (HIAFFINITY) holds customer service, customer contact and billing information. In another role, it is also used as the asset database for meters. Water sampling data is held in a laboratory information management system and this can be used to map quality failures geographically in the GIS. It also helps to provide an overview of the aesthetic service provided by the Company and can be compared to aesthetic customer complaints (e.g. discolouration complaints). Financial data concerning the Company and its customers is held in ORACLE, the Company s financial system. Data Quality The following primary data sets are central to the Company s operational, capital delivery and asset management functions. The data, availability and quality are commented on in the following table Data Set Data availability Score (good, fair, poor) On-line data Good available to July Oracle; capital and operational costs Hi Affinity; customer contact, billing and meter asset database GIS, including burst reporting NIAD 1997 Custima implemented; Hi Affinity upgrade 2006 From 1990 onwards Implemented 2007/08 All operational and capital project costs are captured and reported through Oracle. Alignment of data with OWMS system needs to be improved to give better granularity of costs at activity level Good. All customer contact and billing data captured in this system. System has limited flexibility as asset inventory for meters but meter data reliable. Good. Full GIS mapping of network; burst reports for all burst. Good Data based on full asset survey. Links to OWMS need development. Page 23 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

62 Data Set Data availability Score (good, fair, poor) Implemented 2003 Average. Operational Works Management System (OWMS) Hydraulic Network Model Full model, last updated to reflect network changes 2007 Asset Management Processes Capture reactive and proactive maintenance and network activity. Data structure and links with Oracle and NIAD need improvement. Average to Good Company wide model which validates well to Operational experience. Required demand updates and re-validation. Table 6 Summary of Data Quality for Key Systems In support of the Common Framework and its forward-looking approach, the Company has developed a long-term strategic Business Plan, looking at investment in and beyond the AMP5 period, aligned with its Strategic Direction objectives. The Company follows a standard asset management cycle as described in Figure 3. Investigate Historical data is collected during operational activities and is analysed by the Company and hired consultants. Monthly reports are prepared for the Executive Management Committee (EMC) example reports can be seen in Appendix 3. Data is trended to create serviceability and risk profiles (See Section 3.2.3). Profiles are extended and data is modelled to provide estimates for the future (See Section 3.4). In the same way, issues on the problems register are turned into Statements of Need to record and analyse the potential consequences to serviceability if left untreated. Plan Project Justifications are produced based on Statements of Need. At a higher level, Asset Needs are identified by comparing risk profile scenarios with and without intervention. Costs for interventions are calculated and projects are compared using costbenefit analysis (see Section C5). Projects with high benefits are optimised and selected based on their relevance to the Company s priorities, impact on serviceability and costbenefit ratio. Periodically, the optimal basket of solutions selected through this process is presented to Ofwat in the Company s business plan. Deliver The selected projects, both capital and operational, are delivered. Operate The Company operates its asset base and collects asset observations, condition and performance data. Customer contact, financial and capital data are also recorded. Asset needs are recorded on a register. Data is held in the corporate databases described in the Data Holding section above. Feedback is gathered throughout the process both internally and externally through stakeholder engagement. Feedback Feedback on the success and implementation of projects leads to better planning. The development of longer-term asset strategies is incorporated into the development of regulatory Business Plans and the Strategic Direction statement. The Company is also looking further ahead, with its distribution and trunk mains renewal ambitions covering a year planning horizon, as described in Section 4. Page 24 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

63 Issues Register and Process The Company has an internal issues identification process, which allows all staff to flag asset and site delicacies. This is an integral part of the identification of asset needs shown in Figure 3 and Figure 4 above. Issues, when apparent, are added to a register as indicated in Figure 5. Identified issues are developed into Statements of Need using a standard form (see Appendix 4). This form requires details about the delicacy, historical occurrences, and potential consequences including serviceability impacts, related problems, perceived solutions and score. Needs are scored by probability and severity (both on a 1-5 basis) against Water Quality, Water Sufficiency, Health and Safety, Financial and Regulatory Overall Performance Measures. Statements of Need, once clarified, are entered into and held in the CIMS database. Short-term and small risks that can be solved by operations are assigned to project managers. Larger problems, which are deemed to require more than a conventional operational solution, are reviewed to become part of larger project solutions. High risk needs are reviewed quarterly by the Head of Capital Investment and Asset Management. All Project Justifications in the planning stage should refer to a specific Statement of Need. Issue Identified Statement of Need (SON) raised & scored SON clarified Entered into CIMS system Capex meeting to review SON Opex solutions Project Definition Project Justification Figure 5 Internal Issues Process Page 25 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

64 Regulation The Company tracks its progress against Ofwat serviceability indicators DG2, 6, 7 and 8. It also tracks leakage on a monthly basis and has monitoring and reporting tools in place to measure pressure and leakage performance within the distribution network. Leakage is measured against the Company s leakage target. The Company follows DOMs regulations and undertakes Drinking Water Safety Plans, in accordance with DWI requirements. The implementation of the Water Safety Plans has led to a number of problems being identified including Iron and Manganese deposits. Development The Company has commenced an internal project to review and refine the processes of data collection and management as part of its ongoing data improvement initiative. It is the responsibility of the whole business to capture relevant data but it is the responsibility of the asset management team to analyse the data to inform decisions. A full asset survey was recently undertaken for non-infrastructure assets and mechanisms are being developed to keep this data updated. The implementation plan will ensure that a high level of data quality is maintained and that the process of updating the data is fully incorporated into the Company s business as usual activities. Section 3.2 Section Historical Analysis Infrastructure Assets Infrastructure asset data (including physical performance data such as numbers of bursts) is held in the Company s GIS software and is supported by sister company data where lacking in detail. GIS allows spatial analysis of asset data and is particularly useful for tracking customer complaints, water quality sample results and bursts. This allows the Company to track the number and location of customers affected by bursts. The Company has also developed a hydraulic model to track the number of customers affected by unplanned interruptions to supply using data stored in GIS. Figure 6 shows the number of bursts per 1,000 km against water distribution mains service and the number of unplanned interruptions greater than 12 hours. The Company proposes investment in distribution mains and trunk mains in AMP5 to maintain the low number of bursts occurring each year, thus helping to keep stable serviceability and a stable company risk profile. Page 26 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

65 FDWS Historic Base Service Provision versus Serviceability Water Distribution Mains Base Service Provision ( M) / /92 Section / / / / / / / /00 Year 2000/ / / / / / / / Figure 6 Distribution Mains Serviceability and Expenditure Non-Infrastructure Assets Ratio to average of actuals Water Distribution Mains Base Service Provision DG2 properties below ref level D3 Unplanned interruptions >12hrs Mains burst per 1000km 5 yr rolling avg (Base Service Provision) The Company s non-infrastructure data is held in its NIAD database and also includes condition and performance data. A full non-infrastructure asset survey has been completed for PR09. Tynemarch has used this data to underpin the analysis of the Company s investment requirements for non-infrastructure assets. The Company is currently investing in systems to ensure that this data is maintained in the same way as GIS infrastructure data and is core to asset management and investment decisions. In AMP5, the Company is proposing investment in water treatment works, UV and turbidity monitoring schemes to maintain serviceability levels. Figure 7 shows turbidity and detected coliforms at Water Treatment Works against treatment works base service. Page 27 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

66 FDWS Historic Base Service Provision versus Serviceability Treatment Works and Resource Facilities Base Service Provision ( M) / / / / / / / / / / /01 Year 2001/ / / / / / / Figure 7 Treatment Works and Resource Serviceability and Expenditure Treatment Works & Facilities Base Service Provision WTW with coliforms detected Turbidity 95%ile Measured Works 5 yr rolling avg (Base Service Provision) The data held in the Company s CIMS, OWMS, ORACLE, HI-AFFINITY and GIS databases enables the Company to track its progress against Ofwat serviceability indicators; these are discussed in Section 3 above. In addition to these databases, the Company has a telemetry system, MC2000, which holds data for the majority of sites since Flow data is kept as a 24 hour rolling average for each site, based on readings taken at five minute intervals. This is supported by the Company s ORACLE system. Auto-trending of data is configured to allow immediate analysis of key parameters. Section Cost of Failure The cost of failures has been derived from Company historic costs. Where it is has been necessary to disaggregate costs to a more detailed level than Company data provides, expert judgement has been applied. These costs have been used in the development of cost effective business cases and in the cost benefit analysis. The details of these costs in contained in Section C8, section In the context of the cost benefit analysis, costs of failure are called private costs. Section 3.3 Forward Looking Analysis The Company has adopted the UKWIR Capital Maintenance Planning Common Framework approach, which is forward-looking in its analysis, based on the forecasting of customer service and subsequent investment needs. Having assessed current performance, the Common Framework stipulates that the Company must examine how serviceability is likely to change through resource capability and changing requirements. Deterioration of the asset base and stock, change in demand, availability of energy and raw water, quality and environment enhancements, efficiency and the impact of climate change are likely to constrain any forward-looking models and where appropriate these factors have been incorporated into the Company s modelling approach. Section Regulatory Measures Page 28 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

67 The Company measures performance against regulatory targets as well as a number of internal sub-threshold measures. For example, the Company has an internal customer service target of addressing complaints within five days, which exceeds Ofwat s 10 day target. The Company also collects data to track the new Lead standard, which will be implemented in 2013, in addition to the current standard. Section Infrastructure Assets For the purpose of forecasting infrastructure performance data, the Company has access to the Veolia Group s pipe sample database which contains over 3,700 samples. Additional data from this database has been used to supplement Company data where appropriate and where materials, ground type and mains age align within the Veolia dataset. Information on corrosion rates derived from the pipe sample testing results has been used to derive corrosion rates for use in the Company s forward looking analysis modelling. The Company has built and maintains a water mains hydraulic model. The model allows detailed assessments of the impact of intervention options to be made for both infrastructure and noninfrastructure assets. This model has proved to be a key tool in the forward looking analysis and cost benefit studies associated with infrastructure assets. Where data has been modelled, this has been made available for cost-benefit analysis as described in Section Section Non Infrastructure Assets Available data for Non-Infrastructure assets has been supported by expert opinion regarding the likelihood and consequence of asset failure that was collected at a number of Company workshops. As the Company is small and operational staff have very detailed knowledge of the assets and their performance, the use of expert opinion is a valid approach Experts were asked a number of questions and data was then collated and included in the forward-looking analysis. The expert opinions were validated through the comparison of a prioritised list of the types of asset predicted to be driving cost and service failures against historical data. Where possible this validation was undertaken using the Company s own historical data, however, where suitable inhouse data were not available the results were validated against sister company data held centrally by Veolia. Section 3.4 Identification of Asset Needs The Company is aware of its serviceability obligations and has expressed these as part of its Strategic Direction Statement. Serviceability trends are monitored and the Company informs itself of its progress through monthly reports about asset performance, as discussed at the Executive Management Committee and Quadripartite Group meetings. Section Current Performance The Company records the current performance of its asset base through collection and analysis of customer and operational data as described in Section 3. This data forms a basis for forwardlooking analysis. For example, the Company has been recording the impact of its current rate of mains renewal and has used this as the basis of assessing an appropriate mains renewal rate for AMP5 to meet its objective of maintaining steady levels of serviceability and risk for these assets, for the benefit of both the customers and the Company. Section Interventions Page 29 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

68 Current performance is analysed and future trends in serviceability have been modelled. The Company uses the comparison of a reactive maintenance only scenario to a range of investment scenarios as a basis for Company intervention options. Figure 8 shows modelled burst forecasts for a range of mains replacement scenarios (including reactive only ) for the next 15 years. Burst Forecasts for Distribution Mains Intervention Options Bursts / year / / / / / / / / / / / / / / /25 Year Reactive Only 3km/yr 5km/yr 9km/yr 12km/yr Reference Upper Control Limit Lower Control Limit Figure 8 Treatment Burst Forecast for Distribution Mains Intervention Options Section Cost-Benefit Analysis The Common Framework allows companies to justify funding requirements based upon economic arguments: aligning levels of service and serviceability with customers willingness to pay. Although the Company is working to maintain serviceability in line with the Common Framework cost-effectiveness objective, as described in Section 2.3, it has used cost-benefit analysis to support the justification for its decisions. This process is detailed in Section C8. Outputs from the Company s models are used to help quantify the consequences that will result from a lack of investment. Section 3.5 Cost Estimation Approach Section C5 provides a full explanation of the Company s approach to cost estimating for future projects. The below is a summary of that approach particularly focusing on the cost estimation of the Base programme. The Company has implemented a systematic approach to the development of project cost estimates for the final business plan, based on the use of Company unit costs wherever possible. The Company s unit costs have been used as the basis of the Cost Base submission and, therefore, there are clear audit trails between the Company s unit costs, the standard costs in the Page 30 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

69 Cost Base submission and the cost estimates for the interventions presented in the final business plan (where these have been on unit costs). The key steps in the development of cost estimates for the capital programme are: A consistent approach to the definition of project scope. All capital investment schemes in the business plan are developed from a scheme definition form which details the scope against consistent work breakdown structures. The scope for interventions is based on detailed feasibility studies and engineering reviews. Direct costs are estimated based on the defined scope and derived from the Company s unit costs where possible; or from supplier estimates or unit rates from consultants where unit costs are not available. The consistent application of indirect costs for design, project management, construction management for infrastructure and non infrastructure projects. From the Cost Base work, percentages were derived for indirect costs on infrastructure and non-infrastructure projects. For infrastructure projects, the percentage used is 15.6% and is developed from typical Company infrastructure projects. Similarly, for non infrastructure projects the percentages used are 7% for design, 18% for project management including contractors overhead and profit and 18% for construction management including preliminaries, site supervision, site overheads. These values have been developed from typical Company projects and are consistent with the Cost Base submission. Risk: for schemes above 1m, project specific risk registers have been produced with risk likelihood and cost impact ranges quantified. From this a P80 probability risk value has been generated using Monte Carlo approach. Where a risk allowance is appropriate, schemes estimates less than 1m have included a risk allowance based on the average risk applied to schemes above 1m. Full details including example risk registers for projects are contained in section C8. Consistent application of Company overhead at 12.8%. This includes costs for asset management, programme management and allowances for time spent on capital projects by members of the finance, regulation and senior management teams. This is consistent with that applied in Cost Base. With regard to the specific interventions in the Base programme, the following table summaries the approach to cost estimating for each project. This is an extract of the full table included in Section C5, section 2.0. Further details for each intervention are provided in the relevant business case in Section 4. Scheme Title Scope and Estimating Approach Risk Allowance INF125 Mains Renewal Each mains renewal project in AMP5 programme developed from GIS analysis and review with Company operational staff to define actual schemes. Company unit costs used. Indirect cost & Company overhead as per overall approach. Scheme specific risk register for AMP5 schemes. AMP6 + risk allowance base on average P80 risk. Page 31 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

70 Scheme Title Scope and Estimating Approach Risk Allowance INF200 INF113 INF114 INF101 INF150 NIF306 NIF NIF300 M&G700 M&G701 M&G702 M&G703 Trunk Mains - TP28 Trunk Mains - TP03 and TP04 Communication Pipes Leakage Maintenance Revenue Meter Replacement WTWs, WPS, SRs Hills 2nd Cell IT Telemetry Vehicles Detailed feasibility study undertaken by Atkins. For infrastructure elements - Company unit costs used. For non-infrastructure elements - No historic Company costs, costs provided by Atkins / F+G from cost models and supplier quotations. Indirect cost & Company overhead as per overall approach. Detailed feasibility study undertaken by Atkins. Company unit costs used. Indirect cost & Company overhead as per overall approach. Activity rates based on Common Framework Modelling. Unit costs based on Company historic rates which represent an all in rate. Same level of capitalisation as agreed with Ofwat for AMP4. Activity rates based on Common Framework Modelling. Unit costs based on Company historic rates which represent an all in rate. Insufficient Company unit cost data to apply modelling approach. Schedule of unit rates identified and costs estimated using cost consultant rates (Faithful +Gould at draft; peer reviewed by Franklin & Andrews for final business plan). Indirect cost & Company overhead as per overall approach. Detailed feasibility study undertaken by Atkins. For infrastructure elements - Company unit costs used. For non-infrastructure elements - no historic Company costs therefore, costs provided by Faithful +Gould from cost models and supplier quotations. Indirect cost & Company overhead as per overall approach. Rates based on Veolia IT unit rates. All in rates, inclusive of on-cost and Company overhead Scope developed in-house based on bottom up estimate of work required. Rates base on Company data and supplier quotations Rates based on Veolia Framework Agreement, including cost of internal fit-out for operational purposes Table 7 Summary of Cost Estimating Approach for Base Programme Scheme specific risk register Scheme specific risk register No risk sum included - all in rate. No risk sum included. No risk sum included - all in rate. No risk sum included as risk on like for like replacement very low. Scheme specific risk register No risk sum included - like for like replacement No risk sum included - like for like replacement No risk sum included - no risk For derivation of the Company s failure costs (called private costs in the context of cost benefit analysis) see Section above, and Section C8. Section 3.6 Quality Assurance and Review The Company is ISO14001 and ISO18001 accredited, having established Environmental Management Systems and Quality and Risk Management Systems respectively. Page 32 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

71 ISO18001 is supported at a strategic level by the Company s business as usual asset management approach. Key processes and procedures are in place, supported by a small but robust asset management team. The Head of Capital Investment and Asset Management, as discussed in Section 5.3, has complete visibility of the Company s investment programme as well as the day to day development and management of the asset base. The Company incorporates quality and risk management systems in its business as usual operation of the Company. The Board undertakes high-level annual risk reviews and reviews quarterly the internal risk register. Risk appetite and risk tolerance is reviewed each year and over the past ten years, the risk exposure that the Company finds acceptable has changed and reduced. Mechanisms are also in place for staff to flag up asset issues on a daily basis. Each department has its own risk register for day to day risk management. Each site location has a facility to link to the Company network where asset data can be entered and updated. It is a requirement of ISO18001 accreditation that risk registers are updated on a regular basis and these are reviewed monthly by managers. To help minimise and mitigate health and safety risks the Company employs a full time health and safety manager. Within project delivery processes such as design review and HAZOPS are followed to ensure solutions are robustly reviewed. Safety procedures are in place for all of the chemicals and treatment processes in use including UV, chlorine gas and Hypochlorite. Quality procedures are also followed at every level of the business. Expert judgement is used for sense checking of everything from investment proposals to cost benefit calculations and asset design drawings. For example, operators are involved in checking and approving all designs to ensure that local knowledge and expertise is incorporated. The managing director approves all capital investment and a monthly Executive Management Committee meeting challenges and reviews business operational performance. The Company s Business Plan is put through the same checking, review and approval process before issue. As the Company is also ISO14001 accredited, it has to meet additional environmental management standards. The Company measures its performance and development against a number of environmental OPMs including water pollution and carbon emissions. The Company is audited annually against the ISO criteria for these standards and has also been environmentally assessed. Page 33 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

72 Section 4 Section 4.1 Section Business Case by Asset Group Infrastructure Assets Water Distribution Trunk Mains Summary The Planning Objective for water distribution trunk mains is to cost effectively maintain stable serviceability and to stabilise risk to service at start of AMP5 levels. Historically, trunk main performance has had a marginal impact on overall infrastructure serviceability due to a low frequency of burst rates and very low number of DG3 incidents. However, the modelling undertaken by the Company demonstrates that the risk to customer service (primarily in terms of interruption to supply) from trunk main failure is increasing. This business case demonstrates how this risk to service should be stabilised in the most cost effective way. Reliability of supply is a major component of the Company s Strategic Direction Statement. The Company s target is to maintain burst rates at below 100 bursts per 1,000km per annum and to have no unplanned interruptions lasting longer than 6 hours. Customers also express strong support for reliability of service; with 87% of customer identifying maintaining a reliable supply of high quality tap water as their highest priority. The Company has developed a priority ranking for its Trunk Mains, based on likelihood and consequence of failure using the Common Framework approach and detailed modelling of the asset base. From this the Company has assessed a variety of intervention options to deliver the planning objectives before finalising on the selected cost effective options. The options selected are: o o Replacement of the two highest risk trunk mains (TP03 and TP04) which are the only remaining pre-1980 UPVC mains in the Company s asset stock and have a significantly higher likelihood of failure than other trunk main materials (see Figure 11). To mitigate the consequences of failure of TP28 by installing a new pumping station and 800m of new main, thereby providing 18,000 properties in the Folkestone zone with a reliable alternative supply of water should failure occur. This same solution has secondary benefits in that it enables the Company to also provide an alternative source of water for 10,000 properties in the Paddlesworth zone. A material factor in the Company s decision replace TP03 and TP04 is that, due to network changes resulting from the introduction of the Denge Security Main, these existing trunk mains will be subject to increased operating pressures which will materially increase their failure likelihood when the Denge Security Main is operating. When the Denge Security Main is operating TP03 and TP04 are the only source of water for 6,500 properties in Denge. Material factors in the decision to provide network connections to mitigate the consequences of failure of TP28 are the high consequences of failure. TP28 provides water to 18,000 properties (rising to 24,500 properties when the Denge Security Main is operating). Additionally, TP28 is laid down a steep hill which is in a known geological slipplane. Previous movement has occurred in this location resulting in the joints of the main Page 34 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

73 needing to be re-caulked. The increased likelihood of failure resulting from seismic activity causing movement in the slip plane has not been included in the modelling results as it is very difficult to quantify, however, the consequences for customer service and serviceability are significant. The three investments have also been tested for cost benefit and the investment is shown to be cost beneficial. The proposed AMP5 investment for the replacement of TP03 and TP04 and the network solution to TP28 is 6.5m, compared to an AMP4 expenditure on maintaining the serviceability of trunk mains of 0.6m. The Company believes that the three selected trunk mains schemes are Exceptional Items as per Ofwat s definition and in the context of the Capital Maintenance CIS baseline. The network modifications for TP28 and replacement of TP03 and TP04 are therefore proposed by the Company as defined outputs for AMP5. Asset Data and Historical Analysis The Company has a comprehensive and accurate asset inventory, based on its full network GIS system. Within this data the age and material profile are recorded for each trunk main with only 0.14% of mains being of unknown age and 1.7% of mains being of unknown material (percentage by overall length). This information is presented in the following tables and figures. Business as usual processes related to burst reporting provide additional data for verification of this data set. Asset performance in terms of bursts is recorded in the same way as for distribution mains. Failure data is reliably recorded by staff on site and updated on GIS. The Company has accurate burst data; however, further steps will be made in AMP5 to ensure cause of failure is also accurately captured. Trunk main bursts represent a small proportion of mains failure. Table 10 shows the trunk main burst history by material. The average number of trunk mains bursts per year is 4.7. This compares to the Company wide average number of bursts per year of approximately 100. The long term burst rate of trunk mains is 22 bursts/1000km. This compares to a Company wide long term burst rate of 136 bursts/1000km, although the average for the last five years is lower at 102 bursts/1000km. Figure 10 clearly shows the elevated risk of failure from the Company s UPVC mains. Trunk main failures affect serviceability primarily through burst rate (albeit trunk mains bursts are only a small proportion of the overall mains bursts) and DG3 incident greater than 12 hours in duration. As can be seen from Figure 11, DG3 figures are very low for the Company with zero DG3 incidents greater than 12 hours in the last 6 years. The DG3 incident in 2001/02 was as a result of failure of temporary works on statutory diversion work associated with Channel Tunnel Rail Link. It is important to note that DG3 reporting only highlights actual failures, it does not accurately reflect deteriorating assets and increased risk levels where these risks have not yet materialised. Serviceability history has been shown against historic spend in Figure 11. As with trunk main failures being a small proportion of the overall failure rate, the same is true for historic spend and replacement activity, which has also been low. For the whole of AMP4, the Page 35 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

74 expenditure on mains renewals is forecast to be 2.8m to deliver 16.5km of renewal. By comparison, the AMP4 expenditure on Trunk Mains is forecast to be 0.6m for delivery of 0.7km. This is due to expenditure on trunk mains being significantly more expensive per unit length than for distribution main, due to higher the costs associated with larger diameter mains. Rates of activity and levels of expenditure are believed to similar for periods prior to AMP4, although accurate historical data is not available. Historically, trunk main replacement activity has also been vey low and has been related to replacing short lengths of poor performing mains. From historic cost data and an analysis of historic bursts and burst rates, it can be concluded that the low level of historic activity on trunk mains has had a marginal effect on overall infrastructure serviceability. Cost of failure has been assessed from Company data as described in Section and Section C8. The trunk mains inventory is a sub-set of the overall asset inventory, where mains have an identifier TP or TR to designate either a potable water or raw water trunk main. The designation is not based upon size of main but on the operational significance of the main. The inventory length totals are presented in Table 8 and Table 9 below. Trunk Main Category Total Length (km) Raw water mains 34.2 Potable water mains Table 8 Trunk Mains Inventory Summary Table 9 presents a detailed breakdown of sizes and lengths of all potable water trunk mains. Material < Nominal diameter (mm) Grand Total Asbestos Cement ,519 5,382 7,919 Cast Iron 31 12,769 5,150 8,183 4,227 3,795 34,155 Ductile Iron 67 8,527 5,937 47,174 19,330 14,800 2,127 97,963 HPPE 602 4,152 4, ,449 MDPE Spun Iron 68 14,393 16,005 7,175 4,247 3,638 3,026 48,553 Steel 9 9 UPVC 3,029 2,313 4,256 6,932 2,035 18,564 no data 3,699 3,699 Grand Total ,620 33,553 69,816 34,775 27,615 7, ,339 Table 9 Inventory Analysis of Potable Water Trunk Mains Figure 9 illustrates the age and material mix raw and treated water trunk mains. Page 36 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

75 Trunk Mains by Age & Material Length (km) Data unavailable UPVC Steel Spun Iron PE MOPVC Galv Duct. Iron Cast Iron Asb. Cem Data Unavaialble Age Band Figure 9 Analysis of Trunk Mains by Age and Material Table 10 and Figure 10 present the burst record which clearly highlights the elevated failure risk presented by UPVC in comparison to other pipe materials. AC Cast Iron Ductile Iron HPPE Spun Iron UPVC Grand Total Average per Yr Bursts Length (km) Bursts/km/yr Table 10 The Company s Trunk Mains Burst History (1998 to 2007) Page 37 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

76 0.12 Brust Rates for Trunk Mains by Material Bursts / km / year AC Cast Iron Ductile Iron HPPE Spun Iron UPVC Figure 10 Burst Rate for Trunk Main by Material FDWS Historic Base Service Provision versus Serviceability Water Distribution Mains Base Service Provision ( M) / / / / / / /97 Forward Looking Analysis Data 1997/ / /00 Year 2000/ / / / / / / / Figure 11 Distribution Main Serviceability and Expenditure Ratio to average of actuals Water Distribution Mains Base Service Provision DG2 properties below ref level D3 Unplanned interruptions >12hrs Mains burst per 1000km 5 yr rolling avg (Base Service Provision) A description of the asset data available as the basis for forward looking analysis is described in the distribution mains business case; but these apply equally to trunk mains. This section presents the work undertaken specifically for the trunk mains forward looking analysis study. Veolia data-set for trunk main performance: As previously identified, the Company has very small failure data for trunk mains. However, Veolia collects all its companies data which is categorised on an identical basis with regard to bursts, material, diameter and Page 38 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

77 ground conditions, propensity to ring fracture etc. Therefore, the Company has been able to compliment its own failure data with applicable data sets for pipe material and ground conditions from the Veolia data. This enables a validated modelling approach to be taken, as otherwise the Company would be too small to provide reliable performance data. This database has been built over the period since 1992 as part of a Veolia Group initiative to understand the behaviour of underground assets and contains more than 3,750 sample results. This is high-quality information with a great deal of consistency. Each sample has been tested in the same manner by the same laboratory to consistent standards. Each result has been geo-located and available via the GIS. Environmental data: The group has consistent soil corrosion and soil movement potential data in digital form across all companies provided by the National Soil Resources Institute 1. This allows soil corrosion and soil movement potential to be mapped with mains failures and pipe sample results in a consistent manner across the group. This means, for example, that data from other group companies regarding performance of cast iron pipe in non-corrosive ground is applicable to the Company. Trunk mains walks: The Company undertook detailed assessment of operability and consequential damage for a number of key trunk mains TPs: 03, 25, 36, 45, 48, 52 & 60 as part of a programme to survey all principal trunk mains. TP28 was the subject of a review during AMP3 and therefore a walk was not repeated. This was done by surveying each main along its length to determine any specific consequential damage risks and risks to operation of valves etc. This information supported the analysis undertaken for consequence modelling described below. In the future this information will be maintained on the GIS; in the mean time it is contained in individual survey reports. Condition assessment: Pipe samples have been taken from trunk mains where corrosion attack is thought to be a risk (for example: TP36). Partitioning trunk mains for analysis: To facilitate analysis of trunk mains risk the mains were partitioned using the GIS. This is described further in section below. Forward Looking Analysis Analytical Approach The modelling approach is based on network asset data and the recorded burst history. Pipe lengths are assigned to a category according to groupings of material and ground conditions. Within each of these, all pipes are assumed to behave on average in the same manner. The approach used is the same in principle for all material types and is applied on a class-by-class basis, allowing for different modes and rates of deterioration. The principles employed for this analysis are compatible with the UKWIR Common Framework. The approach assesses service risk, based upon an analysis of asset data, in conjunction with recorded burst data. To achieve this goal, a mathematical model has been set up to replicate the likelihood of current failure events and to forecast future levels up to the year The approach takes into account the effects of bursts and repairs and proactive renewal on the assets and their behaviour. An economic model then allows the modelling of different strategies in terms of a fail and fix approach or the proactive renewal of mains. The output from the model consists of predicted failures with annual costs for repair on failure, and options for proactive renewal in isolation, or in conjunction, with distribution mains. 1 NSRI, Soil Data Maps, Page 39 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

78 Figure 12 illustrates the process in diagrammatical form. The base data used for the predictive modelling of failure includes: Trunk mains each section tagged with the trunk main reference. Burst records associated with trunk mains, covering the 19 year period 1988 to Soils data derived from National Soil Resources Institute (NSRI) soils maps, showing corrosivity to iron and zinc. Each pipe length was assigned values from the soils data that it intersects. Bursts were then joined to the pipe data spatially, to provide the pipe data relevant to each burst. Page 40 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

79 Asset Stock: Soil type, material, birth year, length Asset Bursts: Soil type, material, birth year, burst year Summary: -Nr. of assets, length and failure profile -Grouping according to the combination of material and soil type Note: Remove asset failures: -if failure was before asset laid -if reason for failure is other than burst Data structured for model Optimised parameters Model Input - Output file Calibrated,ץ (β, Weibull Parameters η) and equivalent length (Le) OR Iterate Calibration Model Calibration of Weibull parameters and equivalent length by optimisation of trunk main Renewal Model Burst and Repair Model Iterate Probability of failure at asset level Probability of failure at asset level Consequence costs Unit costs of repair and renewal Renewal options Risk and Strategy Model Assess resultant probability of failure and cost-benefit at asset level for different renewal years Summary Failures, OPEX, intervention options, CAPEX and consequence cost at asset level by strategy TRUNK MAIN PROCESS MODEL Failure Modelling Figure 12 Trunk main process model The model used assumptions, which as far as practicable, represent the physical behaviour of the assets. Key parameters affecting deterioration, material and soil aggressivity were combined to form pipe classes. Within each of these all pipes were assumed to behave, on average, in the Page 41 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

80 same manner. At any particular time during the period for which failure records are available, various aspects are used to describe the deterioration behaviour of a set of assets: Failure at commissioning, due to deterioration, is zero; Deterioration develops over time and for each class tends to follow a smooth continuous S type of curve, which has the following properties: o o o o It has zero slope at time of commissioning; It takes a number of years before the onset of any significant number of failures due to deterioration; After the onset of failure, there tends to be a gradual increase in the trend. In effect, the rate of increase in probability of failure becomes approximately constant; and As the pipe reaches very old age the majority of pipes in the same class have failed, and the rate of change in probability of failure slackens off, leaving a small residual remaining in a serviceable state for a notable period of time. This type of deterioration curve can be modelled using a Weibull distribution plot, which is often used for Reliability Modelling. It has been applied here in a specially modified basis. A more detailed description of the modelling process are contained in the consultant s reports (see Appendix 6 and 7). Consequence Modelling The consequence of failure of a trunk main was generically defined according to a number of input factors relating to customer impact and topological features. The key items were: Number of customers affected on failure; Number of customers in isolated once failure has been shut in; Number of valve operation and complexity to achieve isolation; Number customers subject to low pressures on failure; Proximity to railway lines and priority roads; and Trunk mains passing under buildings. What is highlighted in this approach is that it is the consequence of failure for customers that is being considered and is central to the analysis provided. Rather than apply a crude measure that flags a whole trunk main segment as affected by a particular input, regardless of the segment length, the mains were partitioned into 10m sections prior to analysis. These sections are then re-combined to produce the length of each segment affected by each input. In this way a realistic assessment of risk can be attributed to each pipe unit (asset ID). A detailed explanation of this process are given in the consultant s reports (see Appendix 6 and 7). Strategic Capital Maintenance Model The purpose of this model is to test intervention options necessary during the initial planning period (AMP5) to achieve the planning objective. The model combines risk assessment, at pipe unit level, with the cost of replacing each pipe unit. This allows ranking of mains by their predicted future performance and risk profile. Page 42 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

81 The results of using the Strategic Maintenance Model are presented below. Two assessments were made: Ranking of individual trunk main by highest risk (failure likelihood and consequence); and Ranking of individual trunk main by greatest consequence only. The maximum risk rather than total risk is used to rank the trunk mains. If the trunk mains were ranked by total risk longer trunk mains would be prioritised over shorter ones as they contain more 10m section. Priority Ranking by Overall Risk Rank Trunk Main Length (m) Consequence Score Max Risk Total Risk Burst Reduction p.a. Risk Reduction 1 TP03 5, TP04 2, TP01 3, TP09 5, TP25 5, TP17 5, TP10 4, TP36 4, TP45 6, TP31 5, TP02 3, TP55 2, TP60 2, TP52 2, TP30 2, TP34 3, TP47 1, TP40 2, TP22 4, TP Table 11 Trunk Mains listed by highest risk Page 43 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

82 Priority Ranking by Consequence Rank Trunk Main Length (m) Consequence Score Max Risk Total Risk Burst Reduction p.a. Risk Reduction 1 TP TP TP60 2, TP55 2, TP45 6, TP25 5, TP40 2, TP TP TP TP01 3, TP31 5, TP61 1, TP30 2, TP35 1, TP57 2, TP TP41 1, TP17 5, TP38 3, Intervention Options Table 12 Trunk Mains listed by greatest consequence From this analysis the Company commissioned technical solutions and cost estimates to be prepared for 14 trunk main interventions. The selection of the trunk mains was the top 13 from the priority list (Table 11) plus TP28, as being the highest consequence main from Table 12. From its previous Business Plan submission at PR04, the Company identified TP28 as representing a significant risk to customer service due to the high consequences of failure; TP28 feeds approximately 18,000 properties and runs beneath the M20 and Channel Tunnel Rail Link high speed railway in a service culvert. In addition TP28 is exposed to failure as a result of it being in a slip plane for which the likelihood of failure has not been modelled in the above analysis. This justifies its inclusion in the initial assessment. To develop the specific intervention studies on the trunk mains, an expert panel workshop was convened of Company network staff and design consultants to assess the potential intervention options for each trunk main. Each trunk main was assessed for the potential to improve valving Page 44 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

83 and provide cross connections to mitigate the risk of failure, as well as examining total replacement. Operational issues and requirements were also incorporated into decisions to include or reject solutions to each trunk main. This process was enhanced by the production of a GIS shape file plot of the trunk mains, together with relevant supporting information from the trunk main walks. This ensured that trunk main model output was used as the focus for rational scheme development and that solutions were practicable and buildable and thus significantly improving the reliability of the cost estimates. A scheme definition form was created for each solution to each trunk main identified above and each intervention was priced on unit rates to provide an overall comparison. For each trunk main, the reduction in risk that can be achieved by the intervention option was calculated. This is shown in the final column in Table 11 and Table 12. An assessment was then undertaken to compare for each intervention, the amount of reduction in maximum risk per m of investment, and similarly for total risk and the reduction in risk from the intervention. This enabled the cost effectiveness of the different interventions to be assessed. The results of this comparison are shown in the following table: Trunk Main Intervention Cost, m Maximum Risk / m Rank Total Risk/ m Rank Risk Reduction / m TP TP TP TP TP TP TP TP Table 13 Trunk Main Cost Effectiveness Analysis Rank This clearly demonstrates that TP03 and TP04 are the most cost effective trunks main interventions, particularly where considering the risk reduction for customers delivered by the investment. In addition, from Table 11 above, it can clearly be seen that TP03 and TP04 represent by far the greatest risk score of all ten trunk mains. This is largely driven by the fact that they are pre-1980 s UPVC mains, which as shown in Figure 10, have the highest likelihood of failure in the Company. Combined they represent 51% of the risk of the top ten mains. Historical data shows that TP03 has experienced 4 bursts, 1991, 2002, 2005 and 2006 although TP04 has no recorded bursts. This is not entirely surprising as TP03 is fed directly from the Denge Tower and, therefore, experiences higher pressures compared to TP04. It should also be highlighted that the cost of repair on the trunk mains in this area is high. The mains are laid predominately in gravel and in low lying coastal areas. Excavating to undertake a repair requires extensive dewatering while the operation is undertaken, which is both costly to arrange and operate. A further consideration for the Company is that these trunk mains are part of the overall Denge Security Main. The Denge Security Main is an AMP4 strategic investment scheme to enable the Denge Water Resource Zone to be fed from the Hills Water Resource Zone in the event of the Denge source being rendered un-usable due to inundation from the sea or a pollution event. (The Denge source is a very shallow coastal gravel aquifer, rain fed and is vulnerable to surface pollution or saline intrusion from flooding). The Denge Security Main is comprised of existing mains Page 45 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

84 which include TP03 and TP04, plus a new section of main between St Mary s Bay and a crossing of the M20 close to Sellindge. As a consequence of the implementation of the Denge Security Main, TP03 and TP04 will be subjects to flows and pressures greater than those they have been operating at historically. Given that these mains comprise pre-1980s UPVC with very poor fracture toughness, the increase in operating pressures evident from hydraulic modelling will certainly result in an increased likelihood of failure. Moreover, this risk of failure will increase when the Denge Security Main is required to operate. With the Denge Security Main being the means by which the Company protects 6,500 properties at Denge from loss of service an increased likelihood of failure to that service when no alternative means of support is unacceptable to the Company. As described above the trunk main TP28 was included in the initial assessment as a result of its very high customer service impacts in the event of failure. The Company commissioned hydraulic analysis to better inform the consequences of failure of TP28 (see Appendix 8 for the report). TP28 is the primary source of water for 18,000 properties in Folkestone and is laid down an extremely step slope with a history of movement and on a known geological fault line. The modelling described above does not included the likelihood of failure resulting from ground movement or seismic activity and therefore, the risk score for TP28 in the modelling is not representative of the actual risk. The consequence score is representative and as shown in Table 12 is the highest consequence main in the Company by a significant margin. On failure, 18,000 properties are at risk of interruption to supply; network changes can restore supply by feeding all customers from the Paddlesworth reservoir but network modelling demonstrates that this is possible only for 16 to 20 hours depending on demand. The network modelling provides the window in which a repair would need to be made to ensure service for all 18,000 customers. Given the location of the main on such steep ground with limited access and the volumes routinely carried by the main, a failure is likely to cause significant disruption to the surrounding area, especially as the main is in a narrow road. This significantly complicates the task of undertaking a trunk main repair and a hour window is insufficient for a repair in this location. Further, the lower sections of the main pass through a culvert under the M20 and Channel Tunnel Rail Link high speed railway. Mains failure in this vicinity also threatens structural damage to the structures under which the main passes. Finally, an additional 6,500 properties at risk of interruption to supply when operating the Denge Security Main which cannot be supplied from other sources if failure occurs during this time. In considering these facts and from discussions with the Senior Management Team and the Board, the Company does not consider the existing situation as being acceptable when numbers of customers at risk is so high. Finally, with the serviceability measures for interruption to supply >12hours being a reference level of 0 and an upper control limit of 23, failure of TP28 also represents a significant risk to serviceability. The intervention options, therefore, proposed by the Company for trunk mains are: T03 and TP04 as being the most cost effectiveness interventions, and TP28 due to risks to customer service and serviceability being unacceptable to the Company. Finally, re-running the Strategic Maintenance Model with the Company s selected interventions demonstrates that these interventions achieve the planning objective to maintain risk at the start of AMP5 levels. This is shown in Figure 13. For the purposes of this analysis the delivery of TP03, Page 46 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

85 TP04 and TP28 have been assumed to occur at the end of AMP5, in reality the benefits are achieved as soon as the scheme is complete. Trunk Main Strategy fit with Planning Objectives Change in Bursts p.a Risk Level Year Post Investment Risk Unmitigated Risk Unmitigated Change in Bursts pa Mitigated Change in Bursts p.a. Figure 13 Trunk Main Risk and Burst Forecast Fit with Planning Objective For the three options selected above, the Company commissioned option development work on all interventions. This work looked in detail at route selection and the implications on the design and construction method from service crossings, traffic sensitivities and topological features. Planning and environmental considerations were also reviewed and incorporated into the design. The Company s unit costs were applied for estimating and as described in Section 3.5 and Section C5, for each scheme a specific risk register was developed and used for the final cost estimate. This work is summarised in the following section. TP28 Initial reviews identified a number of solutions for TP28. These were: Option 1: Full duplication of the main by an alternative route to the existing TP28; this solutions was the selected option for the draft business plan. This offers the best level of risk protection by providing a full alternative, but is also the most expensive. Option 2: Duplication of the main following the existing route. While the shortest route, this solution provides no mitigation of the risk of failure due to ground movement as such movement would cause failure in a new main in the same way as the existing. Furthermore, Page 47 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

86 in the event of the existing main failing, the discharge of water from this failure could quite possibly cause a failure in the new main. On the basis that this option did not mitigate the risks, it was rejected. Option 3: Full duplication of the main by an alternative route to the existing TP28, but including a section in a sunken shaft through the chalk escarpment with the main passing over the Eurotunnel railway into France. While potentially feasible, the option has significantly greater risks relating to ground conditions and permitting of the construction by Eurotunnel which are very difficult to quantify further an account for at this stage. Due to complexity and uncertainty of this solution it is not a preferred solution for the Company. Option 4: Between draft and final business plans, the Hills to Paddlesworth scheme included in the draft business plan was re-assessed for its potential to also provide a solution to the TP28 risk. From the subsequent hydraulic modelling (Appendix 8) this option is shown as being feasible, although sections of the existing network are exposed to velocities of 2.4m/s for this solution. However, it is a lower cost solution than the alternatives. With some modifications to the Hills to Paddlesworth scheme presented at draft can be an effective solution to TP28 and provide secondary benefit in providing a reliable alternative source of water for Paddlesworth zone. For all options the solutions above were developed in conjunction with the detailed study of the Hills 2 nd cell (See Section 4.2.6) to ensure correct technical alignment of interfaces between to the two schemes. A copy of the trunk main feasibility report is contained in Appendix 14. Costs for the four options are given in Table 14: TP28 Solution Costs, m Option 1 Alternative Route Surface Option 2 Duplicate Existing Route Option 3 Alternative Route with Shaft Option 4 Pumping Station and Main Direct Costs Indirect Costs Risk (%), m (14.2%), (28.3%), (19.9%), (26.4%), Company Overhead Total Opex Change pa Table 14 Capital Costs for TP28 Solutions The Company s selected solution is Option 4 as this offers the lowest cost solution at an acceptable balance of risk. Option 2 has been excluded as it runs in the same slip plane as the existing main and provides no risk mitigation. Option 3 is heavily dependant on the proposed solution being approved by Eurotunnel for which there is significant uncertainty. A detailed design and approvals process is necessary before this option could be put forward as a credible solution. Option 4 also provides secondary benefits in that it can be used to provide an alternative source of supply for 10,000 properties fed by the Paddlesworth reservoir. Paddlesworth reservoir is a singe cell reservoir which cannot be taken out of service. An extract of the scheme definition form showing the detailed costs breakdown for option 4 is contained in Appendix 12. Page 48 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

87 TP03 and TP04 Solution options for TP03 and TP04 are straight forward as they required a like for like replacement. Routes for the replacement trunk mains have been carefully chosen, as the Denge area is a significant natural resource and parts are designated as SSSI, Natura 2000 and therefore need to be protected. A copy of the trunk main feasibility report is contained in Appendix 14. Examples of the cost breakdown structure and risk register taken from the Scheme Definition Forms for TP03 are contained in the Appendices to Section C5. TP03 and TP04 Solution Costs, m TP03 TP04 Cost Benefit Analysis Direct Costs Indirect Costs Risk (%), m (17.2%), (12.0%), Company Overhead Total Opex 0 0 Table 15 Capital Costs for TP03 and TP04 28 Solutions The Company is confident that it has chosen the right trunk main interventions based on risk to customer service and serviceability and that the interventions selected are cost effective. It has demonstrated how the selection of these interventions meets the planning objective for the asset group. As a further test, the Company has chosen to assess the AMP5 interventions for cost benefit. These interventions are scored using the Company s methodology as described in Section C8. The assessment and results are summarised below. Assessment of Benefits Only the performance measures affected by the intervention have been assessed. These are described in the following table. The solution to TP28 provides secondary benefits to provides support to the Paddlesworth reservoir and zone, however, these secondary benefits have not been explicitly included in the CBA analysis. OPM Intervention Data Used for Likelihood and Consequence 3 Pressure 4 Supply Inter- TP03, 04 and 28 TP03, 04 and 28 This was considered, however, low pressure only occurs at the point of burst and is, therefore, a very short duration impact. The impact of loss of supply is covered in OPM 4, therefore, this OPM is not used. The burst frequencies are determined from the deterioration modelling for the existing pipe and the renewed pipe (new ductile iron) across a 40 year profile. Page 49 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

88 OPM Intervention Data Used for Likelihood and Consequence ruptions TP03 TP03 feeds 1,901 properties. A failure has been assessed as resulting in all customers being without water for up to 6 hours. This is due to historic failures of TP03 not resulting in DG3 incidents. The likelihood of this service impact being experienced without investment is the forecast probability of failure from the trunk mains model. In 2010/11 this probability is assessed as 1.90 burst per year, rising to 9.55 burst per year after 40 years. 8 Extra Reg. Reporting TP04 TP28 TP03, T04 TP04 feeds 946 properties. A failure has been assessed as resulting in all customers being without water for up to 6 hours. This is based on historic failures of TP03 not resulting in DG3 incidents. The likelihood of this service impact being experienced without investment is the forecast probability of failure from the trunk mains model. In 2010/11 this probability is assessed as 1.00 burst per year, rising to 5.09 burst per year after 40 years. TP28 feeds 17,927 properties. A failure has been assessed as resulting in all customers being without water for up to 6 hours. While continuity of service can be provided from the Paddlesworth zone for 16 to 20 hours, as explained above, a trunk main repair on TP28 is estimated to take more than this. A judgement has been made that loss of supply would not exceed 6 hours. As the benefit value increases with longer interruption times, this is also ensuring the benefit is not overstated. The likelihood of this service impact being experienced without investment is the forecast probability of failure from the trunk mains model. In 2010/11 this probability is assessed as burst per year, rising to burst per year after 40 years. Post-intervention, the risk is eliminated; therefore, post-intervention likelihood is 0. (Both the existing TP28 and the revised network solution would have to fail at the same time to result in an interruption to supply). Not applicable TP28 A significant failure on TP28 which resulted in approximately 18,000 customers off supply, and potentially resulting in damage to the M20 and/or the CTRL high speed rail link could trigger additional regulatory reporting. This has been included here. The total number of hours is estimated as 1 man year to report for each failure event. The likelihood of failures are the same as for OPM Personal Injury 12. Carbon equivalent emissions 14 Traffic Disruptions TP03, 04 TP28 TP03, 04 and 28 TP03, 04 Not applicable. This was considered in relation to the CTRL and M20 crossings, however, the forecasting the likelihood of injury resulting from a trunk main burst resulted in such low probabilities that it was not included in the analysis. The cost of carbon for operational and embedded carbon are calculated automatically from the scheme costs. This is described more full in Section C8. Not applicable as the mains do not cross significant road or rail networks. Page 50 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

89 OPM Intervention Data Used for Likelihood and Consequence CBA Results TP28 Due to TP28 being in a culvert below the M20 and CTRL high speed rail link the potential for interruption to transport has been included. The likelihood of failure is the same as used in OPM4. The impact duration has been assessed as 30 days. This is a simple estimate to allow for structural reviews to be undertaken. Any serious damage would take longer then this to repair. Table 16 Scoring of Benefits for Trunk Main Strategy As demonstrated by the data in Table 17, the changes in service performance generating the greatest benefit are clearly the supply interruptions for all schemes and the transport disruption for TP28. Even excluding the transport disruption for TP28, this scheme remains cost beneficial. Solution Ref INF200MP Scheme Title TP28 (Option 4) Whole Life Cost, k Whole Life Benefit, k Net NPV, (WLB less WLC) k OPM 4. Supply Interruptions Benefit Value per OPM, k OPM 8. Extra Regulatory Reporting OPM 12. Carbon equivalent emissions OPM 14. Transport disruption 3,286 49,639 46,353 23, ,608 3,286 INF113MP TP03 1, , , , ,952 INF114MP TP ,412 53,620 54, Table 17 Trunk Main CBA Results The TP04 and TP03 solutions shows significant benefit as the likelihood of failure for these UPVC main is high, particularly TP03 which has a history of bursts. The results from the two CBA sensitivity scenarios described in Section C8 are as follows. Solution Ref Scheme Title Sensitivity # 1 Private Cost Only Net NPV, (WLB less WLC) k Sensitivity # 2 Lower Bound WTP (95%ile) INF200MP TP28(Option 4) 20,873 34,281 INF113MP TP03-1,719 98,791 INF114MP TP ,248 Table 18 Trunk Main CBA Sensitivity Results This clearly shows that TP28 is cost beneficial even if customer valuations are removed and only costs to the Company are considered. Using lower bound 95%ile Willingness to Pay values still shows all schemes as being beneficial. Selection of Optimal Solutions The Company has demonstrated that it has applied the common framework approach to the assessment of its trunk main assets. Its approach is clearly based on risk, with customer service Page 51 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

