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

23 additional processes with the remainder being due to the use of the revised cost model GMEAV of Intake pumping stations Four large intake pumping stations account for over half the GMEA value at 29m and considers that this explains why the GMEA value of these assets is an industry outlier. We have compared the spread of pump sizes with those at a limited number of other companies and on this basis consider the argument to be valid. The use of the revised cost model has also resulted in a cost reduction over the DBP from 66m to 54m. This is despite the review of kilowatts for pumping stations which has resulted in a shift to larger pump ratings. Page 23 of 61 October 2010

24 1.6 Asset lives The reporter shall comment on any inconsistency between differences in asset lives used by the company for accounting purposes to establish the net MEA value and those lives also used by the company for the purposes of taking decisions in respect of asset renewal or replacement. s approach to the assessment of remaining lives is different from that applied at PR04 but consistent with that used for previous price reviews. In PR04, it was assumed that the asset depreciates linearly year on year. Therefore, it was assumed that the midpoint age of each quartile could be used as a surrogate reference point to depreciate the assets. The PR09 approach assumes that condition grades equate to remaining life and has matched the condition grade (which differentiated at the survey level between Civils and M&E) to the nominal asset life. Thus the Net MEA is calculated by multiplying GMEAV x (Remaining life/total asset life) A typical asset life of 60years has been assumed for Civils and 20 years for M&E assets. Engineering judgement has been used to assess the remaining life against each condition grade. The methodology is detailed below: Condition grade Civils Remaining life Remaining life M&E Remaining life Remaining life Net MEAVs are not calculated at plant group nor at site level but were calculated for each line of the Ofwat reporting tables. 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. We asked whether the asset lives used to assess capital maintenance also match the nominal asset lives. The Company responded that asset lives used for the valuation are based on engineering judgement. Capital maintenance at Anglian Water is assessed on a risk based approach on the balance of performance, cost and risk and does not take account of asset lives for renewal rates. Page 24 of 61 October 2010

25 1.7 Summary asset surveys and condition grades Where the information on underground and/or surface assets is incomplete, the company may have derived summary information on a statistical basis, by extrapolating the results of a limited number of surveys to cover larger sections of the asset stock. The reporter shall highlight what coverage has been achieved through surveys, comment on company reasons for adopting this approach and confirm, or otherwise, that the approach is based on a sound methodology, using statistical expertise. The reporter shall also comment on the robustness of the relevant sections of the company's business plan. Summarise the company's surveys of its asset stock valuation, condition, and summary age profiles as at 31 March 2008.: Comment on how the company has derived the information required for tables C3.1 and C3.3, including: The extent to which the asset stock has been re-surveyed; The extent to which asset surveys and the judgements of condition have been updated since 31 March 2003, The method used by the company for updating its judgements of condition,(see section on condition grade)0 The present coverage of company asset surveys The procedures, including any statistical techniques adopted by the company to extrapolate the results of individual surveys to larger groups of assets Comment on any differences between the asset condition grading procedure used by the company for this submission and that used by the company for the compilation of tables C11 and C13 of the 2004 business plan; Surveys The Company completed a comprehensive asset survey for PR04, the results of which were fed into its SAP system. The PR04 data has been used extensively to complete this business plan. Some surveys have been completed for PR09 and where available these have been used in preference to the PR04 data. For the FBP, some additional surveys have been completed: The condition survey of Water storage assets has been reviewed by local engineers. For sewage treatment works, the DBP surveys for M&E were judged to be incomplete. The Company has therefore referred back to its PR04 surveys which were stored on SAP and broken down by M&E and Civils. The PR04 surveys have been used, deteriorated by age. In order to satisfy ourselves as to the extent of the PR04 survey we reviewed comments made by the Reporter at the time of the PR04 FBP. These are reproduced below: We confirm that the Company has carried out a thorough and systematic review of its asset inventory using the best data available to it and, where the size of the asset group is too great to justify complete survey, appropriate and statistically significant sampling has been carried out to inform the process. We have been impressed with the thoroughness of the Company s approach to the revision of the asset inventory for PR04. Realising that the exercise had made assumptions that had proved to be erroneous there has been a determination to produce a more dependable inventory on this occasion. The work is underpinned with quality-controlled Page 25 of 61 October 2010

26 databases and where assumptions have had to be made we have challenged these and found them to be robust. Surveys completed for the PR09 FBP, have been done on the same basis as in PR04 with a 10 point assessment system then being automatically mapped to the five Ofwat grades. For the DBP, we queried why the ten point assessment has been selected and the Company responded that it gave a greater level of granularity. We checked the survey forms and confirmed that whilst the grading system was more detailed, the scoring criteria followed the Ofwat guidelines. The surveys have been completed by local asset managers and consulting engineers Mouchel for water and Halcrows for sewerage. We asked whether these were desk top surveys and the Company confirmed that they were physical site surveys. We queried how consistency of scoring between assets had been achieved. The Company responded that this was reliant upon correct interpretation of the guidelines and for sewage treatment works; the same two consultants completed the work. In its commentary, the Company refers to assets being extensively surveyed. For most water assets, with a few exceptions (service reservoirs water towers and intake PSs), the bulk of the surveys are those completed for PR04. Wastewater assets have been covered by PR09 surveys with the exception of SPSs which were mainly PR04 surveys Condition grade methodology The methodology for assigning condition grades varies between asset groups, however a large proportion of asset condition grades are based on assumptions relating to deterioration rates of the asset: In effect condition grades have been obtained by three methods: PR09 asset survey PR04 asset survey deteriorated using the methodology below. For assets not surveyed for PR04 or PR09, recent condition surveys together with PR04 surveys (after applying deterioration rules) have been linked with GMEAVs to get the percentage of GMEAV in each condition grade for assets with surveys. This condition profile has then been extrapolated across the remaining asset stock for each type of asset. Conditions grades for stock surveyed in PR04 have been deteriorated as follows: For civil assets with a 60 year life, condition grades 1&2 allocated for PR04 have remained as it is assumed that there will be minimal deterioration from these grades in a 5 year period. For assets allocated a condition grades 3 and 4, the condition grade has been reduced by 1. For M&E assets with a nominal life of 20 years (DBP 25years), it has been assumed that each asset will deteriorate by 2 grades except for those in condition grades 1&2 where deterioration is assumed to be equal to one grade only. Page 26 of 61 October 2010

27 The amendment for deterioration is taken from the 10 condition grades and then automatically mapped to the Ofwat grades as described in the Company commentary. This is a simplistic mechanism for extrapolating conditions grades but is consistent and any other method would have required considerable more research into the relevant data. No account has been taken of capital expenditure in the period since PR04 and where condition grades have been based on a sample of PR04 surveys, any expenditure in the preceding AMP. As can be seen in the following tables, the percentage of assets where an extrapolated condition grade has been given is relatively high for some asset groups notably water treatment works and sewage pumping stations. Given that extrapolation is only required where a PR04 survey has not been completed this means that the last physical surveys for these assets were undertaken, at the latest, for PR99 An alternative methodology would have been to extrapolate the results of only those assets that have PR09 surveys. It is difficult to ascertain whether this provides a more realistic result of the overall condition of the assets. We asked the Company whether it would be possible to test a sample of assets to see how the results compared. This was not possible for the DBP, but the Anglian Water agreed to consider this for the FBP. It has responded that it tested the approach of using only the PR09 surveys for its WTWs but believes that this provided a very uealistic portrayal of condition grades, partly due to the limit of the PR09 sample size for WTWs. did not pursue this further for other assets. Given below is a table detailing the methodology employed to assess condition grades for each Ofwat asset line for water and sewerage assets. Asset surveys - Water Asset Water assets Condition grade methodology PR04/09 Survey GMEA Extrapol d GMEA Water treatment works SD GW GW GW GW Water Storage Service reservoirs Comment 41 WTW PR04 survey 38 WTW PR09 survey 3 WTW mixture of both Results of 82 extrapolated to remaining 64 WTWs We reviewed the allocated condition grades for Clapham West WTW and confirmed that the data matched that on the backing sheets to the C3 tables 34 PR04 surveys 161 PR09 surveys Surveyed as part of the statutory maintenance programme. Scored on civil structures only as for PR04. This takes no account of deterioration of M&E assets at site. The Company response is that M&E assets on service reservoirs are immaterial in value terms compared to Page 27 of 61 October 2010

