Severn Trent Water Accounting Separation Methodology statement

Transcription

1 Severn Trent Water Accounting Separation Methodology statement Contents Introduction 1. Systems in place and sources of information used to populate tables 2. Population of lines 3. Internal governance and consistency procedures 4. Capitalisation policy 5. Commentary Appendices i. ST1: Activity costing analysis Water Service ii. iii. iv. ST2: Activity costing analysis Retail Services ST3: Activity costing analysis Sewerage Service ST4-6: Analysis of fixed assets v. Capital Expenditure Accounting Policy 1

2 Introduction The purpose of this statement is to explain the systems, processes and allocation methods used to populate the Accounting Separation tables, historically 21a, 21b, 22a and 25a-c of the June Return. 1. Business structure and systems in place and sources of information used to populate tables Severn Trent Water is structured as follows: Water Services Waste Services Customer Relations Central functions (e.g. Information Technology) Information used to populate the tables originates from our SAP system, which was implemented during We believe that the allocations made within the accounting separation models are reasonable on the basis that: a. They are consistent with our stated methodology which was constructed based on a detailed review of the business; and b. The outputs are reviewed by our Performance Analysts and Performance General Managers for Water, Waste and Customer Relations, who bring a comprehensive view of their respective business areas. 1.1 Water service The table is populated from a matrix that records and analyses operating costs by cost centre. The cost centre data is sourced from the accounting system (SAP) and represents the transactions for the water services group of departments in their totality. The process is currently aligned to the existing reporting cost structure that is operational within the business. The majority of costs can be directly attributed to business units by specific identification of costs, whilst others are allocated based on a specific cost driver, leaving some costs based on management estimates. 1.2 Retail service As above, the table is populated from a matrix that records and analyses operating costs by cost centre. This data is sourced from SAP and represents the transactions for the customer relations department in its totality. 2

3 Whilst the majority of costs can be directly obtained from cost centres, certain costs require analysis using specific cost drivers, leaving a remainder of costs to be allocated based on management estimate. 1.3 Sewerage service The table is populated from a SAP Business Warehouse (BW) report that analyses operating costs by cost centre. Each operational cost centre in the Sewerage Service is either a location cost centre, a manager cost centre (i.e. contains costs that are not site specific), or a combination of manager activity and location. These cost centres are reviewed annually to capture changes in the organisational hierarchy. The majority of costs are directly attributable to the business units. However, apportionments are necessary for both direct Sewerage Service costs and general and support costs, based on specific cost drivers and some based upon management estimate. 1.4 Fixed assets The fixed assets tables (historically 25a, 25b and 25c of the June Return) consist of the assets capitalised to the SAP fixed asset register plus work in progress. The opening balances and current year transactions are analysed to the business units using the following approach: Fixed asset register Assets in the SAP asset register are allocated to cost centres which identify the operational business owner. Each asset also has an asset class which identifies the split between infrastructure, operational and other assets. This data is held as part of individual asset records on the SAP asset register. A direct link from cost centre to profit centre is included in the asset download from SAP. Profit centres are aligned to the accounting separation business units. A review is undertaken of categorisations of assets to business units to ensure they are appropriate. This targets areas where assets are more likely to require reclassifying. We identify any assets requiring reallocation based on specific asset detail in the asset register. Management and general assets have been allocated to business units based on set allocation rules. Each allocation is at cost centre level to provide the most appropriate allocation in line with the operating cost allocation rules. Retail asset costs have been allocated on the number of domestic or non domestic customers and, specifically for meters, on the number of domestic or non domestic metered customers. This is also used to analyse the depreciation charge and asset disposals by business unit and asset type. 3

4 Additions (Capital expenditure) Capital expenditure is analysed by business units and asset types based on the purpose code for each project. The expenditure value is adjusted to exclude infrastructure renewals expenditure and include sewer and pumping station adoptions. The purpose code for each project is obtained from a SAP Capital Project Expenditure BW report. 2. Population of lines In Appendices 1-4 we detail, on a line by line basis, the methodology employed to populate the accounting separation tables. Specifically, we provide details of the following (for lines that require a direct input): An explanation of how the data from the systems is processed to populate each line and any additional analysis or adjustments needed. An explanation of any assumptions made in the methodology, the basis of any assumptions and how we are satisfied that the basis is reasonable. An explanation of the allocation basis used for each line of the table, why these allocation bases are considered appropriate and how we are satisfied that they are reasonable. An explanation of any sampling used to populate the tables, justification for using sampling, the methodology applied and how we have ensured the results are reliable. Pensions For the activity costing analysis (historically tables 21a, 21b and 22a of the June Return) pension costs are allocated on the same basis as all other manpower costs since they are coded directly to cost centres from the payroll system. Any centrally held pension cost/credit is allocated pro rata to direct pension costs. Cost allocation principles Our approach to accounting separation applies the general principles set out in RAG 4 wherever possible. Ofwat has set out the following general principles which accounting separation systems are required to comply with. Transparency: the attribution methods applied within the accounting separation system need to be transparent. This requires that the costs and revenues apportioned to each service and business unit should be clearly identifiable. The cost and revenue drivers used within the system should also be clearly explained to enable a review of their appropriateness. 4