90 central to its assessment of risk. From this basis it has selected interventions for trunk mains TP03 and TP04 that are the most cost effective in meeting its planning objective. The Company has also selected TP28 for intervention due to the unacceptable risk to customer service and serviceability that failure of this main represents. Each of these investments has been discussed with the Board who have endorsed their support to ensure the Company can effectively manage the risk to service. A range of solutions have been considered for the interventions from which the proposed solution has been selected. The solutions selected have also been assessed as cost beneficial. The investment aligns with the Company s Strategic Direction Statement, where as part of Ensuring A Reliable Supply of Water, the Company s target is no unplanned interruption to supply exceeding 6 hours. In addition, it aligns to customer priorities as described in Section 2.1.1, in that 87% of customer identified maintaining a reliable supply of high quality tap water as their highest priority. The expenditure across future planning periods is forecast as: AMP4 AMP5 Capex m (07/08 pb) Opex change to base 0 0 Table 19 Expenditure for Trunk Main Investment The Company recognises that this is a significant change to expenditure compared to historic rates, but believes the case presented provides robust justification for the AMP5 investment. Section 4.4 discusses the overall approach to the balancing of risk and affordability in detail. However, it is important to note here that a key decision in relation to the additional trunk main investment and addressing these issues has been for the Company to reduced its mains renewal programme from 5km/year at draft business plan stage to 3km/year for the AMP5 period. Finally, Ofwat define exceptional items as (Ofwat, Capital Expenditure for : CIS draft baseline report) 1. Investment is not typical and a step change from recent historic expenditure is needed (e.g. maintenance of long life assets resulting in lumpy investment); 2. The investment delivers a benefit that other regulatory indicators would not detect; or 3. The business case for the output and expenditure should be assessed independently of our Asset Management Assessment. The Company believes that the three investments meet Ofwat s definition above; the trunk mains programme is a step change from historic investment and the benefits of the investment are to maintain risk to service at the start of AMP5 levels and these benefits would not be detected by other regulatory indicators. In Ofwat s draft business plan feedback (Annex 9) it stated that it was considering the trunk main investment as being exceptional due to the lumpy nature of the investment and that it related to specific outputs. Therefore, the Company proposes that the trunk main schemes should be considered exceptional items in the context of the Capital Maintenance CIS baseline. Additionally, the Company proposes that the three investments be defined outputs for AMP5. Section Water Distribution Distribution Mains Page 52 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

91 Summary As described in Section 1 above, the Planning Objective for distribution mains is to cost effectively maintain stable serviceability. Under the section Ensuring a Reliable Supply of Water the Company s Strategic Direction Statement states that the burst rate will be held stable at less than 100 per 1,000km per year as well as no unplanned interruptions exceeding 6 hours. Customers express strong support for reliability of service; with 87% of customer identifying maintaining a reliable supply of high quality tap water as their highest priority. Historic performance is that the Company has had stable serviceability for its infrastructure assets since JR99. Expenditure in AMP4 is greater then in AMP3 and the Company forecasts that in delivering its Monitoring Plan mains renewal outputs, which it is on programme to achieve by the end of 2009 will exceed the costs allowed in the PR04 determination. The additional costs for mains renewal are due to more stringent traffic management requirements and that the simpler schemes have been delivered in previous AMP periods. Increasingly, the mains renewal schemes are located in dense urban areas of Dover and Folkestone which has increased unit costs. The current rate of renewal gives an average asset life for distribution mains of greater than 300 years, which is at the lowest end of the industry and is a significant concern for the Company. The Company has developed and calibrated a distribution main survival model to forecast mains failures. This is combined with consequence modelling to generate a forecast of risk at pipe unit level. The pipes most at risk have been converted into defined schemes, which have been individually priced. These have then been combined to generate costs estimates for different renewal rates in AMP5. The programmes of actual replacement have then been re-entered into the distribution main survival model to give revised forecasts for failure. From the modelling, the Company considers that long term stable serviceability can only be delivered through a mains renewal rate of 5km/year. Due to considerations of customer affordability, however, which in part result from the higher investment in trunk mains, the Company is proposing a 3km/year mains renewal programme for AMP5 and 5km/year for AMP6 and beyond. The Company believes that in the short term (AMP5) it can continue to deliver stable serviceability with a 3km/year mains renewal rate. The capital investment in AMP5 is 5.22m. This compares to 2.8m in AMP4. There is no change to opex resulting from this investment. The selected strategy (3km/yr) is shown as being marginally not cost beneficial. The Company s preferred strategy (5km/yr) is shown as being cost beneficial., for the benefit of customers the Company has selected a renewal strategy which is less beneficial in the longer term. Asset Data and Historical Analysis The Company has a comprehensive and accurate asset inventory, based on its full network GIS system. Within this data the age and material profile are recorded for each main with only 0.41% of mains being of unknown age and 0.31% of mains being of unknown material (percentage by length). This information is presented in the following tables and figures. Page 53 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

92 Business as usual processes related to burst reporting provide additional data for verification of this data set. Asset performance in terms of bursts is well recorded, with more than 20 years of historical data. Failure data is reliably recorded by staff on site and updated on GIS. The Company has accurate burst data, however, further steps will be made in AMP5 to ensure that cause of failure is also accurately captured (the type of failure is already recorded as shown in Figure 16). Figure 15 shows the all main burst history for the Company, with the long term average being between 100 and 120 bursts per annum. From the trunk main section, the average number of trunk mains bursts per annum is 4.7 which have a marginal impact on the burst performance, which is almost entirely driven by distribution mains. Figure 14 shows the age and material profile of distribution mains. 22% of the Company s mains are over 100 years old and 37% are greater than 80 years old. When considered in combination with a historic renewal rate of 300 years, this is a significant concern for the Company as it is clear from industry experience that this is in excess of the asset life of the pipe and represents a significant long term risk to customers bills in the future. The Company s AMP4 monitoring plan forecasts 16.5km of mains renewal being delivered in this period. The Company is on track to deliver this level of renewal by the end of 2009/10, however, the Company is forecasting that it will exceed its mains renewal budget to achieve this level of replacement by 0.7m. Ofwat s classification of the Company s infrastructure performance has been stable since JR99, with improving in JR06 and JR07. Figure 17 and Figure 18 show mains replacement activity and infrastructure serviceability and expenditure. In AMP4, the Company s average renewal rate is 3.3km/year, however, the expenditure fluctuates annually depending on the actual schemes delivered in any one year. Figure 18 shows a reasonably consistent relationship between distribution mains expenditure and maintaining a stable burst rate. Page 54 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

93 Distribution Mains By Age & Material 250 Length (km) Data unavailable UPVC Steel Spun Iron PE Lead Galv Duct. Iron Cast Iron Asb. Cem Age Band Figure 14 Distribution Mains by Age and Material The burst table from the GIS contains all reported bursts in a reliable manner from 1988 onwards. An analysis of this data is presented in Figure 15 which presents all recorded bursts after third party damage failures have been removed. The trend line indicated is the 5-year average. The Company s burst rate is one of the lowest in the water industry. Clearly the burst rate appears stable but this must be considered against a background of pressure reduction activity in AMP2 and AMP3. It should also be noted that a considerable variation in burst numbers occurs from year to year. From Table 4 the serviceability reference level for burst is 100 bursts/yr with control limits of 127 and 73. Page 55 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

94 FDWS Historical Burst Analysis Bursts Burst Analysis 5yr Rolling Average Calendar year Figure 15 Historic Burst Trend An analysis of the burst records by failure type is presented in Figure 16 and this indicates that the proportion of corrosion related failures is relatively low; the greatest contribution coming from ring fractures which are largely driven by ground movement. FDWS Mains Failure Alalysis 62% 1% 0% 12% 0% 12% 13% At Ferrule At Joint Bolts Hole Long Fracture Ring Fracture Unknown Figure 16 Analysis of Mains Failure Type The Company has a history of consistently modest mains replacement activity as can be seen from Figure 17. The annual proportion by length replaced being typically around 0.3% per year; this implies average asset lives of greater than 300 years. This is a significant concern for the Company as it is clear from industry experience that this is in excess of the asset life of the pipe and represents a significant risk to customer s bills in the future. Page 56 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

95 FDWS Mains Replacement History and Forecast for AMP4 km/yr / / / / / / / / / / / / /10 Year Figure 17 Mains Replacement History and Forecast for AMP4 FDWS Historic Base Service Provision versus Serviceability Water Distribution Mains Base Service Provision ( M) / / / / / / /97 Forward Looking Analysis Data 1997/ / /00 Year 2000/ / / / / / / / Figure 18 Water Distribution Serviceability and Expenditure Ratio to average of actuals Water Distribution Mains Base Service Provision DG2 properties below ref level D3 Unplanned interruptions >12hrs Mains burst per 1000km 5 yr rolling avg (Base Service Provision) Datasets used for the analysis are described below: Burst records: This data is generated via the works management system and are recorded within the GIS. A system of mains burst record reports is the vehicle used to collect the additional technical data required for burst reporting. Cross checking is Page 57 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

96 undertaken between the works management system and the burst record reports to ensure that records are obtained for all bursts. Pipe Samples: The Company has been taking and testing pipe samples since 1992 as part of a Veolia Group initiative to understand the behaviour of underground assets. The Company has 385 sample results in its pipe sample database, which is part of the larger group database containing 3,750 sample results. This is high-quality information with a very great deal of consistency. Each sample has been tested in the same manner by the same laboratory to consistent standards. Each result has been geo-located, latterly on the GIS. Veolia collects all its companies data which is categorised on an identical basis with regard to bursts, material, diameter and ground conditions, propensity to ring fracture etc. Therefore, the Company has been able to compliment its own failure data with applicable data sets for pipe material and ground conditions from the Veolia data. The Company therefore has very good knowledge of long-term pipe performance and also benefits from the much larger data set for the Veolia Group. All Mains Hydraulic Model: The Company has maintained an all mains hydraulic model, which is used for operational and planning purposes. The model is directly generated from the GIS so has an identical network structure. This enables comparisons to be made, via each pipes asset ID, between asset failure events and consequent hydraulic implications. GIS and Asset IDs: Each element of the underground network has a unique numeric identifier within the GIS. This is allocated when the records are digitised and is the common reference between the GIS, the burst table and the hydraulic model. The modelling approach adopts this identifier as the pipe unit with properties of length, diameter, material and age. It also allows the GIS to be used to display outputs from the forward looking analysis for sense checking and the development of real schemes. Hydraulic observations: The all mains hydraulic model has been used to forecast the impact of a failure of any pipe unit within the network. This was undertaken primarily as a critical mains analysis for trunk mains study purposes but it also provides hydraulic impact predictions for every pipe unit in the network. It has therefore been used to predict the numbers of properties that would suffer a loss of supply or poor pressure due to the isolation of any particular pipe unit. Mains at Risk Register: This register is updated regularly as part of the business as usual process to identify priorities for mains replacement activity. This provides an essential balance to the modelling approach and facilitates the building of practical schemes around modelled output as well as accommodating practical operational issues. Veolia data-set for distribution main performance: As previously identified the Company has relatively small failure data for distribution mains. However, Veolia collects all its companies data which is categorised on an identical basis with regard to bursts, material, diameter and ground conditions, propensity to ring fracture etc. Therefore, the Company has been able to compliment its own failure data with applicable data sets for pipe material and ground conditions from the Veolia data. Environmental Data: The group has consistent soil corrosion and soil movement potential data in digital form across all companies provides by the National Soil Resources Institute 2. This allows soil corrosion and soil movement potential to be mapped with mains failures and pipe sample results in a consistent manner across the group. For example this means that data from other group companies regarding performance of cast iron pipe in noncorrosive ground is applicable to the Company. 2 NSRI, Soil Data Maps, Page 58 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

97 Forward Looking Analysis Analytical Approach The approach taken to produce forward-looking forecasts of distribution mains failures and intervention options is described in this section. The process utilises the asset data and observations described above as inputs to a mains survival model provided and run by Three Valleys Water 3. The size of The Company allows for a rational examination of the model output so each of the model s predictions is tested for sense and practicability. The approach has six principal elements: 1. Use of a distribution mains survival model to forecast the likelihood of pipe failure at individual pipe unit level for each year of the planning period. 2. Use of the Company s all mains hydraulic model, via the critical mains analysis process, to predict the impact to customer service of isolating any particular pipe unit. 3. Combining likelihood of failure and consequence of failure to forecast risk at pipe unit level. 4. Production of service forecasts for each pipe unit for each year of the planning period. 5. A rational examination of the output and manual combination with output from the Company s Mains at Risk Register. 6. The development of real replacement schemes for AMP5 that can be accurately priced and used within analysis. Figure 19 illustrates the overall process. 3 Appendix G Burst Model methodology Report, Three valleys Water February 2004 Page 59 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

98 Asset Data (GIS) Combine Asset and Burst Tables Burst Data (GIS) Ground Movement Data Pipe Category Failure Rates Pipe Unit Characterisation Corrosive Ground Data Pipe Category Failure Rates Determine Pipe Unit Failure Risk Determine Pipe Unit Failure Predictions All Mains Hydraulic Model Critical Mains Analysis Pipe Unit Service Forecasts (Do Nothing Scenario) Hydraulic Consequence of Pipe Unit Isolation Model Chooses Pipe Unit Replacements Based on Risk Intervention Options (annual renewal rates) Shape File Plots of Model Output Mains Renewal Unit Cost Data Operational Review and Real Scheme Development Determine Real Costs of Real Schemes Mains At Risk Register Real Scheme Intervention Options Figure 19 Current Business Process for Distribution Mains Replacements Page 60 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

99 The survival model is based on the following primary drivers for pipe failure: The pipe unit s material; The pipe unit s diameter; The pipe unit s age; The environment surrounding the pipe unit; and, Whether or not the pipe unit has already experienced a failure or failures. The model does not take into account system pressures nor does it account for traffic loading directly. The data that would make this possible is not available. Distribution Mains Survival Model Central to the analytical approach is the use of the distribution Mains Survival Model which is used to predict the future failure probabilities for pipe units within the asset inventory. This sub-section describes the method used while supporting detail is provided in Appendices 10 and 11. There are four principal stages to the burst modelling process: 1. Data preparation 2. Calibration 3. Validation 4. Forecasting Data preparation All the data used is extracted from GIS. The specification and detail of the cleansing process is given in Appendix 13. Data is required for both pipes in use and abandoned. For each main recorded in GIS with a unique ID there is a list of required fields such as date laid, date abandoned if any, original material, length, diameter, ground movement, District Metered Area, Hydraulic Demand Zone or corrosion speed. Some information is held in GIS, some is derived from different GIS fields. Each historical burst recorded in GIS has to be attributed to a main, in use or abandoned. Then different filters and consistency controls are performed to ensure consistency, for example the removal of bursts attributed to mains with date laid later than the burst dates. Calibration The model is based on survival analysis; it uses a Weibull Proportional Hazard Model 4. Survival analysis is concerned with studying the time between entry to a study and a subsequent event, in this case a burst. The model performs a regression by using historical data on pipes and bursts to calculate coefficients for the selected explanatory variables and the baseline hazard function. The model can handle different explanatory variables. The variables that have been tried are length of pipe, diameter, age, ground movement and corrosion speed. Each one is tested for statistical significance. The free software R has been used for statistical computation. 4 DR Cox & D Oakes (1984) Analysis of survival data (Chapman & Hall) Page 61 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

100 The Company has a good burst record on the GIS with the earliest recorded bursts dated The model uses data obtained from the GIS. The distribution mains network comprises 20,548 pipe units with a total length of 913 km. Within this a total of 17,117 pipe units are categorised a ferrous (cast iron, spun iron and ductile iron) comprising a total length of 780km and representing 85% of the asset type. Different calibrations have been tested using all pipes or only ferrous. Running the model with only ferrous pipes provided the best calibration and therefore a more reliable model. Non ferrous pipes represent 15% of the network and only contribute 4.7% of the recorded bursts. Nearly half of these bursts occurred on upvc pipes that have already been replaced. For these reasons, excluding non-ferrous pipes from the calibration does not have any material impact on the model results. Any impact, marginal though it would be, would result in the burst rate being under-estimated. Stratifying the data was also tested. Separating pipes in different strata based on their historical number of bursts experienced can lead the model to predict more accurately the future failures. Two strata have been created: 1. Pipe units that have experienced 0 or 1 bursts historically; and, 2. All other pipe units. Other stratifications were tested but the results generated were not statistically significant. After extensive testing of strata and explanatory variables the following solutions were retained to take onto the validation phase. Ferrous only pipe units considered: Two strata; For strata 1 use length, diameter, age, ground movement and corrosion speed as explanatory variables; For strata 2 use length, ground movement and corrosion speed as explanatory variable; and, Parametric calibration weighted by length and without length. Validation The type of model, the variables used and the definition of strata were determined by the calibration process while the validation process ensures that the model can accurately reflect historic experience. The process is one of repeated comparison between forecasts and actuality. Different calibration periods have been tried with different validation periods in order to find the best calibration in terms of the total number of bursts forecasted for the company compared to the real number of experienced bursts. The following tested calibration periods used were: , , , and As historical reliable data are available for , different validation periods are possible depending on the chosen main. When possible the validation period used were and But the other available validation period were also tested. Page 62 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

101 The distribution pipes with the best validation are: Ferrous only pipe units considered; 2 strata; For strata 1 use length, diameter, age, ground movement and corrosion speed as explanatory variables; For strata 2 use length, ground movement and corrosion speed as explanatory variable; and Parametric calibration with no weight for length; The results of the validation exercise are presented in Table 20. From this analysis the validation period of 2001 to 2006 has been used as this provides the most accurate validation. Validation Period Forecast Bursts Actual Bursts Difference 2001 to % 2004 to % 2003 to % Table 20 Mains Survival Model Validation Results The validation used in the model over-predicts actual bursts by 6.6% over the validation period. It is important to remember that it is the trend that is important rather than the exact values predicted. Forecasting The resultant regression factors coming from the calibration and validation process are used to forecast the number of bursts for each pipe unit for each year of the planning period. Due to restrictions on time and computing capacity each pipe unit has burst forecasts generated in this manner for each year up to 2029 and at Linear regression has been used between 2030 and 2048 for each pipe unit to generate the required forecasts. Prediction of Future Asset Performance The survival model produces predictions for bursts on each pipe unit for each year of the planning period. The Company s critical mains analysis (based on the all mains hydraulic model) produces predictions of impacts on customers (properties) for each pipe unit. The pipe unit identifier (GIS asset ID) is used to link these together to produce a forecast of risk for each pipe unit for each year of the planning period. This allows a forecast of service provision (bursts) to be made for the network over the planning period if capital maintenance expenditure is ceased for the planning period. Figure 20 shows how the model predicts the burst rate would climb if no capital maintenance was undertaken (demonstrated by the upper line in figure) and the benefits to service of various intervention options. Intervention Options Though the forward looking analysis results are generated at a pipe-unit level they are only valid at network level so intervention options have been chosen as different annual rates in kilometres per year. The following scenarios are considered valid for testing purposes: Reactive fix on fail only 3km/yr; 4km/yr; Page 63 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

102 5km/yr; 6km/yr; 9km/yr; and 12km/yr. The lowest of the options compares with historic activity while the others represent possible practicable programmes of work. The model allows the impact of different intervention scenarios to be predicted. This is done by removing pipe units from the model as they are replaced. It is assumed, for modelling purposes, that replacement mains installed will not experience failure during the planning period (40 years). The model chooses the pipe units to tag for replacement each year by ranking them by the total risk. Total risk is defined as: (Predicted Bursts Properties Affected) Pipe Unit Length The results of this process produce for each intervention option a list of individual pipe units that have been chosen for replacement together with a forecast of the burst profile over the planning period. Figure 20 illustrates the results of the burst forecasting for the range of intervention options considered and the sensitivity of the asset base to differing levels of replacement. Note: only a selection of the intervention options are plotted in the below graph to aid clarity. The modelling approach undertaken by the Company, a Weibull Proportional Hazard Model with up to 5 covariates is used to forecast bursts, so this would facilitate modelling of uncertainty in predictions. The model can accommodate Monte Carlo simulation to provide uncertainty analysis and confidence bands. However, the events population size (historical number of bursts) for the Company is relatively small and would lead to a wide confidence interval. The value of the likely results, considering the complexity and effort inherent in the process, was considered to low to merit inclusion in the approach. The Company understands that the confidence limits of our predictions will be wide but also understand that this is inevitable with such a small asset and event base from which to model. What is important from the modelling is the longer term trend resulting from the intervention options. Page 64 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

103 Burst Forecasts for Distribution Mains Intervention Options Bursts / year / / / / / / / / / / / / / / /25 Year Reactive Only 3km/yr 5km/yr 9km/yr 12km/yr Reference Upper Control Limit Lower Control Limit Figure 20 Burst Forecasts for Distribution Mains Intervention Options Options of 9km/yr and greater are predicted to have a significant depressive impact on bursts. The 5km/yr option is predicted to maintain a steady burst rate in the short to medium term while options less than this are predicted to allow customer service and serviceability to deteriorate. From the above analysis the Company selected 5km/yr as being the most cost effective intervention to deliver stable serviceability. Scheme Development This section describes the development of individual scheme designs and cost estimates to deliver the 5km/yr renewal strategy. The process followed also enables different renewal strategies to be priced and this information was used in the cost benefit analysis described below. The model output for the first two quinquennium of the planning period was converted to shape files on the GIS so that the model s predictions could be observed against the infrastructure background, burst locations etc. At this stage the model s output was compared with the Company s business as usual mains at risk register and a review with the Company s network technicians enabled the final schemes to be defined. The key elements of this review were: Rejection of model selections where no failure has occurred; The collection of adjacent model selections in different years into coherent schemes; The selection of infill replacements between model selections; The inclusion of schemes from the mains at risk register that are not identified by the model (e.g. failure on PVC pipes, operational issues etc.); and Page 65 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

104 Definition of real schemes that are practicable and can be designed and accurately priced. From these process 43 distribution mains renewal schemes were defined. An outline design was then undertaken on each to develop a full understanding of scope. This formed the basis of the cost estimates. Additional details about the infrastructure assets are captured in the scheme definition form. These include: Actual nominal diameter of the main; Length of pipe; New or Refurbish; and Designer s Comments. Historically, the Company has opportunistically replaced communications pipes as part mains renewal schemes where age and material warrant replacement. This approach minimises disruption for customers and is cost effective as installation costs are lower while a contractor is already mobilised and on site than for one off replacements. The replacement lengths of communication pipes are not included in the reporting of mains renewal activity, but do count towards reported communication pipe replacements. For the AMP5 programme, it is calculated that 50% of communication pipes will be replaced during mains renewal this is based on: Replacement of short- side pipes for all categories except MDPE. From the asset inventory work 20% of communication pipes will be MDPE by 2010, requiring 80% of short side pipes to be replaced. Assuming the number of short side and long side communication pipes is equal, this involves replacement of 40% of communication pipes (all short side). Replacement of long-side pipes where reconnection is not possible due to deterioration and where replacement is necessary. This has been estimated as being 10% of communication pipes for mains renewal activity. Therefore, a total replacement of 50% of communication pipes during mains renewal activity has been included. The cost of opportunistic replacement during mains renewals is very little more than the reconnection cost and more cost effective than individual replacement on failure. Scheme and Scenario Costs Using the scheme definition forms described above, cost estimates were prepared for each scheme using the Company s unit rates and approach to cost estimating described in Section 3.5. As most schemes are less than 1m in value, individual risk registers have not been developed for each solution. Instead, a number of risks common across the programme were identified and lower, average and upper likelihoods assigned. Risk costs were developed as percentages of the scheme costs and the data modelled to provide a P80 risk value. This process is described fully in Section C5. The schemes were then grouped to provide an overall cost for the replacement strategy. The capital costs are summarised in Table 21. Page 66 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

105 Strategy AMP5 2010/ / / / /15 Total AMP5 Total AMP6 Total AMP7 3km/yr 673 1, , ,221 5,305 4,026 5km/yr 1,631 1,251 1,528 1,970 1,119 7,499 7,053 6,106 Table 21 CAPEX for each proposed distribution mains renewal strategy The AMP5 costs are greater than AMP4 for the same level of activity. This is primarily due to two factors. The PR04 business plan forecast investment costs based on average unit rates and overall replacement length. This approach ignored scheme specific issues such as crossing of geographical features and traffic sensitive roads. As demonstrated above, the forecast cost for the selected mains renewals strategy are based on specific schemes which have been specifically designed and costed. Unit rates have risen in the AMP4 period. This is demonstrated by the higher tendered rates the Company has seen from 5.8km of mains renewal work undertaken in the latest regulatory year. This difference in part recognises that the easier mains renewals have been completed and those now being prioritised are in more congested urban areas. Cost Benefit Analysis The Company is confident that 5km/yr is the right distribution renewal strategy based on risk to customer service and serviceability and that the strategy selected is cost effective. It has demonstrated how the selection of this strategy meets the planning objective. As a further test, the Company has chosen to assess the selected strategy and alternative strategies for cost benefit. These strategies are scored using the Company s methodology as described in Section C8. The assessment and results are summarised below. Assessment of Benefits Only the performance measures which are impacted by the intervention have been assessed. These are described in the following table. OPM Intervention Data Used for Likelihood and Consequence 3 Pressure All scenarios This was considered; however, low pressure only occurs at the point of burst and is, therefore, a very short duration impact. The impact of loss of supply is covered in OPM 4, therefore, this OPM is not used. Page 67 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

106 OPM Intervention Data Used for Likelihood and Consequence 4 Supply Interruptions All scenarios The pre intervention position is the forecast burst frequency resulting from a reactive only - fix on fail approach. This can be seen in Figure 20. A 40 year profile is used. The burst frequencies for each scenario are also taken from the forecast modelling as described above. A 40 year profile is used. The number of properties affected by unplanned interruptions to supply is on average 42 properties per burst for between 0 and 6 hours and 1.6 properties per burst between 6 and 12 hours. This is based on historical data. The Company s historic DG3 for greater than 12 hours is 0 for the last 5 years, therefore, no interruptions greater than 12 hours have been forecast. The number of properties affected is the same in all scenarios and for the pre-investment and postinvestment position. 6 Leakage All scenarios The volume of water lost per failure was calculated to be 1,916m3, based on average network pressures and fail to fix run times. This value, in combination with the failure rates taken from the modelling were used to generate a pre and post leakage volume in Ml/d. 8 Extra Reg. Reporting 10 Personal Injury 12. Carbon equivalent emissions 14 Traffic Disruptions All scenarios All scenarios All scenarios All scenarios A rising burst rate will result in deteriorating assessment of infrastructure serviceability. This will result in extra regulatory reporting. The pre-investment position is assessed as 5 months of 1 FTE involved in extra regulatory reporting per AMP period. The post investment position is that where the burst rate is held stable or improving no extra regulatory reporting is required, therefore, generating a benefit when compared to the pre-investment position. Where the burst rate rises in any single AMP period, the same level of regulatory as for the pre-investment will be required, therefore, resulting in no benefit in that AMP period. This was considered, however, the forecasting the likelihood of injury resulting from a distribution mains bursts resulted in such low probabilities that it was not included in the analysis. The cost of carbon for operational and embedded carbon are calculated automatically from the scheme costs. This is described more full in Section C8. Not applicable as the mains identified for replacement do not cross significant road or rail networks. Table 22 OPMs for Distribution Main Replacement Strategy Four scenarios were assessed for cost benefit using the scoring of OPMs as described above. The results of this assessment are presented in Table 23. This table shows the contribution of the relevant OPM to the overall benefit assessment. The most cost beneficial solution is a replacement rate of 5km/yr. Replacement rates of 3km/yr and 5km/yr are not beneficial. The proposed strategy of 3km/yr in AMP5 and 5km/yr thereafter is not cost beneficial, albeit only marginally. Page 68 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

107 Solution Ref Strategy Whole Life Cost, k Whole Life Benefit, k Net NPV, (WLB less WLC) k OPM 4. Supply Interruptions Benefit Value per OPM, k OPM 6. Leakage OPM 8. Extra Regulatory Reporting OPM 12. Carbon equivalent emissions INF160MP 3km/yr 14,423 12,389-2,034 13, INF125MP 3km/yr AMP5 then 20,152 19, , ,025 5km/yr INF130MP 5km/yr 20,957 21, , ,045 INF127MP 9km/yr 39,610 37,031-2,579 38, ,970 Table 23 Distribution Mains Renewal CBA Results The results from the two CBA sensitivity scenarios described in Section C8 are: Solution Ref Strategy Net NPV, (WLB less WLC), k Sensitivity # 1 Private Cost Only Sensitivity # 2 Lower Bound WTP INF160MP 3km/yr - 14,394-8,849 INF125MP 3km/yr AMP5 then 5km/yr - 20,105-11,191 INF130MP 5km/yr - 20,907-11,383 INF127MP 9km/yr - 39,522-22,884 Table 24 Distribution Mains Renewal CBA Sensitivity Results This shows all options as not being cost beneficial and shows the sensitivity of the main renewal to the CBA analysis, in particular the customer valuation of interruptions to suppply. Selection of Optimal Strategy The Company has demonstrated that it has applied the common framework approach to the assessment of its distribution assets and its approach is clearly based on risk to customer service. The Company has assessed a range of renewal strategies and demonstrated that 5km/yr is the most cost effective intervention strategy to maintain serviceability as shown in Figure 20. This strategy strongly links to customers who have expressed strong support for maintaining a reliable supply of water and the targets the Company has adopted and consulted on in its Strategic Direction Statement are to maintain a burst rate below 100 bursts per 1000km per year and to have zero interruptions to supply greater than 6 hours in duration. The Company has developed a sound definition of the technical scope and costs estimates for the investment are based on the Company unit costs and investment costing methodology described in Section C5. The 5km/y strategy represents an increase over historic activity but he forward looking analysis demonstrates that a 3km/y renewal rate will not maintain serviceability in the medium to long term. Page 69 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

108 As discussed in more detail in Section 4.4, the Company has decided that as part of the overall approach to the balancing of risk and affordability it is necessary to reduce the mains renewal programme for the AMP5 period to 3km/year. The decision part of a wider strategy to balance the risk to service and the bill impact to customers arising from additional lumpy investment in the AMP5 programme. The Company recognises that a lower mains renewal rate carries the risk of rising burst rates as predicted by the forward modelling but that in the AMP5 period the risk can be managed within the serviceability envelope and without an unacceptable deterioration of customer service. The results of the cost benefit analysis are important but do not change the selected strategy. What is clear from the analysis is that the results are sensitive to customer valuations of interruption to supply. The expenditure across future planning periods is based on a 3km/yr renewal in AMP5, returning to a 5km/yr renewal rate in AMP6 and beyond. The forecast expenditure is: AMP4 3km/y AMP5 3km/y AMP6 5km/y AMP7 5km/y Capex m (07/08 pb) 2.803* Opex change to base Table 25 Expenditure for Distribution Mains Renewal * FDWS budget for mains renewal based on PR04 determination was 2.1m. The Company s forecast costs for AMP4 are shown above Capitalisation of Leakage Costs At Pr04 the Company, with support from Ofwat, proposed to capitalise a proportion of its operational leakage activity. This approach has been followed for AMP4. To maintain stable leakage levels in AMP5 and as the mains renewal rate in AMP5 will also be the same as AMP4, the Company forecasts the same level of leakage activity in AMP5 as in AMP4. Forecasting the costs and applying the same level of leakage capitalisation in AMP5 as is used in AMP4, gives the expenditure shown in the following table. AMP4 AMP5 Capex m (07/08 pb) Opex change to base 0 0 Table 26 Leakage Capitalisation The Company s leakage strategy for AMP5 is detailed in Section B5; this projects a continuing 0.1Ml/d reduction per year with an end of AMP5 leakage target of 7.5Ml/d. This is a continuation of the AMP4 strategy (the AMP4 target was a 0.5Ml/d target with an end of AMP4 leakage target of 8.0Ml/d). The costs to deliver the 0.5Ml/d leakage reduction are in the Supply Demand programme while the costs detailed above are to maintain leakage stable at the end of AMP4 ie at 8.0Ml/d. Page 70 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

109 Section Water Distribution Communication Pipes Summary The Planning Objective for communication pipes is to cost effectively maintain stable serviceability. Failure of communication pipes does not directly impact on serviceability measures, although they do cause disruption to customers and are a cause of leakage. Failure rate is used as an indication of serviceability for the asset group. In AMP4 the Company s policy for communication pipes has been to fix on fail; the AMP4 approach is to repair all failures if possible and to only replace where this is not possible. This results in about 95% of failures being repaired and 5% of failures being replaced. For AMP5 the Company s proposed strategy remains similar, however, the Company is proposing to replace rather than repair black polyethylene, copper and galvanised iron communication pipes on failure. The cost increase of this strategy over the AMP4 position is marginal (whole life additional cost of 15-20k over 15 years) and replacing these poor performing materials with MDPE is calculated to beneficial for customers in the longer term, as pipes which have failed once are more likely to fail again, whereas replacing with MDPE results in very low failure rates and therefore less customer disruption. For lead communication pipes, the Company has been monitoring its performance against the new lead standard which will be applied from The Company is confident it can achieve this standard without a change to its communication pipe replacement stragegy. The AMP5 strategy delivers a stable failure rate for its communication pipe assets, as shown in Figure 22. The Company has applied a modelling methodology in accordance with the Common Framework; the Company has very good communication pipe data and its forward forecasting of failure calibrates strongly to historic performance data. A number of future intervention scenarios have been assessed to arrive at the proposed cost effective strategy. The CAPEX for the proposed strategy in AMP5 is 481k, compared to 378k for continuing with the currently policy and compared to 285k in AMP4. OPEX costs remain unchanged. Asset Data and Historic Analysis The data sources that were utilised to review historical Communication Pipes activity were: Communication Pipes inventory: The Company have very good asset records relating to communication pipes. It retains asset data in an asset inventory that holds numbers and materials against street. It was fully updated for this analysis using data from OWMS. Operational Works Management System (OWMS): The Company s business as usual work management system was interrogated to determine the number of renewals, new supplies and separation of common supply jobs undertaken by street since the previous analysis for PR04. Distribution mains renewal project records: The Company takes the opportunity to replace a proportion of communication pipes when undertaking mains renewal projects. The project records were interrogated to determine the numbers of Communication Pipes replaced by this means since PR04. The inventory prepared by the Company and used as the basis for forward looking modelling is presented in Table 27 below. Page 71 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

110 Category of Communication Pipes Number in Inventory Lead 26,518 Galvanised iron 11,903 Copper 197 Black polyethylene (BPE) 7,104 Medium density polyethylene (MDPE) 21,845 Other 4 Total 67,571 Table 27 Communication Pipes Inventory (base data) at November 2007 The Company s reported communication pipe replacement activity is presented in Figure 21 below. Historical replacement rates have varied over time driven by policy changes within the Company. Communication Pipe Replacement 1000 Number of replacements / / / / / / / / / / /10 Figure 21: Historical Activity - Communication Pipe Replacement * The bars in purple represent forecast activity for the remainder of AMP4. Forward Looking Analysis Forward looking analysis has been undertaken using an approach consistent with the UKWIR Common Framework. The approach assesses service risk, based upon an analysis of asset data, in conjunction with recorded failure data. To achieve this goal, a mathematical model has been set up to replicate the likelihood of current failure events and to forecast future levels up to the year The approach takes into account the effects of intervention (i.e. repair or replacement) on Page 72 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

111 successive assets and their behaviour. An economic model then allows the modelling of different strategies in terms of the ratio of repair/replacement of failing assets and the proactive renewal of pipes either in conjunction with distribution mains or in their own right. The output from the model consists of predicted failures with sets of annual costs for repair and replacement on failure, and options for proactive renewal in isolation or as opportunistic replacements in conjunction with distribution mains renewal schemes. The key data sets used in the forward analysis are the updated asset inventory referred to above and communication pipe performance data from Veolia datasets. As previously described in the Trunk Mains and Distribution Mains sections performance data for underground assets is consistently recorded across the group and based on common environmental data sets so that cohort characteristics can be confidently applied to the Company s communication pipe assets. It would not have been possible to model the Company s asset performance using Company data alone. The GIS contains a recently developed layer linking property address points to the nearest suitable distribution main. These logical connections, together with the asset register by street provide the opportunity to analyse and use the data in ways that it wasn t possible to do before. This allows a spatial analysis to be undertaken and provides a more robust assessment of the number of common supplies. The calibration of the model is assessed using an optimisation procedure, which has been developed to determine the most likely set of deterioration curves for each respective hierarchical categorisation of material. Due to the volume of data required to achieve a reasonable calibration for each material and soil risk combination, the Weibull parameters arising from the calibration of the Three Valleys Water model were used for the Company. A separate exercise was then undertaken to compare the Company s failure data with the Three Valleys Water s results to corroborate this approach. The model estimates the number of pipe failures in the year 2010 to be 371, which compares very favourably with the average number of failures over the last 8 years at 365. Full details of the modelling approach for Communication Pipes can be found in Appendix 11. Intervention Options The following strategies were considered which represent practicable approaches to the issues of communication pipes capital maintenance. A01 Repair on failure only baseline for comparison; A02 Current Policy; A03 Current Policy plus replacement of black polyethylene, copper and galvanised iron; and B02 Current Policy plus proactive zonal replacement of black polyethylene, copper and galvanised iron. Activity by material is summarised in the below table. Page 73 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

112 Option Ref. A01 A02 A03 B02 Strategy Activity Lead Galv Black Copper Iron Poly MDPE Repair on failure Repair 100% 100% 100% 100% 100% only Replace 0% 0% 0% 0% 0% Current policy Repair 95% 10% 10% 95% 99% Replace 5% 90% 90% 5% 1% Current policy plus Repair 95% 10% 10% 10% 99% replace BPE, Fe and Replace 5% 90% 90% 90% 1% Cu Replacement by zone of all but Pb & MDPE Remain 95% 5% 5% 5% 99% Renew 5% 95% 95% 95% 1% Repair 95% 10% 10% 95% 99% Replace 5% 90% 90% 5% 1% Table 28 Communication Pipe Intervention Options The performance of the asset stock under for each of the above strategies was forecast using the forward looking model. The results are shown in Figure 22. The failure rate when undertaking reactive repair only clearly continues to rise, while the other reactive strategies stabilise the failure in the short to medium term. Proactive replacement reduces the failure rate once allowing for the infant mortality of new MPDE installations (which generate the unusual peak of failure). Forecast Communication Pipe Failures by Strategy Number Year A01 (reactive repair) A03 (current policy + replace BPE, Fe and CU) A02 (current policy) B02 (proactive replacement) Figure 22 Forecast Communication Pipes Failure Rate by Strategy The modelling forecasts the number of communication pipe repairs, replacements and proactive renewals per annum. Using Company s unit costs for repairs, replacements and renewals, the whole life cost of each strategy can be calculated. This has been done for two discount rates, as shown in the following table. The data used in the analysis is taken from historic Company data and is: Page 74 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

113 Cost of failure (Opex) 220 Repair Cost (Opex) 353 Replacement (Capex) 506 Analysis period NPV, k A01 - Reactive Repairs A02 - Current policy A03 - Current policy plus replace BPE, Fe and Cu B02 - Replacement by zone of all but Pb & MDPE 6.6% Discount Rate 2,076 2,185 2,202 12, % Discount Rate 2,218 2,331 2,349 12,454 Table 29 Communication Pipe Strategies NPV analysis The lowest cost whole life strategy is a reactive fix on fail strategy, however, as shown in Figure 22 this leads to an increasing rate of failures, which impacts customer service and results in rising operational costs from repairs and leakage. As this intervention option does not meet the planning objective it has been rejected. The proactive replacement strategy has a significantly higher whole life cost then the other strategies and is also rejected. The current AMP4 policy and the strategy of current policy plus replacement of black polyethylene, copper and galvanised iron have very similar whole life costs. In moving from the AMP4 policy to a strategy of black polyethylene, copper and galvanised iron there is a marginal additional whole life cost of 15-20k over 15 years. The benefits of this approach are the systematic removal of poor performing communication pipe material from the asset base, which results in less disruption for customers. This is the strategy the Company proposes for AMP5. Overlap with Mains Renewal Strategy As stated in the business case for mains renewal (see Section 4.1.2) the opportunistic replacement of 50% of communication pipes during mains renewal has been included in the distribution mains renewal programme. The estimated number of replacements within the mains renewal programme for AMP5 is 865. In the context of the asset base, which comprises some 67,571 communication pipes this represents a replacement of 1.3%. These replacements have not been included in the Communication Pipe modelling due to its insignificance in the context of the overall asset base. Intervention Costs Using the same unit costs as the NPV analysis above, the forecast costs and levels of activity for the selected strategy in AMP5 is: AMP4 AMP5 AMP6 Number of replacements Capital Expenditure, k * 963* Change in Opex, k 0 0 Table 30 Communication Pipe Forecast Activity and Cost * the increased replacements in AMP5 and AMP6 is due to the change in replacement strategy between AMP4 and AMP5. Page 75 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

114 Cost Benefit Analysis The Company is confident that the proposed strategy detailed above is cost effective and delivers. the stated planning objective. As a further test, the Company has chosen to assess the selected strategy and alternative strategies for cost benefit. These strategies are scored using the Company s methodology as described in Section C8. The assessment and results are summarised below. Assessment of Benefits The intervention options for each of the communication pipe strategies are scored using the output performance measures (OPM s). Only the performance measures which have a change between pre and post-intervention are described below. The baseline position was taken as repair on failure only. OPM Intervention Data Used for Likelihood and Consequence 6 Leakage All scenarios Average leak per failure has been calculated as 0.986Ml. This amount is multiplied through the annual predicted number of failures for both the pre and post intervention. 12. Carbon equivalent emissions All scenarios The cost of carbon for operational and embedded carbon are calculated automatically from the scheme costs. This is described more full in Section C8. Table 31 OPMs for Communication Pipe Strategies Solution Ref Strategy Whole Life Cost, k Whole Life Benefit, k Page 76 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36 Net NPV, (WLB less WLC) k Benefit Value per OPM, k OPM 6. Leakage OPM 12. Carbon equivalent emissions INF100MP A02 Current Policy 1, , INF101MP A03 Proposed Strategy 1, , INF102MP B02 Proactive Replacement 11, , Table 32 Communication Pipe Strategies - CBA Results The cost benefit analysis shows that none of the options are cost beneficial. This is largely as a result of the benefits being very limited; leakage being the primary benefit. Selection of Optimal Strategy The above analysis demonstrates that the Company has selected a communication pipe replacement strategy which meets the cost effective planning objective and maintains stable level of service to customers. The results of the cost benefit analysis, while showing the investment to be marginally non cost beneficial, do not invalidate the selected strategy which demonstrably meets the requirements of the cost effectiveness planning objective. The AMP5 strategy is similar to its AMP4 strategy, however, the Company is proposing to replace black polyethylene, copper and galvanised iron communication pipes on failure, rather than repair. This whole life cost increase of this strategy over the AMP4 position is 10k - 15k over a 15 year period and represents a marginal increase in cost. The benefits are that by replacing poor

115 performing materials with MDPE customers will experience less disruption from leaks and repair works as pipes which have failed once are more likely to fail again, whereas replacing with MDPE results in very low failure rates. The CAPEX for proposed strategy in AMP5 is 481k, compared to 378k for continuing with the currently policy and compared to 285k in AMP4. OPEX costs remain unchanged. At PR04 the Company anticipated a significant number of communication pipe replacements to arise from the compulsory metering programme initiated in the same period. This has not been required and no similar expenditure for AMP5 has been proposed. The following graphs forecast the activity and capital expenditure against historic levels. Communication Pipe Replacement - Historic and Forecast Activity Number of replacements / / / / / / / / / / / _ _ _ _ _ _ _ _ _ _20 Figure 23 Communication Pipes Replacement Historic and Forecast Activity Page 77 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

116 Communication Pipe Replacement - Historic and Forecast Capital Expenditure Caital Expenditure, k / / / / / _ _ _ _ _ _ _ _ _ _20 Figure 24 Communication Pipes Replacement Historic and Forecast Capital Expenditure Page 78 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

117 Section 4.2 Section Section Non-Infrastructure Assets Summary of Non Infrastructure Water Distribution (non-infrastructure) Revenue Meters Summary The planning objective of the revenue meter strategy is to provide the most cost-effective replacement approach. The proposed strategy is a fix on fail replacement strategy. A number of proactive replacement strategies based on age were assessed but are not cost effective. Revenue meter failure does not directly impact on serviceability measures, however, meter failure does result in customers receiving estimated bills which can generate additional customer contact. Maintaining high quality customer service is a priority for the Company and the selected replacement strategy aligns with this objective. The Company s plans to achieve 96% revenue metering by the end of 2012 and its aim to reduce average daily consumption per person to below 120l/p/d by 2015 as stated in its Strategic Direction Statement. From this point on all domestic meters will be read quarterly; this will enable more rapid identification of failed meters; meter replacement will continue to be undertaken by the Company s meter reading staff during their regular rounds. The Company wishes to keep its options open regarding automatic meter reading strategies. The Company is proposing an automated meter reading trial of approximately 6,000 domestic meters under its Supply Demand strategy which will inform future meter replacement options. The Company has high quality meter performance data and this was analysed to assess the current asset inventory and the historic failure rates. From this, predicted deterioration and failure rates of the current asset base plus meter additions from the Company s compulsory metering programme and growth was forecast. Replacement costs have been calculated using the Company s unit cost data. The forecast AMP5 expenditure is 280k, compared to 73k in AMP4. The increase reflects the higher failure rate of meters in AMP5 compared to AMP4 as a result of the Company s compulsory metering strategy initiated in AMP4. A consultant was commissioned by the Company to undertake the analysis and forward modelling. The Consultant s report is contained in Appendix 15. At draft the Company proposed investment on DMA meters and PRV valves. The Company has decided to manage these assets within the operational envelope as part of balancing risk and the impact on customer s bills. Asset Data and Historical Analysis The Company retains its inventory data for revenue meters within its HIAFFINITY meter billing database. It contains all meter reading details including meter location references. The data is of high quality with less than 0.5% of meters being of unknown manufacture. Page 79 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

118 More than half of the Company s meter stock is younger than ten years of age and a large proportion has been installed over the last 3 years. There are very few meters with within the inventory with ages older than 20 years. A meter s make is closely associated with the year of installation depending upon the procurement policy at the time. Present policy is to use a single make of meter for new and replacement installations. Both these points are reflected in the age and type profile in Figure 25. Analysis of the HIAFFINITY data enabled the following parameters to be assessed. o o o o o when meters were installed; when meters were replaced; their age at failure; the volume of water passed during the meter s life, and failure mode Table 33 shows the numbers of replacement by meter age. Replacement rates have been largely stable despite increasing levels of metering within the Company. This is in part due to lower failure rates of the Company s chosen meter manufacturer compared to higher rates of failure for previous meters. Failure analysis has been by age, manufacturer and volume passed. The key conclusions are: o o o o There is a trend for high reading meters to have a significantly higher failure rate and that the failure rate increases with the volume recorded (Figure 26). However, these meters only represent 6% of the meter stock and are mostly classified as nondomestic. For domestic meters, there is no clear relationship between the quantity of water passed and their probability of failure (Figure 27). Figure 28 shows that for Company meters the failures rate by age is quite irregular. The average trend line is showing that there is an increase of these failure rates for the meters older than 13 years. In addition, it is important to notify that the failure rates are quite low for meters younger than 13 years old, as they are below the meter stock average failure rate of 1.5%. Higher rates of failure are experienced with the Kent and Schlumberger, although the failure rates seem to vary independently of the age of the meters for these two brands. Sensus meters currently have a declining failure rate over the first height years they have been used by the Company. In conclusion, while valuable data has been gathered about meter performance, and this is used in the forecasting of future failure, it has been difficult to identify clear relationship between meter age, volume passed and failure. Page 80 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

119 Age Year of Exchange Total/year Table 33 Annual Meter Replacements by Age Meters 6,500 6,000 SCHLUMBERGER KENT SENSUS / INVENSYS 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Age Figure 25 Meter Stock By Age and Manufacturer Page 81 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

120 Average failure rate % of meter stock 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% >10000 Reading range m3 Figure 26 Meter Failure Rate by Volume Passed (all Meters) Average failure rate % of meter stock Average failure rate per reading range Trendline 1.60% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% Reading ranges m3 Figure 27 Meter Failure Rate by Volume Passed (up to 2100m 3 ) Page 82 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

121 FDWS Meter Stock Average Meter failure rate Average Failure rate 2.50% 2.00% Average Trendline 1.50%. 1.00% 0.50% 0.00% Years of installation Forward Looking Analysis Figure 28 The Company s Revenue Meter Failure Trend The forward forecast of the number of meters that are likely to fail in the future uses the Company s historical data to determine failure rates by meter age. Current meter stock details have been used, with additional meters to be installed being consistent with the Company s supply demand metering programme and growth forecasts contained in Section B5. From average meter failure rates by age, it has been possible to forecasts of the number of reactive meter exchanges per year, in the period from 2010 to The average failure rates for meters based on age used in the analysis are: Age of the meter Average of failure rates between % 0.95% 0.75% 0.76% 0.73% 0.79% 1.11% 1.41% 1.35% 1.35% 1.06% 0.67% 1.01% 1.78% 2.21% 1.38% 1.88% Table 34 Average Failure Rates for Revenue Meters by Age Intervention Options Four intervention scenarios have been modelled which represent the range of intervention the Company has considered: Scenario 0 Reactive fix on fail; Scenario 1 Replace proactively those meters older than 10 years of age; Scenario 2 Replace proactively those meters older than 15 years of age; and Scenario 3 Replace proactively those meters older than 20 years of age. From the forward modelling, these strategies result in reactive and proactive meter replacements as shown in Figure 29. As previously stated there is no impact on serviceability from meter failure, although there is a customer service impact due to the Company s policy that customers are billed based on a domestic assessed tariff when a meter fails and a metered bill cannot be provided. As can be seen below, while proactive replacement strategies do reduce the numbers of failures when compared to a reactive only strategy, the impact is limited in the context of the customer base. Page 83 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

