Part C3 Asset inventory. Strategic Management Consultants. Anglian Water Final Business Plan

Transcription

1 Strategic Management Consultants Final Business Plan Part C3 Asset Inventory Page 1 of 61 October 2010

2 Strategic Management Consultants Commentary by REPORTER Contents Summary... 5 Non infrastructure... 5 Infrastructure... 6 M&G assets... 6 Structure of commentary... 6 Non infrastructure assets... 7 Introduction... 7 Company approach... 7 Reporter Approach... 7 Changes since the Draft Business Plan... 8 Response to Ofwat reporter guidance Response to General Guidance Material assumptions Quality assurance procedures Company Information systems Review of asset stock Asset Stock validation Confidence grades GMEA Valuation GMEA valuation approach Cost models Generic Assumptions Asset valuation - Water Asset valuation Sewerage Specific Company guidance -GMEA Additions and Disposals Changes in valuation since the DBP GMEAV of Simple Disinfection sites GMEAV of Intake pumping stations Asset lives Summary asset surveys and condition grades Surveys Condition grade methodology Confidence grades Alignment with Capital maintenance common framework 30 2 Response to guidance for Tables C3.1 and C Changes in Asset Stock between PR04 and PR Changes in valuation between PR04 and PR09 33 Page 2 of 61 October 2010

3 2.2.1 GMEA valuation Net MEAV and CCD Confidence grades Changes in Condition grades between PR04 and PR Explanations for changes in condition grades Comparison of expenditure to condition grade 36 Principal Challenges Infrastructure Introduction Company Approach Reporter Approach Response to Ofwat reporter guidance Response to guidance for Part C3 -Infrastructure Response to general guidance Material assumptions Quality Assurance procedures Changes in information Accuracy and reliability of information systems Asset systems conforming to condition L of the Instrument of Appointment Differences of opinion Changes in asset condition Approach to valuation Response to guidance for Tables C3.1 and C Response to guidance for Tables C3.3 and C Changes since the DBP Water Infrastructure Wastewater Infrastructure Valuations Company Commentary 43 5 Asset Inventory - Methodology Water Service Dams and Impounding Reservoirs Raw Water Aqueducts Water Mains Communication Pipes Sewerage Service Sewers and rising mains Sea Outfalls CSO and Emergency Overflows Other structures 50 6 Table Commentaries GMEA Communication pipes Sea Outfalls 50 7 Line Commentaries Tables C3.1 and C Table C3.1a Tables C3.3 and C Page 3 of 61 October 2010

4 Principle Challenges Management and General - Water & Sewerage Introduction Company approach Reporter approach Response to Ofwat reporter guidance Response to General Guidance Asset Valuation M&G Offices and Depots M&G Vehicles M&G Telemetry M&G Computers M&G Other 61 Principal Challenges Page 4 of 61 October 2010

5 Strategic Management Consultants Commentary by REPORTER Summary Non infrastructure s systems are adequate to meet the requirements of the asset inventory. The Company completed a comprehensive survey of its asset stock for PR04 and has not repeated this exercise for PR09. There has been extensive use of extrapolated data to ascertain condition grades both from PR04 and previous data. When referring to survey results, the Company is referring to both PR04 and PR09 survey results. The outputs from the studies used to assess condition grades do not feed into the risk assessments used in the common framework and are not linked to expenditure estimates. We note that a confidence grade of B2 has been assigned to water treatment works. Given that the large percentage of the GMEAV is based on condition grades extrapolated from surveys completed for PR04, we consider that a grade of B3 is more appropriate for these assets. The same comment applies for the B2 confidence grade applied to booster pumping stations. has responded that it considers the B2 confidence grade is appropriate. Its combined PR04 and PR09 condition surveys covered 55 of the total GMEAV of all WTWs and this is a large sample, representative of the asset stock as a whole. Similarly 44 of the total GMEAV of water boosters is covered by PR04 and PR09 condition surveys and is a large sample, representative of the asset stock as a whole The valuation completed for the FBP is a significant improvement over that completed for the DBP when it was largely based on PR04 values inflated by COPI and we are satisfied that it is fit for purpose. We confirmed that the Company s valuation of its asset stock is consistent with costing estimates used elsewhere in the Business plan as its new costing database has been used extensively to complete the valuation. Validation checks have been completed but we queried the extent of the validation of data held on SAP particularly in light of an error identified due to the inclusion of non commissioned assets in the valuation of water treatment simple disinfection sites. The Company has not completed checks to ensure that this error has not been repeated elsewhere but demonstrated that the impact of such an error is likely to be immaterial. The error in relation to the Simple disinfection WTWs has been corrected for the FBP valuation. For the purpose of the valuation, has valued advanced digestion rather than conventional digestion at sludge treatment facilities. We were concerned that this is not an equivalent process and may result in an inflated valuation for those sites where conventional digestion or lime treatment is actually used. responded that its analysis indicates that advanced Page 5 of 61 October 2010