5 Costs apportioned to each business unit are identifiable and can be traced back to our SAP ledger. Our methodology statement and accounting separation models provide transparency. Causality: cost causality requires that costs (and revenues) are allocated to those activities and services that cause the cost (or revenue) to be incurred. This requires that the attribution of costs and revenues to activities and services should be performed at as granular a level as possible. Wherever possible, bases for costs are allocated to activities that cause the cost to be incurred. Some costs are more remote from the activities being allocated across than others (for example costs of regulation). The method applied to allocating such costs is described in the methodology statement. Non-discrimination: the attribution of costs and revenues should not favour any business unit within the regulated company and it should be possible to demonstrate that internal transfer charges are consistent with the prices charged to external third parties. Cost allocations bases are as objective as possible and are not designed to favour any business unit. Objectivity: the cost and revenue attribution criteria need to be objective and should not intend to benefit any business unit or service. Cost allocations bases are as objective as possible and are not designed to favour any business unit. Consistency: the cost and revenue attribution criteria should be consistent from year to year to enable meaningful comparison of information over time. Changes to the attribution methodology from year to year should be clearly justified and documented. We keep the methods of apportionment as consistent as possible. Where changes to the methods of apportionment are required, these are documented in the methodology statement (Section 5.6). 5

6 3. Internal governance and consistency procedures The activity costing analysis tables are prepared by the Lead Analyst for each of the three Services. A review is performed against expectations (using underlying management accounts) and against prior year. At the time of the exercise, regular update meetings are held between analysts responsible for populating the activity costing analysis tables for the respective business areas. A control totals spreadsheet which is centrally managed is used to ensure that costs are not doublecounted between business areas, and that the totals reconcile to total operating expenditure in the Regulatory Accounts. The spreadsheet takes initial operating expenditure figures from SAP and performs initial allocations into business areas before further allocation is performed. A top-down review of the final activity costing analysis tables is performed by the Water, Waste and Customer Relations Performance General Managers who bring a comprehensive view of their respective business areas. The analysis of fixed assets tables are prepared by the Senior Fixed Assets Associate and reviewed by the Capital Accounting Manager and the Financial Service Centre Controller. A reconciliation is performed between the additions in the regulatory accounts and the statutory accounts. The methodology statement is reviewed by the relevant Lead Analysts, the Capital Accounting Manager, Water, Waste and Customer Relations Performance General Managers, the Regulatory Accounting and Reporting Manager, and the Group Financial Controller on an annual basis. The regulatory accounts, which include the accounting separation tables, are approved by the Board. This methodology statement is approved by the Group Finance Director. 6

7 4. Capitalisation policy and process 4.1 Capital expenditure accounting policy The capital expenditure accounting policy applied by Severn Trent Water Limited is prepared in accordance with UK GAAP (FRS 15 Tangible Fixed Assets ) and the appropriate Regulatory Accounting Guidelines. The content of this document is the responsibility of the Group Financial Control and Regulatory Reporting department (Group Finance) who through their own research, and regular interaction with external auditors, keep abreast of changes in the accounting landscape that may impact the company s accounting policies. The capital expenditure accounting policy falls within the scope of this work and consequently is updated to reflect such changes as required. In recent years there have not been any significant changes in the UK accounting framework with regards to the treatment applied to tangible fixed assets. The company s capital expenditure accounting policy is structured to address both the requirements of the accounting standards and the needs of the business. Specifically, it addresses the following issues: The range of tangible fixed assets employed by Severn Trent Water; The accounting principles that determine which costs should be capitalised; The accounting treatment applied to infrastructure assets; Depreciation; and Disposals and assets taken out of commission. A copy of the policy is included in Appendix Capital expenditure accounting process The company s capital investment framework (CIF) process is well defined. Within the framework process, large capital programmes are managed, controlled and monitored. For each project the project manager is required to submit a business case template outlining the extent to which they believe the costs represent operating and capital expenditure. These proposals are submitted at approval bodies (such as programme boards) where project managers (typically engineers) discuss their projects with finance professionals from the Analyst teams. The Analyst team, in consultation with the CIF Governance Analyst, scrutinises these applications and assesses the accuracy around whether operating costs and capital expenditure have been allocated correctly. In the event that they disagree with the proposed accounting treatment the project manager is advised accordingly. However, in certain circumstances, the guidance issued by the Analyst team may be contested by the project team. In such cases the proposal is referred to Group Finance who after referring to the appropriate Financial Reporting Standard or Regulatory Accounting Guidance, provide a defining judgement on the issue. 7