28 Asset Water assets Water towers Condition grade methodology PR04/09 Survey GMEA Extrapol d GMEA Water pumping stations Intake Source Booster the civil structure. 73 PR09 survey 41 PR04 survey Graded for civils only Comment 7 PR04 surveys 3 PR09 surveys 359 PR04 surveys 138 PR09 surveys 1 mixed Includes boreholes with PR09 survey graded using CCTV by Water resources. Guidelines followed for grading do not exactly match Ofwat guidelines but are similar 49 PR04 surveys 19 PR09 surveys 3 mixed Customer ancillaries non infrastructure Meters have been mapped to the Ofwat condition grades by size as follows. Meters are assumed to have a nominal life of 14 years. Ofwat Age of meter years CG ver 18 Asset surveys sewerage Asset Sewerage assets Condition grade methodology PR04/09 Survey GMEA Sewage pumping stations Inline PS Terminal PS Sewerage Treatment works Primary Secondary Tertiary Extrap ld GMEA Comment The same methodology as for water has been applied for assets not surveyed. 582 SPS surveyed with 507 PR04 surveys A project to survey almost 100 of civils at STWs was completed for the DBP. Condition grades for civils assets were obtained at component level, and the average of the component s condition grade was used to obtain the plant group condition grade. Since GMEAVs were only available at the plant group level, the average of the condition grades was not weighted. Condition grades for M&E were assessed at the plant group level. M& E surveys were a mix of PR09 surveys and deteriorated PR04 surveys Page 28 of 61 October 2010

29 Asset Sewerage assets Condition grade methodology PR04/09 Survey GMEA Sludge treatment facilities 100 Extrap ld GMEA Comment Desk top surveys were completed by the sludge manager and his knowledge of the sites and expert opinion used to determine the condition grades. There has been considerable capital investment in these sites in , mainly to update digestion plants to advanced digestion. Work in progress as at 31st March has been ignored in the assessment with only those sites where work was beneficially complete being included in the assessment. New plant groups have been given a grade 1. The condition grades allows for a greater deterioration rate than normal as sludge and lime are abrasive and corrosive, which leads to shorter M&E asset lives Confidence grades Give an opinion of the company's assessment of the accuracy and reliability of data submitted including comment on the role played by both company and Ofwat indicators in informing the confidence grading of condition and performance data for each asset group As stated above, we confirmed that the Company has mapped its grading to the Ofwat indicators for assessing the condition of its assets. However, as also detailed above, the methodology for assessing the majority of condition grades for assets is based on a number of assumptions regarding deterioration as well as a significant degree of extrapolation. The exception to this is sewage treatment works and sludge treatment facilities where comprehensive surveys have been completed for PR09. A desk top survey was completed for sludge treatment facilities by the manager and we agree that for these a B2 confidence grade is appropriate. For sewage treatment works the Company has assigned a B3 as the M&E surveys are based on extrapolated M&E PR04 surveys. We note that a confidence grade of B2 has been assigned for the FBP to water treatment works. Given that the largest percentage of the GMEAV is based on condition grades extrapolated from surveys completed at 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. We are satisfied that a confidence grade of B2 is appropriate for water storage assets and intake and source pumping stations. Page 29 of 61 October 2010

30 1.7.4 Alignment with Capital maintenance common framework The procedures adopted by the company to feed the outputs from the studies into the common framework for capital maintenance planning; Comment on how well asset observations used to assign condition grades align with those to inform business plans through application of the capital maintenance planning common framework; The Company stated that the outputs from the studies used to assess condition grades do not feed into the risk assessments used in the common framework. The Company uses its assessment of the risk of performance failure at equipment level produced from deterioration curves to predict when failure will occur. In the Company s view there is limited linkage between the risk assessments used for capital maintenance expenditure and the condition grades which have been derived to meet Ofwat requirements. Page 30 of 61 October 2010

31 2 Response to guidance for Tables C3.1 and C Changes in Asset Stock between PR04 and PR09 disclose (if not fully exposed) and give an assessment of the reasons for changes in information submitted in the previous business plan (March 2004) and June returns since JR03 ( ) The table below details the differences and reasons for changes in the asset stock in asset stock between PR04 and PR09. Asset Stock Stock PR04 PR09 Difference Water treatment works Difference in stock is due to: Five treatment works removed from service. One new treatment works Elsham treatment works has 2 treatment works. One providing potable water, the other supplying treated but non potable water to the Humber bank. The treatment works have been counted separately for PR09 but as one in PR04 There is also a difference to the June return where 140 treatment works are reported. This is due to water from two treatment works being blended at a storage point and regulatory sampling being based on that one storage point. For the JR, treatment works are counted by sampling points, for the asset inventory, such treatment works are treated separately as a valuation is needed for both. Conversely where there are 2 sampling points on a WTW then these have been counted as 2 works in the JR and as one for the DBP. Service Reservoirs The difference in stock is due to: An addition of 13 large storage sites for treated water on treatment works were missed from the PR04 inventory. Two physically separate reservoirs in the same location now treated as 2. Treated as 1 previously. 26 reservoirs have been taken out of service Water Towers Reduction due to this number being taken out of service. Intake Pumping stations Source Pumping stations Reduction due mainly to a reduction in the number of boreholes. A new exercise was completed based on water resource lists of boreholes in use. 30 additions (not reported in PR04) with a reduction of 73 resulting in a net decrease of 43 boreholes. a reduction of 2 raw water PS Booster PS 50 booster pumping stations have been included in the PR09 valuation that were not included in the PR04 valuation. 36 were booster stations on storage sites that had not been previously reported. 14 were additions since PR04. Page 31 of 61 October 2010

32 Asset Stock PR04 Stock PR09 Difference 18 booster pumping stations included in the PR04 valuation have not been included in the PR09 valuation. These are out of service. Ancillaries non infrastructure Meters - 1.2m Inline pumping stations 3, Terminal Pumping stations Aquarius systems classify Sewage PS in line with the revised split and it has not had difficulty in meeting this revised requirement:. Terminal PSs on STW sites were included in the STW valuation for PR04. These have been included in the terminal PS stock as per the reporting requirements 191 SPS have been added since PR04 (164 inline and 30 terminal PS) mainly due to the adoption of private pumping stations and first time sewerage schemes. Sewage treatment works Primary Secondary Tertiary no longer has any preliminary treatment (3 reported in PR04). The asset stock is as reported in JR08 although there is a slight variation due to the definition of the size bands. Since PR04 there has been an increase due to a number of first time sewage projects and adoption of STW from local authorities. Some secondary treatment works have moved to tertiary due to tighter consents Sludge treatment facilities There have been no removals but assets have been reported differently: The number of sites given includes 6 sites at STW which produce dewatered cake which is then taken to another sludge treatment facility for further treatment prior to final disposal..the two sites reported as other in PR04 produce dried cake and hence are included as cake for PR09. One site produces cake and compost and is reported in both lines. Page 32 of 61 October 2010

33 2.2 Changes in valuation between PR04 and PR09 review the company s assessment of confidence grade for each asset class, and comment on whether you agree with the confidence grade assigned within tables B7.13 and B7.14 for this exercise; explain whether you agree with the Company s assessment of the key drivers of change for net MEA detailing the rationale behind your decision; provide explanations where there is a significant relative change between the gross and net MEA position; provide quantitive and qualitative explanations as to how the CCD charge for both water and sewerage as been effected by: (i) changes in gross MEA value; (ii) changes in net MEA value; and comment on the reasonableness and robustness of the variations quantified within the tables. A comparison between the Company s PR04 and its PR09 valuation is given below: GMEAV m NMEAV m PR04 PR09 Diff PR04 PR09 Diff Water Treatment Works 1,117 1, (117) Water storage Water Pumping stations Sewage Pumping stations 1,555 1, Sewage Treatment works 3,580 3,422 (158) 1,946 1,466 (480) Sludge Treatment facilities ,207 7, ,690 3,382 (308) Note: the above excludes meters and M&G GMEA valuation The company gives limited explanations for the movement of GMEAV in its C3 commentary. A major factor however must be the methodology employed to cost its assets i.e. using its revised cost models. Explanations for significant movements are given below: The increase in the GMEAV for water storage is attributed to the PR04 valuation significantly undervaluing the assets and also the increase in the asset stock. Improved information on installed pump capacity leading to an increase in size and hence value of water booster pumping stations. The PR04 costs were largely derived from TR61 rather than the Company s own data as in PR09.. The asset stock of pumping stations has increased since PR04 and we surmise that this will have affected the valuation, despite a decrease in the kw rating. The decrease in sewage treatment works is likely to be due to the use of the Company s own cost models. The increase in the valuation for sludge treatment facilities is attributed to the use of TR61 in the PR04 costings. The FBP valuation is based on current cost models which are specific. We queried why the GMEAV for sludge treatment has increased so significantly, particularly if advanced digestion is less costly than conventional digestion. The Company responded: Page 33 of 61 October 2010