6 digestion is in fact cheaper than conventional digestion. Without a lengthy investigation we are unable to confirm or refute this statement. The PR09 approach uses condition grades to calculate remaining asset life. The methodology takes no account of installation date or risk interventions. The Company considers that in assessing the remaining life of an asset no account needs to be taken of the installation date. Also any historical risk interventions would be reflected in the condition grade assessment (which would be used to assess the asset life remaining). We do not support this latter statement as some condition grades (particularly for pumping stations and water treatment works) are based on extrapolation to the remaining asset base of surveys completed in PR04. Hence interventions undertaken in the latter years of AMP 3 and AMP 4 will not have been taken into account. Infrastructure has rigorously applied the UKWIR methodology for water mains and sewage pumping mains condition grading. The application of the UKWIR methodology has significantly changed condition grades for water mains and sewerage rising mains such that the condition grades reported have improved from PR04. In order to provide a more realistic set of condition grades for sewage pumping mains, has developed a revised application of the UKWIR methodology. The valuation for infrastructure includes allowance for the anticipated cost of compliance with the Traffic Management Act (TMA). Actual costs may differ and require a corresponding adjustment. The assessment, condition grading and valuation of combined sewer overflows (CSOs) and emergency overflows (EOs) will be reconsidered for PR14. The Company confirmed that both its asset registers and G/Tech GIS are compatible with Bill Emery s letter of 1 February 1996 and the DWI information letter 5/98. M&G assets The GMEAV of vehicles has increased from 10m in PR04.to 63m in PR09. It has also increased from 11m in the DBP. The Company state that this is due to assets being omitted from the PR04 valuation, in particular mobile plant. Due to the level of materiality of this valuation and the number of assets involved, the Company has not verified the existence of these assets and we consider that some obsolete items may be included. The Company response is that whilst it accepts the possibility that the valuation may included some mobile plant assets no longer in use, it does not believe this to be material as any of those assets with a nil historic cost net book value have not been given a new positive net book value. Also it has not charged any depreciation on these assets going forward and the 63m GMEAV represents only 0.2 of total GMEAV or 0.7 of depreciable assets. Structure of commentary This commentary is divided into three sections: Non infrastructure assets Infrastructure assets M&G assets Page 6 of 61 October 2010

7 Non infrastructure assets Introduction Company approach The Company completed a comprehensive survey of its asset stock for PR04 and has not repeated this process for PR09. Asset stock records are held on the Company s SAP system and this system has been used as the starting point for the PR09 asset inventory exercise. For the FBP, data for some assets has been validated, in particular the kilowatt rating of pumping stations and the capacity of service reservoirs and water towers. For the DBP, some repeat surveys were completed and when available these were used to inform conditions grades. Otherwise the PR04 condition grade was deteriorated for PR09 or extrapolated using a combination of PR04 and PR09 survey data. The Company s cost model, reworked for the FBP and used consistently throughout the business plan, has been used to value asset stock. Net MEA values have been derived by matching condition grades to nominal lives to ascertain remaining life. Reporter Approach At the DBP, our review centred on understanding the methodology and then reviewing the database provided at audit with selected examples being reviewed on screen. For the FBP, our audit has concentrated on those areas changed since the DBP and in particular changes in the GMEA valuation. We also reviewed those areas identified by Ofwat in its Company feedback, as requiring further investigation. Page 7 of 61 October 2010

8 Changes since the Draft Business Plan A summary of the changes since the draft business plan is given below. Detail of the impact of these changes is given in the relevant section of this commentary: The major change since the DBP has been the use of the Company s reworked and expanded cost model to value assets. This has had an impact on the valuation. The Company s GMEAV for the water service at the DBP for the water service (excluding M&G) was 2,348m and for the FBP, is 2,379m. A reduction of 55m. For the sewerage service (excluding M&G), the DBP value was 5,527m and for the FBP is 5,629m, an increase of 102m. Condition surveys for water storage assets have been revisited. The condition surveys for the M&E elements of sewage treatment works have also been reviewed. Neither of these reviews has had a major impact on condition grading. The number and kilowatt size for pumping stations has been validated. This has had a major impact particularly for water booster pumping stations where the kilowatt rating has increased due to the inclusion of standby as well as duty pumps. The size bandings for sewage pumping stations has generally reduced since the DBP. A revised mapping of condition grades to remaining life has been used to calculate the Net MEA. Response to Ofwat reporter guidance 1 Response to General Guidance 1.1 Material assumptions The reporter shall disclose (if not fully exposed by the Company) the material assumptions and company policies that underpin the data submitted in tables C3.1 and C3.3 and the scope and extent to which these have been significantly challenged by the reporter and/or the auditor We have detailed any material assumptions identified it the course of our review in the relevant sections of our commentary. 1.2 Quality assurance procedures The reporter shall give a brief assessment of the quality assurance procedures used in relation to the production of the asset inventory information. A technical approach was provided which details the procedures to be followed when completing the C3 asset valuation tables. This was not a formal QA procedure but effectively performs the same function. Work sheets detailing how data was validated were also provided. As part of our review of C3 we queried other checks that the Company had completed in order to validate the data provided. These included: Peer review and check by management accountants of the spreadsheets from which table entries were calculated. Page 8 of 61 October 2010