8 Periodically, the Analyst team may request that Group Finance issue a guidance note to aid business users in the preparation of their capital investment proposals. This tends to occur for more complex areas where the applicable accounting principles, as defined in the capital expenditure accounting policy, are less easily understood by non-finance professionals. The objectives of these guidance notes is to provide an overview of the issue, describe the relevant accounting principle and recommend an appropriate course of action, in a manner that will benefit both finance and non-finance professionals in the future. 4.3 Labour, pensions and overhead absorption rates ( Burdening ) This is the mechanism in place to enable the recovery of costs from departments (primarily Support) whose activities are indirectly linked to the capital programme. We have a process that calculates these costs and allocates them to capital accordingly. The burden rate that is entered into the system, to be applied to all capital coded expenditure, is calculated as follows: Costs to recover as percentage of total capital programme = overhead rate. This information is refreshed at half year and then finalised at the year end. Information is downloaded from the ledger to ascertain gross costs and then there are two methods of calculating the figure to capitalise: Liaison with the business determines the appropriate allocations of both manpower and non-manpower costs e.g. Finance and Purchasing. A proportion of direct manpower recharges to gross manpower costs is applied to the remaining areas e.g. Human Resources and Property Services. 8

9 5. Commentary 5.1 Billing and collection Disclosure requirements for the methodology statement for 2013/14 include various details relating to billing and collection. Where the company outsources billing and collection, the risk of non-collection is not transferred. Any debt transferred to a collection agency for collection is already written down to nil. Collection agencies charged commission of 1.8m during 2013/14, which represents 0.1% of turnover. The company does not raise bills to the occupier. Where a customer leaves amounts unpaid, we do not raise credit notes to cancel amounts billed. The customer is pursued via trace and collect agents if the bill / charges are valid. If the amounts owed cannot be collected, these are written off as bad debts once all collection procedures have been exhausted. Credit notes to cancel charges are only raised when the bill / charges raised are invalid (issued to the wrong customer and / or wrong period). The company s approach to bad debt provisioning is set out in note 2d of the regulatory accounts. 5.2 Other direct costs Disclosure requirements for include a breakdown of the cost categories and values included within other direct costs. Other direct costs are included within other operating expenditure in the accounting separation tables. They are made up as follows: Category Water m Waste m Retail m Vehicle costs Compensation/insurance payments Pump workshop recharges (Waste) - - Service improvement and monitoring Miscellaneous expenses Other Total

10 5.3 Fixed assets and depreciation We maintain a current cost asset register in our SAP system. Individual Water and Waste assets are directly attributed to accounting separation business units based on the cost centre they are associated with. General and support assets are allocated across business units. Excluding general and support assets there is no significant depreciation charge relating to assets held in one business unit used by another. There are therefore no recharges made between business units for the use of shared assets. 5.4 General and support costs The table below sets out general and support costs in each service as a percentage of total operating expenditure (i.e. excluding capital maintenance). Water Services Waste Water Services Retail Household Retail Non Household 12% 10% 14% 10% Water Services Business Units Water resources Raw water distribution Water treatment Treated water distribution 9% 8% 11% 14% Waste Services Business Units Sewage Collection Sewage Treatment Sludge Treatment Sludge Disposal 13% 16% 12% 10% 5.5 Outsourced functions Disclosure requirements for 2013/14 include details of functions outsourced including agreements with other water companies and local authorities. Severn Trent Water outsources the following functions: Part of our customer relations back office processing (overseas) Meter installation Some secondary debt collection (once debt is written down to nil) Printing and issuing of customer bills Majority of maintenance of sewers Proportion of maintenance of treated water distribution network Leakage detection Sludge to land Design and build of capital projects (infrastructure and non infrastructure) 10

11 Managed IT hosting services Occupational health Payroll processing We have agreements with other water companies for cross-border billing and collection: Anglian Water South Staffordshire Water Thames Water Welsh Water Yorkshire Water We have agreements with local authorities (or related entities) for billing and collection: Chesterfield Borough Council Melton Borough Council North East Derby District Council Sheffield Homes Solihull Community Housing Rushcliffe Homes Major bulk import and/or export agreements with other Water Companies are as follows: Welsh Water Anglian Water South Staffordshire Water Yorkshire Water 11