122 Meter Replacements By Strategy Reactive Meter Exchanges Proactive Meter Exchanges Scenario 1 Scenario 2 Scenario 3 Scenario 0 Scenario 1 Scenario 2 Scenario 3 Scenario 0 Scenario 1 Scenario 2 Scenario 3 Scenario 0 AMP5 AMP6 AMP7 Figure 29 Meter Replacements by Intervention Strategy As the costs of meter renewal are the same for reactive and proactive replacements, the difference in investment required for the above strategies is in proportion to the replacement activity and is significant, while the benefits to service and serviceability of proactive replacement are low. The Company has, therefore, selected option 0 - reactive fix on fail as its proposed AMP5 strategy. The costs of the reactive replacement forecasts have been calculated using an average unit cost of replacement of 67 for an external meter excluding boundary box and for internal meter replacements. This is based on historic cost data and is consistent with the Company s cost base submission. The investment costs of this strategy are presented in Table 35. There is no change to Opex costs resulting from this strategy. Strategy AMP5, k AMP6, k Option 0 Reactive Fix on Fail Cost Benefit Analysis Table 35 Meter Replacement Forecasts Costs The above demonstrates the selection of a cost effective strategy. As the proposed AMP5 investment is based on a reactive fix on fail strategy it has not been assessed for cost benefit. Selection of Optimal Strategy In conclusion, the Company does not believe the proactive replacement strategies based on age are cost effective. As the analysis of the historical data shows, there is not a strong relationship Page 84 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

123 between age or volume of water passed and failure. Therefore, the effectiveness of the targeting mechanism for a proactive strategy is not sufficiently robust to justify a proactive replacement approach. Even if considering the loss of income as a result of under-registration, as the relationships between failure and possible failure modes are not robustly understood, the ability to effectively target meters and gain the benefit of recovering the lost income is doubtful. Additionally, the evidence of under-registration of meters is limited and not robust. In the context of its supply demand strategy, the Company intends to read meters quarterly to support customers having accurate information upon which to made decisions about their water use. Meter reading identifies the most frequent meter failure mode stopped meters. Quarterly meter readings will ensure failed meters are quickly identified and replaced as part of the meter reading rounds. Consequently, the Company s selection of a fix on fail approach to meter replacement for AMP5 is a cost effective strategy. The strategy differs from AMP4 where the Company proposed to proactively replace meters older than 10 years of age. The present analysis and work within the industry 5, suggests that this approach is overly pessimistic regarding meter performance. The Company believes that the strategy chosen represents the optimum management of risk in the present circumstances. The Company recognises that once fully metered, different renewal strategies may be required, particularly if the Company seeks to adopt automatic meter reading technologies, which it believes will become significantly more established in the next 5 to 10 years and which will drive meter replacement strategies for different failure modes. The following table and graph show the forecast expenditure and replacements against historic levels. It is important to recognise that the rate of meter installations have been very high in AMP4 due to the Company being awarded Water Scarcity Status and commenced its programme of compulsory metering. The increase in forecast failures in AMP5 and AMP6 is linked to the high installation rates in AMP4 and early AMP5. Strategy AMP4 AMP5 AMP6 Number of replacements 1,095 4,192 5,305 Capital Expenditure, k Change in Opex, k 0 0 Table 36 Meter Replacement Forecasts Costs 5 CP324 Long Term Performance of Domestic Meters, Ongoing WRC Research Project Page 85 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

124 FDWS Meter Replacement Profile (Replace on Fail Option) Meter Replacements Year Historical Replacements (replace on fail) Forecast Replacements (replace on fail) Figure 30 Comparison of Historic and Forecast Replacements for the Chosen Strategy Section Water Treatment Works A Capital Maintenance Planning Common Framework (CMPCF) forward looking analysis of capital maintenance requirements has been carried out for all company non-infrastructure assets. Water treatment works, water pumping stations and service reservoirs have been assessed using a consistent methodology. This section relates to treatment works in particular, but the approach applies also to pumping stations and service reservoirs. Summary The Planning Objective for Water Treatment Works is to cost effectively maintain stable serviceability. The analysis of capital maintenance requirements for non-infrastructure assets is based on a comprehensive asset survey undertaken in 2007/08, from which data were loaded to the Company s newly developed NIAD asset database. The analysis follows a Failure Modes, Effects and Criticality Analysis (FMECA) approach which is consistent with CMPCF requirements and current best practice. As the Company is small in size many staff have detailed knowledge of company assets and their historical performance and effects on customer service, enabling them to identify the failure modes of assets, and their probability/rate, duration and consequences with greater confidence than in larger companies. Historical work order data have been analysed to provide validation of these judgements for those failure modes where sufficient suitable data were available. The consequences of failure resulting is loss of service to customers were calculated using the MISER software, which modelled the impact of loss of throughput at each location in Page 86 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

125 the context of the overall supply network. Results were expressed as the number of customers expected to experience an interruption to supply in each DG3 duration band. Between draft and final business plans the Company has reviewed the analysis in detail, focusing on those failure mode quantities that sensitivity analysis indicated were most influential on results. Improvements are summarised in the following section. From this analysis the Company has provided robust justification that its plans will deliver stable serviceability in the most cost effective way. To maintain stable serviceability a programme of 4.382m is forecast for water treatment works; a small decrease from the total projected for AMP4. This includes 0.742m for firsttime maintenance of membrane and reverse osmosis plants installed as AMP3 quality schemes, the maintenance requirements of which cannot be assessed from historical expenditure. The selected intervention has been subject to cost benefit analysis and is beneficial. Asset Data and Historical Analysis This section details how each type of data has been gathered. Since the same sources have been used for treatment works, pumping stations and service reservoirs, this section applies to all three asset groups. A full asset survey was undertaken in 2007/08 and a Non-Infrastructure Asset Database (NIAD) established. The survey was based on a consistent set of assets types within a well defined hierarchy. Data collected included configurations, capacities, unit counts, installation dates, condition grades. The asset survey, including details of the data checking processes, is described in more detail in Section C3 Asset Inventory. In addition, a more detailed list of telemetry assets was used to provide more detail. Existing and planned maintenance schemes due to be implemented in the remainder of AMP4 were taken into account when planning future interventions. Historical serviceability and expenditure data was collated from June returns. Operational activity in response to asset failures and planned maintenance is captured in the OWMS database. As described below this information has been used as part of the expert judgment validation process. Obtaining data on the serviceability impact of historical interventions is difficult. Because the Company is small the number of failure events has been very low and consequently it is difficult to discern any correlation between the level of expenditure and activity and the subsequent level of serviceability. This is demonstrated in Figure 31. In the current AMP period water non infrastructure serviceability has been stable, with 2005/06 and 2006/07 being classified as improving by Ofwat. High consequence failure events, such as the failure of any one of a number of booster stations that would result in interruptions to hundreds of households, can be identified using the modelling work carried out using the MISER modelling software. The historical frequency of these events is low, but such events are known to occur in the industry as a whole. The Company employs a number of strategies to ensure that high consequence failures are prevented. This include: Duty / standby arrangements on critical assets; Page 87 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

126 Network connectivity and storage, allowing customer supplies to be maintained in the event of loss of treatment works output; On line monitoring of key process parameters (chlorine residual, turbidity) to shut-down a works before water quality parameters are breached; and Holding of strategic spares so that failure of critical asset can be responded to promptly. These measures contribute to the Company approach to maintaining stable serviceability and ensure that a failure which would otherwise result in significant customer impact being kept at a new low level. These potential failures contribute to an underlying level of risk that is not shown in the historical serviceability. The forward looking analysis will take account of this risk and ensure that least-cost interventions are selected to prevent it from increasing. FDWS Historic Base Service Provision versus Serviceability Treatment Works and Resource Facilities Base Service Provision ( M) / /92 Expert Panel Judgements 1992/ / / / / / / / /01 Year 2001/ / / / / / / Figure 31 Historic spend versus serviceability for treatment works Treatment Works & Facilities Base Service Provision WTW with coliforms detected Turbidity 95%ile Measured Works 5 yr rolling avg (Base Service Provision) Available data for Non-Infrastructure assets has been supported by expert opinion regarding the likelihood and consequence of asset failure. As the Company is small, operational staff have very detailed knowledge of the assets and their performance. The use of expert knowledge in these circumstances is a valid approach The expert opinions were validated through the comparison of a prioritised list of the types of asset predicted to be driving cost and service failures against historical data. Where possible this validation was undertaken using the Company s own historical data, however, where suitable in-house data were not available the results were validated against sister company data held centrally by Veolia. Expert Panel meetings were convened during January and February 2008 in order to review and modify a draft list of failure modes and make judgements relating to the rate/probability, duration, cost and service consequences of each. In each case the panels consisted of a number of experienced operational staff from the Company, with facilitators from the consultant Tynemarch. Page 88 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

127 The attendees at the expert panels were as shown in Table 37 and the process is described in more detail below. Chris Taylor Name Position Experience Head of Capital Delivery and Asset Management Overall responsibility for capital delivery and asset management. New to the Company in 2007, but broad industry knowledge and able to challenge. Tony Whitehouse Operations Manager Extensive service with the Company in a variety of roles. Currently manages the operations of all water into supply. Detailed knowledge of how overall water supply system operates. Chris Eldridge Production Manager until 2008 As Production Manager led a team of production technicians. Responsible for operational maintenance on all above ground sites and budgetary control. Extensive hands on knowledge on costs and sites details. Gavin McHale Head of Operations Strategic understanding of operational business; its costs, risks and performance. Allan Winkworth Three Valleys Water Leading TVW s above ground asset modelling as part of Pr09 business plan. Knowledge and data on asset performance of similar assets within TVW. Table 37 Expert panel attendees Validation Initial meetings and review 22/1/08 05/2/08 07/2/08 24/9/08 In all cases the Expert Panel was asked to estimate probability of failure or failure rate in the presence of routine operational maintenance of the asset, assuming repairable failure modes are repaired according to normal company practice. In most cases a starting point for estimating the rate was the number of failures that have occurred each year across the company as a whole, to ensure that the estimates made were consistent with current experience. When applying failure rates to assets arranged in parallel, the analysis takes into account the affect of configuration (i.e. duty/standby arrangement) on the overall reliability of the process stage. Between draft and final business plans the sensitivity of the overall result to each individual judgment was analysed. Replacement, refurbishment and repair costs, installation dates, failure rates, durations and consequences were all individually analysed in this way. From this the judgements with most impact were collated, and these were presented to a further expert panel, involving additional operational staff, held in September Page 89 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

128 In addition, information captured in the OWMS database has been used where possible to derive failure rates for certain assets. This information was used to challenge previous judgements in the September 2008 review. (One factor that makes this more difficult is the lack of a link between the failure event in OWMS and a specific asset within NIAD. This will be addressed by improvements to the OWMS system planned for the next period, which will also include improvements to the capture of data on associated costs and serviceability consequences). At this meeting the previous judgements were reviewed, starting with those shown to have most impact on the overall result. In addition, work done on validating the failure rates used in the draft business plan against OWMS data was presented to the panel. The review panel also has a representative from Three Valleys Water, who compared failure rate judgements with those used in that company and challenged the panel judgements where appropriate. The details of the validation approach are described in more detail in the section on Forward Looking Analysis. MISER consequence model The Expert Panel judgements regarding the loss of throughput consequences of each failure mode were converted into interruptions consequences for customer service using a MISER system model. MISER is a water allocation optimisation package developed by Tynemarch. The MISER model has been created based on the Company s hydraulic modelling and discussions with Company staff. Considerable testing has taken place to ensure the MISER model aligns with hydraulic model results and observed network performance. For each local loss of throughput event, MISER uses optimisation to identify the best possible operational response to minimise the loss of customer supplies. The output is the resulting number of customers expected to suffer interruptions in each duration band. The historical analysis has used the same serviceability indicators for each asset category that is used in the June returns. Figure 31 shows the historic expenditure on treatment works, the number of works with Coliforms detected and the number of works with a turbidity 95%ile greater than or equal to 0.5 NTU. June return cost figures have been adjusted to 2007/2008 levels using COPI. During this period there has been no expenditure on the reverse osmosis filters at Denge since they were installed in 2002 as Quality investment. There has also been no significant expenditure on the Continuous MicroFiltration (CMF) membrane filters since they were installed in , again under a Quality driver. Forward Looking Analysis service and cost forecasting The company has applied a service modelling approach, with both repairable and non-repairable failure modes, as identified as being most successful at the 2004 Periodic Review by the UKWIR Review of the Common Framework. The methodology is based on Failure Modes, Effects and Criticality Analysis (FMECA) and meets the requirements of the Common Framework, taking account of subsequent guidance including the aforementioned Review, MD212 and Ofwat PR09 Guidance. Page 90 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

129 The stages of forecasting are as follows: Selection of service indicators; Identification of failure modes; Probability of failure; Consequences of failure; Validation of expert judgements; and Forecasting service and costs. Service Indicators The following service areas were identified as being important for non-infrastructure assets: Water quality coliforms and plate counts; Water quality cryptosporidium; Water quality other determinands; Discoloration; Chlorinous taste; Non-chlorinous taste; Discharge compliance; Throughput / interruptions to supply; Pressure; Pollution; and Health & safety. For each of these service areas, a set of consequence severity definitions was developed, using up to five severity levels ranging from Very Low to Very High with each consequence being defined in terms of real measurable events. Each severity level was scored to indicate its relative severity, with the highest level being allocated a score of 10. For example, for coliforms and plate counts the severity levels were defined as shown in Table 38. In this case the Low and Very Low severity levels were not used. Service Indicator Water Quality: Coliforms + Plate Counts Failure Level Failure Description Failure Severity Score V High E coli failure 10 High Total coliform failure 9 Medium Colony plate count > 100/ml 1 Low V Low Table 38 Severity Levels defined for Coliform & Plate Counts service area A complete set of service indicators are provided in Appendix 16. Failure Mode Identification Draft failure modes were prepared for each facility type, using the Non-Infrastructure Asset Database (NIAD) and Tynemarch experience in undertaking similar analyses for a number of Page 91 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

130 companies. The failure modes were chosen at a granularity that captures the principal performance and service impacts without introducing unnecessary detail. Table 39 below shows the numbers of failure modes used in each type of water treatment works, following review by the expert panels. Asset Group Failure Modes WTW Marginal chlorination and/or ortho. treatment 39 WTW Membrane filtration 52 WTW RO 40 WTW UV 54 Table 39 Number of failure modes in each asset group Failure modes can be classified into one of three types: Repairable failures where the asset can be repaired to an operational state, for example, failure of a dosing pump. Non-repairable failures where the asset cannot be or is generally not repaired, for example, the failure of a ph instrument. Deterioration to a more expensive intervention state (DTMEIS) an event in which an asset deteriorates to a state in which only more expensive interventions are now feasible. This type of failure mode may justify the refurbishment of a service reservoir to address minor cracking before further deterioration occurs. Probability of failure For each failure mode, failure probabilities were estimated by the expert panel: For repairable failure modes as either failure rates (expected numbers of failures per year) or Mean Time Between Failure (MTBF); For non-repairable failure modes as either survival probabilities (probability of survival to a given date), or conditional probabilities of failure (probability of failure in year N given survival to the start of year N); and No failure modes associated with Water Treatment Works or Pumping Stations were calculated using deterioration of an asset to a more expensive intervention state (DTMEIS). This was used in the service reservoir analysis only. See Section When applying failure rates to assets arranged in parallel, the analysis takes into account the affect of configuration (i.e. duty/standby arrangement) on the overall reliability of the process stage. In assessing the reliability of an arrangement of duty and standby assets, the expected duration of the failure is used to determine the chance of the standby units failing while the duty items are being repaired. Where appropriate a tolerable loss factor was estimated to represent the proportion of parallel unit capacity which would need to fail for a service impact to arise. Page 92 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

131 Consequences of failure The service consequences expected to result from each failure mode were assessed by the expert panels against the consequence severity scales for each service area, as listed in Appendix 16. In order to reflect uncertainties regarding the consequence severity that would result from a failure mode, a percentage probability was specified for each possible severity level. Where these probabilities summed to less than 100%, the remainder represented the probability that no service consequence would result. By way of example, the selected consequences for a RO filter element are given in Table 40 below. (Some serviceability indicators do not have 5 levels of consequence severity, as shown the shading of the lower levels). Consequence Severity Water Quality - Coliforms Water Quality - Crypto Serviceability Indicator Throughput Pressure Health & Safety V High % 20% - High % - Medium Low V Low Table 40 Selected consequences of Failure of RO filter element The Expert Panel judgements regarding the loss of throughput consequences of each failure mode were converted into interruptions consequences using a MISER system model. The analysis involves: identifying the components affected by a failure and the resulting impact on throughput; identifying the duration for which throughput will be lost; specifying appropriate model scenarios e.g. flow initial conditions, demands; optimising system operation to minimise any demand deficit; and extracting results in terms of numbers of properties interrupted in each DG3 band. Cost Consequences of Failure The cost consequences of failure were estimated by the Company s expert panel members. These included repair, clean up and other locally-occurring costs associated with the failure (including man time, parts and consumables). As highlighted in Table 37 the Production Manager has detailed working knowledge of asset placement costs within the Company. In order to reflect the variability of failure costs, minimum and maximum costs were estimated, together with a most likely range. These figures were used to define a trapezoidal cost distribution for use in the optimisation calculations, as shown in Figure 32. The right-hand-side of the trapezium has a sculpted profile to reflect the likely shape of the true cost distribution and prevent overestimation of the mean failure cost. Page 93 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

132 1.2 1 Most likely range 0.8 Frequency Max Min Failure cost Validation of Expert Judgements Figure 32 Example of a trapezoidal cost distribution This section describes following four steps taken between draft and final business plans to validate the expert judgements used within the analysis of maintenance requirements: (i) Use of historical failure data to derive failure rate curves The Company s Operational Work Management System, OWMS, records work carried out on noninfrastructure assets. A snapshot of the database covering the period February 2005 to January 2008 was analysed, during which period there had been a consistent approach to failure recording. In total there were 6,017 distinct jobs, including activities such as calibration and routine deliveries. A process of filtering and selecting jobs on the basis of the various job categories and on key words and phrases occurring in text description fields yielded 838 repairs of non-infrastructure assets. These records were analysed by asset type and in two cases there were found to be sufficient failure records and assets to develop a failure rate versus age curve. The resulting curves are applicable to Ultraviolet disinfection equipment and Orthophosphate dosing equipment, as shown in Figure 33 and Figure 34 respectively. From these graphs it can be seen that the expert panel judgements correlated well for Ultraviolet equipment but were marginally pessimistic for Orthophosphate dosing equipment. The expert panel held between draft and final business plans was challenged with the OWMSderived failure rates and the Orthophosphate dosing equipment failure rate was revised to that shown in Figure 34. It has not been possible to validate further failure modes because the work orders in OWMS are recorded against high level asset groups, rather than at the level of detail shown in the NIAD Page 94 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

133 database. In the next period FDW plan to improve the linkage between OWMS and NIAD so that failure rate data are more easily obtainable. Ultraviolet equipment failure rate 7 Numbers of failures per year Age (years) Expert Panel judgements OWMS work order data Figure 33 Comparison of expert panel and OWMS failure rates for Ultraviolet equipment Orthophosphate equipment failure rate Number of failures per year Age (years) Expert Panel judgements OWMS work order data Figure 34 Comparison of expert panel and OWMS failure rates for Orthophosphate equipment Page 95 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

134 (ii) Sensitivity analysis to identify most influential judgements for review at a further expert panel meeting The draft business plan results were subjected to a sensitivity analysis in which each judgement was increased and decreased by 10%, and the resulting change in the AMP5 capital expenditure required for stable serviceability observed. Table 41 shows the 10 largest changes in response to changes in the failure rate. Failure Mode % change in original value Absolute Change in AMP5 Capex ( k) Failure of membrane unit +10% 6.7 Failure of membrane unit +10% 4.9 Failure of Distribution board -10% 1.5 Failure of Pump (water submersible) -10% 1.5 Failure of MCC / starter panel -10% 1.5 Deterioration of Building (Enclosing Equipment) -10% 1.1 Failure of Lighting +10% 0.9 Failure of Starter/variable speed drive +10% 0.6 Failure of Control panel / starter panel +10% 0.5 Failure of RO filter unit +10% 0.4 Table 41 Failure rate sensitivity - 10 highest failure modes by change in AMP5 Capex The results of this sensitivity analysis were presented to the review expert panel held in September 2008, at which attention as focused on the most sensitive failure modes and quantities. These were reviewed, challenged and where appropriate revised. (iii) Comparison with Three Valleys Water failure rates The expert panel referred to above contained a representative from Three Valleys Water who compared failure rate judgements with those used in that company and challenged the panel judgements where appropriate. (iv) Detailed review of approach to CMF filters. The sensitivity analysis highlighted the sensitivity of the results to judgements surrounding the MEMCOR Continuous MicroFiltration (CMF) filters. Replacement of these units was also the most expensive item in the draft business plan and therefore the analysis of this item was completely reviewed for the final business plan. For the draft business plan it was assumed that the units would have to be replaced in their entirety. However following detailed discussion with operations personnel, it was found that each unit has individual membrane modules which can be replaced independently at significantly lower cost. Each module is regularly tested and on failing a test, limited attempts can be made to keep the module in service, by inserting pins to prevent flow through the damaged part. Page 96 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

135 Detailed records of historic repairs and replacements are available, but there are no data available for assets that are more than 6 years old, so the rate of failure beyond this age has had to be estimated. However the overall expenditure on these units has been greatly reduced, and the results are now much less sensitive to the judgments surrounding this asset. Forecasting service and costs The probability and consequence models were used to forecast the expected number of service failures in each service area and severity level, over a 40 year horizon. The expected numbers of service failures were aggregated for each service area by multiplying by the severity scores (given in Appendix 16) and summing. The resulting risk score across all three asset categories, when no proactive interventions take place, is shown in Figure 35. Similar graphs can be plotted for each service indicator. Risk of interruptions Relative Risk Measure Year Repair Only Figure 35 Forecast interruptions with no proactive interventions Forward looking analysis - intervention analysis Planning objective The Common Framework cost-effectiveness objective has been applied. This selects the capital maintenance and operational interventions which will minimise the total discounted cost to the Company of maintaining the current level of service to customers and the environment. Interventions have been selected at the detailed asset level at which capital maintenance is undertaken within the Company. Water Treatment Works, Pumping Stations and Service Page 97 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

136 Reservoirs have been considered together within an integrated optimisation that balances risks between these asset groups. Identification of intervention options The replacement, or refurbishment where appropriate, of each asset was considered as a separate potential intervention for each of the next eight Review periods. Whether or not refurbishment was a feasible option was guided by Expert Panel judgements. Both options were considered for long-life assets where maintenance is motivated by concern to avoid deterioration to a more expensive intervention state (DTMEIS). Impact of Intervention Options The impact of each intervention option on service was quantified as an impact on the risk score for each service indicator and future year. This was calculated from the improvement in the expected number of consequence events which would be achieved by replacing or refurbishing the asset, taking account of the number of parallel units present in each unit process and any standby capacity or tolerable loss. Replacement and refurbishment both return the asset to an as new equivalent state. This gives a lower bound on maintenance requirements, with greater maintenance being required if an as new state cannot be achieved. Estimation of Cost of Intervention As described in Section 3.5, an estimated cost for each intervention option was provided by cost consultants, including indirect costs and Company overheads. No allowance was made for major civil requirements, groundworks and buildings or land purchase, since these were considered to be unlikely for any scheme to maintain the current level of service. Additionally, no risk allowance was included in these costs as the scope of work is certain - for like for like replacement, and the work is being undertaken on Company sites which, therefore, largely removes the uncertainty of external factors. Between draft and final business plans these costs were reviewed and validated by Franklin & Andrews. In most cases the original costs were confirmed, and there were only a few minor adjustments. Selection of Optimal Interventions The optimal interventions were selected using the Tynemarch intervention selection software, with the following selection process: 1. Identify interventions which should be undertaken on economic grounds, where the discounted failure costs that would be averted by the intervention are sufficient to justify the intervention costs. Similarly, for DTMEIS failure modes the optimal economic refurbishment date was calculated, giving the lowest life cycle cost. 2. Re-forecast service in the presence of these interventions, with results illustrated by the pink line in Figure 36. Page 98 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

137 3. Select further interventions, or bring forward economic interventions in time, so that service is maintained at minimum total discounted cost. This is undertaken in practice by ensuring that the risk score for all service indicators does not increase from its 2010 level, as shown by the yellow line in Figure 36. Interventions are selected that are most cost effective in reducing the relative risk measure to the target level across all service indicators. Risk of interruptions Relative Risk Measure Year Repair Only Economic Grounds Stable Risk Stable Target Figure 36 Forecast of interruptions risk under differing maintenance strategies across all sites By optimising over all water treatment works, pumping stations and service reservoirs together, the optimal set of interventions found will have a lower, or at worst the same, cost as if the three asset groups were considered separately. This is because in the integrated optimisation the optimiser has the option of rebalancing risk between the three asset groups where this would permit the whole-company serviceability targets to be met at lower overall cost. Sensitivity Analysis These results have been subject to two stages of sensitivity analysis. After the draft business plan results, each input parameter was individually varied up and down by 10% and the results used to aid a review expert panel, as previously described. With the final business plan results, a 95% confidence interval was estimated for each of the major types of data and judgements within the model. The quantities selected, and the confidence interval applied in each case, are given in Table 42 below. Each quantity was varied to the two extremes of the confidence interval and results re-calculated in each case, with the outcome reported in Table 42. It can be seen that in most cases the given percentage change in input leads to a much smaller change in the results. The overall sensitivity is Page 99 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

138 deemed to be low in comparison with that observed by Tynemarch in similar models for other companies. The failure rates were considered to have the largest confidence interval, but even a 15% swing only gives rise to a change of around 10% in the result. Installation dates have the greatest impact, but since these have been obtained from a complete asset survey, the quality of this information is good. Within the NIAD asset database, 20% of installation dates come from nameplate or written sources, 60% from visual inspection or verbal information with only 20% being estimated. In addition, approximately 30% of the change caused by varying the installation dates is due to large refurbishments of service reservoirs moving from AMP5 to AMP6 and vice versa. It should be noted that this is an extreme-value sensitivity analysis and that in practice not all individual judgements would vary in this way. For example, this analysis has reduced all failure rates by 20%. In practice given a confidence interval of (-20%, 20%) failure rates would be expected to be subject to a range of errors with only 2.5% of values being subject to an error of 20% or more in this direction. 95% confidence interval % Result sensitivity AMP5 cost Parameter - (minus) + (plus) - (minus) + (plus) Failure mode data Failure rates 15% 15% -6.6% 9.9% Repair durations 10% 10% 0.0% 0.0% Effects durations 10% 10% 0.0% 0.0% Consequences probabilities 10% 10% 0.0% 1.3% Asset data Date of installation Date of last refurbishment Costs 5 years (pre-1990); 1 year (post-1990) 5 years (pre-1990); 1 year (post-1990) 5 years (pre-1990); 1 year (post-1990) 5 years (pre-1990); 1 year (post-1990) 11.6% -15.8% 0.0% 0.0% Replacement costs 5% 5% -2.7% 2.5% Refurbishment costs 5% 5% -1.2% 1.2% Repair costs 10% 10% -1.1% 5.7% Capitalisation threshold 10% 10% 2.7% -2.4% Discount rate 4% 8% 0.1% -0.8% Table 42 Sensitivity analysis results Overall it can be seen that the model is fundamentally stable, and that even quite large one-sided variations in the inputs are attenuated to smaller variations in the result; it gives confidence that the results of this analysis are robust. Page 100 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

139 Cost Benefit Analysis The risk based approach described above demonstrates that the strategy selected by the Company delivers stable service and serviceability in the most cost effective way. The assessment of the cost benefit of the selected interventions was completed as described in Section C8. The serviceability indicators described in the above analysis were mapped to the Output Performance Measures used for the CBA analysis (see Appendix 17) and the results from the Non Infrastructure modelling were directly translated into CBA analysis on a site by site basis. The outcome of the cost benefit analysis is presented below for water treatment works. The baseline for the CBA analysis was a fix on fail maintenance strategy. As described above a number of the interventions are selected on economic grounds, ie it is more cost effective to replace before failure than to fix on fail. As can be seen in the results below, a significant proportion of the benefit comes from cost savings from the selected interventions. The benefits arising from mitigation of service risk are small. Because of the existing measures in place (duty/standby, integrated network, on-line water quality monitoring) any one works failure very rarely results in direct customer service impact. The results of the analysis show that the selected strategy is clearly cost beneficial. Finally, as the majority of the benefit is coming from cost savings versus the baseline, the CBA analysis is insensitive to changes in the WTP. This is clearly shown in the results in Table 43. Strategy CBA Scenario Whole Life Cost, k Page 101 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36 Whole Life Benefit, k Net NPV, (WLB less WLC) k WTWs Base / Normal - 10, ,139 WTWs Sensitivity # 1 Private Cost only - 10, ,139 WTWs Sensitivity # 2 Lower Bound WTP - 10, ,139 Selection of Optimal Intervention Strategy Table 43 Water Treatment Works - CBA Results The Company has implemented a robust bottom-up methodology for Capital Investment planning for the first time in relation to non-infrastructure maintenance. The Company has clearly demonstrated that the Common Framework cost-effectiveness objective has been applied to forecast the expenditure required to achieve stable serviceability for Water Treatment Works in future AMP periods. The non infrastructure draft business plan submitted by the Company was challenged by Ofwat with regard to the use of un-validated expert judgement. As described above, the Company has worked hard to validated the expert judgements through sensitivity testing of the draft results to provide focus for an expert review challenge workshop; use of Company data from OWMS where applicable and by cross referencing to Three Valleys Water data. In addition, the intervention costs were subject to a review by independent cost consultant. Finally, the revised results have been subject to further sensitivity testing which demonstrates the stability of the modelling and improves confidence in the results.

140 The historic expenditure for the last two AMP periods (AMP4 includes the expenditure planned for 2008 and 2009) and forecast expenditure for AMP5, AMP6 and AMP7 is shown in the below table. Period AMP3 AMP4 AMP5 AMP6 AMP7 Water Treatment works ( k) 2,342 4,790 4,382 4,547 5,246 Opex change from AMP Table 44 Water Treatment Works Historic and Forecast Expenditure It is important to note that the majority of the investment within this strategy is justified on economic grounds. Further, the incremental investment to achieve stable serviceability is small, while the incremental benefit is material. The investment required for AMP5 is roughly similar to that spent (or planned to be spent) in AMP4, as shown in Figure 37. Also shown as a dashed line is the predicted expenditure excluding assets which have been introduced recently under quality drivers and are therefore not covered by any historical maintenance expenditure. It can be seen that in general the predicted expenditure is in line with historic amounts, especially when account is taken of assets that have not required capital maintenance expenditure in the past. In addition the operating expenditure associated with the selected strategy is in line with historic levels. The model has been validated as far as possible with existing historical data, and has been shown to be stable in response to variations of input data. Therefore the Company has a high degree of confidence in these results. Page 102 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

141 Treatment works k Historical spend AMP4 mean Predicted spend AMP5 mean (Historical asset base) -500 Figure 37 Comparison of historic and predicted expenditure on treatment works (including amounts planned for the remainder of AMP4) Section Water Pumping Stations Summary The Planning Objective for Water Pumping Stations is to cost effectively maintain stable serviceability. Water Treatment Works, Pumping Stations and Service Reservoirs have been considered together within an integrated optimisation that balances risks between these asset groups. The methodology used for this asset group is the same as for Water Treatment Works. It has not been duplicated in this section. The commentary only covers issues material to Water Pumping Stations. To maintain stable serviceability a programme of 1.233m is forecast for pumping stations. This is a small decrease from the total projected for AMP4 and is in line with historical expenditure. Asset Data and Historical analysis The same data sources have been used for water pumping stations as were used for water treatment works. Figure 38 shows the historic spend on treatment works to compared to the number of DG3 unplanned interruptions lasting for greater than 12 hours. The spike in 2001/02 was due to a water Page 103 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

142 main, and was not related to pumping station assets. The historic serviceability performance for Water Pumping Stations is very good, with DG3 at zero. As highlighted in the Water Treatment Works section, and particularly in the case of Pumping Stations which feed particular pressure zones, the consequences of failure for certain installations is high and these present a risk to customer service and serviceability. This underlying risk is not evident from the serviceability measures. From operational experience and knowledge, the Company is aware that the pumping station asset base is aging and has received relatively small levels of historic investment. For a number of key pumping stations eg Downsgate, Chalksole and Paddlesworth, failure has a direct impact on customer services as customers loose supply as soon as these pumping stations fail. For AMP5 it is key that these critical pumping stations are effectively maintained and existing levels of customer service continued. FDWS Historic Base Service Provision versus Serviceability Pumping Stations Base Service Provision ( M) / / / / / / / / / /00 Year 2000/ / / / / / / / Figure 38 Historic spend versus serviceability for pumping stations Forward looking analysis service and forecasting Ratio to average of actuals Pumping Station Base Service Provision 5 year rolling average DG3 - unplanned interruptions more than 12hrs Service has been forecast in the same way as for Water Treatment Works. Forward looking analysis - intervention analysis Interventions have been selected together with those for Water Treatment Works. Water Treatment Works, Pumping Stations and Service Reservoirs have been considered together within an integrated optimisation that balances risks between these asset groups. By optimising over all water treatment works, pumping stations and service reservoirs together, the optimal set of interventions found will have a lower, or at worst the same, cost as if the three asset groups were considered separately. This is because in the integrated optimisation the optimiser Page 104 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

143 has the option of rebalancing risk between the three asset groups where this would permit the whole-company serviceability targets to be met at lower overall cost. The results were subject to sensitivity analysis as described in the section for Water Treatment Works. Cost Benefit Analysis As for Water Treatment Works, the risk based approach described above demonstrates that the strategy selected by the Company delivers stable service and serviceability in the most cost effective way. The cost benefit analysis has been undertaken in the same way as for WTWs and is presented below for water pumping stations. The baseline for the CBA analysis was a fix on fail maintenance strategy. As described above a number of the interventions have been selected on economic grounds, ie it is more cost effective to replace before failure than to fix on fail. This contribution can be seen in the below table. However, unlike water treatment works where little benefit comes for service risk, failure at a number of water pumping stations directly impacts customer service a significant proportion of the benefit comes from mitigating supply interruptions. As can be seen from the CBA scenario results, there is sensitivity to the analysis but the proposed interventions are cost beneficial under all scenarios. Strategy CBA Scenario Whole Life Cost, k Whole Life Benefit, k Net NPV, (WLB less WLC) k Benefit Value per OPM, k OPM4 Supply Interruptions WPS Base / Normal - 1,557 94,498 96,055 94,488 WPS Sensitivity # 1 Private Cost only - 1, , WPS Sensitivity # 2 Lower Bound WTP - 1,557 45,246 46,803 45,235 Selection of Optimal Intervention Strategy Table 45 Water Pumping Stations - CBA Results As for Water Treatment Works, the Company has implemented a robust bottom-up methodology for Capital Investment planning for the first time in relation to non-infrastructure maintenance. The Company has clearly demonstrated that the Common Framework cost-effectiveness objective has been applied to forecast the expenditure required to achieve stable serviceability for Water Pumping Stations in future AMP periods. The non infrastructure draft business plan submitted by the Company was challenged by Ofwat with regard to the use of un-validated expert judgement. As described above, the Company has worked hard to validated the expert judgements through sensitivity testing of the draft results to provide focus for an expert review challenge workshop; use of Company data from OWMS where applicable and by cross referencing to Three Valleys Water data. In addition, the intervention costs were subject to a review by independent cost consultant. Finally, the revised results have been Page 105 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

144 subject to further sensitivity testing which demonstrates the stability of the modelling and improves confidence in the results. The historic expenditure for the last two AMP periods (AMP4 includes the expenditure planned for 2008 and 2009) and forecast expenditure for AMP5, AMP6 and AMP7 is shown in the below table. Period AMP3 AMP4 AMP5 AMP6 AMP7 Water Pumping Stations ( k) 1,997 1,657 1,233 1,251 1,310 Opex change from AMP Table 46 Water Pumping Stations Historic and Forecast Expenditure It is important to note that the majority of the investment within this strategy is justified on economic grounds. Furthermore, the incremental investment to achieve stable serviceability is small, while the incremental benefit is material. Figure 39 shows the comparison for pumping stations. Historically pumping station expenditure has varied sharply from year to year, which is unsurprising for a company of this size. The predicted expenditure is much less variable, but is at a level around the mean historical value. The model has been validated as far as possible with existing historical data, and has been shown to be stable in response to variations of input data. Therefore the Company has a high degree of confidence in these results. Pumping stations k Historical spend AMP4 mean Predicted spend AMP5 mean Figure 39 Comparison of historic and predicted expenditure on pumping stations (including amounts planned for the remainder of AMP4) Page 106 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

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161 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section Management & General (non-infrastructure) Section IT The approach taken to assess the IT asset replacement profile has attempted to follow the common framework, however this is difficult due to the fact that the IT industry does not tend to plan beyond a three year horizon, technology is rapidly changing and predicting the appropriate future interventions required is difficult. The Company has employed a policy-driven cost effective approach in line with the Common Framework. It has not been possible to show a direct effect of the IT services to the Company s customers, however, it is evident that the policies and procedures being proposed are in the best interest of the customers, through enabling the Company to operate efficiently and effectively. The diagram below summarises the process used for the PR09 submission. Replacing the IT assets based upon the specified policy minimises costs and retains existing IT service levels at a point were we can best support the customers. This aims to reduce equipment down time and disrupted IT services, enhancing staff productivity and service provision. All IT assets are categorised within a Configuration Management Database which links assets to reactive activities and user requests. The agreed set of replacement policies has been refined from those agreed within AMP4. These refinements have been achieved through applying improved experience and knowledge which has been gained using additional IT reports. Benchmarking has been completed with Gartner during AMP4 to compare operational performance, including the capital expenditure elements. The service failures of all individual assets were reviewed in order to confirm the replacement years required in AMP5, however the number of records and their asset categories were found to be insufficient to represent a quantitative analysis at this time. The future cost predictions of replacing/upgrading assets were determined through the analysis of past projects, internal expert view and semi structured interviews with suppliers. On costs were added to these to provide a consistent approach with other investment plans of the Company. Page 123 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

162 Investment costs in AMP5 are 1,024k for maintenance and 555.5k for system enhancements. An additional amount of 144.5K has been added since the submission of the Draft Business Plan to allow for the implementation of a Veolia Group Information Management Strategy based on an approximate 8% contribution. Figure 40 Overview of IT maintenance and enhancement process Page 124 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

163 Section Telemetry Figure 41 Overview of the Telemetry, SCADA & Communications System The system that supports our Telemetry requirements is called MC2000. MC2000 is a supervisory control and data acquisition [SCADA] system which comprises principally of data gatherers and a file server supporting PC based workstations. The system can continually monitor telemetry, record data graphs and annunciate significant changes, display mimic diagrams and historic data graphs, and allow plant to be controlled. Significant improvements have been made during AMP4 to enhance the system as a whole. The network has been converged to allow the use of more mainstream IT equipment. This has resulted in efficiency gains both through capital and operational expenditure. Advantages have been gained in the functionality of the system: Data can now be transferred simultaneously rather than in series Faster data transfer allowing information through bi-directional data transfer means that the system now approaches real time monitoring For PR09, asset lives have been taken from published information provided by the MC2000 the User Group of which the Company is a member. This group uses operational experience from live operation systems throughout Europe and the world to establish accurate asset lives. The Company maintains a database inventory of our telemetry equipment and associated software from which the projected capital expenditure has been calculated. Investment costs in AMP5 are 297k. Page 125 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

164 Section Vehicles The Company s vehicles are maintained through a Veolia Group Fleet Management system which is operated at local level but maintained as a Veolia Group facility. The forecast of Capital expenditure on vehicles is based on our policy of replacement of leased vehicles with capitalised vehicles as the lease periods end. There are 56 vehicles which are renewed according to company policy in line with previously established cost effective vehicle renewal periods. Costs have been forecast using Veolia framework rates and on this basis and are 1,502k for the AMP5 period. Section M&G Cost Benefit M&G investment has not been assessed for cost benefit. The benefits are predominately to staff productivity and are, therefore, largely based on judgements of the impact to staff productivity when M&G services deteriorate. These have not been explicitly quantified for the business plan. Section 4.3 Links with Other Parts of the Business Plan Section C5 describes the assessment the Company has done to consider synergies and overlaps between different drivers and programme as a whole. These are very limited due the small size of the programme and that there is little overlap between different parts of the programme. With regard to the Base programme, there is only one link with other parts of the business plan and that is between maintaining a stable leakage level proposed within the Base programme and a proposed leakage reduction of 0.5Ml/d proposed in the Supply Demand Programme. The Company has clearly separated the cost associated with maintaining stable leakage as part of the Base position (see Section 4.1.2) from the costs associated with delivering a 0.5Ml/d reduction in leakage as part of the Supply Demand programme, although the activity to achieve the objective is common. Section 4.4 Balance of Risk and Customer Affordability The development of the final plan has been subject to a series of Board meeting and special Board meetings. During these meetings the Board has challenged the whole capital programme to ensure that it correctly balances the customer affordability while ensuring significant risks to service inherent in the current asset base are addressed and that overall service and serviceability can be maintained. The challenges made by the Board were set in the context of customer priorities, as informed by the various sets of customer feedback described in Section C1 and the Company s Strategic Direction Statement, which the Company consulted on. Each business case for the proposed AMP5 interventions (for all drivers not just Base) included in the draft business plan was discussed with the Board. The risk to customer service and serviceability of not undertaking the interventions was explored and the investment required to deliver the intervention detailed. Where intervention options existed these were also explained. Through a series of Board meetings the Board reviewed and challenged the components of the final programme. This process was particularly important in the context of a number of significant interventions being required in AMP5 to mitigate unacceptable risks. This process resulted in a number of potential investments being excluded from the plan, as the decision was made that the Page 126 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

165 risks could be acceptably managed through existing measures. These decisions are summarised in Table 47 below. In addition to this, customer affordability was addressed through detailed studies between draft and final business plans, many of which resulted in lower cost interventions being included in the final business plan. The changes between draft to final for the Base programme are detailed in Section 1.1. Similar development work was undertaken in the other programmes and these are detailed in the opening section of each Section B case. For completeness the key changes in intervention costs between draft and final are include highlighted here below. Changes to the plan to balance customer affordability and risk Change in investment Base Programme Reduction in mains renewal rates from preferred strategy of 5km/yr, necessary to achieve long term stable serviceability, to 3km/yr for AMP5 to reduce costs to customers. Risk to be managed in AMP5. Run to waste, UV and turbidity monitoring schemes; risk to be managed within existing operational capacity Hills to Paddlesworth network reinforcement solution integrated with solution to trunk main TP28 Detailed feasibility study of Hills 2 nd Cell to improve understanding of scope and risk and resulting in lower cost estimate Quality Programme Detailed feasibility study of Denge WTW iron and manganese solution. Improved understanding of scope and risk and resulting in lower cost estimate Enhanced Service Level Programme Detailed feasibility study of Denge network cleaning costs. Improved understanding of scope and risk and resulting in lower cost estimate Supply Demand Programme Whitfield Development. With economic down turn and uncertainty of timing for the Whitfield development progressing, the Company has chosen to not include the costs of this development in AMP5, as it believes customers should not bear the risk for uncertain future developments. Study cost to support the development of investment options have remained in the programme. Desalination Study and Hythe Study. Development of demand led strategy has led to a positive supply demand balance across planning period. Company has removed these studies as not essential in AMP m - 0.9m - 0.5m - 4.0m - 0.9m - 2.7m - 3.0m - 0.7m Table 47 Summary of Balancing Of Risk and Affordability Key Decisions and Intervention Changes These changes demonstrate that the Company has developed a final plan which seeks to correctly balances customer affordability with the risk to service and serviceability. Board level scrutiny has been an integral part of the process of arriving at the final plan and the proposals contained in the Page 127 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

166 plan are supported by the Board and the Executive Management Team. This is evidenced by the Board s final business plan endorsement contained in Section A. Importantly, the most recent customer survey (see Section C1) still shows customer support for the areas of investment that are proposed in the final business plan and over 55% are willing to pay more to maintain the levels of service detailed in the plan. Section 4.5 Programme Delivery The Company is confident that it can deliver the capital maintenance programme proposed. It recognises that the level of expenditure is a step change compared to current investment, but the detailed feasibility studies complete on key schemes provide a strong starting point for design development. In addition, the Company has been developing its in house project delivery capability with the objective if providing a basis for AMP5 delivery. This delivery process is explained below. Delivery Philosophy: The Company has undergone a number of changes since PR04 with regard to capital delivery; firstly the Veolia Water Partnership was dissolved and the project management and technical skills taken back into the three Veolia water companies. Secondly, the Company sought to utilise the same delivery partner for AMP4 projects as Three Valleys, which while successful for Three Valleys was not, on reflection, the most suitable model for the Company s specific circumstance. With the appointment of a permanent Head of Capital Delivery and Asset Management, the focus has been on establishing an internal department with the necessary skills and resources to lead the capital programme while engaging the supply chain earlier in the delivery process to bring their knowledge and value to the development of solutions. In simple terms the principles of Capital Delivery for the Company are: To provide clarity and focus on the Company s objectives and purpose throughout the life of all capital projects; For the Company to own the development of the project scope and to clearly define the Company s requirements on projects; To engage the supply chain to develop the design sufficiently for a contract; To engage a contractor to deliver the project through to handover. For straight forward projects, the Company would undertake its own project management and CDM co-ordination. For larger or more complex projects the Company would buy-in project management and CDM co-ordination capability. To continue to utilise Veolia Procurement support in delivering the Capital programme. The model the Company is in the process of establishing is summarised in the below diagram; The * symbol represents internal approval gateways in the process. The Company has recently recruited a full time asset manager to be responsible for Company wide asset data, to co-ordinate the analysis of the data and to provide robust information into asset management decision making. Page 128 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

167 The Company has also recruited a senior project engineer, site inspector and health and safety manager to provide improved management of contractors work. Recruitment is ongoing to appoint a capital delivery manager, and additional project management and technical staff. Project Sponsor - Company Asset Management Data, Systems, Analysis, Information Project Identification and Objectives Project Development * * * Project Definition Statements Design, Estimate, Contract Award Project Delivery Contract, Delivery, Commission, Handover Project Manager Company / Third Party Design, Contract, Commission, Handover Third Party Figure 42 Capital Delivery Process Page 129 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

168 AMP5 Delivery Delivery of the AMP5 capital programme has been reviewed and the procurement strategy at this stage is outlined in the following table. A copy of the AMP5 delivery programme is contained as an Appendix to Section C5. Delivery area Specific Projects Delivery Approach Capital Maintenance Water Distribution: Water Distribution Water Treatment Works Water Pumping Stations Service Reservoirs Management & General (noninfrastructure) Scheme Quality Trunk Main TP28, Trunk Mains TP03 and TP04 3 km/yr Mains Renewal Maintenance of leakage Communication Pipes Revenue Meters Cost effective maintenance programme Cost effective maintenance programme Cost effective maintenance programme Hills Second Cell IT SCADA & Telemetry Vehicles Denge WTW iron & manganese removal Revenue Meters SEMD work NEP Denge Study Single Projects: competitive tender, externally project managed. Outline design complete, detailed design by external design consultant. Establish framework contractors for delivery; internally programme managed As per AMP4 - internal direct labour resources for reactive leakage management As per AMP4 - internal direct labour resources for repair/replace on fail As per AMP4 internal resource to replace on fail Establish framework contractors for delivery, internally programme managed Continue with AMP4 inspection and maintenance programme Single Project: competitive tender, externally project managed. Detailed feasibility study complete, detailed design by external design consultant as part of design and build contract. Internal resources supported by Veolia shared services Delivery Approach Single Project: competitive tender, externally project managed. Detailed feasibility study complete, detailed design by external design consultant as part of design and build contract. Feasibility study undertaken. Requires external project management and security approved design consultant. Construction to be awarded by competitive tender Study work only, appoint consultant to lead. Page 130 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

169 Scheme Enhanced Service Levels Denge network cleaning Revenue Meters Flood protection Supply Demand Selective metering CHOICE tariff Leakage reduction to 7.5Mld AMR Trial NEP Little Stour study Whitfield study Delivery Approach Deliver with operational staff (hiring in to backfill) and hydraulic modelling / detailed work planning by consultants. Feasibility study complete. Competitive tender to award single contract across multiple sites. Continue with AMP4 delivery strategy in-house meter installation team. Internal delivery as per Lydd pilot trial In-house leakage team, as per AMP4 In house management, aligned with metering programme As per AMP4, consultant led and project managed by Southern Water Study work only, appoint consultant to lead. Table 48 Summary of Capital Delivery Strategy Page 131 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