9 A cross check on excel spreadsheets using horizontal and vertical totals. Reconciliation back to PR04. The Company has completed further validation of its asset stock in the intervening period between the DBP and FBP. Further detail of checks completed is given in the Section Review of asset stock, below. 1.3 Company Information systems For surface assets, the reporter shall review the extent of the coverage of company asset management information systems and comment on the company report and the detailed information base underpinning the report. The reporter shall also comment on the effectiveness of computerised records such as geographical information systems used by the company, in informing decisions in respect of surface asset management. The reporter shall provide his professional opinion as to the adequacy of the information systems used by the company for the purposes of efficient management and operation of its assets. s asset management database, Aquarius, is managed by the asset management data centre (ADMC). The database holds the master list of sites and is updated on a regular basis. However it does not hold detail below site level and detail on plants groups the level at which the GMEA valuation has been completed - was obtained from SAP ALM. The Company has given a description of these systems in its commentary. The master list, as for the DBP, was obtained from Aquarius as at 31st March 2008 We reviewed the Aquarius spreadsheets for the DBP and noted that it included a field for operational status e.g. operational, decommissioned, standby, under construction etc. It also included fields for ownership status i.e. owned or private. Mothballed treatment works are not included. The Company has assumed that if the asset is owned but no longer used operationally, it is obsolete Condition survey results from PR04 were fed into the Company s SAP system which holds detail of installed assets down to component level. Assets are grouped at plant group level. For water treatment works and sewage treatment works this equates to treatment process e.g. GAC, chlorine dosing disinfection, tertiary treatment etc. We are satisfied from our review that s systems are adequate to provide the information necessary for purposes of efficient management and operation of its assets. The implementation of SAP ALM in January 2005 has meant that data on non infrastructure assets and the maintenance of these assets is held in one system. The Company s Asset Plus system has been used to determine investment needed to maintain the assets in the future. Our comments on this system and the links between this system and SAP are given in our commentary to Part B3. The exercise required to update data since the DBP however, shows that there is scope for improving communication between SAP and the Aquarius asset database. Page 9 of 61 October 2010

10 We queried whether details obtained as a result of the Business plan exercise will fed into these systems. The Company responded that the systems will be update after submission of the FBP Review of asset stock. The Company has given a breakdown of changes in asset stock since PR04 in its commentary. We have commented upon these changes in Section 2.1 Changes in Asset stock. A major improvement in validation since the DBP is that asset data has been checked against site operational manuals. This has resulted in some changes to the reported asset stock. Detailed below are the validation checks completed by the Company to confirm its asset stock since the DBP Asset Stock validation Water treatment works We queried whether checks had been completed on data held in Aquarius/SAP. The Company responded that data was verified using: Cross checks between the master lists held on Aquarius and SAP. Telemetry A check of the site operational manuals A check against the deployable output from the Water Resources deployable outputs review. These checks resulted in the deployable output for 4 sites being adjusted from the DBP. There is a difference to the methodology employed to identify sites for the June Return where 140 sites are reported. For the June Returns, treatment works are counted by DWI sampling points. This has meant that water from two treatment works blended at a storage point is being counted as one works. For the Business plan these have been counted as two works for valuation purposes. Conversely where there are two sampling points on a treatment works, these have been counted as two works for the JR and one for the Business plan. Water storage Data was obtained from the Aquarius database and verified by: Telemetry Site operations manuals and local operational manager. These checks resulted in a reduction of 4 service reservoirs and 1 water tower and some capacity band changes since the DBP. Water Pumping Stations For the DBP, the greatest uncertainty rested around the kilowatts of pumping stations both sewage and water; the kilowatt of earlier installations is not held on SAP and in many instances theoretical calculations were used to determine the kw rating of each pump. For the FBP, the Company has revisited its asset stock of pumping stations and adjusted both the number and kilowatts of these assets. This has resulted in some additions and some deletions to stock recorded in the DBP. The kilowatt rating for Page 10 of 61 October 2010