12 5.6 Changes to methodology Bases of allocation generally remain unchanged, with the specific exceptions below. Customer side leaks Improved underlying processes mean we have been able to improve our methodology for allocating this cost between household and nonhousehold. We are now utilising categorisation of these jobs in our SAP system between domestic and commercial. Previously we based this allocation on the level of rebates paid to customers relating to leakage on their property. The Property Services cost centre in general and support contains the costs of centrally managed sites. The allocation of this cost centre was previously based upon analysis of FTE relating to each service based at facilities managed sites. Ofwat require that this allocation is based on floor space occupied for PR14. We have therefore adopted this method for 2014 accounting separation. This has no significant effect in the amount of cost allocated to each service. COSC We have updated our methodology which now allocates all of the Customer Services cost centre within COSC to Retail. This is to reflect specific Ofwat guidance relating to internally generated calls. This reduces the allocation of COSC costs to Water and Waste, with a corresponding increase in Household Retail and Non Household Retail. 12

13 5.7 Year on year variances We are required to explain significant year on year variances in the accounting separation tables. Explanations for significant variances are provided below. Water Resources Power 8.2m 2013/14 ( 7.2m 2012/13) +13.8% Increase is mainly due to inflation in power prices. Income treated as negative opex - 0.2m 2013/14 (- 0.3m 2012/13) -38.6% Decrease due to less self generation in current year Infrastructure renewals charge 1.0m 2013/14 ( 1.6m 2012/13) -37.5% Decrease in infrastructure renewals charge due to lower infrastructure renewals expenditure relating to Water Resources assets during the year. Raw Water Distribution Power 2.2m 2013/14 ( 1.9m 2012/13) +13.9% Increase is mainly due to inflation in power prices. Infrastructure renewals charge 2.4m 2013/14 ( 4.7m 2012/13) -48.9% Decrease in infrastructure renewals charge due to lower infrastructure renewals expenditure relating to Raw Water Distribution assets during the year. Water Treatment Power 24.8m 2013/14 ( 22.3m 2012/13) +11.1% Increase is mainly due to inflation in power prices. Bulk supply imports 3.8m 2013/14 ( 4.3m 2012/13) -12.4% Decrease in bulk supply imports is due to lower volume during the year. Third party current cost depreciation 0.5m 2013/14 ( 1.3m 2012/13) -61.5% Reduction in third party current cost depreciation due to write off of assets in prior year, resulting in no associated depreciation in the current year. 13

14 Amortisation of deferred credits - 0.8m 2013/14 (- 1.0m 2012/13) -20.0% Deferred credits are mapped inline with the assets they are associated with. Variances in the value and nature of capital expenditure therefore result in variances in the value of deferred credits. This also applies to the fall in deferred credits in Treated Water Distribution of 0.1m. Sewage Treatment Power 21.9m 2013/14 (26.5m 2012/13) -17.3% Income treated as negative opex - 5.3m 2013/14 (- 10.7m 2012/13) -50.4% Net Power 16.6m 2013/14 ( 15.8m 2012/13) +5.0% Increase in net power is mainly due to inflation in power prices. Power inflation has been offset to an extent by an increase in self supply. In the prior year we classified internally generated power credits as income treated as negative opex. This has been corrected in 2013/14 resulting in a reduction in power cost and a reduction in income treated as negative opex. This has no effect on the net power cost reported. Sludge Treatment Power - 0.8m 2013/14 ( 4.7m 2012/13) % Negative income - 5.3m 2013/14 (- 10.7m 2012/13) -50.4% Net Power - 6.1m 2013/14 (- 6.0m 2012/13) -1.7% Net power is consistent year on year. Power inflation has been offset by an increase in self supply. In the prior year we classified internally generated power credits as income treated as negative opex. This has been corrected resulting in a reduction in power cost and a reduction in income treated as negative opex. This has no effect on the net power cost reported. Other operating expenditure 40.4m 2013/14 ( 36.3m 2012/13) +11.3% The main factors making up the increase in other operating expenditure are o Correction of underlying materials mapping in SAP resulting in an increase of 1.3m (mapped out of Sewage Treatment). o Improved compliance resulting in higher manpower costs in Sludge Treatment ( 0.6m) o A digester incident at one of our sludge treatment works resulting in 0.8m of costs o Costs of improvement initiatives in the current year of 0.8m 14

15 Local authority rates 4.3m 2013/14 ( 3.6m 2012/13) +19.4% Local authority rates are posted to the Waste Service in the ledger. They are allocated between business units based on MEAV of assets across business units. Sludge Treatment assets represent a larger proportion of Waste assets in the current year than in the prior year. Additionally, rates have increased due to price inflation and lower level of refunds in the current year. Sludge Disposal Other operating expenditure 13.4m 2013/14 ( 9.0m 2012/13) +48.9% The main factors making up the increase in other operating expenditure are o A change in the underlying accounting treatment of sludge sales from negative opex to income (accounts for 1.6m of the variance). o Carry over of sludge to land activity from 2012/13 due to extreme wet weather in 2012/13 (accounts for 1.2m variance). o Additional tankering costs incurred due to sludge to land issues in the current year (accounting for 0.4m). o There were also increases in employment costs due to increased activity, and in general and support costs due to increased direct costs. Retail Household Debt management 9.1m 2013/14 ( 8.3m 2012/13) +9.4% Overall debt management costs have increased due to increased head count in order to improve collections, additional spend relating to communications, lower levels of litigation resulting in a lower level of court cost recoveries, and inflation. The allocation between household and non household is based on net debtors. The proportion of total net debtors represented by household net debtors has decreased, resulting in a lower allocation of debt management costs to Household Retail. Doubtful debts 26.9m 2013/14 ( 29.7m 2012/13) -9.5% The Severn Trent Water household doubtful debt provision is calculated based on the ageing of household debt and specific provisions identified. The provision against household debtors (after write offs) increased by a lower amount between 2012/13 and 2013/14 than it did between 2011/12 and 2012/13. This results in a lower charge in 2013/14 than that required in the prior year. No change in the accounting separation methodology has been made in relation to the doubtful debt charge. 15