34 We agree that the GMEAV has risen since PR04. However we believe a simple comparison with PR04 is not warranted. In Part B7 table B7.14 we are required to reconcile GMEAVs as stated in Table 25 of June Return 2008 with our PR09 revaluation (Table 25 takes as its base the PR04 valuation and accounts for additions and disposals each year since the PR04 revaluation). Our GMEAV of sludge treatment centres as per Table 25 of JR08 is 373m which is higher than our PR09 revaluation of 330m. The increase in our PR09 valuation over PR04 when viewed in this context is not therefore surprising Net MEAV and CCD The Company has not commented on the impact of its revaluation on net MEA and CCD charge in its C3 commentary. Its comments are included in part B7. Likewise our comments are included for each asset group in part B Confidence grades The Company has assigned a confidence grade of B2 to most non infrastructure lines in its B7 tables. The exception is for sewage pumping stations where a confidence grade of B3 has been assigned. On the basis of our review, we agree that these confidence grades are a fair reflection of the valuation methodology. However please note our comments in section in relation to the confidence grades applied for condition assessments. Page 34 of 61 October 2010

35 2.3 Changes in Condition grades between PR04 and PR09 The company s explanation of changes in the proportions of asset value in the asset condition categories from the , , positions reported in the 1994, 1999 and 2004 business plans. In particular, attention is to be given to assets that have moved into and out of condition grades four and five in tables C3.1 and C3.3, where this is suggested by the company to be attributable to better information quality or asset deterioration. The company's reasons for differences between asset condition assessed from revised grading systems Explanations for changes in condition grades The following table summarises the Company s explanation for changes in condition grade: Condition grades Asset 4 and 5 GMEAV PR99 PR04 PR09 Water treatment works SD TW n/a n/a 23 W1 TW n/a n/a 25 W2 TW n/a n/a 19 W3 TW n/a n/a 8 W4 TW n/a n/a 21 Summary WTW 1.8 Water storage Service reservoirs Water towers Water Pumping stations Intake PS Source PS Booster PS Sewage Pumping stations Intake Ps 16 Terminal PS Sewage Treatment works Preliminary Primary Secondary Tertiary Sludge treatment facilities Cake disposal Compost disposal 40 Comment From this comparison it can be seen that the number of WTWs in Grades 4&5 have increased significantly. The Company explain this as being due to the large number of complex sites built in the early 1990 s which now require refurbishment. Improvement due to targeted investment following cleaning programme Attributed to better information from surveys and deteriorating stock. Methodology for assigning CGs may impact on assessment. Limited surveys completed in PR04 and PR09. Expenditure for AMP4 is still ongoing and not reflected in current condition grades Expend re Gross GMEAV Page 35 of 61 October 2010

36 2.3.2 Comparison of expenditure to condition grade The condition profiles in tables 3.2 and 3.4, explain the nature of and comment on the effectiveness of the company's intent for the five year expenditures on each of the asset groups. (We have reproduced these from June returns tables 32 for Base Service which is expressed in tables 3.1 to 3.4 as a percentage of GMEA.) Are the outcomes for better or worse than the company was aiming for? Is the company making best use of the expenditure, could it have been done better and what were the constraints? What interdependency exists between preservation and enhancement expenditure? How the company's management of risk is reflected in changes to reported condition grading, by making reference to commentary in section B3. The reporter should comment on the likely impact on the condition grading going forward and whether (or over what period) the company's approach is sustainable. The company's account of the impact on the state of the assets of both capital maintenance and new assets constructed as a result of quality and other enhancement programmes over the period, on asset condition; and state whether or not, in his professional opinion, the company has, during the period 1 April 2003 to 31 March 2008: managed its asset base such that there has been no substantial change to the risk of service, non-compliance with statutory requirements; or through not having carried out sufficient routine or capital maintenance, created a distinct likelihood that there will be a subsequent need for increased capital maintenance in the next five years or future years. Comment on the company's views on relationships between quinquennial capital maintenance expenditure and its proportion of GMEAV and the condition grading for each group of assets; We have sought to establish whether there is any correlation between changes in condition grade and expenditure in the above table. As can be seen in the table, in terms of condition grades the Company s assets could be said to be deteriorating. This could be partly due to the methodology used to assess condition grades which has relied heavily upon PR04 assessments being deteriorated for age. The Company s response is that: We state in our commentary that our investment plan is forward looking and risk based (as required by the Common Framework approach). As such condition grades alone do not drive capital investment, rather it is the likelihood and impact of failure of assets which drives investment. We would therefore expect a range of condition grades for our assets, and would not expect to see a strong correlation between condition grade and expenditure. Page 36 of 61 October 2010

37 Principal Challenges Ref. Status Challenge Ch.1 Validation of data - satisfied that appropriate Ch.2 Consistency in use of cost models in valuation with those used elsewhere Company demonstrated that its revised cost model has been used consistently throughout the Business plan. Ch.3 Duplication of costs no evidence of duplication found Ch.4 Use of modern equivalent asset for sludge treatment facilities (advanced rather than conventional digestion with increased functionality) -The Company response is that this is less costly. We were unable to confirm or refute this statement. Ch.5 Inclusion of risk/contingency costs in valuation Not included Ch.6 Completeness of cost models Improved since DBP Ch.7 Inclusion of non commissioned processes in valuation Company demonstrated that not material. Ch.8 Extent of extrapolation from PR04 surveys (or earlier) for condition grade assessments Concluded that extensive extrapolation undertaken. Ch.9 Compliance with Ofwat guidelines - compliant Ch.10 Reasons for changes in asset stock, condition grades and GMEA valuation from PR04 responses provided Ch.11 Comparison condition grade movement to expenditure Company state that no alignment between these. Ch.12 Impact of interventions on remaining asset lives No account taken of these. Prepared by: PD Date: 6 th April 2009 Page 37 of 61 October 2010

38 Infrastructure Introduction Company Approach has followed the guidelines to produce the data as required for the C3 tables. As part of this approach, a technical review of confidence grades has been undertaken in order that the company achieves a normal status within the industry. This exercise included the review of all public June Return documentation which provided confidence to its approach to many technical interpretation and reviews. Reporter Approach Following the phased approach for the DBP due to the lack of available audit material and data, the company commentary and associated tables were issued to SMC in advance of the principal audit meeting. These documents were examined in detail during the course of the audit meeting. Response to Ofwat reporter guidance 3 Response to guidance for Part C3 -Infrastructure 3.1 Response to general guidance Material assumptions 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 challenged by the reporter and/or the auditor. As far as we were able to determine, the Company has disclosed the material assumptions that underpin the data in tables C3.1 and C3.3. Where we have challenged assumptions we have detailed the challenges in the relevant commentary Quality Assurance procedures Give a brief assessment of the quality assurance procedures used in relation to the production of the asset inventory information. The Company has provided a detailed Technical Approach which provides the high level processes and QA procedures involved in the asset inventory determination. The introduction and subsequent results of the UKWIR method to determine the condition grade of potable water mains and sewage pumping mains has lead to some doubts regarding the accuracy and appropriateness of the method. Page 38 of 61 October 2010