11 each pumping station has been reassessed using data held in the operational manuals and by telemetry. A major reason for change is that allowance for standby pumps had not been included in the PR04 numbers and the DBP data was largely based on that provided for PR04. This has had an impact on size bandings particularly for booster pumps. Data for pumping stations with the exception of Borehole Pumping stations was obtained from Aquarius and validated by: Telemetry Site operational manuals Installed site kw ratings determined from SAP, Energy team pump testing information and site operations manuals. stated that no extrapolation or sampling has been undertaken and that all pump kw data has been validated. An efficiency rating of 80 has been assumed. An example of the methodology for booster pumping stations is given below. Booster pumping stations validation Where the kw was stored on SAP this has been used.. This applies to the more recently installed pumping stations and accounts for 163 out of the 301 booster pumping stations. A further 26 were verified using operations manuals. The use of telemetry to verify flow and pressures and energy team pump tests were used for 84 and the remaining 28 were verified using electricity bills and assumed flows and pressures. In addition a list of pumping stations on water treatment works and service reservoirs was obtained. For the FBP, these (36 booster PS) have been counted as pumping stations and not as WTWs or SRs. However 16 booster pumping stations are no longer in use and so the net increase in the number of booster pumping stations over the DBP is 20. The number of source and intake pumping stations has remained as for the DBP but the number in each of the size bandings has varied. Data on borehole pumping stations was obtained from Water resources and those in service identified. Sewage pumping stations At the DBP, had not validated data on the number and bandings of sewage pumping stations as there were too many to validate individually. For the FBP, data has been extracted from the Aquarius system and the PR04 asset inventory and a desk top exercise has been undertaken to calculate the kilowatt rating. We queried whether this had been completed on a sample basis. Anglian Water responded that all pumping stations had been included in the exercise. The basic methodology used for PR04 has been retained but an error was identified in that an ancillary uplift of 1.6 was used applied to allow for heating, lighting and to account for pump size matching. For PR09 this factor has been reduced to 1.25, to reflect the fact that exact kw rating would not equate to standard pump sizes and so a level of oversizing is inevitable. This change has led to a reduction in the kilowatt sizing. Page 11 of 61 October 2010

12 Sewage treatment works The number of sewage treatment works matches those reported in JR08 and the Excel back up sheets used for JR08 have been used to band these works. Sludge Treatment The number and banding of sludge treatment works is as reported by the Company s sludge treatment manager and is the same as JR08. Customer ancillaries (non infrastructure). The number of assets is as reported for the DBP Confidence grades The number and banding of assets hold greater certainty for the FBP than the DBP particularly for pumping stations and water storage where there was the greatest uncertainty for the DBP. Confidence grades assigned by the Company have increased accordingly. We questioned the grade of A2 for service reservoirs. responded that it has given an A2 grade for service reservoirs and water towers, because while it could claim an A1 for the entire asset stock (in terms of total numbers of assets), it has to report on them by size band. While it is confident of its information on the size of its storage points, an A1 confidence grade (accuracy of 1), would only have to have 2 sites incorrectly banded to comply. We queried the B2 confidence grade for sewage treatment works and sludge treatment facilities. The Company responded that it was confident in the numbers of stock but has to report on them by size band. Size bands are based on the load applying to STWs, and the loads are assessed using calculations, based on connected population, holiday population, trade load etc. Whist it is confident in its methodology, it feels a B2 grade is appropriate. This is consistent with its approach for the June Return. Similar reasons apply for water and sewage pumping stations where the company is confident in the numbers but not so confident in the bandings. We consider the confidence grades applied by the Company for its asset stock to be appropriate. Page 12 of 61 October 2010

13 1.4 GMEA Valuation review the methodology utilised by the Company in performing the modern equivalent asset valuation; comment on the suitability of the Company methodology, giving the basis of that opinion; state whether the methodology was consistently applied across the asset base; comment on the suitability of any sampling exercise, providing the reason for that opinion, and stating whether and if so why the size of the sample is sufficient to adequately represent the total population of assets; review the assumptions and limitations underlying the revaluation exercise, and comment on whether these are reasonable and explain the basis for your opinion; identify where the Company has made assumptions about a modern equivalent asset that is substantially superior in functionality to the current asset ;review and comment on whether an asset with similar functionality to the current asset could alternatively be obtained at a materially lower cost than the company has assumed in its MEA valuation GMEA valuation approach has completed a major exercise to revalue its stock since the DBP. Non infrastructure asset stock has been revalued using the Company s revised cost model which has been used consistently throughout the Business plan. The valuation completed for the FBP is a significant improvement over that completed for the DBP when it was largely based on PR04 values inflated by COPI and we are satisfied that it is fit for purpose. The use of the Cost models has meant that costs have been applied consistently throughout the Business plan and are based on recent data. We have commented on the costing database in Part C5 of our report. Costs were not available for a number of water treatment processes at the DBP and costs for substitutes were utilised. This has been overcome and it seems that a cost model is available for most of the processes currently used. Processes valued are those recorded by SAP. The current cost for providing the same functionality of the existing process has been used. This means that the valuation results in assets being valued based on their function rather than the actual components currently installed on each site. There are exceptions notably for sludge treatment, where advanced digestion rather than conventional digestion has been valued and small sewage treatment works, where a package plant has been costed. No sampling exercises have been undertaken for the purpose of the valuation and the Company has revisited the attributes of some of its asset stock notably pumping stations. We found no evidence of duplication of costs in the course of our review and the Company demonstrated to us that it has not double counted values where, for example, similar assets are on the same site. Meters were re-valued using revised cost models. The only asset we identified where the Company has made assumptions about a modern equivalent asset that is substantially superior in functionality to the current Page 13 of 61 October 2010