16 Local authority rates 0.5m 2013/14 ( 0.3m 2012/13) +50.4% A higher level of credits relating to local authority rates was received in 2012/13 than in 2013/14. Credits relate to challenges made regarding the rateable value of properties. Additionally, there has been an inflationary increase in local authority rates. Allocation between household and non household is consistent with prior year. Current cost depreciation 15.1m 2013/14 ( 17.0m 2012/13) -11.2% A significant number of assets relating to the billing system (Target) reached the end of their useful economic life during the year, resulting in less than a full year s depreciation being charged. Current cost depreciation charge is therefore lower in 2013/14. Retail Non Household Debt management 1.9m 2013/14 ( 1.5m 2012/13) +29.4% Overall debt management costs have increased due to increased head count in order to improve collections, additional spend relating to communications, lower levels of litigation resulting in a lower level of court cost recoveries, and inflation. The allocation between household and non household is based on net debtors. The proportion of total net debtors represented by non household net debtors has increased, resulting in a higher allocation of debt management costs to Non Household Retail. Doubtful debts 7.1m 2013/14 ( 3.6m 2012/13) +96.5% The Severn Trent Water non household doubtful debt provision is calculated based on the ageing of non household debt and specific provisions identified. The provision against non household debtors (after write offs) increased by a greater amount between 2012/13 and 2013/14 than it did between 2011/12 and 2012/13. This increase mainly relates to specific provisions identified. This results in a higher charge in 2013/14 than that required in the prior year. No change in the accounting separation methodology has been made in relation to the doubtful debt charge. 16

17 Other operating expenditure 2.1m 2013/14 ( 3.6m 2012/13) -41.8% Improved underlying processes mean we have been able to improve our methodology for allocating the costs relating to customer side leaks between household and nonhousehold. We are now utilising categorisation of jobs in our SAP system between domestic and commercial. Previously we based the allocation of costs of customer side leaks on the level of rebates paid to customers relating to leakage on their property. This change is the main driver of the decrease in Non Household other operating expenditure. This is a change in accounting separation methodology and is included in section 5.6. Local authority rates 0.06m 2013/14 ( 0.02m 2012/13) % A higher level of credits relating to local authority rates was received in 2012/13 than in 2013/14. Credits relate to challenges made regarding the rateable value of properties. Additionally, there has been an inflationary increase in local authority rates. Fixed assets - Wholesale The main year on year variances in our wholesale fixed assets tables are due to the following factors: Reclassification adjustments these are lower in the year mainly due to the reclassification of customer meters into Treated Water Distribution in the prior year. This is also reflected in the Retail table. Disposals and write offs of assets were higher during the current year due to work undertaken by the Capital Accounting Team to cleanse the asset registers. This has no significant impact on net book value as the majority of these assets have been fully written down. The increase in non infrastructure Additions in Sewage Collection is mainly due to increased capital expenditure relating to the sewer network and increased adoptions of sewage pumping stations. Non infrastructure additions reduced in Sewage Treatment, mainly due to lower project spend at specific sewage treatment works. Non infrastructure additions in Sludge Treatment were mainly due to increased project spend notably at Minworth, Wanlip and Worksop and relating to a biosolids management project. Infrastructure additions in Raw Water Distribution were lower due to lower spend on raw water aqueducts during the current year. Infrastructure additions in Treated Water Distribution was higher due to increased spend on Stop Tap Renewals projects and specific resilience projects. 17

18 Fixed Assets - Retail Reclassification adjustments these are smaller in the year mainly due to the reclassification of customer meters into Treated Water Distribution in the prior year. RPI adjustment RPI adjustments are lower in 2013/14 than 2012/13 due to lower RPI in 2013/14. Disposals and write offs of assets were higher during the current year due to work undertaken by the Capital Accounting Team to cleanse the assets registers. This has no significant impact on net book value as the majority of these assets have been fully written down. Additions has increased due to increased capital expenditure on assets relating to Retail. Depreciation there have been no changes in the depreciation policy. Variances in depreciation are driven by variances in cost. 18