39 3.1.3 Changes in information Disclose (if not fully exposed) and give an assessment of the reasons for changes in information submitted in the previous business plan (March 2004) and June returns since JR03 ( ). has changed the number and type of outfalls since PR04 as a result of this review Accuracy and reliability of information systems Give an opinion of the company s assessment of the accuracy and reliability of data submitted including comment on the role played by both company and Ofwat indicators in informing the confidence grading of condition and performance data for each asset group. The condition grading has generally improved as the revised reporting systems provide a more accurate set of data. This is particularly apparent for the subsequent water main valuation although as described within the commentary additional guidance from Ofwat would help comparison with other similar companies The reporter shall summarise the company's surveys of its asset stock valuation, condition, and summary age profiles as at 31 March The reporter shall include how the company has derived the information required for tables C3.1 and C3.3 and all aspects of re-survey; condition grading. The Company s approach to asset condition determination and condition grading has been discussed in detail during the review and so far as we have been able to establish from our review is as described in the company commentary. While not all methods and procedures may be fully developed and some may have outstanding issues with the Reporter, has approached its FBP proposals with responsibility Asset systems conforming to condition L of the Instrument of Appointment has described in detail its systems, methods and procedures within the company commentary which were subject of discussion throughout our review procedure Differences of opinion Report any significant areas where the reporter's opinion is materially different from that of the company. For Asset Inventory Infrastructure: SMC has identified some difference of opinion in the approach by to CSO/EO assessment procedures and some sewer condition grading. There is a major difference in the valuation of similar lengths of water mains and sewers the understanding of which is considered by SMC to require comparison with other companies since at least one other company does not have such a profound difference Changes in asset condition The reporter shall comment on the changes in asset condition since 31 March 1993 and the Company s explanation of changes in the proportions of asset value etc. as reported in the recent business plans. In particular, attention is to be given to assets that have moved in and out of condition grades four and five in tables C3.1 and C3.3, where this is suggested by the company to be attributable to better information quality or asset deterioration and also to the impact of enhancement on base maintenance activities Page 39 of 61 October 2010

40 There have been issues identified during the Asset Inventory Infrastructure review where some of the asset condition procedures have been discussed in detail and some disagreement has occurred. Throughout these discussions, Anglian Water has provided sensible and thorough argument in defence of its approaches Approach to valuation The reporter shall comment on the Company s approach to Modern Equivalent Asset Valuation (MEA) particularly in the methodology used; its reasonableness, consistency, sampling procedures, assumptions and limitations. As is described throughout this commentary, the Company s approach to the asset valuation has been appropriate for the guidance. Although we may not be in total agreement with all aspects of the methods, as described in the relevant sections, we are generally satisfied with the methodologies. For those which we have identified issues, has instigated further reviews, some of which will have had a bearing on the PR14. Further assessment of the changes can be found in the Part B7 audit. 3.2 Response to guidance for Tables C3.1 and C3.2 Check that the sum of the lengths of main in Table C3.1 line 38 corresponds to the sum of lines 21, 22 and 23 of table C3.1 The total length of potable water mains has been reported in Table C3.1 as 37,332km and Line 38 corresponds to the sum of Lines 21, 22 and 23. Confirm the company has correctly identified the construction date in line with the guidance where the pipe has been relined. There is no reporting line for relined pipes and did not form part of the review nor has the topic been detailed within the company commentary for Part C3. The length of mains recorded is a summary of the existing stock adjusted for renewed mains, new mains and abandoned mains. It should be noted that in recent AMP periods has had a preference to replace water mains rather than reline. has added a statement in its company commentary that no water main structural re-lining has been undertaken, consequently Table C3.1 Line 38 is always the original date of construction. Confirm the confidence grading by assessing the process through which the date constructed profile has been derived by the company, with reference to the amount derived from sound records and on how well the company has derived the date constructed grouping where the data is not specifically attributed on records The age of mains as the date of construction has been determined from using GIS historic maps and age of housing development and the more recent adoption scheme detail. Consequently, the more recent two age bands have the higher Confidence Grades. The reporter shall give a brief assessment of the quality assurance procedures used in relation to the production of the asset inventory information The Company has provided a detailed Technical Approach which provides the high level processes and QA procedures involved in the asset inventory determination. Page 40 of 61 October 2010

41 The introduction and subsequent results of the UKWIR method to determine the condition grade of potable water mains and sewage pumping mains has lead to some doubts regarding the accuracy and appropriateness of the method. 3.3 Response to guidance for Tables C3.3 and C3.4 Check that the sum of the lengths of sewer in Table C3.3 line 39 corresponds to the sum of lines 1, 2 and 3 of table C3.3. The total length of sewers has been reported in Table C3.3 as 43,767km and Line 39 corresponds to the sum of Lines 1, 2 and 3. Confirm the confidence grading by assessing the process through which the date constructed profile has been derived by the company, with reference to the amount derived from sound records and on how well the company has derived the date constructed grouping where the data is not specifically attributed on records The age of sewers as the date of construction has been determined from using GIS historic maps and age of housing development and the more recent adoption scheme detail. Consequently, the more recent two age bands have the higher Confidence Grades. Page 41 of 61 October 2010

42 4 Changes since the DBP 4.1 Water Infrastructure Dams & Impounding Reservoirs No change in methodology or valuation as described for the DBP. Raw Water Aqueducts There has been a small change since DBP due to the review of aqueducts and other mains as described in the company commentary. Water Mains For the FBP, the length of potable water mains has remained the same, however changes to condition grading and cost model changes have led to a revaluation. Other Mains For the FBP, the length of other water mains (mainly raw water supplies to industry) has remained the same, however changes to condition grading and cost model changes have led to a revaluation. Ancillaries No change in methodology or valuation which is as described for the DBP. 4.2 Wastewater Infrastructure Sewers and pumping mains For the FBP, the lengths of sewers, critical sewers and mains have remained the same, however changes to condition grading and cost model changes have led to revaluation. has maintained an interest in the development of new technology including the recent research at the University of Bradford using sonic technology to survey sewers. To date, the results are regarded as good for pipes up to 300mm diameter. CSOs As for DBP, the stock numbers and condition grade have remained unchanged for the FBP but a revaluation has been completed using the revised cost models. Other structures No change in methodology or valuation as described for the DBP. Sea Outfalls The number of sea outfalls is unchanged, however the PR04 datasheet has been fully reviewed and investigated by. The dataset was originally based on number of the number of consents to discharge but this review identified flaws in this approach e.g. a number of duplicate pipes were previously overlooked. The length of each sea outfall to HWML was measured and provided a more accurate approach than for PR04. All sea outfalls with a length >500m are classed as long sea outfalls (LSO), those <500m being classed as short sea outfalls (SSO). Page 42 of 61 October 2010

43 4.2.1 Valuations The valuations have been changed using amendments to cost models which have been audited in part C2 Cost base by SMC. Surface type has been used for the first time for PR09 using a larger selection of road types etc. The sewer condition grade assessment is based on that used for PR04 but improved with the use of Faber/Maunsell ICAM software. 4.3 Company Commentary has produced a detailed and comprehensive account of its approach to the FBP. The preliminary review of the document identified a small number of inaccuracies which have been rectified prior to its final submission. 5 Asset Inventory - Methodology 5.1 Water Service Dams and Impounding Reservoirs As fully reported for the DBP, the number of Dams and Impounding Reservoirs is confirmed as 22 as identified in the corporate Aquarius system and reconciled with reports under the Reservoir Act and PR04 data. This is an increase of two from PR04. The Reservoir Safety Manager (a Supervising Engineer under the Reservoirs Act) has graded all the reservoirs as Grade 2, an improvement at one reservoir Cadney Carrs from Grade 3 at PR04 to Grade 2 at PR09. For FBP, a COPI value of has been applied to the AMP4 valuation. At DBP, it was confirmed that the original cost data was derived in 1993 and subsequently inflated for each AMP. When challenged, the Company stated that it would not be appropriate to derive costs by any other method for these long life assets as there had been little construction of this type of asset in the UK in recent years Raw Water Aqueducts The Company has used the same approach to identify the asset stock, condition and value as for water mains and therefore included the approach in the section relating to mains. Raw water aqueducts are defined as assets which convey water from the environment to treatment i.e. pipes (borehole sources) and tunnels. The new methodology for Condition Grading issued by Ofwat has lead all aqueducts in the region to be classified as CG1 due to the no failures scenario. At PR04 all assets were reported as CG Water Mains The Company s approach was reviewed and described for the DBP, a procedure which has been maintained for the FBP. The Company applied the UKWIR Report No 08/RG/05/22 Volume 2 Mains Condition Grading, the result of which is an overall improvement of condition grade. believes that the original Ofwat methodology did not provide a good CG profile and, as a consequence, has used an improved water network modelling approach (SynerGEE) to provide a more reliable assessment. The entire region was covered and an assessment of real running pressures which could affect the cohort approach was applied to all pipes. This has been a proactive approach by Page 43 of 61 October 2010