14 asset is for sludge treatment where the valuation is based on advanced digestion. We queried the impact of this on the valuation, given that this is likely to be a more costly process than conventional digestion. Of the total stock of 28 cake sludge treatment facilities, 10 currently have advanced digestion installed with the remaining 18 sites using conventional digestion (8) or using lime treatment (10). We challenged the Company to demonstrate that this process is not more costly than conventional digestion. responded that its analysis confirms that advanced digestion is in fact cheaper. The Company provided a lengthy response which is repeated below: Although advanced digestion gives more effective destruction of pathogens than conventional digestion, the principal benefits of using advanced hydrolysis and digestion technologies rather than conventional digesters are that the capital and operational costs are lower for advanced digestion, thus: In conventional digestion the first steps to start breaking down the raw sludge involve hydrolysis of the feed sludge, and this occurs within the mesophilic digesters. Advanced technologies carry out some of the hydrolysis stages in separate heated reactors upstream of the mesophilic digesters. This allow higher solids loading rates on the mesophilic digesters, so that for a given raw sludge throughput, less digester capacity has to be provided; Because pathogen kill is assured by the heat treatment in the advanced hydrolysis stage, there is no need for secondary storage following the primary mesophilic digesters. With conventional digestion, we have found that 21 days batch secondary storage is necessary to achieve even the minimum level of pathogen reduction specified in the amended Sludge (Use in Agriculture) Regulations 2001 for conventionally-treated status. This significant tank capacity adds considerably to the capital costs of conventional digestion plant. Operationally, advanced digestion breaks down more of the raw sludge organic matter, and hence produces more biogas, than conventional digestion. This means that more renewable electricity can be generated, yielding more ROCs payments and more savings on electricity bought from the grid; The reduced amount of solids after advanced digestion results in lower costs for haulage and agricultural recycling of the advanced-treated biosolids product compared with conventionally digestion. There is a marginal additional benefit in that advanced digested sludge is easier to dewater than conventionally-digested, so that the advanced product has a lower moisture content, again resulting in a saving in haulage and recycling costs; has reviewed its valuation model and determined that valuing its asset stock using a conventional digestion approach produces a GMEAV of 410m, compared to its reported GMEAV of 327m for advanced digestion. Without a lengthy investigation, we are unable to confirm or refute the above statement. The Company states that, Since the GMEAV model designs a modern STW to meet the load and consent on each works, the Model may include a process which does not currently exist. We asked it to explain this comment further. It responded that the valuation is for a modern equivalent asset. The valuation is for modern equivalent assets, thus what is valued on each site may not correspond with the process currently installed on a site. For example, has determined that the modern equivalent asset for a percolating filter STW is an activated sludge plant and thus in this instance it has valued a process which does not currently exist on that site. Page 14 of 61 October 2010

15 We have reviewed the application of the cost models to each of the asset groups and details of this review are given below along with those assumptions that we have identified in the course of our review Cost models We have reviewed in detail the cost models in other parts of the Business plan. We completed a number of sample audits against these cost models and confirmed that they have been used for the valuation. has included corporate overheads in the revaluation. These overheads vary according to the size of the scheme and are capped at 3.5m for water and 2.5m for sewerage. For example, for a water treatment works they range from 10 to 44 with a roughly estimated average of 13. For service reservoirs between 13 to 34 with a weighted average of 21. For sewage treatment works, the overheads range from 10 to 34. We confirmed that the oncost has been applied to the whole construction cost of the asset, not the individual plant groups and hence there has been no duplication of the oncost. The percentage of GMEAV in each condition grade (assessed by civils and M&E including instrumentation) was calculated by totalling the plant group valuations each condition grade at Civils and M&E level, then calculating the weighted average of GMEAV in each condition grade. This is a similar methodology to that used at the DBP Generic Assumptions A number of generic assumptions have been made: It has been assumed that SAP contains an accurate list of the processes at each site. It has been assumed that a standard process can be constructed at all sites and that there are no special requirements at sites Land has been valued at 25k a hectare with areas of less than 0.4 hectares being valued at 10k. This is based on current experience of purchase costs. Land areas have been identified from actual land areas when known or where unknown, from the average land area for the type of asset. Sites are assumed to be square and roads assumed to be a proportion of this ranging from a half to a quarter. Exceptions to this rule are boreholes where an assumption of 0.5 hectares has been used, and source and high lift pumping stations where the land area has been assumed at 1 hectare for size band 5, 0.75 hectares size band 4, 0.5 hectares for size band 2 etc. For the DBP, land was assumed to be 1 of the total cost. Electrical distribution costs of 3.5 of the total construction costs have been assumed for treatment works. Where a standby generator exists but no size is stated a regression analysis of known generators against deployable outputs has been completed. Telemetry is included in M&G The approach for each asset group is described below. Page 15 of 61 October 2010