170 Section 5 Table Commentaries Table B.3.1 Water Service Base Service Output Projections Block A Key Output Projections Reliability and Continuity The Company currently has two properties reportable under the DG2 Level of Service criteria. These properties are located close to service reservoirs and fall within the definition of Section 65 of the 1991 Water Industry Act with regard to a duty to supply water at the Level of Service pressure. The location of these properties and the current configuration of the distribution network means there is no practical solution to raising the pressure in the main serving the properties, they will therefore continue to be recorded in the June Return with the caveat regarding section 65. The current performance under the DG3 Interruption to Supply Level of Service will be maintained, this leads to an overall performance score of zero. Block B Key Output Projections Water Quality The Business Plan fully adopts the output projections identified in the Tables 11 and 12 of Ofwat report Capital Expenditure ; Capex Incentive Scheme (CIS) Draft Baseline Folkestone and Dover Water Report These projections vary from those submitted at Draft by establishing Control Limits for performance projections where historically the Company s performance has been zero failures, at Draft the equation, used in accordance with the Ofwat advice provided, generated a zero Control Limit. Block C Key Output Projections Customer Services The Company intends to maintain customer service levels at the current level. This is reflected in the numbers presented in the table. However, it also shows that the Company expects to see a deterioration in DG9 percentage calls abandoned during 2008/09. With service improvements that are intended to make the customer experience easier, the Company hopes to achieve a higher call handling score. Block D Key Output Projections Serviceability The Company intends to maintain steady serviceability over the AMP5 and AMP6 periods and has identified in its Strategic Direction Statement a target maximum burst rate of 100/1000km/year. The projected Reference Level and Control Points are derived from calculation methods provided by OFWAT. Unplanned interruptions to supply exceeding 12-hours are very rare; the Company operates in a small geographic area with good transport routes; a reasonably accessible network and a direct labour team familiar with the asset base. The Company s internal target is less than 6-hours so our projection for this measure is zero. Page 132 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

171 The Company s size does not warrant the sophistication and complexity of a proprietary work management system and the potentially significant operating costs associated with it. Over the past few years the Company has developed an integrated system for monitoring all work; not just that associated with non-infrastructure assets. The twin aim of our maintenance strategy is to reduce reactive maintenance to its economic optimum and maximise plant availability. Two indicators are monitored; the number of reactive tasks raised and the downtime of a plant in hours taking account of the economies associated with the timing of repairs (i.e. in working hours). The management of maintenance, the quality of data gather and the refinement of the maintenance strategy will continue to develop. The nature of maintenance will change as treatment processes change and the need for a greater understanding of the status of the assets develops. The introduction of more sophisticated plant and equipment associated with security considerations will also have an impact. In light of the future changes and the present maturity of the monitoring systems, there are degrees of uncertainty around the predictions of performance. The tables contain two parameters; Line 22 is the projected number of unplanned tasks associated with non-infrastructure assets. Line 23 is the percentage time available for non-infrastructure in a calendar month. Further derivatives of these indices could be the proportion of unplanned work as a percentage of all work undertaken and the average percentage supply capacity available. Page 133 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

172 Table B3.3 Water Service Base Operating Expenditure Projections Section B Line 2 Section C Line 4 Adjustments to the Base Year The adjustment included here relates to atypical expenditure on recruitment expenses incurred in 2007/8. This adjustment is consistent with the atypical expenditure reported in the commentary of Table 21 of June Return It is also consistent with line 12 of Table B2.1a Adjustments to Post 2010 Projections We have made a number of adjustments to base opex as shown in the table below. '000s Bulk supply EA charges Bad debt Accounting Separation CRC administration Rates Pension Total Bulk Supply standing charges: Included in this line is a reduction of 377k from year 2010/2011 due to the fact that the annual reservation charge payable to South East Water (formally Mid Kent Water) for the Barham/Kingston bulk supply import ceases to be payable. EA charges: The EA have indicated to us that they expect charges to increase by 10% per annum for the next five years. We have assumed that this level of increase continues to apply for the rest of AMP5. We have therefore assumed a year on year 7.5% real terms increase (assuming RPI of 2.5%) on the 2008/9 expense. Bad Debt: At the time of publication of this plan, our best estimate of the increase in bad debt charge for 2008/9 over 2007/8 was 83k. We have assumed a further deterioration of 20k in 2009/10 and that this will persist throughout AMP5. This deterioration is the result of the recession. Accounting Separation: Ofwat have strongly signalled an intention to introduce accounting separation requirements during AMP5. This will be a new obligation which will incur costs. As we have very little information to go on at the time of publication we have made the prudent assumption that we will need to hire an extra accountant at a cost of 45k per year including on costs, and that we will incur an additional 50k per year in auditing costs. We have assumed that these costs are incurred from the start of AMP5. Page 134 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

173 CRC administration: The introduction of the Carbon Reduction Commitment (CRC) Obligation introduces aspects of financial management to the use of energy that don t currently exist. Revenue recycling and secondary market trading in the auction of emission rights will require administering. An addition to base opex has been included to cover this new management obligation. We estimate that this task will require 0.5 FTE at a cost of 40k per annum including on costs. We therefore have budgeted 20k per annum for this item. Business Rates: We have received a draft valuation from the VOA which gives a rateable value of 4.478m compared to 2.66m in At this stage this is only a draft number, and it is difficult to know what the final number will be. In our case we will be challenging the draft valuation, and we are also currently in the midst of a rates appeal. The multipliers which will prevail in AMP5 are also unknown. For the purposes of this plan we have assumed a 20% reduction on the draft valuation and we have discounted the AMP5 multiplier by 10% to the 2007/8 level. We have assumed a constant real terms multiplier during AMP5. These assumptions are included here for indicative purposes only. We assume that Ofwat will adjust these figures to take account of the latest available information at the draft and final determinations. Pensions: The Company is currently enjoying a pension holiday from one of its final salary pension schemes, so base year pension expenses cannot be considered a good guide to future expenses. The Company has had a review conducted by its actuarial advisors. The review has forecast pension expenses for the Company for AMP5 and these assumptions have been added into Line 4. The company operates 2 final pension schemes, VWSCPP and VUKPP. Our triennial valuation as at 31 December 2007 requires an annual contribution for VWSCPP of 340 in VUKPP requires an annual contribution of 239k and a deficit repair payment of 16k per annum. These figures will rise in line with RPI. The contributions will rise by RPI + 1%. The table below shows how these figures have been used to calculate the increased cost of these two schemes in AMP5 compared to the base year. Pension costs in AMP5 VUKPP VWSCPP RPI Mar contribution deficit payment contributiondeficit payment Dec deflate / / total expense (07/08 prices) expense in 2007/8 Increased cost in AMP5 2010/ / / / / Notes 1 Pension interest income is excluded from the analysis as it is not a component of reported opex 2 NED pension scheme is excluded as 2007/8 cost is considered a reasonable base Lines 5&6 There is no additional OPEX reported in these lines. Additional OPEX for AMP4 and AMP5 is reported for Quality Enhancement in table B4.3 section C and Supply Demand Balance in Tables 5.2 section E. The one exception to this is 17k anticipated cost in 2013/14 and 2014/15. This accounts for extra pumping costs Page 135 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

174 that are anticipated to arise from the proposed solution to the TP28 problem described in section of B3. This cost is reported in line 6. Page 136 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

175 Table B3.5 Water service - Base capital Maintenance Expenditure Projections (infrastructure) AMP4 Data Year 07/08 Line 1 Line 2 Line 3 Line 12 07/08: JR08 Table 32 - Line 18 - Water Infra 07/08: JR08 Table 32 - Line 20 - Water Infra 07/08: JR08 Table 32 - Line 23 - Water Infra 07/08: Difference between Infra net and Gross position in JR (Table 35 line 6 less line 2 for 2007/08) Year 08/09 & 09/10 Lines 1-3 Data calculated from current year position and forecast to end of 08/09 and 09/10. Line 12 Forecast based on average for AMP4, see table below. Yr 1 05/06 Yr 2 06/07 Yr 3 07/08 Yr 4 08/09 Yr 5 09/10 Gross Net Contributions Data source JR08 Table 35 Average of past 3 yrs Line 14 Infrastructure Renewals Charge (IRC) When selecting the 15 year period of IRE to average in the calculation of IRC the company elected to select the period which would most closely equate the IRC for AMP5 to the forecast IRE for AMP5. The period which most closely matched this criteria was 2004/05 through to 2018/19. AMP5 The IRC charge presented is that calculated by the Reservoir model based on averaging the 2004/05 to 2018/19 IRE. Post AMP5 The IRC charges entered are not the result of averaging IRE. They are equal to the IRE forecast expenditure each year with the exception of 2015/16 (see Line 15) Line 15 IRE/IRC Closing Balance Sheet Prepayment / Accrual The projected accrual at the end of AMP5 is 0.366m. For the purposes of PR09, the company has amended the 2015/16 IRC charge so as to eliminate the AMP5 closing accrual / prepayment position. With subsequent years IRC s equated to IRE s there is no future accrual or prepayment position reported. Page 137 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

176 AMP5, 6 and 7 Data Lines 1-4 Line 9 Line 12 Forecast based on capital programme, categorised as required. AMP6 and AMP7 forecasts for mains renewal activity only; does not include trunk main activity. Required trunk main activity will be included for final business plan. A catch up efficiency of 0% has been assumed for AMP7. Average used as above for per remained of AMP4. Page 138 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

177 Table B3.6 Water Service - Base Capital Maintenance Expenditure Projections (noninfrastructure) AMP4 Data Year 07/08 Line 1 07/08 = JR08 Table 32 - Line 18 - Water Non Infra Line 2 07/08 = JR08 Table 32 - Line 20 - Water Non Infra Line 3 07/08 = JR08 Table 32 - Line 19 - Water Non Infra Line 4 07/08 = JR08 Table 32 - Line 22 - Water Non Infra Line 5 07/08 = JR08 Table 32 - Line 21 - Water Non Infra Line 6 07/08 = JR08 Table 32 - Line 23 - Water Non Infra Line 15 07/08 = JR08 Table 35 - Line 4 Year 08/09 & 09/10 Lines 1-6 Data calculated from current year position and forecast to end of 08/09 and 09/10. Line 15 Forecast remains zero, in line with historic AMP5 and 6 Data Lines 1-6 Line 15 Forecast based on capital programme, categorised as required. Forecast remains zero, in line with historic Page 139 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

178 Section 6 Appendices 1 Willingness to Pay Survey Report 2 Atkins Technical Note Seismic Activity in Folkestone Region 3-1 EMC example quad reports - Levels of Service 3-2 EMC example quad reports - Operational Performance 4 Statement of Need Report 5 Not Used 6 Trunk Main Modelling Report 7 Trunk Main Modelling Report - Additional Information 8 TP28 Hydraulic Modelling Report 9 Distribution Mains PR09 Burst Model Methodology summary 10-1 Burst Model methodology Report, Three valleys Water February Burst Modelling Computer Modelling Care W 10-3 Summary Description of Burst Model 11-1 Communication Pipe Overall Modelling Approach 11-2 Communication Pipe FDWS Modelling Approach 12 Trunk Main Scheme Definition Forms - Cost Breakdown 13 Distribution Mains PR09 Data Requirements 14 Trunk Main Feasibility Report 15 Revenue Meters Modelling Report 16 Non Infrastructure Service Indicators 17 Mapping between the Service Indicators and the Output Performance Measures 18 Hills Reservoir Inspection - Halcrow Technical Note 19 Hills 2nd Cell - Akins Feasibility Study 20 Hydraulic Modelling on Hills (also for TP28) 21 Hills 2nd Cell - Scheme Definition Form - Cost Breakdown SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 140 of 140 Section B3 Maintaining Service & Serviceability 09/11/10, 15:12:36

179 Company Commentary Part B Section B4 Key Component Quality Enhancements Executive Summary... 1 Section 1 Changes from Draft to Final... 2 Section 1.1 Changes to the Business Plan... 2 Section 1.2 OFWAT Draft Business Plan Feedback... 3 Section Deteriorating Raw Water Treatment and Distribution Section Environmental Impacts... 3 Section Security and Emergency Measures Direction... 3 Section Costs of Projects... 3 Section Cost Drivers and Reconciliation with Projects database... 3 Section Misallocations... 3 Section 2 Denge WTW Raw Water Deterioration... 5 Section 2.1 Denge Overview... 6 Section 2.2 Review of Water Quality... 7 Section Key water quality parameters iron, manganese and turbidity... 7 Section Secondary water quality parameters... 8 Section 2.3 Overview of Potential Treatment Options Section Oxidant type for physical / chemical iron and manganese removal Section Waste Disposal Section 2.4 Potential Treatment Solutions Section Rapid Granular Media Filtration Section Membrane microfiltration / ultrafiltraion Section Biological filtration Section Reverse osmosis Section 2.5 Evaluation of Treatment Options Section Pros and Cons Section Scoring of Options with Respect to CAPEX, OPEX and Technical Issues Section Selected Options for Further Evaluation Section 2.6 Laboratory work Section Membrane Filtration Option Section Granular media filtration option Section 2.7 Environmental Impact Section 2.8 Capital Cost Estimate Section 2.9 Cost Benefit Analysis Section 3 National Environment Programme Section 4 Catchment Management Section 5 Security and Emergency Measures Direction B4 Table Commentaries APPENDIX B4.1 DENGE PROVISIONAL PROGRAMME APPENDIX B4.2 DENGE PROVISIONAL PROCESS FLOW DIAGRAM APPENDIX B4.3 DENGE DRAFT LAYOUT APPENDIX B4.4 DENGE COST ESTIMATION Page i Section B4 - Quality Enhancements 11/11/10, 10:25:32

180 APPENDIX B4.5 FINAL WR PR09 NEP APPENDIX B4.6 SEMD COSTS BY ELEMENT APPENDIX B4.7 SEMD COSTS BY SITE APPENDIX B4.8 SEMD SITE SURVEYS (RESTRICTED) APPENDIX B4.9 SEMD SITE EQUIPMENT (RESTRICTED) APPENDIX B4.10 AN10 CONTROL ROOM (RESTRICTED) List of Tables Table 1 : Non-RO raw water quality (key parameters relating to turbidity in final water), 5 years data... Error! Bookmark not defined. Table 2 : Non-RO raw water quality (secondary parameters relating to treatment of iron, manganese and turbidity), 5 years data... Error! Bookmark not defined. Table 3 : Oxidant options for chemical oxidation of soluble iron and manganese...error! Bookmark not defined. Table 4 : Outline sizing for granular media filtration... Error! Bookmark not defined. Table 5 : Membrane plant outline sizing... Error! Bookmark not defined. Table 6 : Required water parameters for successful biological iron and manganese removal... Error! Bookmark not defined. Table 7 : Initial sizing for biological iron and manganese removal...error! Bookmark not defined. Table 8 : Pros and cons of treatment options... Error! Bookmark not defined. Table 9 : Scoring of treatment options with respect to OPEX, CAPEX and treatment / operability criteria... Error! Bookmark not defined. Table 10 : Logic behind scoring of treatment options... Error! Bookmark not defined. List of Figures Figure 1 : Rapid granular media filtration treatment option... Error! Bookmark not defined. Figure 2: Membrane microfiltration/ultrafiltration treatment option...error! Bookmark not defined. Figure 3 : Biological filtration treatment option... Error! Bookmark not defined. Figure 4 : Variation in Mn in filtrate as a function of KMnO4 dose (flocculation time 15 minutes, no... Error! Bookmark not defined. Figure 5 : Mn in filtrate as a function of flocculation time, no coagulant (note there were no tests done using KMnO4 = 0.15 mg/l with a flocculation time of 20/30 minutes, or KMnO4 = 0.2 mg/l with a flocculation time of 25 minutes)... Error! Bookmark not defined. Page ii Section B4 - Quality Enhancements 11/11/10, 10:25:32

181 Executive Summary From the guidance issued it is intended this section should set out a detailed overview of the Company s proposed quality enhancement programme for water services. There are three areas of work, outlined in this Section, that make up the quality enhancement programme, these are:- Improvements to the quality of water produced from the Denge Water Treatment Works. Over recent years the quality of this water has deteriorated with rising levels of soluble iron and manganese. The proposal is to install treatment facilities to address this failing aspect. The proposal has the technical support of the Drinking Water Inspectorate. The Company has worked closely with the Environment Agency in developing its obligations under the National Environment Programme (NEP). This has resulted in the identification of requirements to implement changes to the Company s Licence to abstract water from the Denge Marsh, part of the Dungeness Peninsula, in order to comply with the Habitats Directive. The necessary investigations are outlined in this Section. Advice Notes regarding security measures to be undertaken at sites are compiled by the Centre for the Protection of National Infrastructure (CPNI) and issued by DEFRA. The Company has employed a specialist Consultant, approved by DEFRA, to evaluate the security of Company sites and define the work necessary to ensure they are complaint with the Advice Notes issued. The work identified is associated fully with their surveys and recommendations. Significant work has been undertaken between the Draft and Final plan and detailed scheme specific information is provided on the projects identified. The commentary explains the justification for the work and sets out the basis of the proposals including the outcome of the benefits arising from the work. For the Denge Water Treatment works the outcome has been evaluated using the Cost Benefit Analysis methodology. In accordance with the requirements of the Business Planning process the DWI have been involved in the development of the proposal for Denge and provide a formal letter of support for the scheme. The NEP and SEMD works have not been subject to Cost Benefit Analysis but conform to the instructions issued by the Environment Agency and Defra In addition changes to the plan made between the Draft and Final submission have been highlighted and Ofwat s request arising from the Draft submission have been recognised. Page 1 Section B4 - Quality Enhancements 11/11/10, 10:25:32

182 Section 1 Section 1.1 Changes from Draft to Final Changes to the Business Plan This Section of the business plan has been amended following the feedback on the Draft Business Plan from OFWAT and further guidance from the Environment Agency concerning the National Environment Programme. In line with the OFWAT observations of the Draft Plan two changes have been made. In the Draft the principle investment scheme, addressing the deterioration of the raw water at Denge and its consequent effect at customer s taps, was approached in two parts. Partly with a scheme to arrest the discharge of iron and manganese from the works into the network, and partly with a scheme to address the consequent discolouration of the water delivered. In their feedback OFWAT stated they would consider the work associated with addressing the consequence of discolouration as capital maintenance and hence this investment has been moved from this Section. Further OFWAT expressed the view that investment in flooding protection to ensure the provision of essential water supplies should be considered as an Enhanced Service Level and not resilience under the Security and Emergency Measures Direction. The investment in flooding protection has therefore also been moved from this Section. For the Draft Business Plan the Environment agency, In their letter dated 4 th of April 2008, requested the Company incorporate defined activities associated with the Draft National Environment Programme (NEP). This was to meet the requirements in DEFRA s Statement of Obligations (12/07) and take into account the draft Social and Environmental Guidance to OFWAT (February 2008). The PR09 period also covers much of the first cycle of the Water Framework Directive River Basin Management Plans ( ) and thus schemes associated with this work were also to be included in the Draft Business Plan. The Environment Agency advised at the time that more detailed information and finalisation of the NEP programme would not be available until November Thus the Company included outline costs for all activities advised in the Draft Business Plan, recognising that these were likely to change between Draft and Final versions. The Environment Agency provided the Final National Environment Programme which contained changes to the Draft version that has resulted in the movement of the Little Stour Investigation to the Supply Demand area of the Business Plan and confirmed that the Company is not required to undertake any investigations pertinent to the Water Framework Directive. In their letter dated 29 th October responding to the Draft the Business Plan the Environment Agency identified catchment and land management schemes being particularly relevant as the Company is solely reliant on groundwater sources. They believe influencing changes in land use and agricultural practice can benefit the quality of groundwater and protect future supplies. In response to this the Company has included costs for land management. Page 2 Section B4 - Quality Enhancements 11/11/10, 10:25:32

183 Section 1.2 Section OFWAT Draft Business Plan Feedback Deteriorating Raw Water Treatment and Distribution. Ofwat required caveats attached to the DWI Letters of Support to be addressed, these were Confirmation of preferred option with capex and opex costs and delivery/ completion dates Confirmation of cost benefit calculations In addition they required Reference to Cost Benefit Analysis Cost estimates Solution options considered Comments on rejected options Details of chosen option Volumes and trend analysis. Section Environmental Impacts Final NEP information Section Security and Emergency Measures Direction Separate areas of cost Clarify compliance with Advice Notes Schedule of work Description of problem Population Served Estimated costs Description of benefits Monetary valuation Section Costs of Projects Cost estimate derivation Section Cost Drivers and Reconciliation with Projects database Table of expenditure and outputs Section Misallocations Flooding Resilience Denge Network Page 3 Section B4 - Quality Enhancements 11/11/10, 10:25:32

184 Significant work has been undertaken following the Draft submission to further define the investment its drivers and cost. This work has focussed on addressing the issues outlined above and the Final Business Plan incorporates the information being sought. Page 4 Section B4 - Quality Enhancements 11/11/10, 10:25:32

185 Section 2 Denge WTW Raw Water Deterioration (DWI Scheme FLK 206) SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 5 Section B4 - Quality Enhancements 11/11/10, 10:25:32

186 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 2.1 Denge Overview SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 6 Section B4 - Quality Enhancements 11/11/10, 10:25:32

187 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 2.2 Section Review of Water Quality Key water quality parameters iron, manganese and turbidity SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 7 Section B4 - Quality Enhancements 11/11/10, 10:25:32

188 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section Secondary water quality parameters SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 8 Section B4 - Quality Enhancements 11/11/10, 10:25:32

189 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 9 Section B4 - Quality Enhancements 11/11/10, 10:25:32

190 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 10 Section B4 - Quality Enhancements 11/11/10, 10:25:32

191 Section 2.3 Overview of Potential Treatment Options SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section Oxidant type for physical / chemical iron and manganese removal SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 11 Section B4 - Quality Enhancements 11/11/10, 10:25:32

192 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section Waste Disposal SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 12 Section B4 - Quality Enhancements 11/11/10, 10:25:32

193 Section 2.4 Potential Treatment Solutions SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section Rapid Granular Media Filtration SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 13 Section B4 - Quality Enhancements 11/11/10, 10:25:32

194 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section Membrane microfiltration / ultrafiltraion SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 14 Section B4 - Quality Enhancements 11/11/10, 10:25:32

195 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 15 Section B4 - Quality Enhancements 11/11/10, 10:25:32

196 Section Biological filtration SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 16 Section B4 - Quality Enhancements 11/11/10, 10:25:32

197 Section Reverse osmosis SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 2.5 Evaluation of Treatment Options SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 17 Section B4 - Quality Enhancements 11/11/10, 10:25:32

198 Section Pros and Cons SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 18 Section B4 - Quality Enhancements 11/11/10, 10:25:40

199 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 19 Section B4 - Quality Enhancements 11/11/10, 10:25:40

200 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 20 Section B4 - Quality Enhancements 11/11/10, 10:25:40

201 Section Scoring of Options with Respect to CAPEX, OPEX and Technical Issues SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 21 Section B4 - Quality Enhancements 11/11/10, 10:25:40

202 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 22 Section B4 - Quality Enhancements 11/11/10, 10:25:40

203 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 23 Section B4 - Quality Enhancements 11/11/10, 10:25:40

204 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 24 Section B4 - Quality Enhancements 11/11/10, 10:25:40

205 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 25 Section B4 - Quality Enhancements 11/11/10, 10:25:40

206 Section Selected Options for Further Evaluation SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 2.6 Section Laboratory work Membrane Filtration Option SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 26 Section B4 - Quality Enhancements 11/11/10, 10:25:40

207 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 27 Section B4 - Quality Enhancements 11/11/10, 10:25:40

208 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 28 Section B4 - Quality Enhancements 11/11/10, 10:25:40

209 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section Granular media filtration option SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 29 Section B4 - Quality Enhancements 11/11/10, 10:25:40

210 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 2.7 Environmental Impact SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 2.8 Capital Cost Estimate SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 30 Section B4 - Quality Enhancements 11/11/10, 10:25:40

211 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 2.9 Cost Benefit Analysis SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 31 Section B4 - Quality Enhancements 11/11/10, 10:25:40

212 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 32 Section B4 - Quality Enhancements 11/11/10, 10:25:40

213 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 33 Section B4 - Quality Enhancements 11/11/10, 10:25:40

214 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 34 Section B4 - Quality Enhancements 11/11/10, 10:25:40

215 Section 2.10 Summary & Recommendations SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 35 Section B4 - Quality Enhancements 11/11/10, 10:25:40

216 Section 3 National Environment Programme The Company has worked closely with the Environment Agency in developing its obligations under the National Environment Programme. The Programme has been drawn up to meet the obligations set out in Defra s Statement of Obligations (December 07) and takes into account the draft Social and Environmental Guidance to Ofwat (February 2008). The nature conservation elements of the programme have been drawn up in conjunction with Natural England. The Final NEP guidance from the Environment Agency is shown in Appendix B4.5 and identifies the requirement to implement changes to Licence No 09/40/05/0071/G at Dungeness in order to comply with the Habitats Directive. This is the Licence for the Denge WTW. As part of the Habitats Directive Review of Consents process undertaken by the Environment Agency the Denge abstraction licence has undergone a Medium Priority site Stage 4 assessment in relation to Special Area of Conservation (SAC) and Special Protection Area (SPA) habitats/species status. The key habitat of concern under the SAC designation in relation to the company s abstraction is the perennial vegetation of stony banks. The features of the Denge SAC that are at risk of impact from the FDWS Denge source are the wetland communities of the Open Pits, (these Pits are water bodies created during the evolution of the Dungeness shingle system over the last 7000 years). The specific wetland communities of interest are a sub-feature of perennial vegetation of stony banks. The assumption is that if suitable conditions can be maintained so as to support the presence of Cladium mariscus for Pits 5,6 and 7 the conditions will be suitable for all of the wetland community species. At the end of 2007, it became apparent that the Licence used by the Environment Agency at the stage 4 determination varied significantly from that in the Companies possession as the issued licence. It has subsequently been agreed that neither versions of the Licence are fit for purpose. The consequence is that the abstraction Licence for Denge cannot be demonstrated not to be having an adverse impact on the Denge SAC or SPA and requires further investigation. This may require changes to the Licence conditions to provide protection for the protected habitats. The Company is in general agreement with the possibility of a Licence revision, provided it does not impact on the Deployable Output of the source which in turn would have ramifications for the Company s Security of Supply Index and its ability to ensure the provision of essential water supplies during prolonged periods of below average rainfall. However if any sustainability reduction were to impact on the Deployable Output, then alternative measures would need to be put in place to recover this lost volume of water before the Licence changes could be instigated thus protecting the Security of Supply for the region. The Company undertook an assessment of the impact on Deployable Output in complying with a potential changed Licence assumed by the Environment Agency. This assessment determined that under the present abstraction pattern the Deployable Output of the Denge sources would be reduced significantly. However the Company has suggested that alternative abstraction patterns may decrease any impact that currently may exist and thus comply with the requirements of the Habitats Directive, without reducing the Deployable Output of the source. Page 36 Section B4 - Quality Enhancements 11/11/10, 10:25:40

217 In addition to this arising uncertainty relating to the impact of abstraction under the Habitats Directive Review of Consents process, potential uncertainty exists in relation to the Denge s other environmental designations. Although the Denge also has Ramsar and SSSI designations, these were not required to be evaluated under the Habitats Directive Review of Consents process and therefore it has not yet been determined whether or not the abstractions have an adverse impact on the Ramsar and SSSI designated species/habitats. As a result of the Review of Consents process, the discrepancy between the Licences and the current operational regime, the Environment Agency has indicated that it requires the Company to undertake further work to demonstrate what impact current and possible future operational abstraction patterns would have on the requirements of the Habitats Directive, and thus Licence modifications to the operational constraints on a number of abstraction wells. These requirements are documented in the Environment Agency s Final WR PR09 National Environment Programme advice appended to their letter dated 28 th November 2008 and appended here (B4.5). In accordance with that advice funding is required to improve the conceptualisation of the behaviour of the aquifer and the impact of individual sources by undertaking the following activities: infill gaps in the hydrological and environmental data, and undertake a topographical survey in the vicinity of the Open Pits (the area of interest under the Habitats Directive) undertake environmental surveys of the Open Pits to determine the relationship of the concerned species to known water level changes determine the extent and pattern of abstraction that provides protection to the designated habitat/species determine the extent and pattern of abstraction that provides protection against saline intrusion as far as possible trial alternative operational regimes, with enhanced monitoring to demonstrate that the revised abstraction pattern does not infringe the ecology of the Open Pits and that the current deployable output can be maintained evaluate the medium to long-term sustainability of the Denge aquifer as a groundwater resource in the context of environmental, water quality and climate change considerations to agree licence changes that will protect the key habitats, whilst allowing the company to meet its obligations as a water supplier identify alternative water resource options in the Denge area to address any loss in Deployable Output that studies identify may be necessary development and use of a groundwater model to allow alternative strategies to be evaluated Page 37 Section B4 - Quality Enhancements 11/11/10, 10:25:40

218 These investigations would involve the following tasks: Obtain consensus on habitat/ecological concerns Meetings with Environment Agency and Natural England Collation and review of historical data relating to the habitats and ecology of concern Identification of scope of required field investigations Site investigations and monitoring to verify ecological status and dependencies Ecological surveys Installation and instrumentation of monitoring stations Data collection and analysis Evaluation of impact of abstraction on ecological interests on basis of assessment of data Contribution to the development of a groundwater model that will be able to be used as a management tool Determination of an abstraction regime that provides protection to the designated habitats and species which will also minimise potential for saline intrusion To support the Environment Agency in developing a management plan for the operation of the Denge Marsh Sewer to ensure water levels are maintained across the beach The long-term sustainability of the Denge abstraction needs to be evaluated in the context of both current and modified abstraction regimes in the face of changes in recharge and evaporation resulting from climate change. In order to explore the medium to long-term impact of alternative abstraction regimes and of climate change on the available groundwater resource, a simulation tool is required. It is proposed that this tool should comprise a three dimensional groundwater flow and quality model. It is intended that this will facilitate an assessment of the impact of climate change on the available groundwater resource from both a volumetric and water quality perspective. At least two numerical groundwater models of the Denge or part of the Denge have previously been developed: one for CEMEX the gravel extractors and one for British Energy the nuclear power station operators. However, the former has been determined not to be of use in relation to groundwater management and the latter was limited in extent to the vicinity of Dungeness B power station. Consequently, it is unlikely that either of these models would be suitable for evaluating the sustainability of Denge aquifer as a whole and although they are likely to provide valuable information and will be consulted, it has been determined a new ground water model will be needed. Should the level of sustainable abstraction identified from the modelling exercises not meet supply requirements, alternative resource options will need to be identified. Alternative resource options appraisals will be undertaken in parallel with groundwater model development. The costs for the study have been generated by a cost estimate from Atkins, based on the scope identified above. The study cost is 650k. The cost breakdown is provided below. These costs are inclusive of indirect costs, Company overhead and risk. Page 38 Section B4 - Quality Enhancements 11/11/10, 10:25:40

219 Activity Cost Obtain consensus on habitat/ecological concerns Meetings with Environment Agency, Natural England & other stakeholders Collation and review of historical data relating to the habitats and ecology of concern 10,000 15,000 Scoping field investigations 5,000 Site investigations to verify ecological status and dependencies Ecological surveys 30,000 Installation and instrumentation of monitoring stations 40,000 Data collection and analysis 25,000 Evaluation of impact of abstraction on ecological interests 15,000 Determination of an abstraction regimes that provides protection to designated habitats/species 15,000 Develop dual density groundwater model of Denge aquifer (& possibly West Denge) Sub Total 155,000 Scope model characteristics and objectives 10,000 Data collation & processing 20,000 Borehole Drilling 50,000 Monitoring borehole drilling to verify underlying geology/hydrogeology and water quality profiles 40,000 Model Conceptualisation 20,000 Model build 50,000 Calibration 40,000 Scenario runs 20,000 Sub Total 250,000 Denge investigations MoD liaison and scoping 10,000 Contaminated land site investigation/monitoring hole drilling 80,000 Monitoring equipment 30,000 Test pumping 25,000 Monitoring, water quality sampling and laboratory analysis 20,000 Data analysis and determination of resource 15,000 Page 39 Section B4 - Quality Enhancements 11/11/10, 10:25:40

220 Activity Cost Cost/benefit analysis of source development/treatment 10,000 Effluent recharge/deeper aquifer options appraisal Sub Total 190,000 Assess viability of options 5,000 If appropriate, undertake any investigative works to improve appraisal 30,000 Assess potential impact on supply-demand balance 5,000 Identify option constraints i.e. environmental and social 5,000 Quantify financial costs 5,000 Cost/benefit analysis of option development 5,000 Sub Total 55,000 Total Study Cost 650,000 Page 40 Section B4 - Quality Enhancements 11/11/10, 10:25:40

221 Section 4 Catchment Management Catchment management is a way of managing the input of pollutants so that less treatment will be required in the future and the risk of pollution incidents are decreased. The Water Framework Directive Article 7 designation of drinking water protected areas will go some way to achieving this. The Company understands these areas are to be based on current designated source protection zones by the Environment Agency and thus understand the areas of concern for almost all of the Company s sources. Catchment assessment forms an integral part of drinking water safety plans and these will be refined as more information becomes available. Managing the input of potential and actual pollutants is a time consuming task, requiring regular liaison with a wide range of stakeholders, ranging from farmers to petrol stations as well as industrial premises. Ensuring that the relevant people are aware they are operating within a source protection zone is the first step in raising awareness. Water Companies only have limited powers with regard to entry to premises, and must also rely on the Environment Agency, who for example undertake farm visits, to assess the pollution potential where the Company has no right of access. Almost the entire company area contains unconfined aquifers that feed Company sources with water, thus they are prone to surface pollution events, both point and diffuse. The Company already has a good appreciation of activities that have proved problematical in the past and maintains a good liaison with local land owners and tenant farmers. The proposal is to increase activity in this area by creating the role of Catchment Management Officer, this role s responsibility will be a systematic audit of potentially polluting activities within each sources protection zone, liaison with the Environment Agency and other parties by raising awareness and maintaining updated information for use in the Drinking Water Safety Plans. A full time role is not justified, but the Company has included a 50% FTE at an additional Opex cost of 22.5k per annum to deliver the benefits described above. Page 41 Section B4 - Quality Enhancements 11/11/10, 10:25:40

222 Section 5 Security and Emergency Measures Direction SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 42 Section B4 - Quality Enhancements 11/11/10, 10:25:40

223 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 43 Section B4 - Quality Enhancements 11/11/10, 10:25:40

224 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 44 Section B4 - Quality Enhancements 11/11/10, 10:25:40

225 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 45 Section B4 - Quality Enhancements 11/11/10, 10:25:40

226 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 46 Section B4 - Quality Enhancements 11/11/10, 10:25:40

227 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 47 Section B4 - Quality Enhancements 11/11/10, 10:25:40

228 B4 Table Commentaries Table B4.1: Water Service Quality Enhancement Outputs and Activity AMP4 Data Year 07/08 Line 1 No AMP4 Improvements funded, thus =0 Line 2 No AMP4 Improvements funded, thus =0 Line 3 The AMP4 SEMD output was 1 for a combination of activities. This work will be complete by 2009/10 and is shown accordingly. Line 4 to 12 No AMP4 network improvements funded, thus =0 Line 13 AMP4 Output was 1 investigation (Little Stour); work is complete 08/09; thus =1 Line 14 AMP5 Data FD output was 2 solutions - Bushey Ruff & Buckland Mill; Buckland Mill delivered. Bushey Ruff is subject to an agreed log down between the company and Ofwat, thus no delivery shown. Lines 1-2 Line 3 Line 13 The quality improvement work at Denge WTW is forecast to be complete in year 2. The non RO process stream has a capacity of 7.2 Ml/d. The SEMD requirements are shown as three deliverables, physical, electronic and control room improvements. The Environment Agency has advised a Denge NEP studies for AMP5. Table B4.3: Water Service Quality Enhancement Expenditure Projections AMP4 Data Year 07/08 Line 1 JR08 - Table 37, line 1; however, this was infra spend so has been allocated to line 9; line 1 thus = 0 Line 2 No environmental studies on-going, thus = 0 Line 3 No drinking water programme funded in AMP4; thus = 0 Line 4 JR08 - Table 37, line 15 & 16 Line 5 JR08 - Table 37, line 13 Line 9 JR08 - Table 37, line 1; this was infra spend so has been allocated to line 9; Line 10 to 15 No AMP4 Infra/Distribution Quality Funding, thus = 0 for all lines Line 19 No AMP3 schemes resulting in new opex in 07/08; 08/09; 09/10 Line 20 No AMP3 schemes resulting in new opex in 07/08; 08/09; 09/10 Line 23 No AMP4 Infra/Treatment Quality Funding, thus = 0 Page 48 Section B4 - Quality Enhancements 11/11/10, 10:25:40

229 Line 24 No AMP4 Infra/Distribution Quality Funding, thus = 0 Line 25 Line 26 Year 08/09 09/10 JR08 Table 37 line 8; 5k from Buckland Mill No Opex arising from SEMD expenditure Line 1 No AMP3 projects still active, thus = 0 Line 2 No environmental studies on-going, thus = 0 Line 3 No drinking water programme funded in AMP4; thus = 0 Line 4-5 Line 9 Data calculated from current year position and forecast to end of 08/09 and 09/10. No AMP4 Infra/Distribution Quality Funding, thus = 0 for all lines Line 10 to 13 No AMP4 Infra/Distribution Quality Funding, thus = 0 for all lines Line 14 Infrastructure expenditure calculated from current year position and forecast to end of 08/09 and 09/10. Line 15 No AMP4 Infra SEMD funding, thus = 0 Line 19 No AMP3 schemes resulting in new opex in 07/08; 08/09; 09/10 Line 20 No AMP3 schemes resulting in new opex in 07/08; 08/09; 09/10 Line 23 No AMP4 Infra/Treatment Quality Funding, thus = 0 Line 24 No AMP4 Infra/Distribution Quality Funding, thus = 0 Line 25 Buckland Mill in operation for all of 2008/09; cost of operation estimated at 26k; Dover Priory/Cow lane likely to be in operation for 50% of the year at a similar costs, thus 13k for the year = 0.039m total for 08/09 and 0.052m total in 09/10. Line 26 AMP5 Data No Opex arising from SEMD expenditure Line 1 No AMP4 projects still active, thus = 0 Line 2 No environmental studies expected to be on-going, thus = 0 Line 3 Line 4 Line 5 Line 23 Line 25 Line 26 The quality improvement work at Denge WTW is forecast across 2 years. The Environment Agency has advised one NEP studies in AMP5. The SEMD expenditure are included. Additional Opex is from the operation of the modifications to Denge WTW. Additional Opex for Land Management liaison to improve pollution protection. Additional Opex for management of SEMD electronic and control systems. Page 49 Section B4 - Quality Enhancements 11/11/10, 10:25:40

230 APPENDIX B4.1 DENGE PROVISIONAL PROGRAMME SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix A 11/11/10, 10:25:40

231 APPENDIX B4.2 DENGE PROVISIONAL PROCESS FLOW DIAGRAM SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix B 11/11/10, 10:25:40

232 APPENDIX B4.3 DENGE DRAFT LAYOUT SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix C 11/11/10, 10:25:40

233 APPENDIX B4.4 DENGE COST ESTIMATION SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix D 11/11/10, 10:25:40

234 APPENDIX B4.5 FINAL WR PR09 NEP SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix E 11/11/10, 10:25:40

235 APPENDIX B4.6 SEMD COSTS BY ELEMENT SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix F 11/11/10, 10:25:40

236 APPENDIX B4.7 SEMD COSTS BY SITE SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix G 11/11/10, 10:25:40

237 APPENDIX B4.8 SEMD SITE SURVEYS (RESTRICTED) SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix H (RESTRICTED) 11/11/10, 10:25:40

238 APPENDIX B4.9 SEMD SITE EQUIPMENT (RESTRICTED) SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix I (RESTRICTED) 11/11/10, 10:25:40

239 APPENDIX B4.10 AN10 CONTROL ROOM (RESTRICTED) SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section B4 - Quality Enhancements Appendix C 11/11/10, 10:25:40

240 Company Commentary Part B: Section B5: Supporting Information Maintaining the supply/demand balance Contents Executive Summary... 1 Section 1 Changes between draft and final plans... 4 Section 2 Water Service Strategy... 9 Section 2.1 General Information... 9 Section Operating Area... 9 Section Water Resources Zones Section 2.2 Water Supply Section Deployable output Section Outage Section Raw and potable water transfers and bulk supplies Section 2.3 Water Demand Section Demand forecasts Section Metering strategy Section Water efficiency strategy Section Leakage strategy Section 2.4 Climate Change Section Supply side Section Demand side Section Impact on supply/demand balance Section 2.5 Target Headroom Section Choice of method Section Risk and uncertainty in supply and demand Section Results of the Headroom Assessment Section 2.6 Baseline supply/demand balance Section 2.7 Options Appraisal Section Approach for option appraisal Section Unconstrained options list Section Feasible options list Section Economic Appraisal of Options Section Overall options list Section Optimisation Section 2.8 Final Water Resources Strategy Section Final supply/demand balance Section Contingency plan / sensitivity analysis Section Regional solutions Section Carbon emissions Page i Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

241 Section 3 Expenditure implications of maintaining the supply / demand balance Section Studies Section Leakage schemes Section Metering, Tariffs and Water Efficiency Section Supply/Demand Expenditure Projections Section 4 New Developments and Growth Section 4.1 Whitfield Development Section 4.2 Developer Led Activity Section 4.3 Costs Section Whitfield Development Section New Connections Section New Mains Section 5 Cost Benefit Analysis Section 6 Balance of Risk and Customer Affordability Section 7 Programme Delivery Table Commentaries Page ii Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

242 Executive Summary The Company faces significant challenges in maintaining the supply/demand balance over the planning period; continued growth, the uncertainty of demand management, the impact of climate change on existing resources and the complexity of developing new sources of water are all significant features of the planning period. In view of the Company s water scarcity status and Governments views on areas designated as suffering from water stress, maintaining the focus on demand management is an essential component of the final Water Resources Management Plan and accordingly the supply/demand element of the business plan. It is a priority for the Company and the long-term security of supply that customers are supported in minimising their consumption of water. Demand management measures are, therefore, a central plank in the investment plan for 2010 to 2015, and this means the Company will be able to ascertain if substantially reduced consumption is achievable and sustainable in the longer term. Accelerating the current metering programme is in direct response to these drivers. Further, introducing a socially-responsible stepped tariff for water charges is being promoted by the Company for AMP5 as this is a low-cost scheme compared to the alternative of new resource development. In promoting these demand driven solutions, the Company recognises the need to be sensitive to any issues of affordability that may affect customers and the development of the tariff proposals will be undertaken in consultation with appropriate regulators and stakeholders. The key components of the plan for AMP5 are described below. Full metering (96%) by April 2012 Successful in its application for Area of Water Scarcity status in March 2006, the Company has moved from a change of hands strategy to a selective metering programme based on zonal metering. Following Ofwat s acceptance of the AMP4 metering log-up application, the Company is accelerating metering delivery to April 2012 rather than 2015 as originally planned. The accelerated strategy reflects a number of drivers: Support from customers who view metering as the fairest way of paying for water; The contribution earlier metering provides to the supply/demand balance; The benefits arising from reducing the environmental impacts of the Company s operation and empowering customers to do the same an area the willingness to pay surveys showed strong customer support for; Demonstrating the Company s commitment to metering as part of a wider demand reduction strategy; Establishing full metering to provide a platform from which other water efficient measures can be delivered, such as stepped-tariff, but also other measures such as retrofit trials etc. Implementation of a Company-wide socially responsible stepped tariff from April 2013 As detailed in its SDS, draft WRMP and Business Plan, the Company will roll out the stepped tariff scheme which will provide the Company and the water industry with valuable experience and data on how customers respond to tariffs in the short and medium term. This knowledge is essential for longer term supply and demand planning. This scheme is key to achieving the Company s aspirational target of 120 PCC by However, there is considerable uncertainty around customers response to demand management measures; therefore, the Company has decided to forecast demand based on a Page 1 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

243 Per Capita Consumption of 130l/person/day. By modelling revenue based on 130 PCC rather than 120 PCC, the Company is seeking to appropriately balance the impact on customer bills against the uncertainty in demand and Company income. This position has been approved by the Board as part of the overall strategy to achieve the right balancing between Company risk and the impact on customer bills. If the target of 120 PCC is not achieved by 2015, the Company has the option to explore changes to the tariff mechanism to stimulate further customer reductions to achieve the 120 PCC target. Achieve water efficiency target of 0.07Ml/d per year The Company has incorporated the 0.07 Ml/day/year Water Efficiency Target set by Ofwat into its final Business Plan projections. Water efficiency is a key part of the Company s supply demand strategy and intrinsically linked with the metering programme, tariff scheme and AMR trial. An automated meter reading trial for existing and new internal customers The Company will undertake an AMR trial as part of its demand management strategy. This will help develop the future vision of customer service, while keeping the Company abreast of new technology. The Company will trial AMR technology in advance, in order to properly understand the benefits before a Company-wide roll out. It also gives the possibility to explore commercial tariffs, and identify supply pipe leakage. Leakage reduction to 7.5Ml/d The Company proposes to follow the same leakage strategy as AMP4. A 0.5Ml/d reduction from the AMP4 target of 8Ml/d will maintain a downward track with the view of achieving SELL over 10 years. This is supported by the least cost modelling exercise where leakage options are selected and by customers views: 96% of customers believe that Folkestone & Dover should demonstrate their commitment to water conservation by reducing the amount of leakage. The AMP5 leakage strategy is consistent with the Company s SDS and energy efficiency targets. Continuation of the AMP4 NEP study for the Little Stour catchment, in combination with Southern Water and South East Water Following on from the impact assessment carried out during AMP4, there is a need to evaluate various options for improving the environmental status of the river. This may be by increasing flows in the channel or by improving channel conditions such that the ecology benefits within the current flow regime. Folkestone and Dover Water, South East Water and Southern Water are seeking joint funding in PR09 for this options appraisal. Detailed study of the Whitfield development The Company has identified the area of Whitfield as requiring a key strategic network reinforcement in order to be able to accommodate the planned housing growth. However, the Company thinks it is unlikely that the development will be fully constructed during AMP5 in view of the current economic climate. The Company has made provision for further detailed design and network modelling studies to be undertaken during AMP5 to support future funding from developers, local government and regulators. The gross costs of the AMP5 Supply/Demand programme are 8.2m of capital investment and 0.52m of additional Opex by This is a significant reduction in capital expenditure from the draft plan, where the supply demand total was 20.7m. The key reductions are reduced Page 2 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

244 new development activity resulting in lower new connection and new mains expenditure; the removal of the Whitfield development from the final plan as described above and a reduced programme of investment to deliver the supply demand balance as a result of the changes to the Water Resource plan described above. Further details of the draft to final changes are provided in the following section and Table 3. Page 3 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

245 Section 1 Changes between draft and final plans Following on from the public consultation and additional work on the Water Resources Management Plan, significant changes have been made to some of the components of the supply/demand forecast. The following table shows how the draft plan has changed in response to the comments received. Each component has been graded (none, minor, major) depending on the degree to which the final strategy and overall plan are affected. Categories Draft WRMP Final WRMP Impact Deployable Output Average conditions = 51.15Ml/d Average conditions = 51.15Ml/d None Peak conditions = 65.09Ml/d Peak conditions = 65.09Ml/d Sustainability No loss of DO No loss of DO None Reductions Water Resource 2 zones: Denge and Hills 1 zone whole supply area Minor Zone WRSE WRSE results not available WRSE results taken into account Minor Outage Average conditions = 3.6Ml/d Average conditions = 1.84Ml/d Minor Peak conditions = 2.2Ml/d Confidence level at 95% Peak conditions = 1.97Ml/d Confidence level at 95% Metering 96% metering by end of % metering by April 2012 Minor Tariff Implementation of socially responsible stepped tariff in 2015 Implementation of socially responsible stepped tariff by April 2013 Minor Water efficiency Baseline activities Inclusion of water efficiency target Minor Leakage Reduction in supply pipe leakage Implementation of leakage options Calculation of ELL Reduction in supply pipe leakage Calculation of SELL Minor Population forecast Household forecast Commercial forecast Consumption forecast Shared resources Climate Change Experian most-likely scenario: 15% increase between 2010 and 2035 Experian most-likely scenario: 28% increase between 2010 and 2035 Closure of Dungeness B in 2020 (power station) Experian policy scenario: 13% increase between 2010 and 2035 Experian policy scenario: 26% increase between 2010 and 2035 Closure of Dungeness B in 2020 (power station) 130 PCC Aspirational target of 120 PCC Demand forecast based on 130 PCC in 2015 and 120 PCC by 2020 Renewal of bulk imports agreements with South East Water and Southern Water. Drought curve methodology: Average conditions = 10.05Ml/d Peak conditions = 19.23Ml/d Renewal of bulk imports agreements with South East Water and Southern Water, included in baseline. UKCIP methodology: Average conditions = 4.95Ml/d Peak conditions = 5.57Ml/d Minor Minor Minor Minor Major Major Headroom Calculated for 2 zones. Calculated for 1 zone. Major Options Appraisal 27 feasible options Risk included in least cost optimisation model 27 feasible options Followed Environment Agency methodology. Major Table 1: Summary of the changes Page 4 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

246 Incorporating the changes referred to in the above table and maintaining the demand led strategy outlined at draft, the Company has a positive supply/demand position throughout the period of the plan. Section 1.1 Material changes The Company made significant changes between draft and final to the four components listed below. Shared resources The Company has renewed its current bulk supply agreements with South East Water and Southern Water. The three water companies agreed they would include the transfers in their supply/demand baseline for the whole of the planning period. This provides an extra 3.33Ml/d Average Deployable Output of Water Available for Use. Climate change The Company commissioned Atkins to develop a climate change model following the UKCIP methodology for the Company, South East Water and Southern Water. Atkins has completed the work and the modelling results are included in the final plan. These are based on individual water level changes at each source, based on the modelled output. The Atkins model outputs have been produced for low, medium and high impacts. The Company used the medium impact figures of 4.95Ml/d at average and 5.57Ml/d at peak in its final plan, and the low and high impact figures for the climate change component in the headroom calculation. Climate change estimates Final Business Plan Reduction at average Reduction at peak Atkins High impact Ml/d Ml/d Atkins Medium impact Atkins Low impact 0.97 Ml/d 0 Ml/d Draft Business Plan Reduction at average Reduction at peak 4.95 Ml/d 5.57 Ml/d Ml/d Ml/d Table 2: Climate Change estimates The revised climate change figures are included in the baseline supply/demand balance. Overall, the revised figures have a significant positive impact on the Water Available for Use. Headroom The Company has revised its assessment of target headroom at Company level. The results show no significant difference with AMP4 from draft headroom values, which means that the Company is proposing a similar level of risk. Options Appraisal The Company followed the Environment Agency guidelines for its EBSD modelling. The Environment Agency guidelines suggest that the risk of not delivering the estimated volume should be included in headroom. Page 5 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

247 Section 1.2 Changes to Supply Demand Investment Table 3 shows the changes in the Supply/Demand investment programme for AMP5 between the draft and final Business Plans. The changes in the programme reflect the changes in the supply/demand forecast, which is in surplus during the AMP5 period. Schemes Draft plan Final plan Comments Selective Metering Included in baseline 96% by end of 2012 CAPEX 5,532k OPEX 1,601k CHOICE To implement by 2016 Water efficiency target Leakage reduction Study - AMR trial Study - Little Stour Whitfield development New mains & connections BARI continuation DEAI continuation Study - Desalination Study - Hythe Gravels 301 BARI extension CAPEX 123k OPEX 252k Not included 0.1Ml/d by 2015 CAPEX 25k OPEX 0k To complete by 2015 CAPEX 503k OPEX 32k In Quality programme To complete by 2015 To implement by 2015 CAPEX 3,142k OPEX 0 Gross CAPEX 7,465k Net CAPEX 3,447k Ongoing CAPEX 0 OPEX in base Ongoing CAPEX 0 OPEX in base To complete by 2015 CAPEX 615k OPEX 0 To complete by 2015 CAPEX 115k OPEX 0 To complete by 2015 CAPEX 2,800k OPEX 0 Page 6 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25 Included in baseline 96% by April 2012 CAPEX 3,550k OPEX 801k To implement in April 2013 CAPEX 225k OPEX 290k Achieve 0.07Ml/d reduction per year CAPEX 0 OPEX 209k 0.5Ml/d by 2015 CAPEX 86k OPEX 0k To complete by 2015 CAPEX 280k OPEX 28k Moved to SD programme To complete by 2015 CAPEX 180k OPEX 0 Replaced by study to complete by 2015 CAPEX 175k OPEX 0 Gross CAPEX 3,669k Net CAPEX 535k Ongoing CAPEX 0 OPEX in base Ongoing CAPEX 0 OPEX in base CAPEX 0 OPEX 0 CAPEX 0 OPEX 0 CAPEX 0 OPEX 0 AMP4 log-metering up approved, reducing programme in AMP5 Scope reviewed in light of Lydd pilot trial Additional requirement Full investment removed from FBP as risk shouldn t be paid for by customers Reduced housing growth forecast Included in baseline for the whole planning period Included in baseline for the whole planning period Excluded, as not necessary at this stage given supply demand balance Excluded, as not necessary at this stage given supply demand balance Not required

248 629 SLYE To complete by 2015 CAPEX 13k OPEX Installation of new PRVs 379 New leakage technology To complete by 2015 CAPEX 40k OPEX 0.25 To complete by 2015 CAPEX 50k OPEX 176 CAPEX 0 OPEX 0 CAPEX 0 OPEX 0 Page 7 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25 Not required Not required Not required CAPEX 0 OPEX 0 Table 3: Changes to the supply/demand investment programme Section 1.3 Response to Ofwat challenges The Company has taken into account Ofwat s comments on the draft Business Plan. Table 4 explains how the Company has incorporated the comments in its final plan. Areas where Ofwat challenged the draft plan Metering You have proposed to accelerate your full metering programme for completion by Please provide us with an explanation of the reasons for accelerating this programme, and explain the benefits that it delivers. Company s The Company has provided explanation of the reasons for accelerating the metering programme in the log up application, which has been accepted by response Ofwat. The details of the benefits of metering are explained in section Climate change Climate change is a significant driver of investment. Where climate change has a significant impact on investment, we expect companies to go beyond the most basic approach in the Environment Agency's guidance, and follow one of the more sophisticated approaches that the EA suggests. You will need to consider the timetable for completing this further analysis. Company s The Company used the recommended EA s methodology to assess climate response change in its final pan. This is detailed in section 2.4. Water In section of your report, you outline your water efficiency strategy. You should ensure that in your final plan, your strategy meets the requirements of efficiency the water efficiency targets we will set this autumn. You should also ensure that you take into account other pressures to reduce consumption such as, the Code for Sustainable Homes and Future Water. Company s The Company has included the Water Efficiency Target set by Ofwat in its final plan. This is detailed in section response The Company used the data provided by the Code for Sustainable Homes and the Market Transformation Programme on appliances volumes to derive its Per Capita Consumption base year estimates and forecasts. The Company s strategy is in line with the Government s strategy outlined in its Future Water report (p.22),: - Reducing per capita consumption to an average of 130 l/person/d by 2030, or possibly to 120 l/person/day. - Encouraging demand management to protect customer and environmental needs. - Low leakage levels to meet optimum balance of economic, environmental and other costs. - Water efficiency playing a prominent role in achieving a sustainable supply/demand balance. Logging up We have sent you a query to determine whether you have delivered the required outputs as detailed in 10W. We will continue to contact you separately and down on this issue.