44 the Company on this assessment methodology following a similar approach that was in place prior to the Ofwat/UKWIR methodology. As required, followed the cohort procedure and the Pareto curves as reproduced in the Reporter s Commentary for the DBP and included in the Anglian Water FBP Company Commentary. SMC is satisfied that the Company has applied the methodology as intended by Ofwat and has described in detail the findings in the Company Commentary. To the extent we are able from our limited review we confirm that the GIS system (from GWaterUK) provides an appropriate basis on which to develop the cohorts. identified 155km of mains outside the four specified Bands as these were mains without a size recorded and has proportionally distributed these mains into the four size Bands. The total is reported as 37,232km in Table C3.1 (Lines 21 and 22) plus 100km Other Mains (Line 23). A total of 649km has been identified as Nonpotable Water Mains, consisting of 549km of Raw Water Aqueducts and 100km of Other Mains (95.6km for the former region (ANG) and 5.5km for Hartlepool Water). SMC is satisfied that the final cohort iteration for both size bands met the corrected criteria from the UKWIR report of 1.0 burst per year per cohort. The results from this approach are detailed below and provide the base data for the new Table 3.1a. Condition Grade Smaller Diameter Larger Diameter Total km 1 19,453 2,229 21, , , , , Age bands were further developed and updated from the company s foundation dataset of historical development polygons. has clearly shown that the lengths of water main within the condition grades are different when considering the cohort approach to the Pareto curves. The advantages and disadvantages of the cohort approach are described in detail in the company commentary. The Company has calculated the MEAV by assuming replacement would be 80 by directional drilling and 20 by open cut. As described in above, the valuations recalculated using a larger selection of surface type. As a result, the GMEAV for all potable mains has risen from 3.6bn at PR04 (02/03 prices) to 4.2bn (07/08 prices) for PR09, an increase of has reported a similar length of water mains to sewers (37,300km and 39,700km respectively), however the asset value of water mains is significantly less i.e. less than 25 of the wastewater value - see paragraph below., in its commentary, has confirmed the extensive use of trenchless Page 44 of 61 October 2010

45 technology (directional drilling) as the preferred method for replacement and this could be the reasoning for this lower value. There is a significant difference in valuation for the water main and sewerage asset stock, some of which can be attributed to location, depth and method of replacement. However, there is a clear need for the Reporter to be informed and understand the national trend before further comment on this difference can be made. Strategic mains are regarded as those with a nominal diameter >320mm. Other Mains are generally raw water supplies to industry mainly, the majority being the supplies to the Humberside refineries in North Lincolnshire. A similar approach to the condition grade determination for water mains has been applied. considers that relatively few bursts occur on an annual basis since many mains were replaced rather than relined during AMP3 and the early years of AMP Communication Pipes Ancillaries infra are generally customer communication pipes and an extensive exercise has been carried out to provide a unit cost for a standard length of pipe and stop cock box. Following lengthy discussions in previous PR review meetings, has concluded and agreed with previous Reporters that the valuation associated with long and short communication pipes balance out. A single average length of 7m has been used and cost variation is mainly due to material and labour costs rather than re-instatement due to the use of trenchless technology installation methods. For the DBP, we reported that the Company calculated an average communication pipe length of 8.3m which it compared to the Cost Base assessment of 7.7 m and determined the number of live communication pipes from their SAP billing system. subsequently confirmed the average communication pipe length to be 7.7m for the FBP. 5.2 Sewerage Service Sewers and rising mains A review of the sewer length data provided in the company commentary and Table C3.3 identified some irregularity, the result of which was an amendment to the company commentary. Critical sewers are identified by using GIS applications based on Sewer Rehabilitation Manual criteria and is based on location, size, material, type, traffic flows, property types, main river (only) etc. The audit discussion confirmed that some aspects of traffic sensitivity have not been included to date due largely to the complexity of identifying and applying the criteria. considers its percentage of critical sewers to be mid-table as a Water and sewerage company. The analysis of the sewerage data supports this view, although an increase would occur if traffic sensitivity was applied in full. The document AWS Sewer & Pumping Main Criticality for JR06 provides the criteria for identification and confirms that not all SRM criteria are fully applied yet. The results of the current assessment are summarised in the table below. The length of critical sewer has increased significantly since PR04 (+47), due largely to improved assessment methods, the application of a greater selection of Page 45 of 61 October 2010

46 surface type (road, grass etc) and recognition of proximity to main rivers. The updated EA main river set information has impacted on this criticality rating and added more lengths of main river in the region. In addition, a good GIS set of railway data has been provided by Network Rail. The percentage of critical sewers was approximately 25. The apparent no change percentage at PR09 is due to the additional 4,800km of non-critical sewer to the asset stock, due mainly to improved former S24 data. has an estimated 8,500km of former S.24 sewers of which 6,000km is unmapped i.e. only 30 of this type of asset stock is mapped. The mapped length of former S.24 sewers is included in the average sewer length calculation which has subsequently reduced to 34.5m as a result. Compared to most water companies, has a high percentage of pumping and vacuum assets in its wastewater stock 4,099km of a total of 43,767 is 9.4 of the asset stock. There are no specific guidelines within the SRM to determine the criticality of pumping mains. Some companies apply the gravity sewer criteria which is not appropriate due to the size bands in particular and the effect of the failure of a relatively large sewage pumping main, say 225mm dia. If the gravity sewer criteria were used, the percentage on non-critical pumping mains would be well in excess of 90. has made a determined approach to provide a more realistic length, as described in its criticality guidelines produced for JR06 the results of which are shown in the table below. For rising and vacuum mains each main was subdivided in 10m sections and each 10m length assessed for criticality based on location, diameter etc. This length was identified as the average width of a road and therefore a reasonable unit length for analysis purposes. The analysis of the sewerage data has identified the following non-critical sewer and critical sewer relationship. The data in the table below is a summary of the data provided by in Table 5.2 and para of the FBP company commentary. However, these numbers do not fully reconcile with the data provided in Table C3.3 Lines 1 to 3 which is due to the different JR and PR reporting requirements. Sewer Type Total Length (km) Length Non- critical Sewers (km) Length Critical Sewers (km) Critical Sewers Gravity Sewers 39,668 29,456 10, Rising Mains 4,099 2,712 1, Total 43,767 32,168 11, As described above sewers are classified by material, depth, dia., age, soil (SRM definitions) using a computerised approach. For PR04, the assessment of 100km CCTV survey was completed in each class to identify a condition profile for each class. now has 1100km of CCTV data from DASs, proactive sewer rehabilitation studies and DG5 schemes which have been assessed to generate condition profiles. has not considered the condition grade over-ride approach, say for high water table or tidal reaches where the effect of infiltration and exfiltration is more marked. However, where poor soil conditions exist, such an approach is used. Surveys are assessed using ICAM software which sits above Page 46 of 61 October 2010