16 1.4.4 Asset valuation - Water Water treatment works Costs The valuation has been built up at plant group level. The cost functions used for the capital maintenance programme have been applied to each of the plant groups(processes) at a site there are 41 plant groups cost models. Each site valuation is based on: Construction costs + electrical distribution + company overheads as described above, + land.. We queried whether a risk/ contingency allowance has been included in the costs. The Company responded that the plant group and pipeline models used for the revaluation do not include any risk or contingency allowances. The plant group models and pipeline models used for the revaluation are based on out-turn costs or forecast out-turn costs. These do not contain any risk or complexity factors. They are based on data points with no adjustments. In its investment plan the project complexity factors are applied when building up a solution template to resolve a particular problem. However, for the revaluation it has not used any project complexity factors, and the MEAV is purely based on the construction models with oncosts. Methodology The initial step was to take a download from SAP to establish which plant group cost models should be applied for each site. The driver for the cost function is deployable output although for a few assets such as dirty-wash handling plant and sludge handling, alternative drivers are used such as capacity and kilowatts. We queried what would happen if there were multiples of the same plant on site. responded that since the cost driver is deployable output no account need to be taken of multiple plant groups of the same type on the site.. For the DBP, we noted that costs for some processes were not available and substitute costs from similar process had been used. For the FBP valuation, all but one of these processes (in-line straining used at two water treatment works) now have a cost model. The Micro straining cost model was used as a substitute for inline straining. The exercise was completed on linked worksheets from the cost functions through to the completed table. A clear audit trail was available for review. A breakdown between civils and M&E, required to match the condition grades to the valuation for the Ofwat table, was not available for each process. Where it was not available, the costing engineers provided an estimate of the split for the process. The Company stated that for most WTWs the percentage split was contained within the cost models. We have commented on the valuation for WTW simple disinfection in section Company specific guidance, below. Page 16 of 61 October 2010

17 Service reservoirs The design capacity in Ml is used as the cost driver. Costs were calculated by applying the revised PR09 cost model and consisted of: Reservoir construction cost, Infrastructure costs and landscaping x Company Overheads + Land. Water towers There is no cost model for water towers as the Company does not believe that this is a modern equivalent asset. Water towers have recently been replaced by booster pumping stations and the GMEAV is based on booster pumping stations with a standby generator. It is an established practise to no longer build water towers in the industry and we consider the replacement of these towers by booster pumping stations to be reasonable for valuation purposes. The size of the pumping station has been determined by the water tower daily output. Where it is not known, then an average of all the daily outputs has been used approximately 35 out of the 140 water towers. Daily output in litres has been used to derive peak daily flow by using a peak to average factor of 1.3 for peak day flow and a peaking factor of 2 for peak instant flow. Pump kw rating has been determined using 80 efficiency and duty standby pumping. Standby generation assumes half of the installed capacity as pumping is duty/standby. Pumping stations For the DBP, the PR04 cost models had been inflated by COPI and applied to the asset stock. For the FBP, the cost models have been used. The same process has been applied for all water pumping stations. All pumping stations with the exception of borehole pumping stations have been valued using the cost model for water booster pumps. Intake pumping stations The water booster cost model has been used with installed kw pump capacity as the main driver. The screens plant group cost model was also applied with flow as the cost driver. Thus the final costs include that of the pumping station, screens, fencing and roads, plus the corporate overhead and land There is no standby generation at intake pumping stations. As stated Intake pumps are based on the cost model of water booster pumping stations. We reviewed costs across a number of sites in these categories. As explained above there has generally been an increase in the valuation of these assets since the DBP. Page 17 of 61 October 2010