249 Company s response (S)ELL Company s response Leakage Company s response Data errors table 5.1 Company s response DWRMP feedback Company s response The Company has produced a log up paper, which has been approved by Ofwat. We do not consider your ELL to be robust, and it is not clear to us how your future leakage targets have been derived from your ELL. There are a number of issues which we expect you to include in your SELL with your final business plan. Examples of these are: Taking into account externalities. Please refer to our guidance in RD 02/08. Undertaking sensitivity testing. Update your base year. Taking account of your expected change in efficiency both of your leakage management activity, and your production and treatment of water (including energy). If there is more scope to become efficient in one of these activities than in the other, then this could change your SELL. The Company has revised its ELL assessment. The base year has been updated to 2007/08. The Company has followed the Ofwat guidance on how to account for leakage externalities and has carried out sensitivity analysis around the SELL. This is detailed in section C4 of the Business Plan. We are concerned that you may be reducing leakage in response to a message from customers that if they are to reduce their consumption, then they expect the company to reduce leakage. You need to investigate customers willingness to pay for leakage reductions, or ensure that this is a least cost option. Customers have expressed their support to further leakage reduction through the survey recently undertaken by the Company. Leakage options have been proven to be amongst the least cost options via the EBSD modelling. There are errors in some of the data lines in table 5.1. Your reporter highlights these in his commentary. You should correct these errors in your final plan. This has been resolved for the final plan The feedback given here is in addition to the feedback we provided on your draft water resource management plan. In your final business plan, you should take into account both sets of feedback. The Company has taken account of the representations made on its draft Water Resources Management Plan; The Company has explained how it has included the comments in its Statement of Response, published in January Table 4: Company s response to Ofwat comments on the dbp Page 8 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

250 Section 2 Water Service Strategy Section 2.1 General Information Section Operating Area Folkestone & Dover Water Services is a water supply company providing a service to the towns of Folkestone and Dover, together with surrounding rural areas including Romney Marsh and Dungeness (420 km 2 ). The area has a population of approximately 160,000 people and supplies 43 mega litres of water a day to more than 71,000 properties. The Company is bordered by two other water companies Southern Water and South East Water (Mid Kent Water recently merged with South-East Water). The Company s supply area has major rivers or reservoirs from which water can be drawn and relies on groundwater in local chalk and gravel beds. Boreholes in the chalk of the North Downs provide a major source of water and additional water is obtained from the gravels in the Denge peninsula on Romney Marsh. These water sources are of good quality and provide sufficient water to meet all current customers needs. The Company operates in one of the driest areas of England and in March 2006, was the first water company in the Country to apply for and be granted Area of Water Scarcity status by the Government. This enabled the Company to introduce compulsory metering and a phased metering programme is underway with the aim of installing water meters to nearly all customers by April 2012 (only properties where meters cannot be installed for technical reasons will be excluded). Metering has the effect of raising awareness of how much water is used and water savings of 10-15% are made by households with meters. Metering will therefore play a central role in the drive to improve water efficiency and achieve a sustainable long term supply. Demand for water is set to rise in an area where there is likely to be significant economic growth and an increasing population. The Government has approved major housing development in Ashford and the Thames Gateway and pressure is mounting for further significant new housing stock in the South-East. Approximately 23,000 new houses have been allocated to the Company s area over the next 30 years in the latest South East Plan. In 2009 the fast rail link from Folkestone to London will open and plans are also being progressed for the expansion of Dover Port and the regeneration of Folkestone Harbour. All these activities will inevitably increase demand for water and the Company has a statutory responsibility to satisfy demand from new housing and support economic prosperity for the area by meeting the needs of industry. At the same time, it is important the Company takes into account the impacts of global warming and climate change to ensure that the plan is robust to reductions in the amount of water available and the increased demand for water that is likely to result. The Company is also very conscious of the need to reduce the environmental impacts of its own operations, including the Company s carbon footprint. Page 9 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

251 Section Water Resources Zones A resource zone is the largest possible area in which all water resources, including imports and exports, can be shared and hence the zone in which all customers experiences the same risk of supply failure from a resource shortfall. The Denge Security Main allows the transfer of treated water from the Hills to the Denge Area and effectively integrates the supply system across the Company s area. The Company believes that moving to one resource zone complies with the Environment Agency s definition. The Environment Agency agreed to the change, as indicated to the Company in their letter received on the 29 th of October The final Water Resources Management Plan and final Business Plan have been prepared on the basis of a single company-wide water resource zone, as shown in Figure 1. Figure 1: Map of Supply Area Page 10 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

252 Section 2.2 Water Supply Section Deployable output The current source yield assessment methodology is based on the earlier approaches outlined by UKWIR in This methodology is focused on determining deployable outputs under drought conditions only. Since the 2002/03 submission, there has been no period during which water levels were lower in the Company s supply area than the last minima in However, there has been an extended period (autumn 2003 to summer 2006) of low recharge, which has placed a degree of pressure on source performance. The highest demand was seen in 2003, a year when the water levels dropped to relatively low levels. The Deployable Output (DO) of sources and groups of sources has been reviewed and updated where appropriate. A number of schemes that have been implemented during the current AMP4 period have also resulted in changes in DO. These include a mixture of licence variations arising from the Memorandum of Understanding (MOU) signed by the Environment Agency and the Company in November 2004, outstanding AMP3 schemes and AMP4 projects. Although some new schemes, implemented as a result of the MOU, have not currently been fully commissioned, they are in an operational condition, subject only to final quality testing. Hence, they are all accounted for in the new DO reference year values which are 2007/08 for this DO assessment. Following the process of adjustment of the current (2007/08) deployable outputs, the results were compared with those projected for the same year in 2002/03. It was found that there had been several downward changes to DO. Source Output and Water Level Data Since the PR04 submission, there has been no period during which water levels were lower in the Company s supply area than the last minima in However, there has been an extended period (autumn 2003 to summer 2006) of low recharge, which has placed a degree of pressure on source performance. The highest demand was seen in 2003, a year when water levels in the local aquifer dropped to relatively low elevations. Water level data was available from the Company s telemetry system (both live and archived). This data was extracted from the telemetry system and is held locally within the Water Resources electronic filing system (e.g. Excel workbooks). Excel based tools were developed to take weekly output and water level data, average it to monthly figures and plot the results in the form of Summary Diagrams. The reliability of the telemetry data for water levels has been verified with manual dips where available or by comparison to previous water level data. Site information, such as pump duty and depth settings are available from the Company s Operations Manuals. Asset data and information gaps were filled by direct communication with Operational staff. Station Files, Drawings, Notes and Existing SRO Diagrams A report on the DO of all the Company s sources was published at the time of or just following the AMP4 business plan submission. This documentation provides the basis for the current review. In addition to these files, new information arising from recent project work, downhole Page 11 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

253 inspections and other activities have also been utilised in determining the latest DO figures. During the DO review, if there was insufficient or conflicting information, additional data was sought. All such correspondence was referenced appropriately. Information acquired via electronic correspondence was also documented and referenced similarly. All new data collected were filled as appropriate. This new combined body of data was used to determine the water level and pumping rate constraints for each source and/or borehole being reviewed. These assessments confirmed the previous information and no revisions to existing individual DO s were made as the pumping water levels were above previous minima. Climate Change The impacts of climate change on DO have been the subject of a separate assessment. DO Uncertainty It is important that the degree of uncertainty is expressed in both the DO figures and in the anticipated impacts due to climate change. This work will be conducted as part of the Headroom assessment of the Supply-Demand Balance. Splitting of Group Licences Where the sum of the individual sourcework DOs in a licence group is greater than the maximum licensed abstraction rate for that group, the individual source DOs of one or more of the group has been adjusted downwards to ensure compliance with that licence. Allowances for point source pollution and deteriorating raw water quality Short-term outages and longer term uncertainty from the impact of pollution incidents have been taken into account in both Outage and Headroom calculations. DO changes post AMP4 base year A number of schemes have been implemented during the current AMP4 period and have resulted in changes in DO. These include a mixture of licence variations arising from the MOU signed by the Environment Agency and the Company in November 2004, and outstanding AMP3 schemes and AMP4 projects. Although some new schemes, implemented as a result of the MOU, have not currently been fully commissioned, they are in an operational condition, subject only to final quality testing. Hence they are all accounted for in the new DO reference year values. Table 5 shows those sources where there has been a decrease in DO and Table 6 shows those where there has been an increase. No further changes are anticipated before the end of this AMP period. Page 12 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

254 Source works Average Volume Change Peak Volume Change Notes SOTT Treatment losses from new membrane treatment plant at 6% SLYE New dry year licence restriction under MOU and additional treatment losses at 4% - AMP4 base year value was 7 Ml/d SDRE Treatment losses at 4% from new membrane treatment plant SDEN 0 1 Correction to DO where recent operational experience has revealed that the total output for this Group is restricted at peak by infrastructure SSTM Correction to DO where recent operational experience has revealed that combined output from the North Dover sources is restricted by infrastructure at peak SDNG Treatment losses from new membrane treatment plant SBLU Borehole damage by earthquake that affected Folkestone on 28 April 2007 as confirmed by CCTV inspection on 25 June 2007 Table 5: Sources showing decreases in DO Source works Average Volume Change Peak Volume Change SHOL Notes Network modification to route raw water to new treatment works will result in removal of previous network constraint SPRI Licence variation under MOU SBUC 4 4 Licence variation under MOU and consequent development of new source SCOW Licence variation under MOU and consequent development of new source. Previous baseline DO was 0Ml/d. Subsequently it was projected, post commissioning, at 2Ml/d short of licence for drought at both average and peak, based on the precautionary approach. That value is now considered too pessimistic and potentially misleading. The DO is therefore now estimated to be 80% of licence. Table 6 Sources showing increases in DO Asset failure and DO Asset failure was not considered to be relevant to changes in DO. Equipment failures, such as pump failure, are taken into account via outage and are only short term losses. The status of the boreholes was taken into account in the asset condition revaluation, and where appropriate, will lead to capital maintenance for repair/replacement. Asset failure due to changing water quality is accounted for in headroom. DO statutory adjustments No sustainability reductions or statutory adjustments have been made for the 2007/08 DO Assessment. Page 13 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

255 Drought abstraction figures In accordance with the Drought Management Plan 2007, the proposed abstraction figures are displayed in Table 7. Drought DO (Ml/d) Source Average Peak Average Peak Proposed Drought Abstraction (Ml/d) Change Average Change Peak SDRE SLYE SBUC SHOL SSTO Total Table 7: Abstraction figures under Drought Sustainability reductions Comments Release of restricted flow constraint Release of restricted flow constraint Restoration of restricted peak capacity Release of restricted yield Release of restricted yield Sustainability reductions have taken place with licence changes at SLOW, SDRE and SLYE implemented in July 2006 as part of the Memorandum of Understanding (MOU) for the River Dour. The Company also has new licences for SPRI, SCOW and SBUC, as part of the MOU, which reduces up-catchment abstraction and increases down-catchment abstraction. PR09 Deployable Output In the draft Water Resources Management Plan, the DO assessment was reported for two water resources zones. Following agreement with the Environment Agency, which was certified with a letter on 29 th October 2008, the two resource zones were merged into one company level zone. Following the re-evaluation of the base year (2007/08) deployable outputs, the results were compared with the equivalent AMP4 base year results, as shown in Table 8. It was found that there have been changes, the reasons of which are detailed in a source by source basis in the section below. Company Level Equiv. AMP4 Position: Ave. DO Equiv. AMP4 Position: Peak DO Current Position: Ave. DO 2007/08 Current Position: Peak DO 2007/08 Differ ence Ave. Differ ence Peak Table 8: Summary of DO changes Comments Inclusion of treatment losses, AMP4 schemes no longer allowed for under the MOU, borehole collapse due to earthquake and correction to DO due to observed infrastructure restrictions. The changes detailed at individual source level are discussed below. Page 14 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

256 The Company is supplied by SOTT, SLYE, SRAK, SSHE and SSEA groups of sources and by another 13 individual pumping stations. The DO for the Company has been increased by 5.95Ml/d under average demand conditions and by 5.29Ml/d under peak demand conditions in comparison with the previous DO assessment. Seven of the sources had reductions in their DO whereas four of them had increase DO values. The SDNG DO has been revised downward by 0.35Ml/d average and 0.42Ml/d peak due to treatment losses since the commissioning of a new membrane treatment plant. New licences have caused increased DO values in the case of SPRI, which DO value was uprated by 1.44Ml/d average and 1.82Ml/d peak, and SHOL, which DO was increased by 1.09Ml/d and 1.32Ml/d average and peak respectively. New sources have been commissioned resulting in DO uprating. SBUC was commissioned in 2008 with DO of 4Ml/d both average and peak demand. SCOW was also uprated by 4Ml/d and 4.8Ml/d average and peak demand respectively. Despite the commissioning of new sources during the AMP4 period, there have been several downward changes to both average and peak DO when comparing current (07/08) DO to the AMP4 DO assessment. At three sites (SLYE, SDRE and SOTT) this is due to treatment losses since the commissioning of new membrane treatment plants. The DO at sites in the SRAK group and the group of North Dover Sources has been revised following recent operational experience revealing that group output is restricted by the infrastructure that dominates individual and/or combined flow In each case the reduction in DO has been nominally shown in the DO of one member of the group, SDEN and SSTM, which peak demand DO was downrated by 1Ml/d and 0.81Ml/d respectively. Section Sustainability reductions In November 2008, the Environment Agency (EA) advised National Environmental Programme (NEP) activities relating to the Company. The Environment Agency has identified two sites for further activities under the initial NEP. These are listed in the tables below (Table 9 and Table 10). Cost Driver Supply Demand Site Name Little Sour River Basin District AMP assessment Current Lead Driver Current Status Licences BAPw1 Investigation 9/40/04/0273/GR 9/40/04/0377/G 9/40/04/0060/GR PR09/AMP5 Comment Options appraisal to identify licence changes or other measures to protect the environment from existing extraction. This options appraisal will be more complex due to the fact that there are three water companies involved. Table 9: EA NEP investigations after letter 28/11/2008 Supply Demand There is ongoing investigation on potential sustainability reductions on the Little Stour catchment. Page 15 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

257 The costs and scope of the study are detailed in section of this document. Cost Driver Quality Enhancement Site Name Dungeness River Basin District Dungeness SAC Investigation Current Lead Driver Current Status Hw3 Stage 4 Appraisal (EA) Licences 09/40/05/0071/G PR09/AMP5 Comment Implementation: PR09 funding is required to implement licence changes in order to comply with the Habitats Directive. The licence changes which will be implemented by 2014/15 will insure the necessary protection to the environment. The EA has agreed the Company proposal that this can be achieved without impacting on the Deployable Output. Table 10: EA NEP investigations after letter 28/11/2008 Quality Enhancement The packages of work to meet the Environment Agency s requirements for the National Environmental Programme are described more fully in Section B4. However, the requirements of the Habitats Directive at Dungeness are explained below. Dungeness has been subject to a series of investigations to look at the impact of the Company s public water supply abstraction on water levels within the beach. These concluded in AMP3 that there was no impact on the Blackthorn bushes and their epiphytes (the subject of the investigations) and thus no funds were sought in AMP4 for further work or options appraisal. The current version of the Environment Agency table given in the letter states Implementation (Supply/Demand), but at this stage no options appraisal has been undertaken by the Company. With regard to the Deployable Output assessment for the Denge source, no allowance for a sustainability reduction was included in the draft plan, and this position is also reflected in the final plan. In July 2008, the Environment Agency published the SAC Habitats Regulations Stage 4 Site Action Plan (SAP) for SDNG, which proposed a change in the groundwater level conditions for boreholes 7, 8 and 26 of the SDNG wells. The Company is currently in discussion with the Environment Agency to agree on the revision of the current licence by 2015, as long as there is no impact on the Company s current deployable output, in order to comply with the Habitats Directive obligations. This future licence review and revision needs to be supported by robust information, and, with the EA support, the Company proposes to undertake a study at SDNG during AMP5, under the NEP programme, in order to assess the impact of abstraction on Open Pits 5, 6 & 7. Page 16 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

258 Section Outage The outage assessment used the UKWIR 1995 methodology, described in Outage Allowances for Water Resource Planning. Assessments were completed for each source works within the two resource zones that comprise the supply area. Two standard pro-formas were developed for the assessments: Groundwater sources External transfers and imports For each source, assessments were predominately based on interviews with experienced operational staff, and historical data was used as an aid to assessing outage. The standard outage pro-forma for all groundwater and transfers was then applied to a Monte- Carlo based model using Crystal Ball software, which was created specifically for this outage assessment. Monte-Carlo model was created for the company-wide resource zone, with source outages being summed to give a total outage value for the resource zone. The model gives total outage values for each resource zone, with specified levels of certainty. The outage in periods of average water demand was found to be 1.84 Ml/d, whilst at critical periods of water demand (estimated to be a one month period from mid-july to mid-august) the outage reduces to 1.97 Ml/d (Table 11). The results of the Crystal Ball Monte-Carlo modelling process list a number of different percentiles of certainty for each of the two resource zones. These are then summed to find total outage at a 95% level of certainty. This approach is consistent with the level of confidence used for 2002/03 assessment. Average DO (Ml/d) Average Outage (Ml/d) Peak DO (Ml/d) Peak Outage (Ml/d) Company Level Summary of the methodology applied Table 11: Outage at 95% level of certainty A summary of the steps used in the outage assessment methodology is set out below and shown in the flow chart in Figure 2. More detailed descriptions of key points are then discussed in the following sub-sections of this chapter. 1) Source works definition was conducted. 2) Potential outage events affecting each source works (including transfer between resource zones) were identified, and a standard pro-forma created. 3) For each source works, an estimate for the return period and duration of each outage event (where it was applicable) was assessed by interviewing relevant operational staff. 4) The impact of each outage event on the deployable output (DO) of a source works was assessed during the same interview stage i.e. the magnitude of the outage was estimated. 5) Outage assessment pro-formas were submitted to the operational staff for review. Page 17 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

259 6) The pro-forma data was entered into the model. Monte-Carlo analysis, using Crystal Ball software, was adopted as a means of combining the outages from all source works into a supply area total. This method allows for an overall Company outage value to be stated with a specified degree of certainty. Establish source works that are to be included in the outage assessment Identify potential outage events & construct standard pro-forma Repeat for each source works Collate available historical outage data Interviews with relevant operational staff to assess frequency and durations of outage events at source works Note: Consider all sources GW and SW Assess impact of event on DO of source, i.e. define outage magnitude Use interview data with any relevant historical data to create final pro-forma Pro-forma review by operational staff Input data from each pro-forma into Crystal Ball model Run model to forecast company outage with degree of certainty Figure 2: Flow chart describing outage assessment process Flood risk To assess the impact of proposed flood protection measures on reducing flood risk to assets and the impact on plant outage, it was necessary to determine the anticipated return period that the Company s assets can withstand for two cases: The existing situation, without additional flood protection measures The future situation, after the implementation of any flood protection measures In addition, it has been necessary to determine the duration of the respective flood events in order to estimate the impact on outage. The Company commissioned consultants to undertake the flood risk assessments. Their report is contained in an appendix to section B6. Page 18 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

260 For these flood risk assessments, flood levels were obtained from the Environment Agency Strategic Flood Risk Mapping (SRFM) studies (where available) covering the following return events: 1:20 year 1:100 year 1:100 year (with climate change) In addition, flood levels for the 1:10 year event were derived by logarithmic extrapolation. The SFRM flood mapping has shown that those assets identified to be at risk from fluvial flooding would likely be inundated by floods mainly within the range of between 1:10yr and 1:20yr return period (for the case without additional flood protection measures) and it has therefore been considered conservative to predict a flood return period of 1:10yr for all assets under this case. For the case with flood protection, it has been estimated that assets would be designed to be resilient to floods of return period 1:100yr (including climate change increases) after the proposed flood protection measures had been implemented. These flood return periods have been determined for fluvial flooding within those catchments where SRFM flood modelling and mapping has been carried out. As there is no data available on flood return periods for those catchments where SRFM modelling has not been carried out or for pluvial or groundwater flooding; it is considered reasonable (in the absence of any other data) to use the modelled fluvial return periods as a proxy for these flood types as well. Coastal flooding affects the Denge peninsular and for this it has been found that the risk of inundation, from a peak storm surge at high tide, of the Denge aquifer is likely to be of the order 1:20yr. As it is not feasible to construct flood protection measures to protect the Denge aquifer from saline contamination, the aquifer cannot therefore be protected from flood events. The estimated flood return periods for fluvial/pluvial/groundwater/coastal flooding for the Company s sites are given in Table 12. Assessment of the duration of any flood event is more difficult to assess and is also dependent on the time taken to restore a site back into service. Estimates have been made, following discussion with operations staff. Fluvial Pluvial Groundwater Coastal Return Period (no flood protection) 1:10 yr 1:10 yr 1:10 yr 1:20 yr Return Period (with flood protection) 1:100 yr (CC) 1:100 yr (CC) 1:100 yr (CC) - Flood Duration 2 days 2 days 5 days 14 days Table 12: Flood Return Period and Durations Page 19 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

261 Sites at risk of groundwater flooding Sites at risk of fluvial flooding Sites at risk of coastal flooding Sites at risk of pluvial flooding Beachborough Springs SBRO SDNG SWOR SBUC SDEN SSTO CHER Upper Works SLYE SLYE Computer modelling SDOV SOTT SSTA SOTT SRAN and SRAS SDEN SPRI SSHE SOTT STAN and STAS Table 13: List of Sites at Risk of Flooding The results of the Crystal Ball Monte-Carlo modelling process list the total outage for the company at a number of levels of certainty. The total deployable output is also reported, and hence the outage as a percentage of total DO can be calculated. Table 14 below shows these results. SKIN Outage - Percentiles Deployable output (Ml/d) 50% 75% 90% 95% 97.5% 99.9% Outage Peak Forecast (Ml/d) %ge of DO % 1.4% 2.2% 3.0% 4.5% 10.8% Outage Average Forecast (Ml/d) %ge of DO % 1.7% 3.2% 3.6% 3.9% 6.2% Table 14: Outage percentiles and outage as percentage of total DO Outage assessment It was estimated that a 95%ile certainty value for outage, based on the Monte-Carlo modelling, would be the appropriate value to consider, as this implies that 95% of the time outage will return a value less than the resultant figure. The outage assessment found a value of 1.97 Ml/d outage in critical periods of peak demand, and 1.84 Ml/d outage for the Company in periods of average demand. This equates to an outage value of 3.0% as a percentage of total DO at peak times, and 3.6% as a percentage of total DO at average. Page 20 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

262 Section Raw and potable water transfers and bulk supplies The Company supply area is bounded by the English Channel to the South, the Southern Water supply area to the north and South-East Water to the north-west. In addition, the Company shares a short boundary with Southern Water on the Denge Peninsula in the southwest. The Environment Agency in Water Resources for the Future: a strategy for Southern (March 2001) encouraged the sharing of resources between areas of surplus and deficit through bulk supply transfers, subject to there being no adverse effects. The Company participated in regional water resources studies to specifically investigate cross-company transfers in the context of its supply/demand balance investment plans for business plan 2009 submission. The Company has bulk supply import arrangements with both of its neighbours, but these are threatened by the competing demand for water from the forthcoming Sustainable Communities at Ashford and Thames Gateway South in those companies supply areas. The existing agreements are time limited and both expire in the next ten years. The Company had had a long standing import from South-East Water (Barham) arising from the transfer of customers from East Kent Water in the past. This arrangement was put on a formal footing in 1999 by means of an OFWAT Section 40 Order. The present supply of 2 Ml/d (throughout the year) was due to expire in 2009/10 but agreement has been reached to extend to 2014/15, and this forms part of the Company s Water Resources Management Plan. Following recent discussions with South East Water, the two companies agreed to extent the agreement until 2019/20. For planning purposes, this import is included in the supply/demand baseline until the end of the planning period (2035). This approach is being mirrored by South East Water. The increase of the bulk supply from 2Ml/d to 4Ml/d is an option which the two companies are currently discussing. During AMP3, the Company negotiated a further bulk supply from Southern Water (Deal). The agreement is due to expire in This supply provides up to 4Ml/d over four months of the winter period. Consequently, it was considered as an average demand scheme equivalent to 1.33 Ml/d, although this is dependant on hydrological conditions. For planning purposes, this import is included in the baseline supply/demand balance until the end of the planning period, ie This approach is consistent with that of Southern Water. An increase in the volume and period of availability of the bulk supply is an option under discussion between the two companies. Further and/or extended bulk supplies may be available on a short-term basis, but are uncertain in the times of drought that form the Company s critical planning case. Reliable bulk supplies would require the donor companies to develop further resources to enable them to supply the Company as well as the proposed Sustainable Communities (Thames Gateway and Ashford). In this context, the Company is active within the Water Resources for the South-East group and is monitoring the development of regional resources and the potential benefits they may have for the Company. The Company is currently liaising with its neighbouring companies: South East Water and Southern Water, in order to identify long-term regional solutions which would benefit customers of the South East area. SEW and SW have confirmed they would be able to provide increased bulk imports from These increased bulk transfers may require resource developments within SEW and SW supply areas, and the Company will support its neighbours in doing so (see section 2.8.3). Page 21 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

263 Section 2.3 Water Demand Section Demand forecasts Base Year Demand The Environment Agency guidelines recommend using 2006/07 as the base year for the demand forecasts. However, in the Company and South East area, that year was characterised by hosepipe restrictions and extensive publicity surrounding the drought. Some work has been done at UKWIR level to attempt to quantify the effects of this, but the results were not conclusive at water company level. It is therefore difficult to attempt to normalise that year to derive a base position. On the other hand, the 2005/06 year was relatively climatically normal in terms of overall rainfall and sunshine; although the temperature anomaly compared to the , average shows that the year was warmer than baseline. The Company has, therefore, used the 2005/06 year as the basis for the dry year forecast, and forecasted forward one year to generate figures for 2006/07 in the Water Resources Management Plan. To derive the dry year planning scenarios, demand was benchmarked against the 2003/04 hot dry year. For each component of demand, dry year average and dry year critical, factors have been applied. The Company has estimated that commercial consumption increases by 10% at peak and by a further 1.5% in a dry year. Metered domestic consumption is predicted to increase 30% less than unmetered both at peak and in a dry year. Unmetered peak and dry year factors have been adjusted to reconcile to the benchmark year of 2003/04. This is a departure from the UKWIR methodology, but it is considered to provide a more robust methodology for the forecasts where a large metering programme is proposed. The Maximum Likelihood Method MLE was used to reconcile the water balance and minimise uncertainty in the base year demand. Base Year Population and Properties The number of properties in 2005/06 has been derived from the Company s billing database for all of the property categories reported in the June Return. Historical June Return figures have been analysed to breakdown metered customers per customer type. Where there is no data, simple assumptions have been used to hind-cast estimated total numbers. The customer base per property type and population is split as shown in Table 15. Page 22 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

264 Billing Category Households Population Measured Households 27,920 58,418 Unmeasured Households 39,960 93,439 Void Properties Measured Non-households 4,447 4,232 Unmeasured Non-households Total No. Billed 73, ,089 Table 15: Households and Properties by billing categories Base year population in unmeasured non households has been determined from census estimates of communal establishment populations. No estimates have been made for population in other commercial premises not counted in the census. Calculated metered occupancy is 1.93 persons per property and unmetered is This difference between measured occupancy and unmeasured occupancy reflects the fact that low occupancy properties gain most from switching to meters. Base Year Domestic Consumption Base year estimates on ownership, frequency of use and water volumes for the different components of water use were taken from relevant published literature as well as a comprehensive survey on water use. This was carried out in 2007 and 2,500 households in the Company area responded. The information from the survey was also used to calibrate the Southern Area Group consumption Monitor which measures household demand. The Company uses data from the Southern Area Group Monitor to derive the base year unmeasured PCC. This monitor complies with best practice for small area consumption monitors. The PCC is used in conjunction with Company research data to calibrate the micro-component model in the base year. The survey strengthens the Company s specific understanding of base year water use, which was in turn benchmarked against the existing consumption monitor study. The number of replies received makes the results both representative and statistically significant for the Company as a whole. The measured base year PCC is calculated by dividing the domestic measured billed volume (minus supply pipe leakage) by the measured domestic population. The measured customer PCC projection is then forecasted forward from this figure. Population Forecast The population served by the Company is set to increase over the next 25 years and beyond. The Company produces company-specific population forecasts to inform the supply demand balance and maintain continued security of supply. As discussed in the methodology and from what has been referenced in the appendix, the material available from which to evidence this forecast is considerable, although there will always be inherent uncertainties surrounding forecasts of this nature. To ensure a consistent methodological approach when determining a company-specific forecast, Experian were commissioned to undertake a joint housing and population study for the South East on behalf of a number of water utility companies, including Folkestone & Dover. Page 23 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

265 From this work, three company specific forecasts were produced, as shown in Figure 3: The policy scenario forecasts a population increase of 22% (33,016), from 152,090 in 2001 to 185,106 in The most-likely scenario forecasts a population increase of 30% (45,289) from 152,090 in 2001 to 197,379 in The trend scenario indicates an increase of 33% (50,453), from 152,090 in 2001 to 202,543 in The Water Resources Management Planning Guidelines recommend that each water company forecasts the population supplied based on a policy-based projection. Recent revisions to the national population forecast made by the Office of National Statistics (ONS) have been incorporated into revised Experian forecasts in November The Policy based projection has been used for the final Water Resources Management Plan. The main factors driving the population revision from the 2004 mid-year estimates (used in Experian s forecasts for the draft Water Resources Management Plan) to the revised 2006 midyear estimates (used in the final Plan), are the amended birth rate, death rate and migration estimates. Recent trends have shown that birth rates and migration are higher than previously forecast with death rates being lower. When these revisions are applied, the resulting forecast projects a higher than previously envisaged population level by 6.3% above the 2004-based projections. 210,000 Folkestone and Dover Water Services Total Population by Forecast Method 200, , , , , , , Trend Policy Most Likely Figure 3: Total Population by Forecast Method Page 24 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

266 Housing Forecast The demand for housing in the South East of England particularly, shows little sign of abating in the long term, despite a sharp economic downturn started in the autumn of The growing population and present housing stock shortfall is resulting in strong top-down targets for new dwellings in order to meet this demand. The Company produces company-specific housing growth forecasts in order to ensure a continued level of supply now and in the future. These forecasts use best available information from a national, regional and local scale. Often site specific knowledge is also important, for example where planned developments occur close to a supply boundary. In these circumstances closer inspection is required to assess the precise housing numbers that fall within the Company s supply area. To ensure a consistent methodological approach when calculating the Company s housing forecast, Experian were commissioned to undertake a joint housing and population study for the South East. This study was carried out on behalf of a number of water utility companies, including Folkestone & Dover Water Services. The Company also undertook an internal review of housing build rates which further supports an understanding of expected growth. From this work four company specific forecasts were produced, as shown in Figure 4: The policy scenario forecasts an increase in housing stock of 42% (27,078 dwellings), from 64,362 in 2001 to 91,440 in This method aligns the trendbased estimates with the housing allocations, promulgated in the draft regional plans. The policy scenario with economic downturn. The policy forecast has been amended to reflect the current economic conditions with a downturn in the cumulative households built from 2010, and recovering by The most-likely scenario forecasts a housing increase of 52% (32,254), from 64,362 in 2001 to 97,616 in There is a divergence between the trend and policy projections. The most likely scenario is Experian s subsequent best estimate of household growth, given all the available information. The trend scenario projects a housing increase of 56% (35,836 dwellings), from a 2001 level of 64,362 to 100,198 in This methodology utilises 2001 Census and the most up-to-date sub-national estimates and projections from the Office of National Statistics. The forecasts have been updated following recent revisions to the national population forecast made by the Office of National Statistics (ONS) (which impact on all three scenarios), and proposed amendments to the South East Plan housing allocations, as described below. In light of the very rapid changes and latest information on the recession, the Company decided to reflect the economic downturn in its household forecast and created a Policy with economic downturn scenario. For this scenario, the build rate is reduced, compared to Policy without the downturn, for the years inclusive, then increases above the Policy rate for the years The average number of houses built in the last five years has been around Page 25 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

267 550 per year. Due to the severity of the economic downturn and the number of applications for new connections made over the last couple of months, the Company estimates that between 2010 and new properties each year will be connected to the Company s water supply network. The Company predicts a beginning of recovery from 2014 and estimates that 650 new properties per year would be connected in 2014 and 2015, then increasing to 823 properties per year between 2016 and In 2023, the total number of houses built is the same for the Policy forecasts with and without the economic downturn. From 2023 onwards, the number of households built every year is the same for the Policy forecast with and without the effect of the economic downturn. For the final Plan, the Policy forecast (amended to account for the South East Plan housing allocations and the economic downturn) has been used as recommended in the Environment Agency Water Resources Management Planning Guidelines. FDWS Total Housing Forecast Method , ,000 95,000 90,000 85,000 80,000 75,000 70,000 65,000 60, Policy (no economic downturn) Trend Policy (with economic downturn) Most Likely Figure 4: Total Domestic Household Projections by Forecast Method PCC Forecast Forecasting domestic use can be done using a micro-component approach and by benchmarking the forecast predictions to the base year PCC (per capita consumption). The micro-component method identifies the components of water use, including their levels of ownership and how often they are used. Best available data is then used to determine how projected changes in these factors may effect overall consumption in the future. The micro-component model is based on a series of Ownership, Frequency and Volume equations, summed to give a total PCC. This calculation is repeated year on year to produce a forecast, taking into consideration projected changes in the O, F and V estimates. The model is Page 26 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

268 calibrated in the base year (2005/06) with PCC calculated from the water balance, the Southern Area Study monitor and the known billed metered consumptions. The model is built around a series of spreadsheets including: Ownership of appliances (measured & unmeasured), Frequency of use of the appliances (measured & unmeasured), Volume of use for each appliance. The volume estimates have been kept constant over the forecast period. Consumption of water (measured & unmeasured), Table 16 shows the Central, Low and High forecasts for unmeasured and measured per capita consumption for the Company. Metered PCC Un-Metered PCC Lower Central Upper Lower Central Upper Table 16: Per Capita Consumption Forecasts Page 27 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

269 PCC of metered customers is expected to fall from 137l/h/d in the base year to 125l/h/d in 2035, in the Central forecast. The Company expects to achieve 130 PCC by 2015 for its metered customers, which is in line with the Government aspirational target. Unmetered PCC is forecast to decrease from 165l/h/d in the base year to in 2023, and then to rise to 164l/h/d in Uncertainty bounds from these estimates indicate that metered PCC may be up to 12.7 l/h/d less or 34.2 l/h/day greater than the Central forecast by Unmetered consumption at the end of the forecast ranges from to l/h/day an envelope of 48.3 l/h/day or 29% of the Central forecast. The Company considers that given the accuracy of the data used to benchmark the base year, the Central forecast projects a sound basis from which to consider future demand. The Low and High forecasts are also considered solid outliers, from which to base the considerable uncertainty about a forecast of this type. The Central forecast is recognised as the most robust at this time. The Low and High forecasts use the same base year assumptions as the Central forecast, but include uncertainties around potential future behavioural changes. These forecasts are used in the headroom analysis. The Company has also calculated the combined PCC for the Central forecast, as shown in Figure 5 below. Per Capita Consumption forecast PCC (l/person/day) Financial year ending PCC measured - central forecast PCC unmeasured - central forecast Combined PCC Figure 5: Combined Central PCC forecast The Central forecast shows a combined PCC in the base year of 150 l/h/d falling to 131 l/h/d in 2015 and 126 l/h/d by Page 28 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

270 Commercial Forecast The forecasting methodology that has been used is a two stage process. Firstly, regression analyses have been carried out to establish relationships between commercial demand and the relevant economic explanatory variables based on historic data for a period of 8 years from 1998/99 to 2005/06. Secondly, specific forecasts have been provided for some large users by the Company, and for the residual demand the economic relationships have been extrapolated forward to forecast future demand over a 30-year period to 2036/37 based on long-term forecasts of economic growth. This proposed methodology follows industry best practice guidance as set out by UKWIR in Demand Forecasting Methodology (1995) and Forecasting Water Demand Components - Best Practice Manual (1997), and is similar to the methodology used by Atkins for PR04. Regression analyses have been carried out to explain the Company s commercial consumption as a function of UK regional data for both Real Gross Values Added (GVA) and Employment for the South East Region of the UK. This work has been carried out separately for all categories, Services, and Industry & Manufacturing. The best relationships that have been established (based on the R-squared regression values) have then been used to forecast future demand through 2036/37 based on forecasts for the underlying economic factors. The Company has based its commercial demand forecast on 2008/09 consumption, which has been calculated following the June Return methodology. The forecast used for the final Water Resources Management Plan also includes the impact of the economic downturn. Following the derivation of the central economic forecast of GVA growth of 3% per annum, the impact of changes in the economic outlook for the UK and the South East region in particular, have been assessed on the following basis: 2008/ / / / /13 GVA -2% 0% 0% 3% 3% % change -5.40% -6.60% -4.70% -0.10% -0.10% Table 17: GVA growth assumptions for economic downturn There are significant step changes in the total consumption forecast over the periods 2006/07 to 2009/10 and 2018/19 to 2021/22. Figure 6 reflects the significant drops in demand at Dungeness A (2007) and Dungeness B (2020) as a result of projected closure dates, and at Kent Salads (2010) as a result of the implementation of a more water efficient mode of operation. Page 29 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

271 16 Forecast for Folkestone & Dover Total Commercial Consumption 14 Consumption (Megalitres per day) Total Specified Modelled / / / / / / / / / / / / / / / /37 Year Figure 6: Total Commercial Consumption Demand Forecast Model A number of work streams and technical reports form part of the demand forecast. Population forecast Household forecast Micro-component forecast Commercial forecast Sustainable Economic Level of Leakage Those forecasts are transferred in the demand forecasting model, which comprises three core spreadsheets: demand forecast drivers, normal year and dry year sheets. Demand forecast drivers contain the majority of the outputs from the above forecasts. Normal year contains the water balance for normal year average and peak and the same for dry year is in the dry year sheet. Occupancy rates forecast are calculated for the previous year for new properties, optants, selective meters, un-metered and metered. These occupancy rates are used to calculate the next years population according to the household forecast and metering programme. Housing numbers influence the numbers of people in each customer category but generally have little impact on the demand forecast. There is a limited impact as a result of average supply pipe leakage in metered properties. Micro-component forecasts give the input numbers for the demand forecast. These are used in the demand forecast drivers sheet as annual increments in PCC. These are used in the calculation of water delivered for each customer category. According to a complex interplay of Page 30 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

272 population, occupancy rate, metering estimates and the metering programme the PCC s are recalculated for each year. As a result the final PCC s in the demand forecast do not match the PCC s in the micro-component report and WRP7 of the WRMP tables. Metered commercial forecasts are entered directly into the demand forecast drivers sheet. No change is estimated for un-metered commercial. Future changes in leakage are modelled against other scheme options in the economic modelling. Incremental changes in leakage are selected on economic grounds. Zonal peak and dry year factors have been derived by making an assessment of historic peaks. A nominal increase has been predicted for commercial customers. Metered domestic customers are estimated to use 30% less in a dry year and in peak than un-metered customers. The un-metered factors are used to calibrate to the zonal peak factors. This methodology allows for savings at peak and dry year as a result of the metering programme to be hard wired into the demand forecast. The baseline demand forecast used in the final Plan is shown in Figure 7. Demand forecasts Ml/d Year Dry Year Demand Normal Year Balance Peak normal year demand Peak dry year demand Figure 7: Demand Forecasts (Distribution Input) For all scenarios, total demand is forecast to reduce to 2022 then increase slightly to the end of the forecast. Dry year average demand falls from Ml/d in 2007/08 to Ml/d by 2034/35; demand during the dry year critical period falls from Ml/d in 2007/08 to Ml/d in 2034/35. Page 31 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

273 Section Metering strategy The Company is acutely aware of the need to promote the efficient use of water by its customers and to conserve water resources. A policy of demand management to achieve this aim, through compulsory and subsidised optional metering, has been in place since In 2000, the Company commenced a free meter option scheme for all households and introduced a policy of compulsorily metering all customers with swimming pools. All unmeasured commercial properties were also compulsorily metered. The Company s strategy in its 2002/03 submission was to achieve 90% of all domestic properties paying for water by measured volume by This required the installation of a water meter to all unmeasured properties throughout the area of supply in a 10-year programme. Only properties with complex plumbing arrangements that would require significant alteration in order to be metered would not have a meter installed. Where meters are not able to be installed, the property would be transferred from the RV based tariff to the current Domestic Assessed Tariff that is based on occupancy. The current strategy has developed from the previous position in the light of experience gained in the current period. Successful in its application for Area of Water Scarcity status on 1st March 2006 the Company has moved from a change of hands strategy to a compulsory metering programme based on zonal metering. In addition, the Company is targeting a higher meter penetration of 96% (all properties excluding only the most complex plumbing arrangements), compared to 90%; and to accelerate metering delivery to be complete by April 2012 rather than 2015 as originally proposed. The Company consulted with customers on these changes as part of the development of the Strategic Direction Statement. Positive feedback was also obtained through responses to the consultation on the draft Water Resources Management Plan. The change in strategy reflects a number of drivers: Support from customers who view metering as the fairest way of paying for water; The contribution earlier metering provided to the supply/demand balance; The benefits arising from reducing the environmental impacts of the Company s operation and empowering customers to do the same an area the willingness to pay surveys showed strong customer support for; Demonstrating the Company s commitment to metering as part of a wider demand reduction strategy; Establishing full metering to provide a platform from which other water efficient measures can be delivered, such as stepped-tariff, but also other measures such as retrofit trials etc. The Company metering strategy will be delivered through the following activities: Selective Metering: Operating a compulsory metering policy in line with the Company s status as an Area of Water Scarcity to deliver 96% metering by April Delivery of metering is on a zonal basis. Change of Hands: The Company no longer operates a change of hands metering policy as it is less efficient than selective metering. Page 32 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

274 Meter Optants: the Meter Option scheme will continue to operate as it is a requirement under the Water Industry Act New Properties. All new properties will continue to be metered on connection. The Company is currently ahead of it s AMP4 metering targets and proposed to Ofwat to outperform the AMP4 position as part of achieving its strategy of full metering by April A log up application was approved by Ofwat in January 2009, and the final WRMP and Business Plan reflect the agreed outcome. AMP4/AMP5 Metering programme PR04 forecast Table 18 and Table 19 show the metering programme for AMP4 and AMP5 as forecast in the Business Plan PR04 forecast 2005/ / / / /10 Total AMP4 New properties ,344 Optants 1,168 1, ,528 Selective programme 1,672 2,443 2,567 2,688 2,804 12,174 Number of meters installed - TOTAL 3,533 4,064 4,073 4,199 4,177 20,046 Metering penetration % 44% 50% 55% 61% 66% Table 18: AMP4 metering programme PR04 forecast PR04 forecast 2010/ / / / /15 Total AMP5 New properties ,784 Optants ,369 Selective programme 2,926 3,042 3,157 3,023 2,897 15,045 Number of meters installed - TOTAL 4,289 4,387 4,417 4,176 3,929 21,198 Metering penetration % 71% 76% 81% 86% 90% Table 19: AMP5 metering programme PR04 forecast AMP4/AMP5 Metering programme Actual & PR09 forecast Table 20 shows the actual number of meters installed in 2006, 2007 and For the final Business plan, the Company is currently planning to meet the overall AMP4 meters installed target, although the split between new properties, optants and selective may be different to that anticipated at PR04. Between draft and final plan, the Company applied for a log-up on selective meters. This was approved and the final Business Plan reflects the revised position, as shown in Table 20. PR09 forecast 2005/ / /08 Total 2008/ /10 (actual) (actual) (actual) AMP4 New properties * 741** 250*** 2,391 Optants 1,441 1, ,266 Selective programme 2,115 3,387 2,883 2,909 7,669 18,963 Number of meters installed TOTAL 4,155 5,532 4,181 4,241 8,511 26,620 Metering penetration % 47% 55% 60% 66% 78% Table 20: AMP4 metering programme actual & PR09 forecast Page 33 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