47 sewer.dat data and uses detailed coding to provide the defect density over the full length of sewer. Much of the CCTV survey programme follows a proactive cluster approach in coastal and Essex areas due to the high number of collapses that occur in these regions. Consequently, it may be appropriate for to re-consider the over-ride approach when considering condition grading at least in ground which is subjected to tidal influences. SMC has suggested that the gravity sewer condition grading may be slightly underestimated since the opportunity to upgrade certain defects in sewers which may be affected by tidal conditions and/or a high water table has not been taken by the Company The company commentary for the FBP implies that some Condition Grade 5 (CG5) defects can be simply repaired by the installation of a CIPP patch repair. However, confirmed that such a repair would usually include re-rounding the sewer prior to applying the patch lining repair. Defective connections were also discussed in detail since many Sewerage Undertakers have a higher percentage of CG4 sewers which is the result of using a specific type of sewer assessment software. advised that the company uses the EN scoring method consequently this did not become an issue. As described in detail for the DBP, used the UKWIR methodology to calculate condition grade of the rising mains and vacuum systems for water mains. As reported in the FBP, the majority of the pipework, some 97, was calculated to be in CG1 and considerably less pipework in CG4 and CG5 compared to the grades reported for PR04. reviewed the failure data which confirmed that the failure rate was approximately 30 of the water main failure rate. The UKWIR methodology cohort parameters were adjusted by 30 to reflect this position and revised CG data was produced which provided a more realistic set of CG data as shown in the table below. This approach has provided a more suitable CG grading profile and has proved realistic when compared to actual failure analysis. Anglian Water undertook a major pumping main repair and replacement exercise during which confirmed that the main areas of failure are 1970s PVC; 1950s AC and WW2 Iron products. Data Set CG1 CG2 CG3 CG4 CG5 PR PR09 (orig) PR09 (rev) At PR04 was funded for water main replacement and a similar approach is proposed by for wastewater pumping mains in AMP5. The identification of pressure mains as a proactive approach (i.e. replacement prior to failure) has been a difficult process to date. However, the WRc has developed new technology and assessment procedures to identify defective mains prior to failure project reference CP371. If successful in its application, this would provide a proactive approach to avoid service failure and particularly important for Anglian Water s high percentage of wastewater pressure mains. The approach to the calculation of MEAV is similar to that for the water mains using cost curves. As described in above, the valuations recalculated using a larger selection of surface type. The Company attributes the change in valuation to this change in methodology. As a result, the Gross MEAV has increased from 13.9bn at PR04 to 16.7bn for PR09, a rise of almost 20. Page 47 of 61 October 2010

48 As for water mains, the age profile for sewers has been derived from the inspection of historical maps plus general knowledge of pipe materials Sea Outfalls There have been a number of changes between long and short sea outfalls resulting from the review of all sea outfalls using GIS as described in Table C3.3 Lines 18 and CSO and Emergency Overflows Following the challenge by SMC at DBP regarding some of the assets identified as CSOs and EOs, has reviewed the data and provided a reduced number of 2,135 installations. The main reasons for the amendments were due to duplication of consents (to discharge) and better information. However, the number has increased by 160 overall from PR04 due to an error made at the previous review and the identification of some previously unconsented overflows. Most CSOs reported are static screen installations but powered screens are reported and presumably valued with pumping stations (SPS) since the majority are at SPS locations. Of the number reported, 588 are of known size bands based on consented flow rates: Band 1 = <200l/s; Band 2 = 200l/s to 500l/s; Band 3 = >500l/s flows. The majority of screens are in Band 1 due to the static screen influence. Apart from a general assumption that uniform deterioration at a rate of 4 from PR04, the approach to condition grading range remains unaltered from PR04. Consequently, the valuation has been based on the same principles as for PR04 but with revised unit costs. The CSOs, including the overflow pipe and end structure, have seen a large increase in value due to the increased number and to the average unit cost of 35,104. The unit cost is updated on a regular basis as new construction adds to the asset stock. However, if as stated in the company commentary, the CSO chamber is included in the gravity sewer valuation, there is a potential large proportion of CSO replacement cost which is omitted from the unit cost above. A new CSO chamber is designed to nationally accepted WaPUG standards and cannot be regarded as a manhole, consequently this approach to CSO valuation should be reviewed. The approach to valuation based on new build costs was also challenged at DBP. We requested the number of CSOs and EOs which are screened and of these how many are static or powered screens. has responded to the statement with the comment: - We do not record all static screens on our systems. Powered screens are recorded on our SAP ALM system. The data structure of our SAP system records the screens on each site (e.g. inline pumping station, STWs), whether the screen is an inline screen, inlet screen or a storm screen and the screen type (e.g. drum. mechanically raked bar, static bar). We do not specifically record whether the screen is on an overflow. For example: We have 159 screens recorded on non STW sites, 5 are inline screens, 76 are inlet screens and 78 storm screens. Of the 78 storm screens (which are most likely to be overflow screens) 32 are mechanically raked screens, 35 are static bar screens, 6 are rotary screens, 4 are D screens and 1 is a drum screen. In addition SMC suggested that an improved database would provide with the opportunity to have a more accurate size band determination and Page 48 of 61 October 2010

49 consideration of the introduction of a unit cost for each size band. responded to this statement with the comment: - While we agree that an improved database would improve the opportunity to have a more accurate size band determination, we believe that our current extrapolation of the sample of our known asset sizes (27 of total CSOs and EOs) provides a reasonable approach. Our confidence grade of B3 for the reported asset stock by size band reflects this extrapolation. We also suggested that should consider a review to its approach for CSO valuation to which responded with the comment: - We believe that our current approach to valuation of these assets is reasonable given that the total value accounts for less than 0.5 of the sewerage infrastructure GMEA. The details provided suggest that there is little or no inspection of CSOs and EOs. Since the majority of screened CSOs are static screens, these should be inspected at least every 3 months for maintenance purposes and possibly more frequently in some locations particularly if, for example, there is a specific grease problem. Sewerage undertakers generally regard CSOs and EOs as an important factor in the battle against pollution and flooding and regular inspections provide valuable data regarding service condition as well as structural condition. Such a programme of inspection would give the opportunity to identify the inlet sewer size which in turn provides a good indication of the discharge size band. In addition, where screens are installed, flow data should be available which again would assist the size banding exercise. has responded to the statement with the comment: - We do undertake routine checks of CSOs and EOs. These identify any defects and remedial work required. However, condition grading is not formerly recorded. All mechanical screens are recorded on our SAP ALM system. These receive 3 monthly mechanical service visits. Static screens are inspected during routine operational visits. We also have a programme of installation of remote telemetry monitoring ( Metasphere units) of CSOs and EOs, these produce alarms when the overflows operate and allow operation staff to visit to check satisfactory operation. Condition grades have remained unaltered since PR04. We challenged the company as to whether there is a programme of CSO/EO surveys. We felt that a more proactive inspection and survey programme in the current water quality environment this could be regarded as an improvement. The company s comment that most powered screens are at SPS locations requires further consideration. If such a screen is installed in a separate chamber its identification, condition etc should be include in this asset stock and not with the SPS asset stock as non-infrastructure. In conclusion, we are concerned with the apparent lack of data with regard to screen type, definition, condition grading and unit costs and challenged to provide documentation to prove otherwise or identify a new, improved approach to the impact of this important asset type. responded as follows to this challenge: We believe that our current approach to valuation of these assets is reasonable given that the total value accounts for less than 0.5 of the sewerage infrastructure GMEA. There is a case for to improve its knowledge and understanding of CSOs and EOs in order to provide a more comprehensive valuation based on more appropriate details of size banding, type and condition grading. Despite the detailed information provided by, this remains an area of disagreement. Page 49 of 61 October 2010

50 5.2.4 Other structures The category Other structures includes assets such as balancing lakes and large oil interceptors. Again has used the PR04 valuation and inflated by COPI. The size bands are: Band 1 = <50m; Band 2 = >51m - <1000m; Band 3 = >1000m. Similarly, the update of the unit costs is subject to a rolling programme following completion of constructed projects. As described in para 5.1 above it is difficult to update costs for service reservoirs, dams and reservoirs, and balancing lakes as very few have been constructed in recent years. There is no pressure from Ofwat to complete a revaluation exercise at present. 6 Table Commentaries Commentary associated with the asset infrastructure has been included in Section 5 - Methodology above with the exception of the topics reported below. 6.1 GMEA For the GMEA comparative costs reported in Section 7 below, the entries for water mains and ancillaries were reported differently for PR04, consequently (to date) a true relationship for valuation and subsequent condition grading has not been identified. For example, for PR04 the reporting of water mains was not split by size (as for PR09), consequently the CG profiles given in Lines 21 and 22 are for the combined values. Similarly, Ancillaries were only reported as a single line and not split into infrastructure and non-infrastructure. 6.2 Communication pipes It would appear that does not have records of the communication pipe material for in excess of 75 of these assets including over 122,000 new pipes since PR04. has responded by confirming that the Ofwat guidance requires only lead and galvanised iron to be recorded separately, all other pipes being recorded as Other. does not record these other materials on its GIS even for new installations. 6.3 Sea Outfalls There was an issue raised regarding when condition grade assessments for Sea Outfalls were undertaken and how? The response confirmed that the PR09 reported data was that used for PR04, subject to the asset number changes identified above, the valuation being raised by COPI. also confirmed that no condition surveys have been undertaken either internally or externally. Construction of LSOs has been relatively recent (all since 1995), consequently all are expected to be in prime condition - this assumes, therefore, that there has been no external damage to the pipelines or end structures by tidal action, for instance. For SSOs, regards these as uemarkable in their engineering detail compared to the rest of the sewer network and maintenance is relatively easy. Neither external nor internal condition surveys appear to have been completed in recent years. Page 50 of 61 October 2010