18 Comparison of pumping costs Intake Grafham 6 pumps 5940kW Intake Heigham 2 pumps 245kW Booster Sprites Hall 6 pumps. 330kW Booster Weston 3 pumps 750kW Booster Priory Hills 2 pumps 60kW Civils M&E Screens Standby Fencing Roads Oncost (23) (21) (28) Land FBP Total 10.1m 2.1m 1.86m 3.1m 0.767m DBP total 13.1m (2438kW) 1.0m (141kW) 0.663m (88kW) 0.7m (122kW) 0.3m (31kW) We have commented on the valuation for intake pumps in our response to section Company specific guidance below. Booster pumping stations The kilowatt rating for all pumps has been validated and for booster pumping stations this has meant a substantial increase in the size bandings. A major reason for this was that the PR04 valuation included only duty pumps and took no account of standby pumps. The examples given in our response to Company specific guidance below, demonstrate this impact on the kw rating and explains the large increase in value over the DBP for this group of assets. Source pumping stations These include raw water, highlift and borehole pumps. The GMEA value of source pumping station has increased substantially since the DBP from 154m to 221m most of this increase is due to the cost of boreholes which have increased from 97m at the DBP to 162m in the FBP. We asked whether the Company could explain this increase and the Company replied that a comparison was not possible since the DBP numbers were based on inflated PR04 values for which a breakdown of costs was not available, whereas the FBP numbers are based on the cost model. Meters Data were obtained from SAP and from tariffs and meters owned by other companies removed. The meters were then split between domestic and commercials based on the tariff applied. Remaining meters were allocated as follows: All 15 and 20mm meters were assumed to be domestic. All trade effluent and larger meters were assumed to be commercial. Void properties were assumed to be domestic. The valuation was taken by applying the JR08 split of internal and external meters (91 and 8 internals) to the unit costs for internal and external meter installation to produce a weighted unit cost of for all meters up to 50mm. The cost of the meter box (Atplas box) is included as an infrastructure cost. Page 18 of 61 October 2010

19 For meters over 50mm a cost of 750 was employed which includes the cost of building a chamber. Meter costs for meters up to 50mm have been revised slightly downwards since the DBP Asset valuation Sewerage Pumping stations For the DBP, the cost models used in PR04 (derived from TR61) were applied inflated by COPI. For the FBP, the cost model has been used. We queried whether costs had been completed on a sample basis and extrapolated to the total. Anglian Water responded that no sampling had been undertaken and a revised calculation has been completed for all pumps although a number of assumptions have been made: No roads have been allowed, just fencing. With the exception of the 1.6 to 1.25 factor (detailed under asset stock) the same methodology for calculating the kw of each site was applied as for PR04, using an efficiency factor of 35. Those pumping stations with additional plant groups such as odour control, standby generation, and storm handling were flagged and additional cost models applied to these plant groups. Standby generation accounts for 1.6 of the total GMEAV (before the application of oncost) for inline SPS and 1.7 of the total GMEAV (before the application of oncosts) for terminal SPS. Sewage treatment works For the DBP, a similar methodology to that for PR04 was applied. For the FBP, the Company s cost models have been used. These assets represent over 40 of the total GMEAV for non infrastructure. New cost models have been used for works over and under 1000pe. Assumptions The Company has made a number of assumptions: It has assumed that where a process is known to be common to all works but not shown on the SAP extract it has been valued for all works. This includes inter process pumping, storm handling, screening (inlet works), electrical distribution, primary settlement, final settlement, sludge dewatering and sludge storage. Where a process is redundant a modern equivalent has been assumed, including: a standard approach has been adopted for secondary treatment using aeration as the standard process. for tertiary filtration - reed beds and grass plots have been used as the standard modern equivalent Standard consumption of 145 litres per head per day has been used to derive the dry weather flow. Methodology The main tenets of the valuation are: Formulas within the model convert p.e to the required driver such as kw for pumping. Page 19 of 61 October 2010

20 Where a process relates to sludge treatment, this has been included in the sludge treatment valuation Where on site pumping terminal appears, it has not been included in the STW valuation but in the terminal pumping valuation. If a plant group (process) occurs for a handful of sites it has been reviewed for materiality and relevance. Where a plant group was recorded on SAP for only a very small number of sites (single figures) these were reviewed to identify if they were correct (e.g. it could have been a miscoding of a plant group in SAP) or whether it was material to the valuation. If it was considered not material or incorrect, it was not valued. Works under 1000pe For works under 1000pe, a package plant model has been used, this accounts for 614 of the total 1106 works and represents 10 of the GMEAV i.e. all of the band 1 sites and approximately half of those in band 2. There are two models, a BAF and SAF model. If the 6DWF for the works is less than 50m3/day, the valuation is based on the SAF plant otherwise it has been based on the BAF plant. The appropriate package plant cost model has been applied to the flow calculated from the p.e.. The size of the package plant is based on a formula of 6x dry weather flow. An example of a valuation using the BAF package is detailed below: Wrestlingworth STW p.e Package 567k Primary civils 17k M&E 41k Tertiary 136k Fencing 15k Road 39k Common control 4k Electrical distribution 28k Oncost 205k Land 13k Total 1.065m ( 44k higher than DBP) Works over 1000pe The processes at each site were downloaded from SAP. The costing model assumes a common design for each process i.e. that the same processes are similar at all sites. It also differentiates between nitrifying (ammonia consent) and carbonaceous sites. A breakdown between civils and M&E required to match the condition grades to the valuation for the Ofwat table, was not available for each process. For STWs approximately half of the plant group cost models were combined models and half were separate civils and M&E models. Where the split was not available the costing engineers provided an estimate of the split for the process. We reviewed the cost breakdown for Sudbury STW a nitrifying site with a population equivalent of pe. We confirmed that the costs had been valued using the cost models for each process at the site. Without a detailed examination of the cost model, which we have reviewed separately, it was difficult to ascertain whether there were any errors such as duplicated costs in the valuation. Page 20 of 61 October 2010