19 Appendix 1 ST1: Activity costing analysis Water Service A Operating expenditure 1. Power All energy costs, including the climate change levy which are directly attributable to each of the individually identified service business units: water resources, raw water distribution, water treatment, treated water distribution and water service total. Income from energy generation should be treated as negative operating expenditure. The largest element of power costs is the purchase of electricity. A download for Water Services is taken from the financial ledger. Added to this are centrally incurred Water Services costs which include Carbon Reduction Commitment payments and the negative operating expenditure associated with self generation. To apportion the Electricity cost across the four business units, a detailed site by site analysis is performed. The activities of many individual sites fall into multiple business units, so sub-site analysis is performed where necessary. The principles used are as follows: 1. Site wholly in one business unit then directly allocate. 2. Sites straddling business units apportioned based on average pumping head. 3. Where data not available in (2) above refer to Site Energy Management Plan if available. 4. Where data not available in (2) or (3) above management estimate. 2. Income treated as negative operating expenditure Income from energy generation should be treated as negative operating expenditure. Income from energy generation is allocated in line with power costs. Appendix 1 ST1: Activity costing analysis Water 19

20 3. Service Charges Total cost of service charges by the Environment Agency or BWB (British Waterways Board) for water abstraction which are directly attributable to individually identified service business units: water resources, raw water distribution, water treatment, treated water distribution and water service total. Services charges cost consists of Environment Agency Licences for abstraction and discharge of water. Abstraction charges are directly attributable to the Water Resources business unit. Discharge Consents are directly attributable to the Water Treatment business unit. All costs are directly attributed. 4. Bulk supply imports Total payments for imported bulk supplies that are directly attributable to individually identified service business units, water resources and water treatment. If a supply is a shared supply and is jointly owned, the costs associated with it should not be reported in the bulk supply imports line. The costs should be broken down and reported in lines 1 to 6 and 8 as appropriate. Where this has been done it should be stated in your commentary. Bulk Supplies include one Raw Water supply (Water Resources business unit) and numerous Treated Water supplies (Water Treatment business unit) so the costs can be directly attributed. All costs are directly attributed. Appendix 1 ST1: Activity costing analysis Water 20

21 5. Other operating expenditure a. Employment costs The sum of the total costs of non-manual and manual manpower which are directly attributable to each of the individually identified service business units: water resources, raw water distribution, water treatment, treated water distribution and water service total. To be included are the gross salaries and wages of all employees within the relevant business unit, including payments resulting from bonus and profit-related payment schemes, employer s National Insurance contributions, superannuation, pension liabilities, sick pay, sickness benefits, private health insurance, retirement awards, death in service benefits, paid leave, subsistence, travel, entertaining and conference expenses. Employment costs are captured in the SAP general ledger in the Water Services cost centre hierarchy. Some cost centres are directly attributable to one business unit. Others straddle a number and therefore costs related to these require allocation. A substantial number of employees carry out activities in multiple business units. The time recording system directly allocates costs to business units. Where this is not available, management estimate is required. Water Production department costs The majority of employees working in Water Production complete activities that straddle multiple business units. It is therefore necessary to allocate their costs based on time spent undertaking activities relating to each business unit. There are two methods used to allocate costs. 1. Jobs undertaken by maintainers and borehole operators are coded directly to one of the four business units, depending on the asset which has been worked on. Unbooked time (i.e. time recorded in the system but not booked against a specific asset) is allocated based on directly charged time. 2. Operators at large treatment works do not record their time in any system. It is therefore been necessary to use management estimate to allocate these costs. Third party costs are identified and moved in the table. Line population details can be found in the Third Party Services operating expenditure section. Water Production support costs are grouped and apportioned based on Water Production operational net operating expenditure. Appendix 1 ST1: Activity costing analysis Water 21

22 Distribution department costs The majority of the activities undertaken by employees in the Distribution department are within the Treated Water Distribution business unit, and so their costs are directly attributed. The exception to this is the Aqueducts team whose activities span the Raw Water and Treated Water Distribution business units. No time recording is undertaken in this team, so management estimate is used to apportion their costs between these two business units. Customer side leaks, disconnections and customer first visit costs are transferred to the Retail business unit. Line population details for these activities can be found in the Retail Services section of this document. Third party costs are identified and moved in the table. Line population details can be found in the Third Party Services section. COSC costs See separate section detailing allocation of COSC costs below. Asset Creation Water Production costs The majority of employees in this department work on capital projects and so have no impact on operating expenditure. The exception to this is the Reservoir Team, whose activities span the Water Resources business unit, the Treated Water Distribution business unit, and to a small extent, the Waste Water Service. No time recording is available so management estimate is used to apportion these costs. Any other specific operating expenditure in this department relates to Water Treatment. Asset Creation Distribution costs The majority of employees in this department work on capital projects and so have no impact on operating expenditure. The exception to this is the Mains Cleaning team which are directly attributable to the Treated Water Distribution business unit. Health and Safety department costs This department forms part of the Water Services support costs. Its costs are apportioned based on total direct costs in the four business units. Organisational Development Programme costs This department contains Water support activities. The Asset Data team manage the company s records of physical assets. The majority of this activity supports both the Water and Waste Services. This is split based on management estimate. Support activities are Appendix 1 ST1: Activity costing analysis Water 22