275 * The Company highlighted that the figure of 250 reported for JR08 Table 7 excludes some 140 installed meters which were not yet in charge. ** 682 meters have been installed between 01/04/2008 and 21/01/2009. The Company estimates that around 60 properties will be connected to the supply area in February and March *** Due to the current economic situation, the Company expects the number of new properties to be lower than in previous years. In AMP5 and beyond, metering will continue to form an integral part of the supply/demand baseline and the Company will target an accelerated programme of meter installations to a level of 96% meter penetration of the domestic customer base by April 2012, as detailed in Table 21. PR09 forecast 2010/ / / / /15 Total AMP5 New properties* ,050 Optants Selective programme 6,000 6, ,450 Number of meters installed - TOTAL 6,850 6, ,250 Metering penetration % 87% 96% 96% 96% 96% Table 21: AMP5 metering programme PR09 forecast * New properties forecast reflects the economic downturn. The Company estimates a start of recovery in the housing market in 2013/14. The following benefits of the proposed metering strategy are identified: Minimum 1.5Ml/d savings in demand by April A strong metering policy supports the development of new resource projects required as part of the business plan. Whilst the savings attributable to the metering programme are not sufficient to significantly alter the introduction of major new resource schemes, the timing of such schemes may well be delayed. This twin track approach, therefore, provides benefits to the environment and is an essential component in the regulatory approval process. Metering strongly links to the widening of customers awareness of the need for water conservation. Full metering is necessary for the roll out of the socially responsible stepped tariff scheme. AMP4 & AMP5 metering programme As can be seen from Figure 8 below, the target of 96% metered household base will be achieved by accelerating the rate of meter penetration to around 6,000 meters per annum over the first 2 years of the AMP5 period. Page 34 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

276 Metering programme 50, % 45,000 90% 40,000 80% Number of meters installed 35,000 30,000 25,000 20,000 15,000 70% 60% 50% 40% 30% 10,000 20% 5,000 10% / / / / / / / / / /15 Year 0% Cumulative numbers of meters installed Metering penetration Figure 8: Metering programme AMP4 & AMP5 The detailed costs of the AMP5 metering programme are detailed in Section Section Water efficiency strategy The Company has incorporated the 0.07 Ml/day/year Water Efficiency Target set by Ofwat into its final Business Plan projections. The water efficiency strategy and associated costs to achieve the annual target are detailed in the tables in this section and represent the Company s current plans at the time of final plan s submission. They are all based on the information given by Ofwat at that time. The Company plans to carry out a variety of water efficiency activities during AMP5 with both commercial and domestic customers, with savings estimated for each activity in line with Ofwat's allowance table. Table 22 identifies in each activity the number of devices that would be needed in order to achieve the target using just that one activity. This was the starting point for planning the water efficiency programme to achieve the target. Page 35 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

277 Table 22: Number of items to be installed to meet the Water Efficiency target according to Ofwat savings The cost of each form of activity was then evaluated and the potential limits on each form of activity derived taking account of previous similar activities to ensure no double counting of potential savings. From the activity lists and taking on board limits on potential for each activity, the above activity list was created to minimise costs and maximise savings. Table 23 identifies the specific activities and level of activity that will achieve the total annual Ofwat target for each year of AMP5. Page 36 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

278 Table 23: Company s water efficiency activities required to meet WE target In reality, unforeseen opportunities may arise to make additional savings over and above those listed above and in that event the balance of water efficiency activities in that and subsequent years will be reviewed and adjusted to suit. The Company is part of the WaterUK Water Efficiency Practitioners Group and is looking at optimising savings by using industry best practice wherever possible. In addition, the Company is working with the Environment Agency and SEEDA on their Ensuring Water For All initiative. Although this covers much of the same ground as has been covered before, it is an alternative view on the topic and may provide some innovative solutions that can be introduced to gain more reliable savings from lower cost solutions. Table 24 shows the relative level of water savings each of the various water efficiency initiatives proposed will achieve using the Ofwat estimates. Page 37 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

279 Table 24: Estimated savings per water efficiency activity Again it is important to stress that this is only theoretical activity schedule and the actual water efficiency activities will be dependent on opportunities that arise during the period. This list is a fall back position that we have identified can achieve the target in the absence of a more cost effective solution. The costs of the Water Efficiency strategy are detailed in section Section Leakage strategy The development of the Company s current leakage strategy is fully described in Section C4, and includes the calculation of the SELL according to Ofwat s guidance. In summary the Company s strategy is to reduce leakage levels in order to achieve the sustainable economic level of leakage over a 10-year period. The Company has also considered leakage reduction options as a part of the overall Economic Balance of Supply/Demand and least cost planning objective. Current leakage strategy The Company s current strategy consists of two parts: pressure reduction and find and fix. With regard to the latter, the Company has invested in new technology and supplemented Leakage Technicians with additional resource if leakage breakouts cannot be controlled. There is an element the Company hasn t yet introduced, but has planned to do so, which is more efficient monitoring of the DMA nightlines to enhance the awareness of changes from a weekly Page 38 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

280 assessment to a daily assessment. This will allow more effective targeting and reduce run times of the larger breakout areas. Currently, the Company is divided into 14 hydraulic zones, which in some cases are made up of a number of sub-zones. The Company currently produce a weekly leakage report which is a mixture of flow measurements from zones e.g. reservoir outlet meter (via SCADA) and flow from DMA meters (via telemetered loggers). This is consistent with the baseline demand forecast. Approximately half of the properties in the Company s supply area are subject to pressure control. There are 124 PRVs, mainly Claval and JRG, installed across the supply area. Approximately, 2/3 of these are operating in order to reduce pressure to properties. The rest are used as control at zonal transfer points or emergency transfers. Economic appraisal The economic analysis has been carried out using the WRc APLE model (version 5.04). Detailed company data on leakage levels, leakage costs, repair rates, and externalities values for were entered into the model. The APLE model has been configured to reflect the Company s water resource zone structure (one zone). The APLE model uses the Method A as detailed in the Tripartite report. It uses steady state costs and transitional costs, cost data is derived from company systems, it includes all costs associated with leakage control and it models the cost leakage relationship using fixed and variable costs. This analysis uses the Marginal Operating Cost of Water approach. This approach compares the marginal cost of active leakage control with the marginal cost of water. The marginal cost of water is calculated by considering the cost of providing additional capacity from resource/treatment investment. The ELL is the point at which the marginal cost of active leakage control equals the marginal operating cost of water. A key part of the analysis is the assessment of steady state conditions. The APLE model determines both the active leakage control (ALC) costs to maintain leakage at current levels and the costs associated with reducing leakage (or savings associated with allowing leakage to increase). By incorporating leakage and leakage management externalities it is possible to produce a short run leakage assessment that may be regarded as the sustainable economic level of leakage (SELL). Externalities values were evaluated according to the Best Practice Guidance on the Inclusion of externalities in the ELL calculation (Ofwat, 2008). They were provided for use in the Company s calculation of SELL using the Marginal Social Operating Cost of Water approach using the APLE software 1. 1 Calculation of the sustainable economic level of leakage, RPS Report, November 2008 Page 39 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

281 The results of the assessment are displayed in Table 25 below: Marginal Operating Cost of Water (p/m3) Short-run Economic Level of Leakage (Ml/d) Marginal Social Operating Cost of Water (p/m3) Short-run Sustainable Economic Level of Leakage (Ml/d) Table 25: ELL and SELL results In 2007/08 the Company annual average level of leakage was 7.9Ml/d which is 1Ml/d (with rounding) above the MSOC-SELL of 6.9Ml/d and therefore further reductions in the short term would be socially economic. APLE has been used to profile the level of leakage and associated social operating costs in order to achieve the short-run SELL of 6.9Ml/d by The results of the APLE modelling are shown below in Table 26. Leakage Level (Ml/d) CAPEX ( ) 15,546 16,248 17,100 18,072 19,255 20,769 22,601 24,808 27,976 32,070 CAPEX 0.5Ml/d reduction CAPEX 1Ml/d reduction Sensitivity analysis 86,221 Table 26: Leakage reduction costs RPS have highlighted in their report that the Company was found to have relatively high marginal environmental costs. This is due to a combination of the following: Significant costs associated with angling on reaches of the river Dour affected by Company abstraction (game fishing). Significant costs associated with biodiversity and non use at river reaches affected by abstraction sites (Denge). Dungeness is of international conservation importance for its geomorphology, plant and invertebrate communities and birdlife. This is recognised and protected mostly through its conservation designations as a National Nature Reserve (NNR), a Special Protection Area (SPA), a Special Area of Conservation (SAC) and part of the Site of Special Scientific Interest (SSSI). The marginal environmental costs associated to the abstraction at Denge are estimated to be /Ml, which is equivalent to 17.59p/m3. 214,445 The APLE model was run using a marginal social operating cost of water of: p/m3, the private MOC of water for the most appropriate source to use: Rakeshole North p/m3, the external (carbon and environmental) MOC of water for FDWS sources excluding Denge. Page 40 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

282 The MSOC-SELL using a marginal operating cost of water of 10.09p/m 3 is 7.8Ml/d. As part of the Habitats Directive Review of Consents process undertaken by the Environment Agency, Denge abstraction licence has recently undergone a Medium Priority site Stage 4 assessment in relation to Special Area of Conservation (SAC) and Special Protection Area (SPA) habitats/species. As a result of the Review of Consents process, the Environment Agency has indicated that it requires the Company to undertake further work to demonstrate what impact current and possible future operational abstraction patterns would have on the requirements of the Habitats Directive, and thus licence modification to the operational constraints on a number of abstraction wells. It is not expected at this point in time that there will be significant reductions in the Company s abstraction from Denge arising from this study (details in Section B4). AMP5 leakage strategy As long-term abstraction at Denge is uncertain, the Company proposes to adopt the same leakage strategy as in the AMP4 period which consists of reducing leakage by 0.1 Ml/d every year, over the 5-year period. The leakage level to achieve by 2015 would be of 7.5Ml/d. This target would be well below the ELL and the SELL excluding Denge. At the end of AMP5, the outcome of the NEP Denge study can be known and the SELL will be reassessed. The Company is proposing a 0.5Ml/d reduction over the AMP5 period (leakage target at 7.5Ml/d), which has been estimated to cost 86k above the current CAPEX leakage costs. The full description of the AMP5 leakage strategy is detailed in Section C4 of the Business Plan. Section 2.4 Climate Change Section Supply side The Company has no surface water resources, thus none needs to be evaluated for impacts of climate change. The Company also imports water from Southern Water and South-East Water (previously Mid Kent Water). Both imports are based on groundwater sources. It has been assumed that the agreed import volumes will be upheld for the duration of the current agreements. The Company estimates that they will be entitled to take up to their full allowance, and that the other water companies will manage their other resources to enable this. The impact of climate change on groundwater is a complex issue and does not lend itself to easy solution. Of critical importance is the amount of effective rainfall that occurs over the recharge period from September to April. Generally, summer rainfall does not contribute in significant volumes to recharge; therefore drier summers have little impact on recharge volumes, although rainfall may support water levels, allowing them to decline less rapidly. As most climate models indicate wetter winters and drier summers, there should be more winter recharge, thus more groundwater availability than at present. However, variability is also a significant feature of climate change, and not all winters will be higher than average, and intense summer storms may provide significant summer recharge, as has happened in recent Page 41 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

283 years. The increase in variability will make it more likely that an extended sequence of dry winters could occur. From experience, we know that the Company groundwater sources are robust to one dry winter (dry being 75-80% of long term average rainfall). Two such dry winters result in significantly lower groundwater levels, reduced river flows and reduced outputs from vulnerable sources and the imposition of flow constraints/augmentation requirements. This is what the current drought Deployable Output (DO) scenario is based on. Three dry winters has not been experienced within the available records for groundwater levels, but has been recorded in rainfall terms in the 1890 s. Recovery of groundwater levels following a drought is totally dependant on the volume of rainfall during the recharge period. Historically, periods of very low groundwater levels have recovered to above average levels within one year (eg 1992, 1998), thus re-setting levels for the next summer recession period, but these have been above average rainfall events. With average winter rainfall, it may take several years for water levels to fully recover. East Kent Groundwater Model The Company, in association with Southern Water and South East Water commissioned Atkins to undertake a study of the possible impact of climate change on their groundwater sources in the East Kent area. This study focused on the implications of changes to their deployable outputs. Atkins used guidance from the UKWIR CL/04/C study (ENTEC 2007), and the Environment Agency (2007) and the East Kent Groundwater model, which had been recently developed by the Mott MacDonald for the Environment Agency and is considered to be the most suitable model for this area. Forecasts of climate for the 2020s were made from a suite of general circulation models by perturbing the rainfall and evaporation sequences from the global circulation models, scaled down for the East Kent area. These revised meteorological sequences were then run through the recharge element of the East Kent model to produce new recharge inputs to the model. As the model was repeatedly run with the different climate sequences, a succession of water level fluctuations resulted for the entire modelled area. These water levels were then compared with the calibrated base line historic water levels in nodes where public water supply sources were present to look for additional declines in modelled water levels over those seen in the past. In turn, these water level changes were then applied to the source reliable output diagrams, by downshifting the drought response curve and re-evaluating any constraints, particularly the deepest advisable pumping water level, allowing a revised deployable output to be calculated both at peak and average conditions. Whilst there are some uncertainties in elements of this analysis, it provides a good guide to potential future deployable outputs and highlights the vulnerability of individual sources to deeper pumping water levels. Generally, nodal drought water levels in the mid range were reduced by between 0.1 and 1.78m. In the high impact scenario, the range was 0.3 to 7.35m. The low impact scenario actually produced rises in groundwater levels above those seen historically. The lowest level changes were observed at the costal sources, and are probably artificially low values due to the Page 42 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

284 way the model boundary conditions with the sea have been set. Nevertheless, these values have been used in the subsequent analysis. Equally, no allowance of saline intrusion has been made, as the model does not simulate water quality variations, only level and flows. In the case of Lye Oak, Atkins did not allow for known process losses in their report, and this has been changed by 0.14Ml/d to reflect this. As the East Kent Model only covers the Chalk sources, Atkins did not evaluate water level changes for the Greensand sources. Only Shearway has a deployable output greater than zero and previous reports state this source is relatively unaffected by historic droughts, thus its deployable output has not been changed. In the case of the Denge gravel aquifer, where no suitable model is available and where drought bounding curves for the individual sources do not exist, a different approach has been adopted. The Denge aquifer is sensitive to both decreases in rainfall (both summer and winter) and saline intrusion/sea level rise. In the case of this aquifer, summer rainfall does contribute to recharge as there is very little soil and the large cobbles have only a small capillary flux capability, thus once into the system, rainfall can only leave by lateral transfer to either the sea or the lakes or the Denge Marsh sewer. The exact change in DO cannot be calculated, but it was considered to be very sensitive. Thus by careful manipulation of the well field, sufficient abstraction to meet the demand of one of the Reverse Osmosis skids could be met, even with modest increases in salinity. This has been set as at 2Ml/d for average DO and 2.5Ml/d for peak DO. The revised deployable outputs for all the Company s sources are shown in Table 27. Page 43 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

285 Source Aquifer Type Avg. Ann. Licence Ml/d Max Daily Licence Ml/d 2007 Average DO Ml/d 2007 Peak DO Ml/d Atkins final Analysis Average, high impact Atkins final Analysis Peak, high impact Atkins final Analysis Average, mid range impact Atkins final Analysis Peak, mid range impact Atkins final Analysis Average, low range impact Atkins final Analysis Peak, low range impact Denge Gravel Ottinge Chalk Skeete Chalk World's Wonder Chalk Ottinge Group Lye Oak Chalk Drellingore Chalk Lower Standen Chalk Lye Oak Group Denton Chalk Tappington North Chalk Rakeshole North Chalk Rakeshole Group Stonehall Chalk Broome Chalk Connaught Chalk St Margarets Chalk Lighthouse Chalk Kingsdown Chalk Primrose Chalk Poulton Chalk Holmestone Chalk Dover Priory Chalk Buckland Mill** Chalk Cow Lane** Chalk Individual Shearway LGS Cherry Gardens LGS Terlingham Tunnel Chalk Sherway Group Seabrook Springs LGS Bluehouse LGS Saltwood LGS Postling LGS Hythe Town Spring LGS Blackrock Spring LGS Seabrook Group COMPANY TOTALS Assessment Difference between two Avearge DO Ml/d 4.95 Ml/d 0.97 Ml/d Difference between two Peak DO Ml/d 5.57 Ml/d Ml/d Table 27: Revised deployable outputs The above figures focus on the ability to maintain output from the Company s sources. If significant additional lowering of groundwater levels were to occur, there would be additional impacts on lowering river flows and other groundwater related wetlands, and even possibly some saline intrusion. The Agency may find that these impacts on the environment are so Page 44 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

286 severe that they would either wish the Company to reduce or cease abstraction from some sources, or for additional river support to be made available. No such comments have been received from the Environment Agency, but could significantly impact on the availability of water to meet customer demands should such reductions be required at a later date. The high and low deployable output figures were used in the calculation of uncertainty in the headroom assessment, whilst the mid range values were used in the baseline supply demand/balance to predict future deployable outputs (Table 28). Climate change estimates Reduction at average Reduction at peak Atkins High impact Ml/d Ml/d Atkins Medium impact 4.95 Ml/d 5.57 Ml/d Atkins Low impact 0.97 Ml/d 0 Ml/d Table 28: Climate change estimates The impact of climate change on the overall final supply/demand balance is shown in Figure 9. Impact of Climate Change on WAFU Ml/d Section Demand side Year WAFU without CC WAFU with CC Demand + headroom Figure 9: Impact of climate change on WAFU Uncertainty of climate change on demand has been assessed by applying the demand increases outlined in the DEFRA funded Climate Change: Demand for Water (2003) project. This project forecasts a 1.45% increase in household consumption by 2020 and a 2.7% Page 45 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

287 increase in industrial/commercial consumption by The impact of climate change on demand is included in the Headroom assessment. Section Impact on supply/demand balance Climate change impacts have been assessed using guidance from the UKWIR CL/04/C study (ENTEC 2007) and the Environment Agency (2007) and the East Kent Groundwater model, which had been recently developed by the Mott MacDonald for the Environment Agency and is considered to be the most suitable model for this area. The Company s DO is reduced in 2035 by 10% for average conditions and 9% for peak conditions. Climate change has been included explicitly in the forecasts of deployable output in the Plan. The headroom appraisal includes for the uncertainty around the climate change forecasts. Section 2.5 Target Headroom Headroom is the safety margin that is maintained between supply (minus outage and allowing for imports and exports) and demand to cater for uncertainties in the overall supply/demand balance. Headroom has been determined for the single company-wide resource zone, as agreed with the Environment Agency. The Denge Security main allows transfer of treated water from the Hills to the Denge supply areas, effectively merging these two areas into one integrated zone. There are two recognised methods for examining headroom: A practical method for converting uncertainty into headroom (UKWIR, 1998). An improved methodology for assessing headroom final report (UKWIR 2003). Section Choice of method For the final business plan, the Company has undertaken a target headroom calculation using the 2003 methodology. A review of the 2002/03 headroom submission was undertaken and used as a base position, upon which changes could be evaluated. The 2003 methodology determines a likely range of values for headroom, for selected years within the planning period. It requires the uncertainty for each headroom component to be defined as a probability distribution, and then combines these using Monte Carlo simulations. The result is a range of possible values for headroom uncertainty at given probability. The Company then has to determine which level of uncertainty to adopt as Target Headroom. The key components of the headroom calculation are: S1 Vulnerable surface water licences S2 Vulnerable groundwater licences S3 Time limited licences S4 Bulk transfers S5 Gradual pollution causing a reduction in abstraction Page 46 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

288 S6 Accuracy of supply side data S7 Single source dominance and critical periods (old method only) S8 Uncertainty of climate change on yield S9 Uncertain output from new resource developments (new method only) D1 Accuracy of sub component data D2 Demand forecast variation D3 Uncertainty of climate change on demand D4 Uncertain outcome from demand management methods (new method only) Of these categories the Environment Agency has advised that S1, S2 and S3 should not be included in headroom uncertainty, because: i) There is a presumption of renewal of time limited licences so no uncertainty need be estimated. ii) Where licences are vulnerable as a consequence of the National Environment Programme (NEP) for example the Habitats Directive Review of Consents, the Environment Agency will give sufficient notice of any amendments to licences, so that Water Companies can include supply reductions in their Plans. Section Risk and uncertainty in supply and demand Supply side S1 Vulnerable surface water licences The Company currently has no surface water licensed abstractions. S2 Vulnerable groundwater licences No uncertainty was included for vulnerable groundwater licences following Environment Agency guidance, as described in the Section 3.1. S3 Time limited licences These are licences that either are now, or could at some time in the future be time limited. The EA can renew, revoke or modify a time limited licence and there is therefore inherent uncertainty in time limited licences. No uncertainty was included for this category following EA guidance as described in Section 3.1. S4 Bulk imports This category relates to the reliability of the imports, as discussed in Section 2. No uncertainty has been applied to bulk imports as these are dealt with explicitly in the supply demand balance. S5 Gradual pollution Data required: Magnitude of potential loss of DO (at average and peak conditions) The probability distribution of the potential loss The risk of any of the groundwater sources being polluted from activities within each of the source catchment areas was considered. Risks identified were from petrol stations, salt intrusion and general urban pollution. Page 47 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

289 Dover Sources The Dover Sources are Primrose, Cow Lane, Poulton, Holmestone, Dover Priory and Buckland Mill. Of these, the Buckland Mill source is very close to a petrol station and therefore, at risk from a possible petrol spillage. If a major spillage were to occur the source would be likely to be out of commission for several years while remediation solutions are considered and implemented. Deployable output at Buckland Mill is 4Ml/d at average and peak conditions. For the headroom assessment, it was predicted that there was a 5% risk in any year that this would be reduced to zero, with a 95% likelihood that DO would be unaffected. A discrete distribution was used. The remaining sources are located close to, or within the urban area of Dover, and a general risk of urban pollution is present. The prediction made is that the most likely reduction in DO due to gradual pollution is zero, with a possible maximum reduction of 4% of DO. An exponential distribution was used. The total DO of these sources is Ml/d at average and 14.29Ml/d at peak. Denge Sources Several linked sources close to the coast on the Denge Peninsula are at risk of inundation by a high storm surge. These sources have a DO of 4.65 Ml/d average and 5.58 Ml/d in the critical period. The sources supply the surrounding villages and the Dungeness Power Station (around 1.68Ml/d). The water abstracted from the sources is treated via a reverse osmosis plant in order to remove arsenic. However, the plant has the capability to remove salts if the sources were polluted with saline water. The plant would not be able to throughput more than the water supplied to the Power Station, so the DO would be reduced to 1.68 Ml/d at average and peak. A study 2 commissioned by the Company to assess the risk of storm surge inundation estimated a 1 in 20 year risk i.e. a 5% probability that DO is reduced to 1.68 Ml/d and a 95% probability that no impact occurs. A discrete distribution was used. No further risks of gradual pollution were identified. S6 Accuracy of supply side data There is a risk that data inaccuracy or paucity renders any estimates of DO unreliable. This could for example cover the extrapolation of drought bounding curves where no flow/level data exists for a recognised drought period. Data required: Most likely error in DO, in Ml/d Maximum possible error (positive and negative) An assumption of +/- 2% of DO has been applied as the maximum possible uncertainty in DO, with the most likely uncertainty equal to zero. 2 Jacobs Flood Risk Assessment, Final Report, January 2009 Page 48 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

290 S8 Uncertainty of climate change impact on DO There is a risk that the impact of climate change on water levels will alter any estimate of DO. Assessments for PR09 indicate a significant net effect for climate change on source output. The recent UKCIP02 scenarios have updated the precipitation forecasts. In the 1998 scenarios spring and autumn became wetter, but the UKCIP02 scenarios suggest the seasons may become slightly drier. This reduction in rainfall in the recharge seasons is likely to change the balance of supply and demand. Atkins were commissioned by Folkestone and Dover Water, Southern Water and South East Water to assess the potential impact of climate change on yields of groundwater sources in the east Kent area, using guidelines produced by Entec in and the EA WRMP guidelines 4. In Atkins report ( 5 ) they produced results for high, mid and low climate change scenarios. The potential impacts on DO at 2035 were interpolated linearly from zero at 2006/07. The central or mid climate change impacts were included as an adjustment to WAFU in the Water Resources Management Plan The high and low scenario impacts relative to the mid scenario impacts have been applied as upper and lower uncertainty bounds in the headroom assessment. A triangular distribution was used. The impacts for the three scenarios are shown in Figure 10. Reduction in Deployable Output (Ml/d) Potential Climate Change Impact on Supply dry year "high" impact 14 dry year "medium" impact 12 dry year "low" impact critical period "high" impact 10 critical period "medium" impact 8 critical period "low" impact Figure 10: Potential impact of climate change on water supply 3 Entec, Effects of Climate Change on River Flows and Groundwater Recharge: A Practical Methodology. Draft Guidelines for Groundwater Impact Assessment. 4 Environment Agency, Draft Climate Change Guidance Supplement to Water Resources Planning Guidelines. 5 Atkins, East Kent Climate Change Impact Assessment, Final Report. Page 49 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

291 Demand side For the demand side, the assessment of uncertainty occurs at resource zone level. The UKWIR project Uncertainty and Risk in the Supply/Demand Balance 6 describes a methodology for assessing uncertainty in the demand forecasts. D1 Accuracy of sub component data Accuracy of sub component demand data is assessed with reference to the closure error in the water balance of the base year for the demand forecast. Within the MLE process rebalancing takes place to redistribute errors in the water balance to other components. The sum of sub components was greater than the measured distribution input by 0.74 Ml/d for the Company area, and would therefore tend to overestimate demand by this amount. Uncertainty was therefore modelled as a triangular distribution with a most likely value of Ml/d (implying a reduction in headroom) and a maximum possible value of zero. The same value was used for dry year and critical period. D2 Demand forecast variation This component is a measure of the uncertainty around the demand forecast, which tends to increase over the planning period. The headroom methodology suggests that the sensitivity of assumptions in the demand forecast can be tested to produce an upper and lower forecast, and hence an envelope of uncertainty. The demand forecast spreadsheet developed for the Water Resources Management Plan was used. The assumptions which varied to produce the upper and lower scenarios are described below. Population and household Forecasts Experian produced household and population forecasts for the Company and this work is described in separate reports for the Water Resources Management Plan. For the Final Plan, figures have been revised (from those used in the draft Plan, 2008) to account for the current and projected economic downturn. Three forecasts were produced called trend, policybased, and most likely. The central demand forecast for the final WRMP used the policy based population and household forecasts. For the upper demand forecast for headroom the higher household and population figures from the trend based forecasts were used. These forecasts are shown in Figure UKWIR 2003, Uncertainty and Risk in Supply/Demand Forecasting, 03/CL/09/1 Page 50 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

292 250,000 Household and Population Forecasts 200, , ,000 50, Trend based population (upper bound) Trend based households (upper bound) Policy based population (central and low er bound) Policy based households (central and low er bound) Figure 11: Household and Population Forecasts used for Demand Uncertainty Per capita consumption The Company developed a micro component model to determine forecasts of measured and unmeasured per capita consumption over the planning period. Upper and lower bounds were produced by altering the assumptions on frequency of use, and rates of change, for: bath and shower use, dish washing and clothes washing (manual and machine). The upper and lower forecasts used for the headroom assessment are shown in Figure Per Capita Consumption Forecasts 200 l/head/day high pcc measured high pcc unmeasured central pcc measured central pcc unmeasured low pcc measured low pcc unmeasured Page 51 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

293 Figure 12: PCC Forecasts used for Demand Uncertainty Non household demand The Company commissioned Jacobs to derive a non-household demand forecast. For the final Plan, this was revised to reflect the current economic downturn (non household demand is 8% lower from 2011 to the end of the forecast), and these revised figures are used in the central demand forecast. For the upper bound of demand uncertainty used for headroom assessment, the pre-revision forecast was used i.e. reflecting an optimistic forecast and greater demand. The upper and lower bounds of PCC, household and population figures and the non household demand were input to the Company demand forecast model and upper and lower bounds derived for Distribution Input. These are shown with the central forecast in Figure 13. A triangular distribution of uncertainty was used with the most likely value equal to zero and the maximum and minimum values as defined by the upper and lower bounds of DI. 70 Distribution Input Forecasts (household and non household) Ml/d dry year average lower dry year average central dry year average upper critical period lower critical period central critical period upper Figure 13: Envelopes of Demand Forecasts for D2 Uncertainty D3 Uncertainty of climate change on demand Uncertainty in the impact of climate change on demand was applied based on guidance in the CCDeW report, Climate Change and the Demand for Water 7. Separate factors were applied to household and non household demand, taken from Table 3.9 and Table 4.1 of the report respectively, for the EA Southern Region. These figures are shown in Table 29 below, and are the percentage impacts relative to baseline demand in the mid 2020s. 7 Downing, T.E, Butterfield, R.E., Edmonds, B., Knox, J.W., Moss, S., Piper, B.S. and Weatherhead, E.K. (and the CCDeW project team), Climate Change and the Demand for Water, Research Report, Stockholm Environment Institute Oxford Office, Oxford. Page 52 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

294 Impact on demand at 2025 (%) Min Max Household demand 0.99% 1.45% Non household demand 2.40% 2.80% Table 29: Climate Change Impact on Demand The factors were interpolated from zero at the start of the forecast to 2025 and extrapolated using the same trend to 2035, as outlined in the EA WRMP guidelines. They were applied to the central household and non household Distribution Input forecasts from the Company demand model. A triangular distribution was applied with the central value taken as the mid point between the values in Table 29. Section Results of the Headroom Assessment Headroom values were derived for the dry year average and critical period cases. Crystal Ball software (version 7.2) was used to apply the Monte Carlo sampling, and a distribution of target headroom across the planning period was produced. As the new methodology is based on defining probability distributions, there are a range of outputs which relate to different percentiles, or probabilities of occurrence, as shown in Figure 14 and Figure 15. Target Headroom Target Headroom Ml/day Mean 5% 10% 25% 50% 60% 70% 75% 85% 95% 99% Risk Profile Year Figure 14: Headroom uncertainty Dry year average Page 53 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

295 Target Headroom Target Headroom Ml/day Mean 5% 10% 25% 50% 60% 70% 75% 85% 95% 99% Risk Profile Year Figure 15: Headroom Uncertainty Critical Period The level of risk the business is willing to adopt is fundamentally a Company decision. Ofwat views headroom as an implicit estimate of the costs associated with increased security of supply and the valuation placed by society on the benefits of supply security (i.e. avoidance of supply interruptions). The final headroom assessment presented below has been discussed and agreed at executive management and board level. In arriving at a decision, consideration was given to the influencing factors and the range of potential levels of target headroom from Figures 13 and 14. The Company has adopted a risk profile which accepts a greater risk to security of supply towards the end of the forecast period. That is on the basis that future uncertainties in supply and demand will be reduced over time and reflected in the next cycles of water resource planning. FDWS Target Headroom Profile: 99% confidence from 2006/07 95% confidence from 2011/12 85% confidence from 2016/17 75% from 2021/22 to end of the planning period. The final target headroom numbers used in the plan are shown in Table 30. Headroom (Ml/d) 2006/ / / / / / /35 Average conditions Critical periods Table 30: Target Headroom results Page 54 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

296 Section 2.6 Baseline supply/demand balance The baseline supply/demand forecast is based on the following position: The completion of the compulsory metering programme, which will bring nearly all domestic customers (96%) on to meters by the end of The renewal of bulk imports from South East Water and Southern Water until The revised outage allowance including flood risk. The revised climate change forecasted impact on DO. The revised Experian policy forecasts for population and households (including allowance for economic downturn). The revised commercial forecast (including allowance for economic downturn). The consumption forecast of 130PCC by The revised headroom figures. The supply/demand balance is showed in Table 31. Overall, there is no supply/demand balance deficit under average conditions, except for the last 4 years of the planning period. There is no supply/demand balance deficit under peak conditions. WAFU - (demand + headroom) 2007/ / / / / / /35 Company Average (Ml/d) Company Peak (Ml/d) Table 31: Baseline supply/demand balance Figure 16 and Figure 17 show the supply/demand balance throughout the 25-year period. Page 55 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

297 60.00 Baseline Supply/Demand Balance DYAA Ml/d Year Normal (130 PCC by 2015) Dry Demand Plus Headroom WAFU Figure 16: supply/demand balance average conditions Baseline Supply/Demand balance DYCP Ml/d Year Normal Dry Demand Plus Headroom WAFU Figure 17: supply/demand balance critical period conditions Page 56 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

298 Section 2.7 Options Appraisal Section Approach for option appraisal The Company is committed to the twin track approach of developing new sources in parallel with active management of customers demand. A programme of supply/demand schemes is proposed to enable levels of service to be restored and maintained over the planning period 2010 to The approach was guided by the Economics of balancing supply and demand (EA and UKWIR, 2002). The process comprises the following steps: Development of the unconstrained options list Development of the feasible options list Economic appraisal of options Development of the preferred options list through least-cost optimisation Section Unconstrained options list A range of options were identified and classified into the following categories drawing on the work from PR04 as well as new options developed during the subsequent operational period: Resource management Demand management Production management Customer side management Section Feasible options list The feasible options list was produced by applying a screening tool to the unconstrained list, and by screening out high risk schemes on the basis of a consistent and mutually agreed set of criteria. The screening tool enabled the consideration of technical and financial criteria, in conjunction with environmental and social criteria. In doing so, the tool ensured the feasible list of schemes will: Be capable of enhancing security of supply. Be technically feasible. Provide environmentally preferred outcomes. The tool was applied in two stages: Stage 1 involved the transparent and quick application of pass/fail indicators to measure the performance of a scheme against set criteria. This first stage proved to be a straightforward, complete and efficient way of identifying and separating those schemes considered for the business plan 2009 that could go forward for funding under the supply/demand programme (note: being screened out at this stage does not mean that the scheme will be abandoned but merely that it will not be considered for funding under supply/demand). A few examples that illustrate the use of the criteria could include, for instance: a scheme that is technically infeasible or will not add to the volume of the water supply is immediately screened Page 57 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

299 out; a scheme that carries significant commercial as well as yield uncertainty is screened out; however a scheme whose only uncertainty lies in the area of public unacceptability will not be excluded on the grounds of this criterion alone. The types of schemes considered were: Bulk Transfer (including Local Distribution and Security of Supply) Demand Management (including Reuse) Environmental Protection Leakage Metering Resource Development (including Treatment) Tariffs Stage 2 involved the application of a more detailed set of indicators for an expanded set of criteria to the schemes that successfully passed the stage 1 screening. Stage 2 is not a pass/fail but rather a scoring process. For each of the selected 26 technical/social/environmental criteria, a score was assigned on a range of -2 to +2 according to the relative impact of the schemes on the component examined. Stage 2 was completed during a workshop with the Head of Capital Investment and Asset Management, where it was agreed that only the schemes with a score above 0 would constitute the Feasible Options List. The final number of feasible schemes is 27 schemes. The screening results are presented in Table 32. CATEGORY Unconstrained List Feasible List % screened Bulk Transfer % Demand Management % Environmental Protection % Leakage % Metering 1 1 0% Resource Development % Tariffs 1 1 0% TOTAL % Table 32: Results from the screening process The unconstrained water efficiency schemes which were put forward are wide ranging, covering the different activity strands that make up the Company water efficiency strategy. The feasible list of water efficiency schemes compiled as a result of the screening process included both domestic and non domestic schemes, broadening the Company s current level of activities and incorporating a number of initiatives taken from the Ofwat good practice register for water efficiency. The feasible list of options is distinct from the activities included in the baseline. All of the feasible schemes would result in new activities or a significant change to a current activity, setting them aside from the current baseline. Page 58 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

300 Section Economic Appraisal of Options Each option description was reviewed in detail, and the information recorded was refined and updated throughout the process. The risk of schemes was assessed, based on the interaction of the volume of yield/savings available and the uncertainty (% risk in achieving the benefit) associated with a given option. The following two factors combine the benefit incorporating risk for a particular scheme: Volume of water (yield or savings) per mega litre benefit per day. Percentage of Confidence in achieving the benefit, which is produced by assessing the political and technical risks associated with the project. The assessment accounts for both the risk of obtaining required permits or licences and also the technical feasibility of obtaining the deployable outputs. The assessed risk of schemes is used in the economic appraisal of the least cost solution. Using individual scheme risks allows the Company to consider specific attributes of each scheme, rather than the more limited approach of applying an overall assessment of risk in headroom. This issue is discussed more fully below. The options with the highest environmental and social impacts were screened out during the first stage. However, feasible options were reviewed and any opportunities for environmental enhancement and energy efficiency were looked at. The potential impact of each option against meeting the environmental objectives of the Water Framework Directive was also identified. For any option, which involves taking more water from a water resource management unit currently defined as over-abstracted or over-licenced, considered the potential impact it may have on Water Framework Directive ecological status, was considered. The delivery costs were produced using the Company s Infrastructure and Non-infrastructure unit costs (CAPEX, OPEX and AIC master spreadsheets) produced for the business plan Following discussions with principal engineers, suppliers and/or potential contractors, the scope was developed in greater detail, and the cost of each scheme was calculated using unit cost, uplifted with Construction Industry Price Indices (COPI) value. Schemes, such as leakage, metering and water efficiency were examined in details, with tailored costs identified to meet specific requirements and identified as bespoke costing. Social and environmental costs were established for the 27 schemes using an approach developed by the consultants Jacobs. The approach used to quantify and value the social and environmental costs was based on the Environment Agency s latest (2003) guidance documents entitled Assessment of benefits for water quality and water resources schemes in the 02/03 Environment Programme. This process involved completion of five excels spreadsheet tables for each scheme examined. The approach developed by Jacobs to quantify the carbon footprint of the feasible schemes was based on their experience of doing the same for construction projects and for industrial processes. There was no explicit guidance on the calculation of carbon footprint from the Environment Agency or Defra, except for that on applying a shadow price of carbon. Carbon accounting was carried out for both Capex and Opex elements of the schemes. Page 59 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

301 Bulk Transfer The Company has had the benefit of a long standing bulk supply from a South-East Water source in the Barham area. This was terminated in 1992 following difficulties with source yields on South-East Water s behalf and only reinstated as a 2Ml/d continual supply in The terms of the bulk supply agreement were the subject of an Ofwat determination that is due to expire in 1st April The Company has agreed with South-East Water to extend the agreement a further 5 years to Following recent discussion with South East Water, both companies have agreed to renew the existing agreement until It has also been agree to include the current bulk transfer in the baseline supply/demand balance for the 25-year planning period. The Company is also looking at increasing the Barham import from 2 to 4Ml/d, as detailed in scheme 301. This scheme would be available from During AMP3, the Company invested in the necessary infrastructure to commission a new bulk supply arrangement with Southern Water (Deal High Level Reservoir). This is available at a rate of 4 Ml/d for four months from September to December. Clearly this is not available to meet peak (critical period) demands but it is available at an important time for the company to allow existing sources to be used more fully the rest of the year. In assessing the deployable output a prudent view has been taken, giving 1.33 Ml/d (the annual equivalent) at average and nothing available at peak. The agreement expires in 2012 and the Company proposes to continue the agreement with Southern Water. Both companies agreed to include the current bulk transfer in the baseline supply/demand balance for the 25-year planning period. With scheme 450, the Company is looking at the potential extension of the existing agreement from 1.33Ml/d to 2.67Ml/d over a year at average and from 0 to 2Ml/d at peak. This scheme would be available from The two options put forward by the Company have all been discussed with the appropriate water companies (i.e. South East Water and Southern Water), and both companies have made provision for the extension of those bulk transfers. Demand Management Water efficiency options have been considered by the Company to build upon activity in AMP5. These are: Region school projects in partnership with Environment Agency (scheme 433) Proactive water efficiency retrofits trial (scheme 437) Join water efficiency promotions in partnership with Local Authorities (scheme 439) Leakage The leakage policy is based on monitoring district meter zones by telemetry, with sub zones monitored via SMS text loggers. Best available technology is employed in leakage with dedicated leakage detection and contract staff. Between draft and final Business Plan, the Company has commissioned Halcrow to review the current state of the network and identify any potential improvements. The findings have been used to update the scope and cost of each scheme. Each scheme (except from scheme 441) has now a specific location. Page 60 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

302 The leakage control options are: Optimisation of Enbrook Way DMA (scheme 361) Installation of new PRV at Guildhall Shellon DMA (scheme 362) Installation of new PRV at Cheriton High DMA (scheme 379) Service reservoirs (scheme 441) Local Distribution Three options have been proposed in order to remove network constraints. This would allow sources to be pumped, treated and fed into the network at the same time, or to pump sources up to licence. The schemes are: SBRO network improvement: remove network constraint which prevents SBRO and BARI to be discharged into the network at the same time (scheme 626). Peak scheme only. SWOR network improvement: the benefits of the scheme has been reviewed and the output has been revised to 0 (scheme 627). SRAK network improvement: The proposal is to install a new pump at SDEN in order to achieve licence output (scheme 628). Peak scheme only. Metering Scheme 637 would be to implement a SMART metering trial on internal and new meters with the benefit of: Develop vision for future customer service (internet, data..) Gaining a better understanding of smart metering technology and the opportunities it presents (potential Company-wide roll out); Understanding the technical issues involved in integration of smart metering with existing company systems; To assess customer reaction to smart metering, in particular any behavioural change resulting from improved access to consumption data; Exploring commercial tariff options which could arise from smart metering; Providing better data to support a more robust life cost benefit analysis on a company wide implementation. This would see the installation of 3,286 smart meters between 2010 and Resource Development The Company has identified 7 feasible schemes. These are: SLYE licence recovery: this scheme is about negotiating with the Environment Agency the recovery of water loss to treatment through licence variation (scheme 629). Sources optimisation: the scheme is to relieve the existing network constraint downstream of the bulk import from Southern Water and SSTM, SKIN, SLIG sources towards DOWR. A new pipeline would be lay in order to increase the network capacity Page 61 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

303 (scheme 314). This scheme is part of scheme 043, which means only one of them can be implemented (either 314 or 043). DOVN sources: remove DAPWL constraint on DO to able additional groundwater resource to be deployed and therefore increase output from existing boreholes (scheme 043). This scheme is part of AMP4 resource study work. Folkestone covered storage: construction of a 300Ml covered reservoir for long term storage of winter surplus for dry year peak. The new reservoir will be gravity fed from PADR at a daily rate of 1Ml/d. A booster pumping station will discharge stored water back to PADR at a daily rate of 5Ml/d. BROK regional reservoir: a new reservoir would be built at Broad Oak as a three-way venture by Southern Water, South-East Water and Folkestone and Dover Water. It is estimated that the Company would have 20% stake in reservoir, and that the scheme would be available in Currently, the Company has assessed costs for 20% of total costs and for a direct raw water transfer pipeline from SEW new Ashford reservoir site to PADR (scheme 046). HYTW: the Company has investigated the use and the treatment of the brackish water pumped from the Beach Wells. The water will be treated by a RO plant and delivered to SALR (scheme 008). Full desalination scheme: the Company has investigated the use and the treatment of sea water. The water will be treated by a RO plant and delivered to SALR (scheme 309). Reuse The Company has considered the use of sewage effluent, which preferred use is in conjunction with an environmental protection scheme to maintain river flows. The Company has put forward 2 feasible options: BROB effluent reclamation: the effluent from BROB waste water treatment plant would be treated and delivered to the River Dour, in order to provide low flow compensation. The implementation of this option would require an agreement to be reached between Southern Water and the Company to have access to the effluent (scheme 294). HYWW effluent reuse: the effluent from HYWW waste water treatment plant would be treated to tertiary standard and injected into the Hythe Ranges. This will provide a barrier for saline intrusion into the shallow aquifer. The implementation of this option would require an agreement to be reached between Southern Water and the Company to have access to the effluent (scheme 605). Security of Supply Under scheme 459, the Company would build a new reservoir in addition to Hills reservoir, to ensure peak demand is dealt with. Tariffs The Company is progressively metering all its customers to secure a long term sustainable water supply in the area. Metered customers are more aware of their water usage, and the Company believes that alternative charges will provide an additional incentive for customers to use water wisely. Page 62 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

304 Under this new stepped charging structure an initial allowance of water to cover everyday household use will be charged at a rate below the current standard rate. Any water that is used in excess of this allowance will be charged at a higher than standard rate. The essential use allowance is being set at 219 litres per property per day (equivalent to 80 cubic meters per property each year), and this is designed to cover day to day household needs including cooking, washing and laundry requirements. This allowance is based on a careful assessment of water needed in the average home for everyday living with non essential water use excluded. To further improve the equity of the level of household allowance provided under the stepped charges, larger families will be able to claim an additional volume of water to be charged at the low rate, as well as those with special medical requirements. New Smart bills will replace standard bills and will show customers their water usage in detail, and allow them to compare this easily against average use. Meters will be read and bills sent out on a quarterly basis to allow customers to check regularly on their water use. This option would be implemented to the whole supply area in Treatment The Company has identified SDNG re-mineralisation of RO stream (scheme 630) as a feasible option. The SDNG water treatment plant consists of 2 streams: RO stream with a capacity of 3.6Ml/d Traditional stream (filtration) with a capacity of 7.2Ml/d. The water from the RO stream is supplied to British Energy (1.8Ml/d at average, 2.4Ml/d at peak). The public water supply is a blend of the 2 streams with a ratio of 30% from RO stream and 70% from traditional stream. The scheme proposes to upgrade the traditional stream with a RO plant of a capacity of 7.2Ml/d. Section Overall options list Table 33 gives the following information for each feasible scheme: Output at average and peak, Confidence in achieving output (%), Construction period, Total Capex (at 07/08 prices), Total Opex (at 07/08 prices), Annual and one-off Social and Environmental costs. Page 63 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

305 Scheme number Scheme name Type of scheme 8 HYTW Resource Development 43 DOVN sources Resource Development 46 BROK Resource Development 293 Folkestone covered storage 294 BROB effluent reclamation Resource Development Reuse Description Abstraction of brackish water with treatment through reverse osmosis plant. The water will be delivered to SALR. Additional groundwater resource to be deployed from actual boreholes by removing DAPWL constraint on DO. A new reservoir to be built as a 3 way venture with Southern Water, South East Water and the Company. Scheme based on SEW information for MRF 160 Ml/d and 41.5m AOD. Assume FDWS 20% stake in reservoir. Scheme available in Construction of a 300Ml covered storage reservoir for long term storage of winter surplus water for dry year critical period. Effluent from BROB is treated to enable it to be delivered to the River Dour in order to provide low flow compensation. 301 BARI increase Bulk Transfer Option to increase import from SEW from 2Ml/d to 4Ml/d. Scheme available in Full desalination scheme Resource Development Treatment of sea water via reverse osmosis plant. Output at average (Ml/d) Output at peak (Ml/d) Confidence in output being achieved Construction period (years) Total Capex (000's ) Total Opex per annum (000's ) S&E costs - one-off (000's ) S&E costs - annual (000's ) % 4 12, % 2 1, % 5 38, % 4 19, % 4 15, % 2 2, % 4 11,144 1, Page 64 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

306 Scheme number Scheme name 314 Sources optimisation 361 Optimisation of Enbrook Way DMA 362 Installation of new PRV 379 Installation of new PRV 433 Region School Projects 437 Proactive Water Efficiency retrofit trial 439 Join Water Efficiency 441 Service Reservoirs Type of scheme Resource Development Leakage Leakage Leakage Demand Management Demand Management Demand Management Leakage Description Relieve existing network constraint downstream of the bulk import from SWS and SSTM, SLIG and SKIN sources towards DOWR. Redesign DMA by installing meter, booster and telemetry. Install a PRV at Guildhall Shellon DMA. Install a PRV at Cheriton High DMA. Joint project with EA and other water companies to carry out school audits and promote water efficiency measures. Promote the use of retrofit dual flush systems within house through the installation of a number of subsidised devices. Work jointly with Local Authorities to promote water efficiency within LA buildings and to their customers Drop tests will be carried out at reservoirs on a regular basis (2 per annum) resulting in a reduction in reservoir leakage. Output at average (Ml/d) Output at peak (Ml/d) Confidence in output being achieved Construction period (years) Total Capex (000's ) Total Opex per annum (000's ) S&E costs - one-off (000's ) S&E costs - annual (000's ) % % % % % % % % Page 65 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

307 Scheme number Scheme name 450 DEAI extension Type of scheme Bulk Transfer 459 NEHI Security of Supply 605 HYWW effluent reuse 626 SBRO network improvement Reuse Local Distribution Description The actual import agreement with SWS provides 4Ml/d over 4 months only (Sept-Dec), which is equivalent of 1.33Ml/d over a year. The scheme is to uprate the import for 1Ml/d for 2/3 of year (Jan-Aug) and for 4Ml/d for 1/3 of year (Sept-Dec), which is equivalent of 2Ml/d over a year. Scheme available in Ensure peak demand is dealt with at the critical pinch point in network: HIRE (150years old reservoir) by building a new reservoir in addition to the actual reservoir. Effluent from HYWW is treated to tertiary standard and injected into the HYTW Hythe Ranges. This will provide a barrier for saline intrusion into this shallow aquifer. BARI import and SBRO discharging together are constrained by the network downstream of SBRO. The scheme is to change the location where SBRO feeds into the network. Output at average (Ml/d) Output at peak (Ml/d) Confidence in output being achieved Construction period (years) Total Capex (000's ) Total Opex per annum (000's ) S&E costs - one-off (000's ) S&E costs - annual (000's ) % % 3 4, % 4 14,943 1, % Page 66 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