21 Sludge treatment All but one of s sludge treatment sites are for cake disposal. For the DBP, these were based on an inflated PR04 valuation. For the FBP these have been revalued using the cost model. However the cost model has assumed that the modern equivalent asset for these sites is advanced digestion regardless of whether or not this process exists on the site. We have commented on this above under section Valuation approach. There has been significant investment in these plants since PR04.and work is ongoing. Only completed investment in operational use as at 31st March has been valued. Work in progress has not been valued. 1.5 Specific Company guidance -GMEA Please perform a further review on the treatment of additions and disposals since PR04 for the FBP Please carry out a further review of Anglian s work on Franklyn and Andrews non infrastructure cost curves for the FBP. The reporter will also review any changes in the valuation as a result of Anglian using the updated cost models. Please investigate why Water Simple disinfection and Water -intake pumping stations are valued at 17m and 66m against an indicative value of 3.6m and 18m respectively Additions and Disposals The Company has assumed that SAP holds accurate data on the processes and plant groups at each site and would have taken account of disposals as it is updated continually. However we are concerned that an Ofwat query on the valuation of WTW - Simple disinfection has led to non commissioned processes being included in the valuation as well as the original process. We asked what steps the Company had taken as a result of this error to ensure that it was not repeated elsewhere and that disposals as well as additions had been taken into account. It responded: We do not believe that there are any other material errors in the base data held on SAP. Given the low number of water quality schemes ongoing and the fact that newly installed processes will only be entered onto SAP just prior to commissioning The error on WTW SD sites was due newly installed treatment process from Water Quality Schemes (which were in the process of being commissioned) being recorded on SAP. Because these schemes were not fully commissioned until April 2008, these additional plant groups should not have been included in the valuation. We have reviewed and confirmed the existence of plant groups on WTW for all those plant groups that account for 3 or more of the total WTW valuation. Following this response we asked whether sample checks had been undertaken in areas where there is substantial capital investment to ensure that this mistake has not been repeated elsewhere. The Company stated that it has not carried out any further sample checks, however it does not believe that there are any material errors in the inclusion of additional plant groups in the valuation. It presented the following analysis to substantiate its point: Additional plant groups (processes) are only added for quality enhancement capital investment. In the year prior to the revaluation ( June Return submission), Page 21 of 61 October 2010

22 quality enhancement investment totalled 28m for the entire water service and 76m for the entire sewerage service. This is only 2.4 of WTW GMEAV and 2.2 of STW GMEAV, this therefore gives an indication of the maximum impact assuming all of this investment resulted in additional plant groups which were not commissioned but recorded on SAP at 31 March Changes in valuation since the DBP We have commented on the changes as a result of the use of the cost model and review of asset attributes under each asset heading above. The changes are summarised in the table below: Summary of Changes in valuation between DBP and FBP Asset group FBP valuation m DBP valuation m Difference m Water treatment works (128) Water storage (78) Water pumping stations Ancillaries - meters (4) Total -water 2,379 2,434 (55) Sewage pumping stations Sewage treatment works (180) Sludge treatment Company explanation of difference Increase due to: Booster PS where standby pumping now included but not included in DBP. DBP based on PR04 cost models which were compiled from TR61. The FBP valuation is based on current cost models which are AW specific As above As above facilities Total-sewerage 5,629 5, Overall difference 47 (0.6) GMEAV of Simple Disinfection sites Following the Ofwat company specific guidance, we reviewed in detail the calculation of the GMEAV for two simple disinfection sites where processes not yet commissioned, had erroneously been included for the DPB valuation Lower Links and Rushbrooke WTWs. WTW Lower LInks DBP Cost of additional process FBP 2.7m 1.79m 0.526m Rushbrook 6.6m 4.1m 2.4m Comment Reduction due to additional process and 0.38m due to reduction in cost model. Reduction of 4.1m due to inclusion of additional process. As can be seen, the GMEAV value of these assets has halved from that in the DBP i.e. a reduction of 8.8m - 6m of this is accounted for by the removal of these Page 22 of 61 October 2010