23 grouped together for all of Water Services and apportioned based on total direct costs in each business unit. Strategy department costs The Strategy Team contain costs of support activities, the Water Efficiency team, the Leakage Management team and the Always On team. The Water Efficiency Team costs are transferred to the Retail business unit. The Leakage management and Always On costs are directly allocated to Treated Water Distribution. Support activities are grouped together for all of Water Services and apportioned based on total direct costs in each business unit. b. Hired and contracted services All hired and contracted equipment and services including the hire of vehicles and plant, which are directly attributable to each of the individually identified service business units: water resources, raw water distribution, water treatment, and treated water distribution and water service total. Contracted services include all contracted labour; professional advice (such as lawyers and consultants); and computer software. Hired and contracted costs booked in WFM are coded directly to one of the four business units, depending upon the asset being worked on. Water Production department costs Hired and contracted costs within Water Production cover multiple business units and so cost allocations are required. With the exception of Chemical Analysis costs (Scientific Services) and Sludge Recycling (Water Treatment) all remaining hired and contracted costs are apportioned based on the direct manpower principles detailed above in the Employment Costs section. Third party costs are identified and moved in the table. Line population details can be found in the Third Party Services operating expenditure section. Distribution department costs The majority of hired and contracted costs in the Distribution department relate to activities which fall into the Treated Water Distribution business unit and so their costs are directly attributed. Appendix 1 ST1: Activity costing analysis Water 23

24 The exception to this is the Aqueducts team whose activities span the Raw Water and Treated Water Distribution business units. No time recording is undertaken in this team, so management estimate is used to apportion their costs between these two business units. Customer side leaks, disconnections and customer first visit costs are transferred to the Retail business unit. Line population details for these activities can be found in the Retail Services section of this document. Third party costs are identified and moved in the table. Line population details can be found in the Third Party Services section. COSC costs See separate section detailing allocation of COSC costs below. Asset Creation Water Production costs The majority of work carried out in this department is capitalised and so has no impact on operating expenditure. The exception to this is the Reservoir Team, whose activities span the Water Resources business unit, the Treated Water Distribution business unit, and to a small extent, the Waste Water Service. No time recording is available so management estimate is used to apportion these costs. Any other specific operating expenditure in this department relates to Water Treatment. Asset Creation Distribution costs The majority of work carried out in this department is capitalised and so has no impact on operating expenditure. The exception to this is the Mains Cleaning team which is directly attributable to the Treated Water Distribution business unit. Organisational Development Programme costs This department contains Water support activities. The Asset Data team manage the company s records of physical assets. The majority of this activity supports both the Water and Waste Services. This is split based on management estimate. Support activities are grouped together for all of Water Services and apportioned based on total direct costs in each business unit. Strategy department costs The Strategy Team contain support activities, the Water Efficiency team, the Leakage Management team and the Always On team. The Water Efficiency Team costs are Appendix 1 ST1: Activity costing analysis Water 24

25 transferred to the Retail business unit. The Leakage Management and Always On costs are directly allocated to Treated Water Distribution. Support activities are grouped together for all of Water Services and apportioned based on total direct costs in each business unit. c. Materials and consumables All materials and consumables that are not in hired and contracted services which are directly attributable to each of the individually identified service business units: water resources, raw water distribution, water treatment, treated water distribution and water service total. This category of cost includes equipment (such as small tools and clothing), provisions, tarmac and backfill materials, but excludes all items capitalised or included within infrastructure renewals expenditure. Most if not all stock items fall into this category. Water Production Materials and consumables costs booked in WFM are coded directly to one of the four business units, depending upon the asset being worked on. Chemical costs are directly attributable to the Water Treatment business unit. All other material costs cover multiple business units and have been allocated based on the direct manpower splits. All other departments As per Hired and Contracted detailed above. d. Other direct costs Any other direct operating costs, but excluding interest and taxation, on an aggregated basis, including costs associated with the provision of depots and offices, and insurance premiums, (where such costs exceed 5% of total water service operating costs, an analysis should be provided), also include fines and penalties (including network related GSS payments), and any bad debt costs associated with the sale of network services which can be directly attributable to individually identified service business units: water resources, raw water distribution, water treatment, treated water distribution and water service total. Appendix 1 ST1: Activity costing analysis Water 25