308 Scheme number Scheme name 627 SWOR network improvement 628 SRAK network improvement 629 SLYE licence recovery 630 SDNG remineralisation of RO stream Type of scheme Local Distribution Local Distribution Resource Development Treatment Description Network restriction is caused when SWOR works in conjunction SOTT supplying PADR. The scheme network improvement by laying a new pipeline to connect the existing main from SWOR to SRAK- PADR main. A new borehole pump and upgrading treatment process will also be introduced at SWOR. The group of borehole sources (SDEN STAN STAS SRAN and SRAS) and is not achieving the licence output due to the wrong pump sizes. The proposal is to install a new pump at SDEN. Negotiation with the EA to recover the water lost to treatment through variation of the licence. SDNG treatment works consists of 2 streams: RO stream with capacity of 3.6Ml/d and a traditional stream (filtration) with a capacity of 7.2Ml/d. Upgrade is required to replace traditional stream with RO plant (capacity 7.2Ml/d). This would reduce the outage at SDNG treatment works. Output at average (Ml/d) Output at peak (Ml/d) Confidence in output being achieved Construction period (years) Total Capex (000's ) Total Opex per annum (000's ) S&E costs - one-off (000's ) S&E costs - annual (000's ) % % % 3 6,531 1, Page 67 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

309 Scheme number Scheme name Type of scheme Description 632 CHOICE Tariffs New stepped charging structure where an initial allowance of water to cover everyday household use will be charged at a rate below the current standard rate. Any water that is used in excess of this allowance will be charged at a higher than standard rate. Scheme available from Smart metering 638 BARI continuation after 2014/ DEAI extension after 2012 Metering Bulk Transfer Bulk Transfer Implement Smart metering trial with the benefit of gaining better understanding of Smart metering technology. Output at average (Ml/d) Output at peak (Ml/d) Confidence in output being achieved Construction period (years) Total Capex (000's ) Total Opex per annum (000's ) S&E costs - one-off (000's ) S&E costs - annual (000's ) % % The Company has an export agreement with SEW and this agreement expires in 2014/15. This option is for the continuation of this existing agreement. 2 2 In baseline 0 0 Base opex The Company has an export In baseline 0 0 Base opex agreement with SWS and this agreement expires in This option is for the continuation of this existing agreement. Table 33: Description of the feasible schemes Page 68 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

310 Section Optimisation The Company used the least-cost optimisation Dynamic Model developed by the consultants Jacobs, to define the preferred options list. The model has been designed to pull together the various components of the Water Resources Management Plan to produce an optimised leastcost development scenario for each water resource zone and allow the plan to be updated rapidly to respond to changes in demand forecasts, deployable outputs, risk and headroom etc; and take account of alternative climate change scenarios and sustainability reductions as these may become available. The methodology adopted follows the procedures outlined in the Economics of Balancing Supply and Demand (EBSD). The optimisation routine chosen is the dynamic programming (DP), which is probably one of the most robust optimisation techniques for determining a global optimum solution for a staged process such as the Water Resources Management Plan. The least-cost optimisation model includes provision for calculating the following economic costs: AIC - for each option is defined as the Net Present Value (NPV) of the combined CAPEX and OPEX, at a given discount rate, divided by the NPV of the expected output (yield) for that option. AISC - for each option is defined as the NPV of the combined CAPEX and OPEX, together with the estimated environmental and social costs added in, divided by the NPV of the expected output (yield) for that option. NPV Net Present Value, of the range of options in a given scenario is the combined CAPEX and OPEX cost streams, together with estimated social and environmental costs (over time), discounted at a given discount rate, of all options included in that scenario. The model calculates these economic costs for the feasible options list to arrive at an optimum selection of schemes and implementation sequence, that meets the projected supply/demand balance (including allowance for headroom) at a minimum NPV, for a given target level-ofservice. The Company s preferred methodology for the optimising calculation is to use individual scheme risk benefit values, as the Company consider this more effective and accurate when using a modelling approach that considers a large number of combinations of scheme options. The outcome of this approach has been used for the proposed investment strategy. The Company has also considered the alternative outcome of modelling scheme risk in headroom and the results and commentary on this approach are included in Section Page 69 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

311 Section 2.8 Final Water Resources Strategy The Company has taken full account of the views of stakeholders and customers in formulating its final water resources strategy. In view of the Company s water scarcity status and Governments views on water stress, maintaining the focus on demand management is an essential component of the plan. It is a priority for the Company and the long-term security of supply of customers that customers are supported in minimising their demand for water. Demand management measures are, therefore, a central plank in the investment plan for 2010 to 2015, and this means the Company will be able to ascertain if reduced consumption is sustainable in the longer term. Accelerating the current metering programme is in direct response to these drivers. Further, introducing a socially-responsible stepped tariff for water charges as a low-cost scheme compared to the alternative of new resource development is being promoted by the Company for AMP5. In promoting these demand driven solutions, the Company recognises the need to be sensitive to any issues of affordability that may affect customers, and appropriate safeguards are built into the plan. With this strategy, the Company does not have a supply/demand deficit and therefore does not need to implement schemes over the 25-year period. Section Final supply/demand balance The Company proposes to follow the strategy defined in its Strategic Direction Statement (SDS) and include it in its supply/demand strategy: As detailed in its SDS, draft WRMP and Business Plan, the Company will roll out the stepped tariff scheme (currently trialled in the town of Lydd) to the whole supply area in April The tariff scheme will provide the Company and the water industry with valuable experience and data on how customers respond to tariffs in the short and medium term. This scheme is key to achieving the Company s aspirational target of 120 PCC by However, there is considerable uncertainty around customers response to demand management measures; therefore, the Company has decided to forecast demand based on a Per Capita Consumption of 130l/person/day. By modelling revenue based on 130 PCC rather than 120 PCC, the Company is seeking to appropriately balance the impact on customer bills against the uncertainty in demand and Company income. This position has been approved by the Board as part of the overall strategy to achieve the right balancing between Company risk and the impact on customer bills. If the target of 120 PCC is not achieved by 2015, the Company has the option to explore changes to the tariff mechanism to stimulate further customer reductions to achieve the 120 PCC target. The Company will continue its AMP4 leakage strategy, which aims to reduce leakage by 0.5Ml/d over the 5-year period. This will reduce the leakage level to 7.5Ml/d by 2015 and progress towards achieving the Sustainable Economic Level of Leakage over a 10-year period. This is consistent with the Company s SDS and energy efficiency target. The willingness to pay survey highlighted strong support from customers for carbon reduction. Customers have also Page 70 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

312 made it clear that leakage should be reduced further, if they are expected to reduce their consumption, and the Company is responding to that message by lowering leakage by a further 0.5Ml/d. The Company will also undertake three studies during AMP5. The AMR trial will strengthen its position towards customer service and new technology by installing AMR meters in internal properties. The Company is responding proactively to growth challenges around Dover, by undertaking further detailed design and network analysis for the Whitfield development. The Company will be in a position to propose detailed network solutions to the developers at the end of AMP5. The Company continues to work with the Environment Agency and neighbouring companies on the Little Stour catchment. The Company has incorporated the 0.07Ml/d per year Water Efficiency Target set by Ofwat into its final Business Plan projections. The Company plans to carry out a variety of water efficiency activities during AMP5 with both commercial and domestic customers, with savings estimated for each activity in line with the information provided by Ofwat. The Company s water resources strategy is made of a small number of schemes which are required to maintain a satisfactory supply/demand balance over the planning period. The schemes and studies to be implemented over the AMP5 period are shown in Table 34 below. Scheme name Implementation Output at Output at 5-year 5- year date average (Ml/d) peak (Ml/d) CAPEX ( k) OPEX ( k) 96% metering April 2012 Baseline Baseline 3, CHOICE April Ml/d leakage reduction AMR study Little Stour NEP study Whitfield study Water efficiency target Baseline Baseline Table 34: Investment programme The result of the proposed investment programme is shown in Figure 18 and Figure 19 and demonstrates that the Company is able to maintain security of supply throughout the planning period. Page 71 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

313 60.00 Final Supply/Demand Balance DYAA Ml/d Year Normal (130 PCC by 2015 / 120 PCC by 2020) Dry Demand Plus Headroom WAFU Figure 18: Final supply/demand balance average conditions Final Supply/Demand balance DYCP Ml/d Year Normal Dry Demand Plus Headroom WAFU Page 72 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05: Figure 19: Final supply/demand balance critical period conditions

314 Section Contingency plan / sensitivity analysis The Company has run different scenarios to test the robustness of its supply/demand forecast. These scenarios are: - High outage - Loss of Denge DO from Loss of licences through WFD - High Climate Change impact - High PCC - Supply Pipe Leakage - Commercial forecast based on 2007 consumption While various sensitivity scenarios bring forward the supply/demand deficit in the planning period, none result in a deficit during AMP5. The Company has identified from the sensitivity analysis which schemes would be implemented if the demand management strategy does not result in customers reducing their consumption as forecasted. Indeed, it is customers who decide how much water they should use (in the light of the cost, if they are metered), and the Company has a statutory duty to supply domestic customers with the water they wish to use. It is, therefore, possible that demand may rise more quickly than predicted in the plan. To cope with this uncertainty, preparing for new resource schemes is important. The Company continues to explore with the Environment Agency and other water companies in the South-East the best ways of sharing resources. In this way, the Company s Plan will remain flexible and the Company can bring forward schemes if demand rises beyond that currently predicted. Further, uncertainty over whether reduced demand will continue in the longer term remains, and the Company expects to work with Ofwat to ensure that this risk can be reflected in the financing of the Company. The Company proposes to bring forward the following schemes if demand was rising faster than predicted in the plan. These would be: Regional solutions - The Company has considered the results from the Water Resources in the South East modelling work and is closely working with its two neighbouring companies: South East Water and Southern Water, to secure augmented bulk imports. These bulk imports would provide an additional 3.34Ml/d at average and 4Ml/d at peak. - Scheme 301 BARI increase from 2Ml/d to 4Ml/d at both average and peak conditions. - Scheme 450 DEAI increase from 1.33Ml/d to 2.67Ml/d at average and from 0Ml/d to 2 Ml/d at peak. From recent conversation with SWS, it is understood that the increased bulk supply will not be available before Optimisation of output from existing sources - The Company is currently investigating the possible optimisation of the outputs from its operating DOVN sources by removing DAPWL constraint on DO. If the investigations are proved successful, the Company would have the possibility to use the additional water from This scheme would provide at best an extra 4.9Ml/d at average and 4.19Ml/d at peak. Page 73 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

315 Section Regional solutions The Company is part of the Water Resources in the South-East Group and is liaising with its neighbouring companies to develop joint regional solutions for the South East of England. The Company has met regularly in the past few months with South East Water (SEW) and Southern Water (SW) to discuss the possible increase of its two bulk imports: Barham from SEW and Deal from SW. Both SEW and SW have agreed to augment those supplies to Folkestone and Dover but have highlighted that: - The increased bulk supplies will not be available before 2020; - In order to provide the Company with extra supplies, SEW and SW would require developing new resources in their own supply area. Although the Company s would be a minor stakeholder in the development of these schemes, the Company will support SEW and SW in the implementation of their preferred options which would benefit the Company in the future. The Company will continue to work closely with its customers, local stakeholders and neighbouring companies in order to ensure availability of water through demand management savings and regional resource developments. Section Carbon emissions The carbon footprint resulting from investment has been calculated for the planning period based on the emissions required to meet the dry year annual average forecast demand in each of the next 25 years. Included in this calculation is the carbon impact resulting from the baseline metering strategy which is to reach 96% by 2012, and the implementation of the stepped tariff scheme. Figure 20 illustrates that the resulting CO2 emissions from the Plan decrease steadily between 2008 and 2020 due to the implementation of demand management measures, which is in line with the Company s commitment to reduce 1% annually energy carbon use until 2020 (as included in the Strategic Direction Statement). The Company forecasts a positive supply/demand balance until the end of the planning period. Therefore, no resource development schemes are required, and consequently, the level of CO2 emissions will remain constant between 2020 and Page 74 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

316 CO2 emissions 7,000 6,000 Actual Distribution Input (June Return / Corporate Responsability) Forecast Dry Year Distribution Input 5,000 tc02 per year 4,000 3,000 2,000 1, Section 2.9 Security of Supply Index Year Final Water Resources Strategy Figure 20: Carbon Footprint for The security of supply index at Company level is estimated at: SOSI DYAA (company LOS) SOSI DYCP (company LOS) * Table 35: Security of Supply Index * The figures are as per the response to the Ofwat JR08 query of 04/07/2008. The figures improved in 2008/09 following the commissioning of Cow Lane and Dover Priory sources. Page 75 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

317 Section 3 Expenditure implications of maintaining the supply / demand balance Section 3.1 AMP5 Scheme Details and Costs The Company s water resources strategy is made of a small number of schemes which are required to maintain a satisfactory supply/demand balance over the planning period. The schemes and studies to be implemented over the AMP5 period are shown in Table 36. Scheme name Implementation Output at Output at 5-year 5- year date average (Ml/d) peak (Ml/d) CAPEX ( k) OPEX ( k) 96% metering April 2012 Baseline Baseline 3, CHOICE April Ml/d leakage reduction AMR study Little Stour NEP study Whitfield study Water efficiency target Baseline Baseline Table 36: Investment programme The Company is seeking funding for the preferred schemes, which will have to be implemented during AMP5. Section Studies Study 1: NEP Little Stour Investigations into the impact of abstractions on flows in the Little Stour have been undertaken during AMP3 and AMP4 in relation to the Alleviation of Low Flows project. These investigations are ongoing and conclusions from the investigation will not be finalised until The outcome of the current studies will be an assessment of the impact of water company abstractions on flows in the Little Stour. Following on from the impact assessment, there will be a need to evaluate various options for improving the environmental status of the river. This may be by increasing flows in the channel or by improving channel conditions such that the ecology benefits within the current flow regime (or a combination of the two). The water companies are seeking funding in PR09 for this options appraisal. Folkestone and Dover Water and South East Water as well as Southern Water abstract in the Little Stour catchment. The three water companies have worked together successfully in AMP4 and the majority of the AMP5 work will also be run in partnership. (It is assumed that all three companies have been provided with the same Stage Plan by the EA). The appraisal should review the options for improving the environmental condition of the Little Stour in terms of enhancements to the physical structure of the river and/or modifying Page 76 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

318 abstractions in order to increase flows at critical times. Whether it is appropriate to consider abstraction changes will depend on the outcome of the current impact assessment study. The practicality of implementing the options must be considered. For abstraction changes this may mean setting trigger flows or levels which are environmentally meaningful but also workable for water company operations. Any channel improvement solutions should consider the need for ongoing maintenance and are dependent on the cooperation of local land owners. In considering any modifications to water company abstraction licences which impact on deployable output, some thought should be given to how this loss will be compensated so that the supply / demand balance is maintained. The EA Stage Plan specifically notes that a detailed assessment of alternative sources should not be included in the AMP5 programme. However, in making an informed assessment of how best to address problems in the Little Stour catchment an initial look at where else water for public supply might come from is needed to ensure wider sustainability issues are considered. Broadly, the AMP5 options appraisal work should cover the following tasks: S1. River rehabilitation options (design and costing of restoration schemes for specific reaches, initial discussions with land owners, targeted geomorphology and ecology surveys) S2. Define target flow regimes (review latest EA work on silt deposition, LIFE, Baysian Belief model, fish requirements etc. including EA definition of thresholds for Good Ecological Status and Environmental Flow Indicators under the WFD, include non-alf reaches and potential effects of habitat restoration) S3. Identify ways to achieve target flows (which abstractions? magnitude and timing of changes, alternatives to abstraction reduction (e.g. bed relining, flow augmentation), include update and test runs using EKGM, potential impacts of climate change will be considered) S4. Management of any abstraction changes (detail of implementation e.g. setting triggers and protocol, may include pilot testing of proposed mechanism) S5. Alternative supply options (initial review of potential alternatives if abstraction reductions required, separately for each company e.g. SW to include test runs in MISER) S6. Propose preferred approach and plan implementation (compare costs / benefits / risks,/ sustainability (incl. carbon cost), select appropriate river rehabilitation and / or abstraction modification options, propose phased implementation of schemes) (Note this will not include options appraisal for alternative supply of water.) S7. Project management and liaison (at all stages in the options appraisal close cooperation between the water companies, EA and local stakeholders will be maintained, which will involve the formation of a Steering Group that will include all interest parties. Budget costs for these tasks are given in Table 38. The three water companies would work together as for AMP4 with coordinated management of the work and costs split along an agreed formula. However, alternative supply options is not included in this split: for this task each water company may have quite different situations to review and so it is suggested that this task is run separately by each company. Page 77 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

319 In developing the scope of work for the AMP5 study, it is assumed the EA will continue with other activities in the catchment, including: Addressing other factors which have an influence on the environmental status of the Little Stour (e.g. vegetation management, land management, head-loss at mills) but which may have to be augmented by a water company-led programme. Assessing the impact of non-water company abstractions and modifying where appropriate. Maintain (and if needed enhance) the hydrological and biological monitoring in the catchment; the lack of historic data for the Little Stour has been identified as an issue in previous phases. Availability of reliable, continuous data records will be important in validating the current assessments and quantifying benefits of any improvements. As for the Little Stour, the Wingham River has been subject to investigation in AMP4 because of the potential impact of groundwater abstraction on baseflow. The driver for work on the Wingham is Biodiversity Action Plan designations. Work in AMP4 has taken the Little Stour and Wingham schemes as one: the focus has been on defining the impact of water company abstractions on flows in both rivers and as such all abstractions in the catchment needed to be considered together. However, only Southern Water is directed to seek funding to address the specific problems on the Wingham River. As on the Little Stour, following on from the AMP4 impact assessment, there will be a need to evaluate various options for improving the environmental status of the river. This may be by increasing flows in the channel or by improving channel conditions such that the ecology benefits within the current flow regime (or a combination of the two). Funding is sought in PR09 for this options appraisal. It is proposed that the options appraisal would again run jointly with the Little Stour scheme, at the very least for all aspects addressing flow quantity and abstraction modification, allowing issues to be addressed at a catchment scale. However there are a number of additional issues on the Wingham River arising in part from the different nature of the river and in part from the much lower baseline of understanding of the river. Running the Wingham and Little Stour investigations together, as a joint project between the three water companies is considered the only efficient way to proceed. Costs are therefore presented for the two schemes together. For all technical tasks, the total cost will be divided between the companies according to a funding formula Project management costs will be met by Southern Water The initial review of alternative supply options (S5/W7) will be carried out (and funded) separately for each company Page 78 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

320 The same funding formula as used at AMP 4 is proposed. This is based on the relative sizes (in terms of ADO) of the abstractions operated by each company in the Little Stour catchment as shown in Table 37. Company Total ADO/MDO* % of catchment total Agreed funding % Southern Ml/d 59% 60% Folkestone and Dover Ml/d 26% 25% South East 8 Ml/d 15% 15% Total Ml/d Table 37: Agreed funding between the 3 water companies * Note that these figures are based on Deployable Outputs as at PR04 any recent amendments to DO are not taken into account. The costs of the study are detailed in Table 38. Task Joint cost SW cost FDWS cost SEW cost (technical tasks) Little Stour S1 River rehabilitation options 100,000 S2 Define target flow regimes 50,000 S3 Identify ways to achieve target flows 100,000 S4 Management of any abstraction 60,000 changes S5 Alternative supply options (initial 20,000 20,000 20,000 review only, full assessment if needed would be in AMP6) S6 Propose preferred approach and plan 50,000 implementation S7 Project management / liaison 40,000 Wingham W1 River rehabilitation options 60,000 W2 Water quality pressures 40,000 W3 Define flow requirements 40,000 W4 Identify ways to achieve flow 20,000 requirements W5 Identify impacts of options on Preston 20,000 Marshes SSSI W6 Management of any abstraction - changes W7 Alternative supply options (initial - review only, full assessment if needed would be in AMP6) W8 Propose preferred approach and plan 20,000 implementation W9 Project management / liaison 20,000 Technical task total (3 water 560,000 Page 79 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

321 companies) Company component (60:25:15% split) 336, ,000 84,000 Individual water company activities 80,000 20, ,000 (S5) 20,480* * 12.8% FDWS overhead Water company total 416, , ,000 Table 38: Little Stour Study costs Study 2: Automated Metering Reading metering trial Scheme 637 would be to implement a SMART metering trial on internal and new meters with the benefit of: Developing a vision for future customer service (internet, data..) Gaining a better understanding of smart metering technology and the opportunities it presents (potential Company-wide roll out); Understanding the technical issues involved in integration of smart metering with existing company systems; To assess customer reaction to smart metering, in particular any behavioural change resulting from improved access to consumption data; Exploring commercial tariff options which could arise from smart metering; Providing better data to support a more robust life cost benefit analysis on a company wide implementation. This would see the installation of 3,286 smart meters between 2010 and AMR trial on all internal meters The assumptions are: 5% of Experian most likely scenario figures for new household numbers are internals. 13 monthly total consumptions and current meter reading sufficient for future tariffs. To date internal meters are correctly recorded on Hi-Affinity database. Reasonable access to fit new AMR meters. Adopt a system compatible with that chosen by TVW for their AMR roll out. Price for AMR unit and supporting IT is similar to that obtained by TVW. Walk by system sufficient. System adopted is upgradeable to fixed network AMR at a later date. Any required new billing database costs are borne elsewhere in the capital programme. The Company will adopt same new billing system as TVW. The replacement billing system will be able to bill all customers based on any tariff including, seasonal, rising block, time of day, etc. Page 80 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

322 AMR trial on some commercial meters The assumptions are: Only applied to top 50 non-household water consumers. System will be independent of standard Company meter reading & billing systems. System will provide continuous access to meter consumption. Web based consumption information for the Company and customer. 20,000 estimated for billing system to enable trial. Future replacement billing system will be able to bill all customers based on any tariff including, rising block, time of day, etc. The Company will adopt same new billing system as the Veolia Group. Any required new billing database costs are borne elsewhere in the capital programme. The costs breakdown of the AMR programme is detailed in Table 39 below. AMR internal meters Capex/Opex Capex Opex Asset Asset Life Purchase year Number Unit Rate Replacement of all internal meters with AMR /11 2, AMR unit for new internal meters / AMR unit for new internal meters / AMR unit for new internal meters / AMR unit for new internal meters / AMR unit for new internal meters / Upgrade/replacement of MTS handheld DCU /11 4 1, Upgrade of data transfer to Hi-Affinity software /11 1 5, Data storage upgrade - dedicated server / , Training /11 1 2, Total AMR meters 3,236 Maintenance of radio read units 2010/11 2, Maintenance of radio read units 2011/ Maintenance of radio read units 2012/ Maintenance of radio read units 2013/ Maintenance of radio read units 2014/ AMR commercial meters Capex/Opex Capex Asset New SMS data loggers on top 50 meters Software to enable time of day billing Asset Life Purchase year Number Unit Rate / / , Page 81 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

323 Opex Training /11 1 2, Implementation Project Management /11 1 5, Maintenance of radio read units 2010/ Customer support manager 2010/11 1 2, Table 39: Costs breakdown The overall costs are detailed in Table 40 below. Capex/Opex Asset Life Sum of 2010/11 Sum of 2011/12 Sum of 2012/13 Sum of 2013/14 Sum of 2014/15 AMP5 Capex - internal 5 23,500 23, ,135 16, ,178 2, ,841 Capex - commercial 5 39,500 39,500 Capex total ( ) 258,135 16, ,178 2, ,841 Opex internal 2,912 3,203 3,216 3,248 3,281 15,861 Opex - commercial 2,000 2,500 2,500 2,500 2,500 12,000 Opex total ( ) 4,912 5,703 5,716 5,748 5,781 27,861 TOTAL ( ) 263,048 22,217 6,553 7,926 7, ,703 Table 40: Costs of AMR trial The total cost of the AMR trial for the next 5-year period is 307.7k. Section Leakage schemes Leakage Reduction of 0.5Ml/d In 2007/08 the Company annual average level of leakage was 7.9Ml/d which is 1Ml/d (with rounding) above the MSOC-SELL of 6.9Ml/d (see section 2.3.4) and therefore further reductions in the short term would be socially economic. APLE has been used to profile the level of leakage and associated social operating costs in order to achieve the short-run SELL of 6.9Ml/d by The results of the APLE modelling are shown below in Table 41. Leakage Level (Ml/d) CAPEX ( ) 15,546 16,248 17,100 18,072 19,255 20,769 22,601 24,808 27,976 32,070 CAPEX 0.5Ml/d reduction CAPEX 1Ml/d reduction 86,221 Table 41: Leakage reduction costs 214,445 The total capital cost to reduce leakage by 0.5Ml/d is 86k for AMP5. The costs of maintaining current leakage level are detailed in B3. There are no additional Opex costs. Page 82 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

324 Section Metering, Tariffs and Water Efficiency Acceleration of metering programme to achieve 96% by 2012 The objective is to accelerate the metering programme to achieve 96% metering penetration by the end of The number of meters to be installed during AMP5 is detailed in Table 42. PR09 forecast 2010/ / / / /15 Total AMP5 New properties* ,050 Optants Selective programme 6,000 6, ,450 Number of meters installed - TOTAL 6,850 6, ,250 Metering penetration % 87% 96% 96% 96% 96% Table 42: AMP5 metering programme PR09 forecast * New properties forecast reflects the economic downturn. The Company estimates a start of recovery in the housing market in 2013/14. The assumptions are: Meters are read twice a year The Cost Base submission unit cost for a meter installation of is applied to all meters fitted onto unmeasured supplies assuming standard installation techniques apply i.e. this is a composite rate that covers, boundary box install, screw-in and internally fitted installations From experience to-date it is know that a number of properties which so far have been surveyed and recorded as Unable to Meter or No Contact will need to be metered to achieve 96% penetration. Meters fitted to these properties will require more complex techniques at a higher unit cost of calculated as shown below. An assessment has been carried out of the cost of undertaking more difficult to meter properties, based on analysis of those properties to date where an installation has not been complete. From reviewing this data four main categories arise for no installation having been made. These are; Shared tank supplies; Unable to locate internal isolation /stop tap; Existing fixtures and fittings prevent installation; and No Contact. Using current labour and material costs and a bottom up approach the total cost for each of these types of install including materials, labour and risk has been calculated. Risks included are : Customer no show on appointment a significant issue given the likely need to obtain access for most of these installations Legal process Dealing with enquiries and complaints Resolving leakages Page 83 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

325 Insurance claims The likely number of successful installations of each type was also taken into account to arrive at an all in price of Without this higher level of funding to resolve these difficult to meter properties, the Company will not be able to meet its 96% target. The costs breakdown and number of each type of install included in the Final Business Plan Tables is as detailed in Table 43 below. Page 84 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

326 Capex/Opex Capex Opex Asset Purchase year Table 43: Costs breakdown Number Unit Rate Meter in B/box on existing properties 2010/11 2, Meter in B/box on existing properties 2011/12 2, B/Boxes on existing properties 2010/11 2, B/Boxes on existing properties 2011/12 2, Internal meter installation 2010/ Internal meter installation 2011/ Screw-in meter installation 2010/11 1, Screw-in meter installation 2011/12 1, Additional meters on "Unables" to 96% 2010/11 2, Additional meters on "Unables" to 96% 2011/12 2, TOTAL meters 16,957 Meter reading costs 2010/11 6, Meter reading costs 2011/12 6, Additional call agent in Customer Services 2010/ , Additional meter reader 2010/ , Page 85 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

327 The overall costs of the metering programme for AMP5 are detailed in Table 44 below. Capex/Opex Sum of 2010/11 Sum of 2011/12 Sum of 2012/13 Sum of 2013/14 Sum of 2014/15 AMP5 Capex selective ( ) 1,673,483 1,724,095 3,397,578 Capex optant ( ) 101,225 50, ,838 Capex total ( ) 1,774,708 1,774, ,549,415 Opex selective ( ) 105, , , , , ,286 Opex optant ( ) 4,770 7,155 7,155 7,155 7,155 33,390 Opex total * ( ) 109, , , , , ,676 TOTAL ( ) 1,884,672 1,947, , , ,928 4,351,091 Table 44: Cost of metering programme * This does not include the OPEX costs resulting from years 4 and 5 of the AMP4 metering programme. The total cost of the metering programme for the next 5-year period is 4.3m. Scheme 632: Socially responsible stepped tariff scheme - CHOICE (Customer Having Optimal Information Concerning Efficiency) The key components of the tariff scheme are based on the Lydd trial: An essential use allowance currently set at 219 litres per property per day (equivalent to 80 cubic meters per property each year). The essential use allowance to be charged at a rate below the current standard rate. Any water that is used in excess of this allowance will be charged at a higher than standard rate. Larger families and those with special medical requirements will be able to claim an increase in the essential use allowance. New Smart bills to replace standard bills and provide customers with better information of their water usage based on quarterly reads and bills. The development of the final components for CHOICE scheme will be based on the findings from the Lydd trial, which will be published in the next coming months. The implementation of the stepped tariff to the whole Company is key to achieving the Company s aspirational target of 120 PCC by There is considerable uncertainty around customers response to demand management measures, and this will provide the Company and the water industry with valuable experience and data on how customers respond to tariffs in the short and medium term. The assumptions are: It will be necessary to promote the scheme and provide robust positive PR support at the start of the roll out. Stepped tariff will only apply to household properties not commercials. 96% of household properties will be metered at the start of the roll out. Page 86 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

328 All meters are dumb meters. It is necessary to read all meters four times a year in order to successfully implement the stepped tariff. Amendment of current billing system will enable roll out of stepped tariff, and produce the new Smart Bill. The cost of modifying the billing system is included in the total cost of the tariff scheme, but the upgrade of the whole billing system is covered in the M&G programme in B3. The replacement billing system will be able to bill all customers based on any tariff including, rising block, time of day, etc. Meter reading of most meters continues to be a manual exercise but efficiency of the meter readers is similar to that achieved in Lydd during 2007/08. Full household meter penetration will improve meter reading performance: All commercials will continue to be read at the same frequency and rate as at present. The costs breakdown is detailed in the Table 45 below. Capex/Opex Asset Asset Life Purchase year Number Unit Rate Modification of Billing system / ,000 Capex 3 additional handheld Data Capture Units /14 3 1,500 Promotional material to introduce the scheme / ,000 3 new meter readers for quarterly reading 2013/ ,000 Additional software licences 2013/14 3 1,000 Opex 2 additional call agents in Customer Services 2013/ ,000 Multi colour printing 4 times a year 2013/ Table 45: Costs breakdown The overall costs of the tariff scheme are detailed in the Table 46 below. Capex/Opex Asset Life Sum of 2010/11 Sum of 2011/12 Sum of 2012/13 Sum of 2013/14 Sum of 2014/15 AMP5 Capex ( ) 5 224, ,500 Capex total ( ) 224, ,500 Opex ( ) 145, ,000 Opex total ( ) 145, , ,000 TOTAL ( ) 224, , , ,500 Table 46: Costs of tariff programme The total cost of the tariff programme for the next 5-year period is 476.5k. Page 87 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

329 Water Efficiency strategy The Company has incorporated the 0.07 Ml/day/year Water Efficiency Target set by Ofwat into its final Business Plan projections. The water efficiency strategy and associated costs to achieve the annual target are detailed in the tables in this section and represent the Company s current plans at the time of final plan s submission. They are all based on the information given by Ofwat at that time. The Company plans to carry out a variety of water efficiency activities during AMP5 with both commercial and domestic customers, with savings estimated for each activity in line with Ofwat's recommendations. From the activity lists and taking on board limits on potential for each activity, the activity list was created to minimise costs and maximise savings. Table 47 identifies the specific activities and level of activity that will achieve the total annual Ofwat target for each year of AMP5. Table 47: Company s water efficiency activities required to meet WE target In reality, unforeseen opportunities may arise to make additional savings over and above those listed above and in that event the balance of water efficiency activities in that and subsequent years will be reviewed and adjusted to suit. Page 88 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

330 The Company is part of the WaterUK Water Efficiency Practitioners Group and is looking at optimising savings by using industry best practice wherever possible. In addition, the Company is working with the Environment Agency and SEEDA on their Ensuring Water For All initiative. Although this covers much of the same ground as has been covered before, it is an alternative view on the topic and may provide some innovative solutions that can be introduced to gain more reliable savings from lower cost solutions. Table 48 shows the costs associated to each activity. The costs have been based on a blend of quotations, internal costs and engineering judgement to arrive at a best estimate of the costs of the programme. Table 48: OPEX costs per year to achieve WE target The AMP5 OPEX costs to achieve the Water Efficiency target are 209k. Page 89 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

331 Option Section Supply/Demand Expenditure Projections CAPEX expenditure ( ) Acceleration of metering 96% by April 2012 CHOICE 632 available in April 2013 Leakage reduction of 0.5Ml/d by 2015 Little Stour study complete by 2014/15 AMR trial complete by 2014/15 Whitfield study complete by 2014/15 Water efficiency target 0.07Ml/d reduction per year Option Option No. In baseline Total AMP5 2010/ / / / /15 3,549,416 1,774,708 1,774, , , ,221 15,546 16,248 17,100 18,072 19,255 Study 180,480 36,096 36,096 36,096 36,096 36,096 Study 279, ,135 16, ,178 2,178 Study 175,000 35,000 35,000 35,000 35,000 35,000 In baseline CAPEX TOTAL 4,495,459 2,119,485 1,878, ,534 91,346 92,529 OPEX Expenditure ( ) Acceleration of metering 96% by April 2012 CHOICE 632 available in April 2013 Leakage reduction of 0.5Ml/d by 2015 Little Stour study complete by 2014/15 AMR trial complete by 2014/15 Whitfield study complete by 2014/15 Water efficiency target 0.07Ml/d reduction per year Option No. In baseline Total AMP5 2010/ / / / /15 801, , , , , , , , , Study Study 27,860 4,912 5,703 5,716 5,748 5,781 Study In baseline 209,180 34,470 34,670 46,680 46,680 46,680 OPEX TOTAL 1,328, , , , , ,389 The OPEX costs for AMP5 do not include the additional OPEX costs resulting from years 4 and 5 of the AMP4 metering programme. Page 90 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

332 Section 4 New Developments and Growth Section 4.1 Whitfield Development The Local Development Framework (LDF) produced by Dover District Council has identified potential development land around the area of Whitfield. The plan estimates that an additional 5,790 domestic dwellings could be created in the local area and the Company needs to make provision for these new houses. Additionally, in July 2008, proposed changes to the South East Plan were published for consultation by the Secretary of State. The main outcome with direct impact on the Company s plans is the proposal to define Dover as a growth point and housing growth numbers being increased from 6,000 to 10,000. These dwellings are planned to be delivered before The proposed development would be built on the outskirts of Whitfield, which is currently supplied by the Downsgate Booster Zone. The existing mains infrastructure is not capable of supporting such a large development and the Downsgate Booster has already been identified as operating close to its maximum capacity. The Company has reviewed its position since the draft business plan regarding this key development and given the economic changes is no longer seeking funding in AMP5 for the development. The Company has included for detailed study work to develop both technical solutions and work with Dover District Council to establish robust developer funding mechanism and thereby minimise customer funding and risk. Section 4.2 Developer Led Activity Experian policy housing forecasts (including economic downturn) predict a total of 2,050 properties to be connected to the Company water supply network during the AMP5 period. The analysis of Company data shows that on average: 45% of new connections are property conversions, 2m of distribution mains are laid for every new connection (assumption is 150mm pipe in sub-urban ground type). Based on Company data, the length of new distribution mains to be laid is estimated to be 4kms over the AMP5 period TOTAL AMP5 Number of new connections ,050 Number of conversions Number of new properties ,130 Length of new mains (km) Page 91 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

333 Section 4.3 Costs Section Whitfield Development With the proposal of a new development on the Whitfield area, the Company, in combination with HydroCo consultants, undertook an investigation into short and long-term supply strategies. In this context, a scheme is included in the final Business Plan which will assess how to best augment supplies in the area to supply the proposed development. Subsequently, the Company commissioned Atkins to further investigate the technical and financial aspects of this scheme with the primary objective of producing a more robust costing for the final Business Plan. Atkins completed a technical pre-feasibility assessment of the preferred bulk water augmentation solutions to support the Business Plan submission. These solutions consist of: 1. Upgrade Downsgate pumping station to 8.64Ml/day. 2. Replace the bulk transfer main between Downsgate Reservoir and the Whitfield Development area with a 300mm Ductile Iron (DI) main 3.7km long. 3. Construct a new bulk water storage tank of 2.6 Megalitre capacity capable of supplying 24-hour demand for the ultimate development level of the Whitfield area. 4. Construct a new 5.2 kilometre long DI trunk main from Martin Transfer bulk main into the proposed 2.4 Megalitre ground storage tank at Whitfield. The main should be capable of conveying a flow of 45l/sec or 2.6Ml over 16 hours. The key conclusions of the pre-feasibility study into the proposed Whitfield development bulk water augmentation upgrades included: A 2.6 megalitre ground reservoir should be constructed as the preferred storage reservoir within the Whitfield township to cater for future growth and demand requirements. Further hydraulic assessment into the 5.2km long 300mm diameter Martin transfer main should be completed to identify whether any cost savings can be recouped through optimisation of the trunk main size and associated headworks pumping station at Kingsdown. Project constraints identification for the Downsgate rising main and Martin transfer pipeline: - Planning private land crossings and construction within residential areas; - Sixteen road crossings between the two trunk main projects; - Construction constraints: Access to private property, buried services (gas mains, BT services and existing water and sewerage asset crossings). Further project constraints identification for the Downsgate pumping station upgrade and new Whitfield Reservoir/pump station construction: - Power supply connection or upgrade application and approvals for the new/upgraded pumping stations. - Possible geotechnical constraints or difficulties constructing the new Whitfield reservoir. Page 92 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

334 - Land acquisition and planning approvals required to acquire the land required to construct the new Whitfield reservoir and pumping station. - Construction constraints: Access to private property and buried services. As a minimum, all of the stakeholders responsible for the above constraints will need to be notified of the proposed works, and formal approval will be required from many to precede projects. The formal approval process may incorporate liaison with stakeholders, application fees and possible compensation payments. The preferred solution is a combination of options 3 & 4 (listed above). The total cost of these proposed bulk water augmentation schemes is estimated at 7.2 million. With a 25% developer input into the three schemes, the estimated financial investment required by the Company would be 5.4 million. However, the global economic downturn has increasingly weakened the market over the last months for new residential and commercial development in the UK. As a direct result of this, the full extent of the proposed developments at Whitfield is currently uncertain. In that context, the Company proposes to proceed with the study and outline design of the proposed Whitfield Residential and Commercial developments as the first priority in order to fully understand the nature and extent of any reduced scope. The main tasks and the estimated cost of undertaking this study during AMP5 are as follows. Study TASK BUDGET COSTS Data collection, processing and analysis 15,000 Meetings with Dover District Council 30,000 Meetings with Developers, Land Agents, Environment Agency, Natural England & other stakeholders 15,000 Land Agent, Planning and other Fees 15,000 Site Visits, Route Reconnaissance and Field investigations 10,000 Topographic Survey 10,000 Geotechnical Investigation 15,000 Hydraulic Analysis 10,000 Study Report 5,000 Outline Design Engineering 25,000 Drawings 15,000 Outline Design Report 10,000 TOTAL COST 175,000 The total capital costs of the Whitfield study is 175k. Page 93 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

335 Section New Connections Based on Company data and Experian forecast, the costs associated to new connections are detailed in the tables below (actual) (actual) (actual) (forecast) Average Number of new connections Total costs ( k) Average cost per connection including infrastructure charges ( ) 1, , , , TOTAL AMP5 Number of new connections ,050 Number of conversions Number of new properties ,130 CAPEX associated with new connections ( k) , OPEX associated with new connections( k) The developer is liable to pay the full amount associated with the connection of the property. Section New Mains Based on Company data and Experian forecast, the costs associated to new mains are detailed in the tables below (actual) (actual) (actual) Average Number of new connections Total new mains paid ( k) % Developers Contributions new mains ( k) % Average cost per connection ( ) TOTAL AMP5 Number of new connections ,050 Number of conversions Number of new properties ,130 Costs associated with new mains ( k) Developers Contributions 33% ( k) Length of mains to be laid (km)* *It has been estimated that the new mains would be 150mm pipes laid in sub-urban ground type. Historically, the Company sees developers contributing 33% of the total costs for new mains and this has been estimated to continue for the next AMP period. Page 94 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

336 Section 5 Cost Benefit Analysis As the Company s supply demand balance is in surplus for the planning period, no interventions have been proposed as part of the Company s supply demand plan. Therefore there are no interventions to assesses for cost benefit. The Company s metering strategy is based on the Company s successful application for Water Scarcity Status. Section 6 Balance of Risk and Customer Affordability Section 4.4 of Section B3 describes how the Company has balanced the overall programme to reflect customer priorities, but also to balance the risks to customer service and the impact on customer bills. Section 7 Programme Delivery The Company s programme delivery strategy for AMP5 is detailed in Section 4.5 of Section B3 of the final business plan. Page 95 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

337 Table Commentaries Table B5.1 Water service demand forecasts Block A - Properties Line 1 Line 2 Line 3 Line 4 Line 5 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 19fp Figures include both internal and external meters 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 22fp 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 25fp 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 27fp Figures include both households and non households 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 29fp+30fp Block B - Population Line 6 Line 7 Line 8 Line 9 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 18fp 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 21fp 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 24fp 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP4FP line 26fp Block C Water delivered (volume) normal year Line 11 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP9 line 33n Line 12 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP9 line 37n Line 13 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP9 line 41n Line 14 06/07 & 07/08: From JR08 Table 10b 08/09 14/15: From fwrmp tables - WRP9 line 44n Block D water service output measures Line 15 07/08: From JR08 Table 10 08/09 14/15: From SOSI calculation Line 16 07/08: From JR08 Table 10 08/09 14/15: From SOSI calculation Page 96 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

338 Line 17 07/08: From JR08 Table 10 08/09 14/15: From fwrmp tables - WRP4FP line 48fp Line 18 07/08: From JR08 Table 10 08/09 14/15: From fwrmp tables - WRP4FP line 15fp Line 19 07/08: From JR08 Table 1 Line 1 08/09 09/10: Assumed savings will be similar to the savings achieved in 2007/08 as there is no change in the water efficiency strategy for the remaining AMP4 10/11-14/15: The numbers presented are in line with recent objective agreed with Ofwat and the Company assumes it will achieve the voluntary target of savings 0.07Ml/d every year. Table B5.2 Supply demand balance expenditure projections Block B - Water service SDB capital expenditure infrastructure Line 6 Line 7 Line /08: From JR08 Table 35 line 13 - PR09 tables have no Security of Supply Line, so the JR08 Table 35 Line 16 (Capex Security of Supply) which is all INF has been assigned to line m 08/09-09/10: Forecast from AMP4 programme AMP5: None 07/08: New Development; similarly as line 6; all new dev is infra; thus line m 08/09-09/10: Forecast from AMP4 programme AMP5: Costs associated with new mains and new connections (gross) + leakage strategy AMP4: There were no sustainability reductions funded in AMP4; [Bushey Ruff + Buckland Mill were Quality Funded] AMP5: None Block C - Water service SDB capital expenditure non-infrastructure Line 13 Line 14 07/08: From JR08 Table 35 line 13 - reviewing JR08 Table 35 build up can ascertain that the JR08 figure is all NON-INF; thus Line m 08/09-09/10: Forecast from AMP4 programme AMP5:none 07/08: Selective and optional metering = JR08 Table 35 Line m; costs have been split proportionally between optional (911 installed in 07/08 and 2,882 installed Selective (incl. Change of Hands) (JR Table); Thus 31.6% of overall cost optional. 08/09-09/10: Selective metering forecast AMP5: Cost of selective metering to achieve 96% by April 2012 Line 15 AMP4: No demand management activity being capitalised associated with growth; thus 0 AMP5: Cost of tariff scheme + cost of AMR study Line 16 07/08: New Development; similarly as line 13; all new dev is infra; thus line 16 is 0. 08/09 09/10: No New Development NON INF expenditure, as per previous years AMP5: Costs associated with Whitfield Development study Line 17 07/08: Selective & optional metering; JR08 Table 35 Line m; costs have been split proportionally between optional (911 installed in 07/08 and 2,882 installed Selective (inc Change of Hands) (JR Table); Thus 31.6% of overall cost optional. 08/09-09/10: Optional metering forecast AMP5: Optional metering forecast (ends in April 2012) Page 97 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

339 Line AMP4: There were no sustainability reductions funded in AMP4; [Bushey Ruff + Buckland Mill were Quality Funded] AMP5: Cost of Little Stour NEP study Block D Water service SDB capital contributions Line 23 07/08: From JR08 Table 35 Line 21; 0.260m; Grants = 0 08/09 09/10: Forecast at average of previous 3 years; 0.172m. AMP5: Contributions associated with new connections (total cost less Infrastructure charge) and new mains (33% of total costs) Line 24 07/08: From JR08 Table 35 Line 21; 0.260m; 08/09 09/10: Grants assumed to be zero AMP5: None Line 25 07/08: From JR08 Table 35 Line 20 08/09 09/10: Forecast based on number of forecast new connections in C4.1 multiplied by the 2007/08 infra charge AMP5: Forecast based on number of forecast new connections in C4.1 multiplied by the 2007/08 infra charge Line 26 No Compensation allocated for AMP4 or AMP5; thus 0 Block E Water service SDB changes in operating expenditure Line 27 Line 28 Line 29 AMP4 & AMP5: None the OPEX costs for the bulk imports (Barham and Deal continuation) are included in Base OPEX 07/08: As 07/08 is the base year for Opex, assumed that there is no new Opex associated with selective meters in this year 08/09 09/10: Costs associated with selective meters (base year 07/08 = 0) equals number of selective meters multiplied by unit cost of 9.54 AMP5: Cumulative costs of selective metering to achieve 96% by April 2012 (base year 07/08 = 0) AMP4: Growth other demand mgt; no new Opex AMP5: Cost of tariff scheme +cost of AMR study Line 30 Line 31 Line AMP4 & AMP5: Cumulative costs associated with new connections (base year 07/08 = 0) is number of new properties connected multiplied by unit cost of 15. The OPEX cost for Whitfield Development will be assessed between draft and final BP 07/08: As 07/08 is the base year for Opex, assumed that there is no new Opex associated with selective meters in this year 08/09 09/10 + AMP5: Cumulative costs associated with optant meters (base year 07/08 = 0) is number of optant meters multiplied by unit cost of 15. AMP4 : There were no sustainability reductions funded in AMP4; [Bushey Ruff + Buckland Mill were Quality Funded] AMP5 : None Block F Enhanced service levels capital expenditure infrastructure Page 98 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

340 Line 37 & 38 No changes to levels of service in AMP4 and AMP5, thus = 0 Block G - Enhanced service levels capital expenditure non-infrastructure Line 39 & 40 No changes to levels of service in AMP4 and AMP5, thus = 0 Block H - Enhanced service levels changes in operating expenditure Line 41 & 42 No changes to levels of service in AMP4 and AMP5, thus = 0 Table B5.3 Water service supply demand balance (average) Block A Baseline supply forecasts Line 1 Line 2 Line 3 Line 4 Line 5 Line 6 Line 7: From fwrmp tables - WRP1-BL (line 1bl - line 2bl) none none From fwrmp tables - WRP1-BL line 3bl From fwrmp tables - WRP1-BL line 4bl 07/08 From JR08 Table 10a (i) 08/09 14/15: From fwrmp tables - WRP1-BL line 13bl 07/08 From JR08 Table 10a (i) 08/09 14/15: From fwrmp tables - WRP1-BL line 12bl Block B Baseline demand forecast Line 9 From fwrmp tables - WRP1-BL line 14bl Block C Baseline supply demand balance (average) Line 11 From fwrmp tables - WRP1-BL line 52bl Block D Final planning solution Line 13 Line 14 Line 15 Line 16 leakage reduction + tariff savings none none none Block E Final planning supply demand balance Line 17 Line 7 Line 18 Line 17 - line 9 + sum (lines 13 to 16) Line 19 From fwrmp tables - WRP4-FP line 52fp Line 20 Line 18- Line 19 Page 99 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

341 Table B5.3a Water service supply demand balance Block A Baseline supply forecasts Line 1 Line 2 Line 3 Line 4 Line 5 Line 6 Line 7 From fwrmp tables - WRP1-BL (line 1bl - line 2bl) none none From fwrmp tables - WRP1-BL line 3bl From fwrmp tables - WRP1-BL line 4bl 07/08 from JR08 Table 10a (iii) 08/09 14/15: From fwrmp tables - WRP1-BL line 13bl 07/08 from JR08 Table 10a (iii) 08/09 14/15: From fwrmp tables - WRP1-BL line 12bl Block B Baseline demand forecast Line 9 From fwrmp tables - WRP1-BL line 14bl Block C - Baseline supply demand balance (peak) Line 11 From fwrmp tables - WRP1-BL line 52bl Block D - Final planning solution Line 13 Line 14 Line 15 Line 16 leakage reduction + tariff savings none none none Block E - Final planning supply demand balance Line 17 Line 7 Line 18 Line 17 - line 9 + sum (lines 13 to 16) Line 19 From fwrmp tables - WRP4-FP line 52fp Line 20 Line 18- Line 19 Page 100 of 98 Section B5 Maintaining Supply/Demand Balance 11/11/10, 09:05:25

342 Company Commentary Part B Section B6 Key Component Consumer Service Strategy and Changes in Services Contents Executive Summary... 1 Section 1 Changes from Draft to Final... 2 Section 2 Introduction... 3 Section 3: Consumer Service Strategy... 4 Section 3.1: Achieving a Sustainable Use of Water... 4 Section 3.2: Safeguarding Drinking Water Quality... 5 Section 3.3: Ensuring a Reliable Supply of Water... 5 Section 3.4: Mitigating Climate Change Impacts... 7 Section 3.5: Enhancing Customer Services... 7 Section 3.6: Financing our Future... 9 Section 3.7 Proposed Changes to Customer Services Section 4: Proposed Changes in Service Denge Network Cleaning Section 4.1: Description of Denge Zone (FD21) Section 4.2: Hazards and Assessment of Risks Section 4.3: Discussion Section 4.4: Costs Section 4.5: Cost Benefit Analysis Section 4.6: Conclusion Section 5: Flood Protection and Resilience Section 5.1: Background Section 5.2: Overall Approach and Methodology Section 5.3: Desk-Top Flood Risk Analysis Section 5.4: Quantification of Flood Risk Section 5.5: Site Surveys, Scope and Cost Estimates Section 5.6: Cost Benefit Analysis Section 5.7: Conclusions Table Commentaries Page i Section B6 Consumer Service Strategy 11/11/10, 09:12:55