51 7 Line Commentaries 7.1 Tables C3.1 and C3.2 The details provided below are the combination of the two tables, the methodologies being described in Section 5 Methodology Water Service. Line 1 Dams and Impounding reservoirs The number has increased to 22 from 20 for PR04, a rise of All assets have the condition grade CG2 for PR09 following remedial works to one dam which moved it from CG3 to CG2. The review of dams and reservoirs has been completed by and its Supervising Engineers and applying the Ofwat condition grading guidelines. The GMEAV is reported to be 383m from 298m for PR04, an increase of 85m i.e Data Set CG1 CG2 CG3 CG4 CG5 PR PR Line 2 Raw Water Aqueducts Raw water aqueducts transfer water from catchments to WTWs. The length of aqueducts has increased by 53km from 496km for PR04 to 549km for PR09, a rise of 10.7 and due to the re-classification of some Other Mains. The assessment of aqueducts has followed the same principles as for water mains, resulting in the condition grade being set as CG1 for all assets compared to all being CG3 for PR04. The GMEAV is reported to be 82m from 143m for PR04, a decrease of Data Set CG1 CG2 CG3 CG4 CG5 PR PR Line 3 Total water resources GMEAV The total for water resources for PR09 is 465m which is an increase of 23m from the 442m sum at PR04, an overall increase of 5.2. Line 4 Water resources expenditure as a of its GMEAV This is a new reporting line and is an automated infill by Ofwat, the PR09 value is given as 3.17 compared to 4.47 for PR04, a decrease of 1.3. Line 21 Water Mains Potable Mains (up to 320mm dia) The length of water mains has increased slightly since PR04 due to the growth pattern of new development, the PR09 length for small mains is 34,897km and the total length of 37,232km (inclusive of Line 22 below) is 1.4 greater than the PR04 reported length of 36,700km. The condition grades for the two potable mains bands were not available for PR04. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR ,627 Page 51 of 61 October 2010

52 Line 22 Water Mains Potable Mains (greater than 320mm dia) The length of water mains has increased slightly since PR04 due to the growth pattern of new development, the PR09 length for large mains is 2,335km. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR All potable mains trend. Data Set CG1 CG2 CG3 CG4 CG5 PR PR Line 23 Water Mains Other Mains The length of other water mains has decreased significantly since PR04 due to the reallocation of some to Raw Water Aqueducts where a corresponding increase is reported. The PR09 length is now 100km, a 35.5 reduction from the 155km reported for PR04. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR PR The revised grading to 100 CG1 is a direct result of the revised Ofwat methodology as described in para above. Line 24 Ancillaries Customer (infrastructure) This line identifies the number of communication pipes estimated by which for PR04 total was 1,914,956 and has increased to a PR09 total of 2,037,439 an increase of 6.4. The average length has been calculated to be 7.7m. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR04 PR ,733 The distribution of materials has been summarised as: PR04 PR09 Material No Pipes Total Pipes No Pipes Total Pipes Lead 377, , Galvanised Iron 96, , Other 1,441, ,560, Totals 1,914, ,037, Line 25 Ancillaries Customer (non infrastructure) A total number of 1,338,659 customer meters have been reported for PR09. Data Set CG1 CG2 CG3 CG4 CG5 GMEA PR04 PR Page 52 of 61 October 2010

53 Line 26 Total Water Mains GMEAV The PR09 value is given as 5,989m compared to 4,482m for PR04, an increase of 33.6 as detailed in para above. Line 27 Water Mains Expenditure as a of its GMEAV This is a new reporting line and is an automated infill by Ofwat, and for PR09 the value is given as 2.19 compared to 2.68 for PR04, a decrease of Line 37 Water Service Expenditure as a of its GMEAV The PR09 value is given as 3.50 compared to for PR04 since these figures are downloaded by Ofwat, the Company considers there may be a doubt regarding the PR04 calculation. Line 38 Potable and Other Water Mains Age Profile (date of construction) The age of mains i.e. the date of construction has been determined using GIS historic maps, material history, housing development records and the more recent adoption scheme detail. All mains are included in this profile, totalling 37,333 which corresponds to the sum of Lines 21, 22 and 23 above. Length (km) Total Length Pre ,153 2,466 1,309 1,968 4,911 10,556 12,296 2, Table C3.1a This is a new table, the data being supporting to Table 3.1. Line 1 Analysed cohort potable mains (up to 320mm). Units CG1 CG2 CG3 CG4 CG5 Total km 19,453 11,095 3, ,897 Line 2 Annual average bursts from cohort analysis (5 year average) potable mains (up to 320mm). Units CG1 CG2 CG3 CG4 CG5 Total 902 1,988 1, ,539 Line 3 Annual average bursts on analysed cohorts potable mains (up to 320mm). This is a calculated field from Lines 1 and 2. Units CG1 CG2 CG3 CG4 CG5 Total /000km , Page 53 of 61 October 2010

54 Line 4 Annual average bursts on replaced potable mains (5 year average) up to 320mm. Units CG1 CG2 CG3 CG4 CG5 Total Line 5 Annual average bursts (5 year average) on potable mains up to 320mm. Units CG1 CG2 CG3 CG4 CG5 Total 902 1,988 1, ,539 Line 6 Potable mains (up to 320mm). Units CG1 CG2 CG3 CG4 CG5 Total km 19,423 11,095 3, ,897 Line 7 Current annual bursts on potable mains (up to 320mm). Units CG1 CG2 CG3 CG4 CG5 Total 902 1,988 1, ,539 Line 8 Current annual bursts on potable mains (up to 320mm.). This is a calculated field from Lines 6 and 7. Units CG1 CG2 CG3 CG4 CG5 Total /000km , Line 9 Annual bursts on mains (5 year average) greater than 320mm and other mains. Units CG1 CG2 CG3 CG4 CG5 Total Line 10 Annual bursts on mains (5 year average) on potable and other mains reported in June returns JR04 to JR08. Units CG1 CG2 CG3 CG4 CG5 Total 935 2,003 1, ,604 Page 54 of 61 October 2010

55 7.3 Tables C3.3 and C3.4 The details provided below are the combination of the two tables, the methodologies being described in Section 55.2 Sewerage Service Line 1 Critical Sewers The length of 11,597km is represents 29.2 of the public gravity sewerage system of 39,669km. This is an increase of 3,711km (+47.1) from PR04 and due to the improved assessment of some criteria. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR ,726 PR ,165 Line 2 Non-critical Sewers The length of 28,072km represents an increase of 4,788km (+20.6) from PR04 and is reported to be largely due to better information particularly on former S.24 sewers. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR ,048 PR ,911 Line 3 Sewage Pumping Mains The length of 4,098km is an increase of 419km (+11.4) from the PR04 length of 3,679km, the increase being mainly due to new development. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR PR Line 4 Combined Sewer & Emergency Overflows The number of CSOs and EOs is now 2,135 from 1,975 as reported for PR04, an increase of 295, i.e but fewer than identified at the DBP audit meeting. has reviewed the database following the challenge made by SMC at DBP. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR PR Page 55 of 61 October 2010