26 Water Production The largest element of Other direct costs relates to vehicles used by maintainers and operators. All costs have been allocated based on the direct manpower split between business units. All other departments As per Hired and Contracted costs. Costs included in Other direct costs are Vehicles; Map Licences; Service Standard Payments; Abortive Expenditure; and Miscellaneous Expenditure. e. COSC apportionment STW operates a Customer Operations Service Centre (COSC). Activities undertaken in COSC straddle all nine business units. It has therefore been necessary to use apportionment methods for all costs relating to COSC. The method used is based around the most appropriate cost driver for each cost centre/team. Cost drivers are as follows: Customer Service The costs of the Customer Service team, which receives calls from both customers and the business have been apportioned based on volumes of call-types. The total costs included in this cost centre have been allocated to Retail. The costs are then further split between household and non household based on customer numbers. The costs allocated to customer services include scheduling of jobs arising from customer calls and internally generated calls. Optimisation The costs of the Optimisation team have been apportioned based on the combined total of allocations in COSC. The team support all of the COSC functions with process improvement work, performance reporting and development of staff training. Operations Services The costs of the Operations Services team have been apportioned between Waste, Water and Retail based on Alarm Volumes (one half) and Job shifts (one half). Costs apportioned by Alarm volumes are then further analysed into business units Appendix 1 ST1: Activity costing analysis Water 26

27 based on a mixture of system data and management estimate. Costs apportioned by job shifts have been allocated to Sewage Collection in the Waste Service and Treated Water Distribution in the Water Service. TMA The TMA team costs have been split between Waste and Water based on the number of notices relating to each Service. The Water costs all relate to work undertaken in Treated Water Distribution and hence are all allocated to this business unit. The Waste costs all relate to work undertaken in Sewage Collection, which are similarly all allocated to this business unit. COSC Management Team The management team costs have been apportioned based on the combined total of allocations above. PDAS An element of COSC costs which relate to PDAS are transferred to PDAS cost centres for monitoring purposes on a monthly basis. For the purposes of Accounting Separation, these are reinstated to COSC. These costs represent customer contacts and so are allocated to Retail. f. Meter maintenance/installation non capex Operating costs associated with meter installations, maintenance, testing and removal installation, repair and exchange of customer meters, including planning and scheduling of work, pre installation survey, design of work and costing. Meter maintenance costs are allocated to treated water distribution. Meter maintenance costs are collected on a specific cost centre, 100% of which is allocated to meter maintenance. In addition, an allocation of the field management team is also made, based on total cost allocations of the Field Services cost centre. g. General and support expenditure General and support activities include all centrally provided services, except for any items specifically recorded in direct costs, scientific services or other business activities. The following services should be included where not already recorded in Direct costs: Human resources / personnel services; IT and data processing; Legal services; Management services; Appendix 1 ST1: Activity costing analysis Water 27

28 Financial services; Audit services; Planning liaison; Research and development; Administrative services; Property management services; Operational and technical support; Vehicles and plant; Electrical and mechanical maintenance; Land and property maintenance; Materials storage. Where an associated company provides such services, the relevant charge should be included. General and support costs are identified in the ledger by cost centre. These are apportioned between the Water Service, Retail Services and the Waste Service following the rules detailed in the table below. Where possible, specific cost drivers are used to allocate general and support costs. For example: manpower numbers by department; FTEs to apportion costs relating to HR & IS; or MEAV values to apportion rates. For some central functions the tasks being undertaken do not relate specifically to Water, Waste, or Retail (for example, Directors or Other Business Activities). One ninth of any such cost is allocated to each of the business units. This method of allocation mirrors Ofwat s approach to the Ofwat licence fee, which is required to be allocated on this basis. Some areas of apportionment require an annual refresh. For example: Internal vehicle and plant costs for transport have been allocated on the basis of vehicle and plant expenditure recharged to each of the business units; and Pension costs are allocated on the basis of actual pension costs attributed to each of the business units the data to apply this allocation is obtained through the SAP General Ledger. For summary level allocations between Water Service, Waste Service and Retail Services please refer to the Allocation of general and support expenditure between services below in this Appendix. Appendix 1 ST1: Activity costing analysis Water 28

29 Within the Water Table the following general and support costs have been allocated based on Manpower costs in each business unit: Information Systems Human Resources Financial Performance Financial Service Centre Property Services Business Improvement Sustainable Service Organisation Management charge The following G&S costs have been allocated based on total direct costs in each business unit: Legal and Professional Treasury and Tax Purchasing Miscellaneous Reporting Directors Group Reporting Communications and Public Affairs Assurance Small Companies credit Pension costs Transport has been allocated pro-rata on the basis of internal vehicles and plant charges. Appendix 1 ST1: Activity costing analysis Water 29