343 APPENDIX B6.1 OVERVIEW OF WATER SUPPLY ZONE F21 DENGE APPENDIX B6.2 INTERNAL PROTECTION OF WATER MAINS APPENDIX B6.3 CUSTOMER CONTACT RECORD FOR 2007 FD21 AESTHETIC ISSUES APPENDIX B6.4 DENGE PEAK FLOW ANALYSIS APPENDIX B6.5 MAINS SUBJECT TO FLOW REVERSAL UNDER NORMAL CONDITIONS APPENDIX B6.6 FLOOD RISK ASSESSMENT REPORT Tab List of Tables Table 1 Inventory of Water Mains... Error! Bookmark not defined. Table 2 Ranking of zones by aesthetic serviceability measures (excludes customer contacts resulting from disruptions)... Error! Bookmark not defined. Table 3 Ranking of zones by aesthetic serviceability measures (includes all customer contacts)... Error! Bookmark not defined. Table 4 Analysis of customer contacts % per zone per year...15 Table 5 Location of customer contacts for aesthetic issues in Table 6 Compliance results for iron 2004 to Table 7 Compliance and operational samples for iron 2004 to Table 8 Compliance results for manganese 2004 to Table 9 Compliance and operational results for manganese 2004 to Table 10 Compliance results for turbidity 2004 to Table 11 Compliance and operational results for turbidity 2004 to Table 12 Mains bursts for Denge 2003 to Table 13 Company Sites to be Surveyed and Desk Top Flood Risk Assessment Results...32 Table 14 Rye, Dover and Denge coastal flood levels by return period...33 Table 15 Sites at risk of flooding following site investigations...34 Table 16 Cost Estimates for Flood Protection Measures...36 Table 17 CBA Results for flood protection investment...38 Table 18 CBA Sensitivity Results for flood protection investment...39 List of Figures Figure 1 Pipe Materials... Error! Bookmark not defined. Figure 2 Iron compliance results...16 Figure 3 Manganese compliance results...18 Figure 4 Turbidity compliance 2004 to Figure 5 DOMS Risk Matrix...23 Figure 6 MISER Modelling results for Interruptions to Supply from loss of Ottinge, Rakesole, Broome and Lye Oak WTWs...38 Page ii Section B6 Consumer Service Strategy 11/11/10, 09:12:55

344 Executive Summary The following Section picks up two distinct areas, the Company s longer term Consumer service Strategies and short term changes in service as a consequence of investment being made. Section 1 outlines the Companies desire to continuously improve the customer experience based around the structure of the Strategic Direction Statement published in December Sections 2 and 3 reflect a request by OFWAT in the Draft Business Plan feedback that this section should include investment schemes that relate to changes in service. Those schemes are the addressing of water quality issues in the Company s Denge Zone and the protection of a number of Water Treatment Works from flooding thus ensuring the supply of water. The Denge Zone works are interlinked with the proposal to address the discharge of iron and manganese from the Denge Water Treatment works described in Section B4. It is the concentration of these materials in the raw water that passes through the current treatment process that causes the Denge Zone to significantly underperform when compared with the Companies other water treatment zones. The risk to water quality, water aesthetics and prosecution is significant and providing a sustainable long term solution to the risk is a high priority for the Company. Customer support for this investment is also strong, as highlighted in the Willingness to Pay survey results and from customer responses to Company questionnaires (see Section C1 for details). The long term benefits to customers can only be provided through the delivery of both the Denge WTW investment presented in B4 and the Denge network cleaning investment described in this business case. The proposal for protecting a number of treatment works from the risk of flooding stems from OFWATS PR09 methodology paper Setting Price Limits for : Framework and Approach. which required a review of the risks to critical assets from flooding. Both investment schemes have been subjected to cost benefit analysis and both provide positive outcomes from these evaluations. Page 1 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

345 Section 1 Changes from Draft to Final In line with the OFWAT observations of the Draft Business Plan two changes have been made to this Section. In the Draft Business Plan the principle investment scheme in the Quality section is addressing the deterioration of the raw water at Denge, part of the Dungeness peninsula, and its consequent effect at customer s taps. This is being approached in two parts. Partly with a scheme to arrest the discharge of iron and manganese from the works into the network, and partly with a scheme to address the consequent discolouration of the water delivered. In their feedback OFWAT stated they would consider the work associated with addressing the consequence of discolouration as Enhanced Service Levels and hence the definition of this investment and its benefit has been moved to this Section. Furthermore, through a detailed review of the scope of this intervention between draft and final business plan and from market testing of this scope, the Company has significantly reduced the cost estimate for this intervention from 3.7m at draft to 1.0m for final. The second change reflects a reallocation of driver advised by Ofwat in its draft feedback for the flood protection investment, which is now contained in this investment case. The scope and cost estimates for this work remain the same as for the draft business plan, however, the business case has been developed and include a cost benefit analysis. Page 2 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

346 Section 2 Introduction The Company makes regular use of customer surveys to identify their satisfaction, views on future services and willingness to pay. Extensive consultation proceeded and contributed to the development of the Company s Strategic Direction Statement (SDS) which was published in December 2007 and sets out the strategy for the next 25 years. The analysis of consumer feedback confirms that their overriding priority is to receive a reliable supply of good quality drinking water. There is also increasing evidence that they require this to be achieved in an environmentally friendly manner. This is best demonstrated by the Willingness to Pay conclusions that indicate consumers are prepared to pay most for a reduction in CO 2 emissions, protection of river water levels and water savings measures. The feedback also indicates that there is a reluctance, or lower priority, to invest in improving service levels of normal activity, such as customer service. This indicates that in general the majority of consumers are satisfied with the service they are receiving. The conclusions about customer priorities have been used in the development of the six themes detailed in the Strategic Direction Statement and their respective targets. They are: Theme 1 Achieving a Sustainable Use of Water Theme 2 Safeguarding Drinking Water Quality Theme 3 Ensuring a Reliable Supply of Water Theme 4 Mitigating Climate Change Impacts Theme 5 Enhancing Customer Service Theme 6 Financing our Future The various consumer surveys are summarised in Section C1 of this Business Plan, and detailed in its appendices. Page 3 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

347 Section 3: Consumer Service Strategy This section of the submission details the Company s proposed service levels for the period, linking this to customer s views, and areas of service improvement. Underlying all of this however, will be a desire to continuously improve the consumer experience in all that relates to the Company. Section 3.1: Achieving a Sustainable Use of Water The objective is to maintain a small surplus of available water, such that in a dry year the Company will be able to meet customers demand for water. This will be achieved through the continuation of the Company s twin track approach of developing new water resources in parallel with managing demand. The Company operates in one of the driest parts of England and has limited access to goodquality raw water. Studies undertaken for the Water Resource Management Plan indicate that the next significant new water resources will come from the development of a new desalination plant, or in the much longer term a regional reservoir. Consequently, the emphasis during this period will be on demand management activities because they are more cost effective. Desalination is currently an expensive energy-intensive solution. Accordingly, the key targets are: Achieve a Security of Supply Index (SoSI) score of 100 by 2010 and maintain it thereafter this will require access to sufficient water to maintain supply, even in dry periods, across the whole area. This was achieved in 2008/09. Meter all customers supplies that can be by 2012 estimated to be 96%. The acceleration in 2009/10 has been approved by Ofwat as a log up in the current period. Reduce average daily consumption per person to 120 litres by 2015 currently 140 litres for metered households The Company proposes to introduce in 2013 a socially-responsible stepped tariff for all customers as a low-cost way to incentivise customers to avoid unnecessary use of water, thereby reducing overall demand; this is currently being trialled in Lydd. In doing this the Company recognises the need to be sensitive to issues of affordability that may affect some customers and will work to ensure appropriate safeguards are built into services offered. Demand management through the period will include a continuation of the leakage strategy for this current AMP4 period. This is part of a 10-year plan to achieve a Sustainable Economic Level of Leakage (SELL) and is supported by least cost modelling and by customers. The Company will seek to extend beyond 2015 its current right to receive regional water resources through the existing bulk supply agreements with South East Water and Southern Water. Page 4 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

348 During the period, the Company will continue to identify and develop longer term water resources options and will participate in further studies with South East and Southern Water to identify options for improving the environmental status of the Little Stour river. However, no allowance has been made for any reduction of abstraction licences under the Water Framework Directive, Habitats Directive or Alleviation of Low Flows project, as these are not yet known. The Company s strategy is innovative and sustainable, promotes least-cost solutions and reduces carbon emissions. Significantly, it aligns with the views of customers that water conservation is important and that metering is the fairest way of paying for water. Section 3.2: Safeguarding Drinking Water Quality The Company has a good track record of providing customers with high quality drinking water. In order to continue to provide water that meets the standards set down in the Water Supply Regulations, the Company has agreed two projects with the Drinking Water Inspectorate for the period. The first is the provision of additional treatment at the Denge Water Treatment Works, where there is deteriorating raw water quality (attributable to iron, manganese and turbidity). The second is for a systematic mains-flushing programme in the Denge water supply zone. Both are necessary to avoid major discolouration events. The Company is also proposing a series of measures to ensure that its sites comply with the various Advice Notes issued by DEFRA under the Security and Emergency Measures Directive. Following the summer floods of 2007, in common with other water companies, the Company has reviewed the resilience of its infrastructure to extreme weather events. Its sites are generally well located or protected, but the Company has identified six sites where further reinforcement work is necessary to protect them from flooding. The Company proposes to deal with these sites during the period. Further details of the proposed quality programme are given in Section B4. Section 3.3: Ensuring a Reliable Supply of Water Consumers are very clear in their desire for an uninterrupted and reliable supply of high quality drinking water through their taps. In the willingness to pay survey, they indicated that they would be prepared to pay more to maintain the current level of unplanned interruptions. Unplanned interruptions are a consequence of deteriorating assets (i.e. pipes and treatment works). Currently both pipes and treatment works are considered stable in Ofwat's serviceability assessment. Page 5 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

349 The rate at which the Company is currently renewing pipes is the lowest in the water industry at in excess of 300 years and the burst frequency is also among the lowest. However, the detailed assessments undertaken by the Company suggest that, unless the renewal rate is increased, there will be deterioration, with more frequent bursts and therefore more unplanned interruptions. The draft Business Plan included an increase in the replacement rate to 1 in 200 years for the pipe network. This level of renewal is still among the slowest in the water industry. The Company considers that in the longer term an accelerated rate is essential to maintaining stable condition. However, in recognition of the low likelihood of immediate rapid deterioration and the financial pressures facing many customers over the next few years, the Company has decided to continue with current rates of renewal for the next five year period. It believes however that it will be essential to increase the renewal rate in and thereafter to a sustained 5Km/year. The Company has undertaken an assessment of all of its trunk mains on the basis of the likelihood and consequence of failure. This identified the need to replace or duplicate three trunk mains and these costs were included in the draft Business Plan. Failure of these trunk mains would lead to a very significant number of customers being without water. Following submission of the draft Business Plan, further investigations have been carried out. These have identified an alternative, lower cost, solution for one of the mains (TP28). This solution removes the considerable risk to service that the loss of this main would have, recognising that it sits in a geological fault plane which has been subject to two earth tremors in the last two years (i.e. April 2007 and March 2009). The location of these are shown in the Figure A. Figure A In , the Company invested significantly in membrane filtration water treatment technology to treat all water at risk of water quality failure due to cryptosporidium. Approximately 70% of water put into supply now undergoes this form of treatment. These membranes have a short life and will need to be replaced during the period. The maintenance of these and other above-ground assets is essential to ensure reliability of supply and maintain levels of service. Page 6 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

350 The Company has assessed the risk and consequence of failure of its other key infrastructure. This has highlighted the need to duplicate the Hills Reservoir. This project was included in the Company s last price limits submission, but rejected by Ofwat due to insufficient supporting evidence. The project is again included with more robust evidence in support of it. In the event of a failure of the Hills Reservoir a significant number of properties would be without water for an extended period. Section 3.4: Mitigating Climate Change Impacts The Company is working with its customers and suppliers to reduce emissions and help reduce the severity of its climate change impacts. Government is setting longer term targets for cutting CO 2 emissions in the UK (60% by 2050). However, in line with customers stated preferences, the Company has set its own targets of: a 1% per annum reduction in energy use from carbon sources up to 2020; and use of a minimum of 20% renewable energy by The Company s strategy over the next five years is consistent with this. Through demand management activity, the Company expects to reduce energy requirements by pumping less water into supply. The capital maintenance programme will continuously look at the efficiency of existing assets and the opportunities to replace inefficient plant with new more energyefficient plant and technology. Customer engagement and socially responsible tariffs will also contribute towards achieving these targets during the period. As customers use less water in response to the Company s encouragement, they are likely to make consequential reductions in their own energy use. These savings have not been included in the Company s calculations. Section 3.5: Enhancing Customer Services The Company has continued to deliver a good quality customer service in this quinquennium, as measured by Ofwat s DG service indicators. The only exception to this being DG4 (Restrictions to Water Supply) where the Company introduced hosepipe restrictions to all of its customers between 2 April 2006 and 1 October 2006, during what is now known to have been the worst drought since the 1930 s. This was the first time since 1995/6 that the Company has had to impose such measures. The level of customer satisfaction is borne out by what they are saying. The various consumer surveys are summarised in Section C1 of this Business Plan, and detailed in its appendices. In these surveys, customers rate how satisfied are you overall with the service provided by your water company, using a scale from 1 meaning not at all satisfied to 5 meaning highly satisfied. The most recent survey rated the overall service level at 4.3. Page 7 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

351 Unfortunately, this is not reflected in Ofwat s Overall Performance Assessment (OPA) ranking, where the Company s position has deteriorated from being the highest ranked in 2003/4 and 2004/5 to equal 7 th (2005/6) and 12 th (2006/7). This is very disappointing for the Company, especially given the financial incentive in the price review associated with its ranking and the causes of the deterioration. The causes have been highlighted in the Company s June Return in recent years, but relate to the disproportionate impact of the failures (i.e. points allocation) and the scalability of the performance measure test across all companies leading to a greater impact of failure on smaller companies. Specifically, the Company has seen the following impacts: Year Performance Failure OPA Impact 2005/6 Downgrading of CCW complaints audit to Acceptable -4 points 2006/7 Single iron failure at customers tap -10 points 2006/7 6-month hosepipe restriction -3 points 2007/8 Failure to achieve SoSI of points It is therefore imperative that Ofwat consider the following issues when determining the OPA ranking and its impact on price limits k if this is to truly reflect the level of service delivered by the Company to its customers: i) If a company has a Water Resource Management Plan that is agreed by the EA and funded in price limits, which includes as a measure the use of hosepipe restrictions every 10 years, is it fair to penalise the company for utilising this measure? ii) iii) iv) The severity of the OPA impact is disproportionate to the performance failure. Is a single iron failure at one customers tap, or a reduction in CCW s complaint audit from good to acceptable, a greater customer service failing than a 6-month hosepipe restriction for all customers How will Ofwat reconcile the unfairness of a CCW complaints audit that uses the same sample size for each company, regardless of the number of complaints received? For example in 2005/6 the sample size represented 18.9% of all complaints received by the Company compared to 0.8% for Southern Water Services. Clearly, the greater the sample size as a proportion of the total, the greater the probability that the poorer quality responses will be included. This is not a fair or relative comparison. How will Ofwat reconcile the unfairness of the OPI performance measure which is directly related to the number and size of water supply zones? Analysis shows that as the Company gets larger it is likely to have more zones and bigger zones, which leads to a significant dilution of the impact of a single failure. Page 8 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

352 v) How will Ofwat reconcile the impact of the retrospective (2007/8) introduction, a measure which all parties knew would have the consequence of moving the Company from what would otherwise have been 2 nd place in the ranking to 19 th? Firstly, the Company s strategy was set in 2003/04 as part of the early start programme. Secondly, the Company s strategy was founded on a 3Ml/d yield from a new source at Bushy Ruff, agreed in 2003/4 with the Environment Agency. In 2006 the EA notified the Company that any gain would be required to be offset by an equal reduction at another source in the same zone. Therefore, the development was not progressed and the Company had to explore alternative options to address the SoSI score; these were completed in 2008/09. Both of these factors were outside the Company s control and yet it has suffered significantly as a consequence. The Company s strategy follows from customer survey responses that indicate a high level of satisfaction currently with the overall service levels being delivered. The Company will continue to provide customers with a service that exceeds expectations at a cost which they are willing to pay. Section 3.6: Financing our Future The Company has a very clear strategy on charging. It believes that the fairest way for customers to pay is for the amount they use. In the recent customer surveys over 82% agreed with this. The Company s pro-active approach to balancing supply and demand requires every customer to be metered, this is also a prerequisite of charging by volume, or amount used. Accelerating the compulsory metering programme from 90% of customers metered in 2015, to 96% by 2012 will address this issue. Customer debt has been increasing in recent years and particularly since the removal of the right to disconnect domestic customers in The current economic climate this is likely to worsen. However, there are two groups of customers here; those who choose not to pay and those who cannot afford to pay. Where there is genuine hardship, the Company will continue to offer support as it does currently through the WaterSure scheme, EOS charitable trust and other mechanisms. The Company does not at this stage propose to introduce new social tariffs. This is consistent with CCW national customer research findings that suggest customers largely do not wish there to be any cross-subsidy to assist those less able to pay. Their research also supports the Company s position that it will continue to lobby government to deal with this issue through the social benefits and taxation systems. The Company will also continue to lobby government for legislative change to provide the tools to ensure that all customers pay for the water they use. This could include the use of trickle flow meters to encourage those that choose not to pay to do so. Page 9 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

353 Section 3.7 Proposed Changes to Customer Services Consumers have not indicated a willingness to pay more for improved customer levels of service. This does not come as a surprise given the consistently high standard delivered by the Company. Accordingly, there are not significant improvements proposed. For details of current customer service levels and those proposed for the future refer to tables B3.1 and A2. There are no significant changes proposed although there are some areas that the Company will focus upon in order to improve the customer experience. These include: Billing Literature the Company occasionally receives contact from customers in connection with the clarity of bills and usefulness of the information provided. It is proposed to improve the layout of the bill and provide additional information that will enable the customers to understand their consumption, the amount of water they use compared to previous years and that of others, the link to energy use and how much they owe. Provision of Actual Use Information currently the Company provides quarterly bills to measured domestic customers which will include at least one actual meter reading but normally two. In order to provide customers with more information concerning their use the Company is proposing more frequent quarterly meter readings. Ease of Contact for Customers whilst customers do not have problems with contacting the Company, the Company will be reviewing both its telephony and internet facilities to ensure they are effective both in terms of access and use. Avoidable Contact the Company is aware of Ofwat's proposed OPA customer experience measure, which supports the existing right first time approach. A review of the Company s approach to customer facing activity will be undertaken and areas for improvement identified and actions taken to address them. Non-Domestic Customers the Company is aware that it does not have formal policy for commercial and business customers. This will be developed over the remainder of AMP4 alongside a review of the services offered by the Company. Page 10 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

354 Section 4: Proposed Changes in Service Denge Network Cleaning Over the past years the Company has seen deterioration in the quality of the raw water it abstracts to supply the Denge Zone. The Denge Water Treatment Works is not equipped with the appropriate treatment to deal with this deterioration and as a consequence the network supplying the customers in the Denge zone has become contaminated with deposits of Iron and manganese that has affected the level of service, in the form of discoloured water, received by customers in this area. This deterioration has led to the need for investment to permanently address the removal of Iron and Manganese from the water abstracted at Denge and to clean the distribution network to remove the build up of deposits. The work in the network involves the flushing of the distribution pipework at a cost of 982.4k. It is this investment that is described in this Section of the Business Plan. The cost benefit analysis shows the scheme is cost beneficial. The investment to address the deterioration of the raw water quality at the treatment works is identified in Section B4. In January 2008 the Drinking Water Inspectorate issued guidance regarding submissions for water quality driven schemes to be included in companies PR09 business plans. The following commentary presents information in the form specified in that guidance regarding distribution main interventions to remedy water quality service failures in Denge Water Supply Zone (FD21). The principles of the Common Framework for Capital maintenance have been adopted. Section 4.1: Description of Denge Zone (FD21) SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 11 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

355 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 12 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

356 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Page 13 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

357 SECTION REMOVED AND REPORTED IN EXCISION DOCUMENT Section 4.2: Hazards and Assessment of Risks The approach to the evaluation of this customer service performance has been driven by the Company s DOMS and follows closely the principles of the Common Framework for Capital Maintenance Planning. The following commentary deals with the historical analysis and service forecasting aspects of the Common Framework. Historical Analysis The historical analysis uses the performance indicators developed for the Company s DOMS namely: Customer contacts for aesthetic issues (discolouration, particles and animalcules) Iron as Fe Manganese as Mn Turbidity The analysis also examines the effectiveness of control measures deployed in the past to resolve discolouration issues. Customer Contacts Table 1 presents the analysis of customer contacts for aesthetic issues (primarily discolouration) expressed as a percentage of zone population per year: Zone Reference % of customer contacts for aesthetic issues FD FD FD FD FD FD Page 14 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

358 Table 1 Analysis of customer contacts % per zone per year It can be clearly seen that FD21, Denge, consistently performs very poorly in comparison with the Company s other zones. An analysis of the location of customer contacts was possible for 2007 and the results are presented in Table 2. The great majority of these complaints are for dirty water and Appendix B6.3 provides an extract from the customer contact record. A number of the complaints are associated with minor flow disruptions within the zone and it is clear that New Romney appears to be the most problematic within the zone. In 2007 Denge zone generated 54% of all aesthetic customer complaints for the Company from a population representing only 10% of the total. Location Contacts % Contacts Lydd % New Romney % St Marys Bay % Littlestone 1 1.3% Greatstone 1 1.3% Grand Total 78 Table 2 Location of customer contacts for aesthetic issues in 2007 Iron Results Table 3 and Table 4 present the historic data for iron. The first table presents compliance sample results while the second presents the same information with the addition of opportunistic operational samples from customers taps. These have been taken for operational purposes often in the wake of flow disturbances in the zone. This data gives a clearer picture of the extent and severity of the transient problems customers experience. Samples taken specifically at customers request as a result of discolouration complaints have been excluded. Page 15 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

359 Location Average Max Count µg/l µg/l GREATSTONE LITTLESTONE LYDD LYDD ON SEA NEW ROMNEY ST. MARYS BAY Table 3 Compliance results for iron 2004 to 2007 Note: 15.0 µg/l is the level of detection The PCV for Iron is 200 µg/l Figure 1 presents the results in graphical form Compliance Results for Iron 2004 to /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/2006 Iron (ug/l) 08/01/ /03/ /05/ /07/ /09/ /11/2007 Date Figure 1 Iron compliance results A single PCV failure was reported in late 2006 and half of the 10 results obtained above the level of detection have occurred in Page 16 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

360 Location Average Max Count µg/l µg/l DUNGENESS GREATSTONE , LITTLESTONE LYDD LYDD ON SEA NEW ROMNEY , ST. MARYS BAY Table 4 Compliance and operational samples for iron 2004 to 2007 The operational samples show a significant and severe water quality issue with nearly 20% of the results exceeding the PVC and averages in Greatstone, Lydd on Sea and New Romney exceeding 50% of the PCV. The spread of numbers of samples reflects operational activity rather than strict population density as with compliance sampling. Two thirds of the worst 50 sample results were taken in 2006 and Manganese Results Table 5 and Table 6 present the historic data for manganese. The first table presents compliance sample results while the second presents the same information with the addition of opportunistic operational samples from customers taps. These have been taken for operational purposes often in the wake of flow disturbances in the zone. This data gives a clearer picture of the extent and severity of the transient problems experienced by customers. Samples taken specifically at customers request as a result of discolouration complaints have been excluded. Location Average Max Count µg/l µg/l GREATSTONE LITTLESTONE LYDD LYDD ON SEA NEW ROMNEY ST. MARYS BAY Table 5 Compliance results for manganese 2004 to 2007 Note: 2.0 µg/l is the level of detection The PCV for manganese is 50 µg/l Page 17 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

361 Compliance Results for Manganese 2004 to Manganese (ug/l) /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/2007 Date Figure 2 Manganese compliance results No PCV failures have been reported for the zone since % of the 14 results obtained above the level of detection have occurred in 2006 and A clear rising trend in compliance results for manganese can be observed in Figure 2. Location Average Max Count µg/l µg/l DUNGENESS GREATSTONE LITTLESTONE LYDD LYDD ON SEA NEW ROMNEY ST. MARYS BAY Table 6 Compliance and operational results for manganese 2004 to % of all samples exceeded the PCV. 70% of the worst 50 results have been obtained in 2006 and 2007 Page 18 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

362 Turbidity Results Table 7 and Table 8 present the historic data for turbidity. The first table presents compliance sample results while the second presents the same information with the addition of opportunistic operational samples from customers taps. Samples taken specifically at customers request as a result of discolouration complaints have been excluded; these are not necessarily representative. Location Average Max Count NTU NTU DUNGENESS GREATSTONE LITTLESTONE LYDD LYDD ON SEA NEW ROMNEY ST. MARYS BAY ST.MARY IN THE MARSH Table 7 Compliance results for turbidity 2004 to 2007 Note: The PCV for turbidity is 4.0 NTU Compliance Results for Turbidity 2004 to Trubidity (NTU) /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/2007 Date Figure 3 Turbidity compliance 2004 to 2007 Page 19 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

363 Turbidity results are consistent with those for in iron and manganese results but with no PCV failures. This is to be expected as turbidity failures for iron and manganese would reflect in gross failures for the metals. 21 of the worst 25 results have been obtained in 2006 & of the best 25 results were obtained in 2004 and 2005 Figure 3 shows evidence of a deteriorating trend in turbidity results. Location Average Max Count NTU NTU DUNGENESS GREATSTONE LITTLESTONE LYDD LYDD ON SEA NEW ROMNEY ST. MARYS BAY ST.MARY IN THE MARSH Table 8 Compliance and operational results for turbidity 2004 to 2007 These results reflect the poor operational sample performance for the metals. 70 out of the worst 100 results have been obtained in 2006 & of the best 100 turbidity results were obtained in 2004 and 2005 Control measures and existing Interventions The Company has taken great care in operating the Denge distribution system so as to minimise the risks of widespread discolouration events. These measures are documented in the Company s DOMS. The Company has also undertaken ad-hoc flushing operations in Lydd (2005), Lydd on Sea (2006), Dungeness (2006) and Greatstone (2006) in response to customer complaints of dirty water. Further reactive interventions in New Romney have been prevented by the mains configuration which makes ad-hoc cleaning difficult without causing discolouration issues. Flows Deposition Appendix B6.4 presents the results of recent updated analysis of peak flows across all District Metered Areas within the zone. It can be observed that maximum flows at peak demand conditions are generally less than 0.2m/s and can be considered to be low enough for widespread deposition of any suspended matter to occur in the great majority of mains within Page 20 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

364 the zone. The issue is exacerbated by the rural nature of parts of the network which comprise long lengths of pipe terminating at a dead-ends. Re-suspension The stable and very static flow regime of the zone is subject to some disruption under normal circumstances; the hydraulic model has been used to identify those mains subject to flow reversals under normal flow conditions. Analysis of flow reversals under normal operating circumstances reveals a single main subject to these conditions Appendix 6 and highlights the 250mm main supplying Lydd. When the operating regime changes for some reason, for example treatment works outages or pumping failures, the zone is supplied from the east. This causes flow reversals within principle mains and leads to widespread discolouration events. One such event is the cause of the customer complaint cluster in December Bursts The burst rate within the Company and particularly within the Denge zone is very low; the reported rate for the Company 2007 was 70bursts per 1,000km. Table 9 presents the bursts recorded for the zone over the last five years Mains Bursts Table 9 Mains bursts for Denge 2003 to 2007 The Company maintains a water mains at risk register that identifies mains for future replacement due to high failure rates; of the 50 or so mains on the register only two are within the Denge Zone. Section 4.3: Discussion Overview The annual update of the Company s DOMS historical analysis has clearly highlighted Denge as the principal concern regarding risk of service failure for water quality. Customers are unhappy with the quality of water they receive but problems are mostly transient, often generated by changes to flow regime. Analysis of water sample results supports this view; water compliance is good but operational samples reveal significant problems across the zone with New Romney appearing to be the worst performing. Operational staff operate the zone with great care as it is highly sensitive to any disruption to flows. Ad-hoc flushing interventions were undertaken in 2005 and 2006 to remove deposits from the main but these areas cleaned less than 3 years ago are again exhibiting problems of dirty water. It is instructive to note that the mains in New Romney have not been cleaned in recent years and its these that appear to produce the most dirty water. The single compliance failure from the zone occurred in New Romney. Page 21 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

365 Trends All the indicators examined in the historical analysis point to a deteriorating trend in water quality. Figure 1, Figure 2 and Figure 3 all show a worsening trend over the recent past and Table 4, Table 6 and Table 8 show that failures of the standards for iron, manganese and turbidity are commonplace within the zone. This trend will continue without systematic intervention to remedy the situation. Hazard and Risk (Service Forecast) Hazard The zone was renovated using in-situ lining techniques in the 1990s and can be considered as non-ferrous for the purposes of this study (mains under 75mm diameter will not have been renovated but the great majority of these are plastic pipe). Internal corrosion is therefore not considered an issue and can be discounted as a driver for the water quality issues observed. Deposition of iron and manganese across the zone due to pass-through at the treatment works is the most likely hazard and cause of the water quality problems within the zone. Risk Assessment The following expresses the risks to service in the terms set out in the Company s DOMS and also the principles outlined in the DWI Information Letter 02/2008. The Company has considered the risk at zone level as it believes that it has demonstrated significant issues across the entire zone supplied by Denge water treatment works. The risk is assessed as the likelihood of customers receiving water that fails the regulatory standards for turbidity, iron and manganese; the Company believes that it has demonstrated above that this is occurring frequently at present and that the situation is deteriorating despite the Company s control measures. Figure 4 illustrates the risk matrix used by the Company within its DOMS: Page 22 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

366 RISK SCORE: Associated with hazardous event SEVERITY 1 off PCV Failure and /or a single customer cluster WSZ Multiple PCV failures and/or multiple customer complaint clusters in a WSZ. DWI notifiable event. Precautionary advice to 100 properties or less. DWI incident Precautionary advice to more than > 100 < 5,000 properties. Supply of unfit water (no not use) to 100 or less properties Precautionary advice to more than 5,000 properties. Supply of unfit water (do not use) to more than 100 properties LIKELIHOOD Highly unlikely Possible in long term (likely to occur in next 5 years) Possible medium term (likely to occur in next 3 years) Possible short term (likely to occur this year) Figure 4 DOMS Risk Matrix The assessment of the present risk to customers is: Present Likelihood: 4 (likely to occur at least once per year) Severity: 2 (Multiple PCV failures and complaint clusters) Risk Score: 6 Near Future Likelihood: 4 (likely to occur several times per year) Consequence: 4 (Precautionary advice to up to 500 properties) Risk Score: 8 These scores are very poor in the context of the Company s size and performance in all other zones Service Forecast There is presently a significant risk of service failure within the zone (PCV failures for iron. manganese and turbidity). If no interventions are made both at the water treatment works and in the zone then these will increase in frequency and severity. These levels of iron and manganese will continue to settle out within the mains, forming loose deposits. These deposits are disturbed by sudden flow changes or high flows/demands. This subsequently causes customers to experience discoloured water, which the majority find unacceptable and creates a breach of the Water Supply (Water Quality) Regulations Page 23 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

367 Flushing is needed to clear the discoloured water from the system and to support this process on occasions it is necessary to inform the customers of the deterioration in water quality and ask them to run their taps to assist with clearing the discoloured water from the system and from within their own domestic systems. This involvement of the customers has the effect of informing them the water is not fit to use, and once the discolouration had been resolved the customers would be further notified that the water was back to an acceptable standard. Such an event has to be notified to the DWI, as it would be of widespread concern to customers. Once notified the DWI would monitor the situation with a view to potential prosecution if they considered that water unfit for consumption was supplied to customers. This is particularly significant for the Denge zone as the Denge works has had 4 samples in 2007 fail the treatment works turbidity standard and 3 samples in 2008 fail the same; the DWI have not closed their investigation into these failures and at a liaison meeting on 11 February 2009 informed FDWS that this could still potentially result in a legal instrument being used. Discoloration events in the zone would almost certainly therefore lead to the sample failures being reconsidered as evidence of an ongoing, and as yet unresolved, concern. If one event occurred but did not result in a prosecution attempt, then if a second event of the same nature occurred a prosecution attempt would then be expected, as this would be regarded by the DWI as a failure to learn from previous incidents and a failure to prevent the same problem happening within the same area. Eight compliance samples per year are taken from the Denge zone for Iron, Manganese and turbidity, the parameters of concern for this zone. Any failures of these have to be fully investigated, to determine the cause of, and extent of, the problem, and the results of the sample and the resulting investigation have to be reported to the DWI. They will then determine if the failure is trivial, i.e. of no concern to the customer and unlikely to recur, or if the failure is significant. If the latter, they will expect an action plan to be developed to prevent reoccurrences. If a plan is not developed, or they consider it to be insufficient, then enforcement action can be taken. If a regulatory sample failed then flushing of the mains would almost certainly be required, to try to clear deposits that are causing the elevation of the failing parameter. If the investigations showed that more than one property was affected it may then become necessary to ask customers within a local area to run their taps to assist in resolving the issue. As for aesthetic problems as described above, this would result in customers considering their water not fit for use for a period of time until it could be confirmed to them that the water quality had been returned to the appropriate standards. In addition to the eight regulatory samples for these parameters, 200 operational samples are taken for the same parameters (i.e. two samples of each parameter are taken every week, either for operational or regulatory purposes). These operational samples show an overall deteriorating trend, therefore regulatory sample failures will be expected to occur in future. A possible future concern if the problem is not addressed is bacterial re-growth in the extremities of the system as the water quality in the distribution system deteriorates from the Page 24 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

368 constant deposition of iron and manganese. Deposits within the system form an ideal media for bacteria to develop into biofilms. This then forms a cycle whereby the presence of the deposits causes the chlorine levels to decay faster, which can allow bacterial growth to occur. This could result in bacterial failures across the system in future, though this has not been identified as a problem, currently the water across the Denge zone has a higher chlorine demand reflecting this mechanism. Investigations into such failures would show a widespread area being affected and could potentially lead to Boil Notices being imposed on customers depending on the type and levels of bacterial detections. The foregoing considerations have driven the evaluation of cost/ benefit analysis supporting the capital proposals in the business plan. Proposed Action It is clearly evident that water supply zone F21 Denge requires systematic cleaning to mitigate the increasing risk of water quality failures and gross customer complaints. The most cost effective intervention action is to resolve the water treatment issues at the works then undertake a one-off systematic cleaning of the network. Having identified Iron and Manganese deposits accumulated within the distribution system as a cause of deteriorating water quality and discolouration incidents as a result of process failures at the treatment works. Upgrading the treatment works to more effectively remove Iron and Manganese is part of the Business Plan and has the support of the DWI. This will be followed by a one off distribution mains cleaning programme to resolve the current Service problems this proposal also received the support of the DWI. Section 4.4: Costs The Company does not have recent historic mains cleaning costs and also recognised that the cost estimate used for the draft business plan needed further refinement. Therefore, following the draft submission the Company commissioned Atkins to review the scope and cost estimate for this interventions. A detailed scope was developed, identifying the material, diameter and length of all mains to be cleaned in the zone. Also, the scope of the enabling activity required for the work to be undertaken was developed. This included work such as customer communications, hydraulic modelling, site investigations, modifications to network valves and washouts and water quality sampling. From this scope a brief was prepared two external contractors asked to quote for the work. A third cost estimate was prepared based on costs and working method that Atkins were employing for an other water industry client in the southern England. Risk costs were assessed against each diameter of main to be cleaned, then using the these three separate cost estimates, an average all in rate per meter was developed for each a range of pipe diameters. This all in rate included direct, indirect costs and risk. The cost estimate for the final business plan was based on these average rates, as per the table below. The risk allowance included in this cost is low, at 3%. This is due to uncertainties Page 25 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

369 associated with mains being in the road rather than the footpath and the additional traffic management requirements where this is the case. Pipeline Diameter Cast iron Spun iron Ductile iron HPPE/MDPE UPVC Asbestos cement Total Length Composite Cleaning Rate* (direct+ indirect) Costs m m m m m m m /m k 75mm D 100mm 22,104 26,388 6,104 3, , mm < D 150mm 16,137 9,223 2,219 2, , mm < D 200mm** 1,874 2, , mm < D 250mm** 4, , , D = 300mm 0 2, , , mm < D 400mm , , D = 450mm Sub Total Company overhead 12.8% Total 44,498 40,559 9,269 6,610 13, , Section 4.5: Cost Benefit Analysis Prior to the compilation of the Business Plan two significant studies were undertaken associated with water quality. These were the preparation of Drinking Water Safety Plans, arising as a consequence of changes to the Water Supply (Quality) Regulations as Amended, and the establishment of a Distribution and Operating and Maintenance Strategy for the network. The latter following the principles of the Common Framework for Capital Maintenance. Both of these documents highlighted significant issues associated with the abstraction and treatment of water from the Denge Marsh, part of the Dungeness Peninsula and the distribution network serving the Denge zone and the communities of Lydd, Greatstone, Littlestone, New Romney and St Marys Bay. The water quality issues are associated with the high content of iron and manganese in the water that manifests itself with turbidity problems at the treatment works and discoloration of water at the customers taps. These studies have formed the foundation of the proposed quality and service enhancements identified in this Business plan. Cost benefit analysis has been undertaken on the proposals and shows them to be cost beneficial. The Company has applied the cost benefit analysis as per the approach described in Section C8. The following commentary covers the application of Company s approach to the identified Denge water quality failings and the effect on customers before and after investment. Page 26 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

370 As identified in Section B4 the current treatment process does not address high levels of iron and manganese in the raw water, this in turn leads to turbidity and PCV failures at the treatment works plus the contamination of the distribution network that inevitably leads to the supply of discoloured water at the customers tap that can also breach the prescribed PCV for Iron and manganese as previously explained. Four output performance measures have been evaluated in the cost benefit analysis to assess the benefit of making the investment, these are; OPM1 Biological and Chemical water quality OPM2 Aesthetics of the water supplied OPM9 Prosecution for failing to comply with the Water Supply (Quality) Regulations OPM12 Carbon. This is assessed as per the overall approach applied by the Company as described in C8. Analysis of historic performance has identified the potential frequency of failure if no proactive interventions are undertaken at the Denge treatment works or the Denge distribution network. The nature of the issue is one of continuing deterioration, the more untreated water abstracted and distributed constantly increases the risk of the works failing on turbidity and constantly increases the risk of the customers receiving discoloured water as a consequence of increasing levels of deposition of iron and manganese in the network. The Business plan proposal is to install treatment at the works and systematically flush the distribution network to remove the build up of deposited material. Three potential options were evaluated for cost benefit:- o o o QAL005 - Investment in treatment only ESL002 - Investment in mains cleaning only QAL002 - Investment in treatment and mains cleaning It is obvious that with the first two scenarios there will be residual risks following the intervention. If only additional treatment is provided the currently deposited material in the distribution network will continue to cause service issues, with discoloured water, for years to come until effectively it has been flushed out through customer taps. If only the mains are flushed, as has been previously done, the constant discharge of iron and manganese from the treatment plant only leads to reoccurrences. Experience is showing this has a cycle of approximately 5 years. In reality the customer experience is one of continuing deterioration because their second and third experiences over a long period of time will be represented by greater levels of dissatisfaction on each occasion. This aspect of customer experience is not reflected in cost benefit analysis. The data used in the cost benefit analysis is summarised in the following table. Page 27 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

371 OPM Intervention Data Used for Likelihood and Consequence OPM1 Chemical & Biological Water Quality Baseline / Pre investment position QAL005 treatment only Historical water quality data collated for the Drinking Water Safety Plan and projected forward for future deterioration. Risk stabilises at current levels and no not deteriorate further. OPM2 Water Quality Aesthetics OPM9 Prosecution OPM 12 Carbon ESL002 network cleaning only QAL002 treatment and network cleaning Baseline / Pre investment position QAL005 treatment only ESL002 network cleaning only QAL002 treatment and network cleaning All All Risk reduced to zero following investment, but increases over 5 year period until network cleaned again. Cycle repeats. No risk of failure. Historical water quality and customer contact data collated for the Distribution Operating and Maintenance Strategy and projected forward for future deterioration. Risk stabilises at current levels and no not deteriorate further. Risk reduced to zero following investment, but increases over 5 year period until network cleaned again. Cycle repeats. No risk of failure. Based on above data and frequency of reportable failures and predicted action by Regulator. Carbon costs based on cost of investment as per approach described in C8. Using the approach described above, the result of the cost benefit analysis for the options are: CBA / Solution Ref ESL002 Scheme Title Denge Network Cleaning for WQ Improvements Whole Life Cost, k Whole Life Benefit, k Net NPV, (WLB less WLC) k OPM 1. Water Quality (Bio & Chem) Benefit Value per OPM, k OPM 2. Water Quality (Aesthetic) OPM 9. Prosecution OPM 12. Carbon equivalent emissions 2,662 9,039 6,377 3,826 2,914 2,306-7 Page 28 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

372 QAL005 QAL002 Denge Treatment Solution GMFilter Only Denge Treatment Solution GMFilter and Mains cleaning 4,801 5, ,815 2,121 1, ,621 10,163 4,542 4,572 3,286 2, The results of the analysis shows that of the options, ESL002 - systematic network cleaning is a more cost beneficial solution than QAL002 the combined treatment and network solution. However, there are two material factors which are not represented in the cost benefit analysis. These are: o o The customer disruption and risk of water aesthetic service failure from repeating a systematic network cleaning programme every five years is not reflected in the cost benefit approach. As described above, in reality the customer experience is one of continuing deterioration because their second and third experiences over a long period of time will be represented by greater levels of dissatisfaction on each occasion. This is not reflected in the cost benefit approach. Given that customers stated preferences for water quality and water aesthetics are consistently high, the Company believes that the objective in address this risk should be to deliver a long term and sustainable solution to the water quality issues at Denge. This approach fully aligns to the Company s strategic direction statement. Furthermore, this approach will ensure that customers are no longer at risk of water quality and aesthetic failures and that they are also not subject to on-going disruption from repeated mains cleaning. These long term and sustainable benefits can only be delivered if both the Denge WTW and the network cleaning interventions are progressed in AMP5 and it is on this basis that the Company has selected both interventions as being the right strategy for customers and the Company in the final business plan. Section 4.6: Conclusion For the preparation of the Business plan guidance was issued by the Drinking Water Inspectorate identifying how investment proposals should be presented, this guidance has been followed and at the draft stage the proposals had the formal support of the DWI subject to caveats regarding cost benefit, detail and timing. These caveats have been fully satisfied by the work carried out and detailed in this final Business Plan. In undertaking the work customers in the Denge zone will benefit from a level of service comparable with the excellent service received by all of our other customers. For this full benefit to be accrued both the investment in the treatment works and the network must be undertaken, the cost benefit analysis has demonstrated in financial terms the positivity of the benefits for all scenarios considered. Page 29 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

373 Section 5: Section 5.1: Flood Protection and Resilience Background In Ofwat s PR09 methodology paper, 'Setting price limits for : Framework and approach' companies were asked to review the risk to their critical assets from flooding and to identify whether further investment is necessary. Ofwat also commissioned Halcrow to develop an approach to flood risk assessment and the approach outlined in the report 'Asset resilience to flood hazards: Development of an analytical framework'. The Company commissioned the consultants Jacobs to undertake a flood risk assessment of the Company critical assets from which this business case has been developed. A copy of their report is contained in Appendix B.6. Section 5.2: Overall Approach and Methodology The approach to identifying flood risk at key Company sites is outlined in the following steps: 1. Desk top analysis of sites at risk: This considered fluvial, groundwater, coastal and pluvial flooding mechanisms. From this a list of sites potentially at risk was developed. 2. From the desk top analysis the quantification of flood risk probabilities was undertake for at risk sites. 3. Site surveys were undertaken for at risk sites to assess the site specific conditions in more detail and to identify the scope of flood protection measures required. 4. Detailing of investment scope and cost estimates on a site by site basis. 5. Cost benefit analysis of investment options. Each of these steps is detailed in the following sections. Section 5.3: Desk-Top Flood Risk Analysis All of the Company s sites were assessed against four flooding mechanisms, fluvial, groundwater, coastal, and pluvial. The approach for each type of flooding is presented below. Fluvial Identification of sites, and associated structures, exposed to flood risk from fluvial flooding was assessed as a two stage process: Page 30 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

374 o o An initial assessment was carried out by overlaying the Environment Agency 1:100yr and 1:1000yr published flood extents over GIS layers showing the range of Company s water supply structures across the catchment, based on the earlier J-Flow preliminary modelling studies carried out at national level, using the IFSAR digital terrain model. From this screening process a shortlist was drawn up that identified those sites (and associated structures) that warranted further more detailed survey in order to produce a more accurate assessment of flood risk. It was then intended to identify sites that fall within the water surface flood profiles based on water surface levels obtained from the recent EA modelling studies using the ISIS hydrodynamic model and more accurate LiDAR digital terrain model (DTM). For these flood studies return periods of 1:20yr, 1:100yr and 1:100yr+20% were generally available, however it was found that no IYSIS modelling data was available for those catchments where the Company s structures are located and thus this approach could not be adopted. It is understood from the Environment Agency that it is not their policy to carry out detailed ISIS modelling of the upland chalk catchments of the South Downs due to the unreliability of modelling such catchments and that even the approximate JFLOW modelling cannot be relied upon at all for estimating potential flood levels. Nevertheless, the 1:100yr and 1:1000yr JFLOW flood outlines can still be useful in identifying sites located within these outlines that could potentially be at risk. Thus, as no detailed flood modelling data was available from the EA for these catchments, an approximate assessment was made on-site to identify structures that could be potentially at risk of flooding, including those structures with a known history of past flooding. Groundwater Flood Risk Assessment Sites potentially at risk from groundwater flooding were identified by overlying the Company s assets GIS layer over the Defra Groundwater Emergence Maps (GEMs). This series of maps identifies those areas where groundwater is predicted to rise to within 2 m of the ground surface in an unusually wet winter. Coastal Flood Risk Assessment Sites potentially at risk from coastal flooding were identified by overlying the Company s assets GIS layer over the EA 1:1000yr undefended coastal flood extents. This flood extent indicates the predicted inundated area assuming no flood defences are in place. Pluvial Flood Risk Assessment Sites at risk from Pluvial flooding were assessed from historical operational information, from desk top site assessments and the site visits. This focused on the potential for flooding as a result of run-off from large catchments or adjacent roads in event of significant localised rainfall, which was not shown on flood mapping. Page 31 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

375 From the above analysis the following site survey list was developed, based on flood risk potential. Sites Selected for Survey Flood Level Data Available Recent Flood History 1:20 yr coastal flood risk Denge WTW Yes No Yes 1:100 fluvial flood risk Groundwater flood risk Ottinge WTW No Yes Yes Yes Worlds Wonder WTW No No Yes Rakesole WTW No Yes Yes Tappington Borehole No No Yes Denton Borhole No No Yes Broome WTW No Yes Yes Lye Oak WTW No Yes Yes Pluvial flood risk Standen WPS No No Yes Stonehall WTW No No Yes Kingsdown WTW No No Yes Elms Vale WPS No No Yes George Gurr WPS No No Yes Fairways control No No Yes Yes Table 10 Company Sites to be Surveyed and Desk Top Flood Risk Assessment Results Section 5.4: Quantification of Flood Risk The coastal flooding risk at Denge has been interpolated from Environment Agency costal surge data at Dover and Rye. This is presented in the following table: Page 32 Section B6 Consumer Service Strategy 11/11/10, 09:12:55

376 Table 11 Rye, Dover and Denge coastal flood levels by return period The site and Denge peninsular is protected to some extent by existing sea defences which are maintained by British Energy to protect the existing nuclear power stations on the site. However, as described in the following section, protection of the freshwater aquifer from saline inundation in a sea storm event which breaches the sea defences is impossible. For assessing fluvial flood risk, the normal process would be to obtain from the EA Strategic Flood Risk Mapping (SRFM) studies covering the 1:20yr, 1:100yr and 1:100yr+20% (climate change) flood events. From these, flood levels for the 1:10 year event could then be derived by logarithmic extrapolation. However, for the reasons given in above, no flood level data is available from the SRFM modelling studies for the Folkestone & Dover catchments and thus the only fluvial flood data available is the approximate flood outlines for the 1:100yr and 1:1000yr events from the earlier JFLOW modelling studies. The GIS analysis showed that those sites within the 1:1000yr flood extents were also within the 1:100yr flood extents and many of those were well inside the latter, indicating that they would likely be inundated by floods of a lower return period than 1:100yr. Analyses of other Veolia catchments where SRFM modelling has been carried out (e.g. Colne valley for Three Valleys Water) has shown that where structures are located well within the 1:100yr flood extent, such structures are also potentially susceptible to flooding from lower return periods such as 1:20yr or even 1:10yr event (for the case without additional flood protection measures). It is therefore considered conservative to assume a flood return period of 1:10yr for those assets under this case. As there is also no data available for pluvial or groundwater flooding, it is thus conservative (in the absence of any other data) to assume the fluvial return periods as a proxy for these flood categories as well. As described below, the design of flood protection measures has been to be resilient to floods of return period of 1:100yr +20% which represents the increased 1:100yr event, due to climate change, predicted to occur by 2115 as per Environment Agency guidance. Page 33 Section B6 Consumer Service Strategy 11/11/10, 09:12:55