56 Line 5 Other Sewer Structures (m 3 ) A total of 310 other structures have been identified an increase of 15 from DBP (+5.1) due to an increase in sewer balancing tanks. Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR PR The structure type / size distribution is summarised as follows: Size Band <=50m 3 >50m 3 >1,000 Totals <=1,000m 3 m 3 Balancing Tanks Balancing Lakes and Ponds Oil Interceptors Totals Line 6 Total Sewerage (Sewers and Sewer Structures) GMEAV The GMEAV is reported as 16,993m and is the sum of lines 1 to 5 which is 2,733m greater than the PR04 total of 14,260m, an increase of Line 7 Sewerage Expenditure as a of its GMEAV This is a new reporting line and is an automated infill by Ofwat, the value for the FBP being Line 18 Short Outfalls conducted a complete review of the Sea Outfall database and assessed location, attributes and length using GIS. A number of duplications or incorrect lengths have been identified and the number of short outfalls is now recorded as 41, an increase of 7 from the PR04 total of 34 (+25.6). Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR PR Line 19 Long Outfalls Following the review described above, the number of long outfalls is now 11, a decrease of 9 from the 20 reported for PR04 (-45.0). Data Set CG1 CG2 CG3 CG4 CG5 GMEA m PR PR Line 20 Total Sea Outfalls GMEAV The GMEAV is reported as 147.1m, a decrease of 4.8m on the PR04 figure of 151.9m. i.e due to the review of long and sea outfalls. has used PR04 unit rates plus COPI to determine the current valuation. Line 21 Sea Outfalls Expenditure as a of its GMEAV This is a new reporting line and is an automated infill by Ofwat, the value for the FBP being Page 56 of 61 October 2010

57 Line 39 Sewers Age Profile (date of construction) The age of sewers i.e. the date of construction has been determined using GIS historic maps, material history, housing development records and the more recent adoption scheme detail. All sewers are included in this profile, totalling 43,766 which corresponds to the sum of Lines 1, 2 and 3 above. Length (km) Total Pre ,060 3,727 6,808 8,967 6,179 10,446 1, Principle Challenges There is a case for to improve its knowledge and understanding of CSOs and EOs in order to provide a more comprehensive valuation based on more appropriate details of size banding, type and condition grade. Despite the detailed information provided by, this remains an area of disagreement. There is a significant difference in valuation for the water main and sewerage asset stock, some of which can be attributed to location, depth and method of replacement. However, there is a clear need for the Reporter to be informed and understand the national trend before further comment on this difference can be made. SMC has suggested that the gravity sewer condition grading may be slightly underestimated since the opportunity to upgrade certain defects in sewers which may be affected by tidal conditions and/or a high water table has not been taken by the Company. It would appear that does not have records of the communication pipe material for in excess of 75 of these assets including over 122,000 new pipes since PR04. has responded by confirming that the Ofwat guidance requires only lead and galvanised iron to be recorded separately, all other pipes being recorded as Other. does not record these other materials on its GIS even for new installations. Prepared by: BSy Date: 6 th April 2009 Page 57 of 61 October 2010

58 Management and General - Water & Sewerage Introduction Company approach The Company has not amended its approach to M&G assets since the Draft Business plan. Hence the asset stock and valuation (with the exception of vehicles) remains unchanged. The value of M&G assets has been apportioned between the water and sewerage services Reporter approach Given the relatively low materiality of the M&G asset stock in relation to the rest of the asset inventory and the lack of change since the DBP, we limited our review of M&G assets for the FBP to the area where the valuation has changed vehicles. Response to Ofwat reporter guidance 8 Response to General Guidance 8.1 Asset Valuation M&G Offices and Depots The majority of the offices are leased. The following are owned by the Company: Two offices, at Sudbury and Hartlepool. Three depots, at Sudbury, Colchester and Hartlepool. The Company stated that these details were unchanged from PR04. These assets have been valued using PR04 prices inflated by a COPI factor of A condition grade of 3 has been assumed and is based on the condition grade at PR04. The condition grade has not been deteriorated as these are long lived assets. All the offices and depots owned by are included in the water service M&G Vehicles The GMEAV of vehicles has increased from 10m in PR04.to 63m in PR09. It has also increased from 11m in the DBP. We queried the reasons for this. For the DBP, the Company s Plant and Transport Department had produced a spreadsheet of vehicles. The spreadsheet was refined to select owned vehicles only, 963 in total (from an original figure of 1856 in the spreadsheet). This list did not include items held in the fixed asset register (SAP), mainly mobile plant. The valuation included only the vehicles on this list. For the FBP, the total of the vehicle fleet and plant held on the SAP fixed register has been valued by taking the historic value and inflating by RPI from the date the asset was commissioned. Page 58 of 61 October 2010

59 We asked why a more accurate valuation based on replacement dates and current values had not been undertaken. The Company responded: The valuation was complicated by the mix of assets. It was considered that the amount of effort required to complete a more accurate valuation was not warranted given the materiality of the assets. The amount of time needed to complete such an exercise would not have been available given the timescale of the FBP submission. We reviewed the difference between the valuation completed for PR04 and that for PR09. The movement is summarised below: Vehicle GMEAV m NMEAV m Boats.Rowing/fishing Boats. Sailing/inflatable Plant Mobile. Non vehicular Vehicles Cars Vehicles. Lorries/land rovers/tankers /trailers Vehicles. Vans <1 ton Vehicles.Vans.1 ton/tractor/excavators Total Note : The above includes both water and sewerage service vehicles. However, in our opinion, the above cannot fully explain the increase, particularly for mobile plant, and we considered it probable that the list includes, for example, plant that is no longer in use. We asked the Company to review the numbers. In response it has included additional information in its commentary to explain the increase. The additional commentary is reproduced below. The valuation of vehicles is based on data from the asset register. The valuation at PR04 focussed on assets that had been identified by our transport division. We had not reconciled that valuation to the listing of assets contained in the asset register at the time. For PR09 we have reviewed the movements in the asset register since the previous valuation and, apart from the over-allocation of depreciation to the Management and general category of assets, other movements have been reflected in table 25 without material exception. For assets not included in the PR04 valuation we have reviewed the list of assets provided at the time of that valuation and note that the majority of the exceptions relate to mobile plant and Tankers/trailers. We have not verified the existence of each of these assets (given the quantity) but note that the NMEAV for these assets is less than 0.1 of the total assets. We also queried whether any assets owned by the non appointed business such as boats were included in the valuation. The Company responded that all the assets valued relate to appointed activities e.g. boats used in recreation are within the appointed business. Net MEAV is based on book life (using purchased date.). This has been calculated for each asset. Page 59 of 61 October 2010

60 8.1.3 M&G Telemetry Information relating to the telemetry system was supplied by the telemetry section and detail of assets produced in a spreadsheet. Each outstation or data server was shown with associated replacement costs. There were 3499 water and 6565 wastewater assets. The Company is currently completing an 8 year programme for its telemetry stations and thus has confidence in the data supplied. The Gross MEAV was calculated from the number of a particular asset multiplied by the unit cost and summed for all assets. The basis of the costs is those included in the replacement programme. Where an asset was used by both services, Anglian Water has assumed that the unit cost is split 50:50 between water and sewerage. The remaining life for each group was determined from the installation date and anticipated life for each asset. The asset life ranged from very short (5yrs) to long (25yrs). At the DBP, we challenged the Company to give more detail on the coverage of telemetry on operational sites as the stated 99 figure for water was not supported at the audit. The Company explained that this is based on DMAs, all of which are connected to the telemetry system. The Company has reported 13 for sewerage based on the number of PSs with external pumping station controls and CSOs connected to the telemetry system M&G Computers has outsourced its computing services and data has been obtained from its external provider. The Company explained that accurate data on its asset stock and costs was essential as part of its supplier control. A spreadsheet was produced detailing the number of laptops, desk tops and servers within the Company. The computer assets were split between sewerage and water on a 60:40 ratio. Water Sewerage Laptops Desktops Servers To calculate the GMEAV, the Company has taken the cost for each asset from the historic fixed asset register in SAP. For the DBP, we undertook an audit of the specific computer data at the Company s Capital Accounting Dept. We were shown the asset class for computers and the relative asset life as described below. Asset Class Asset Life Descriptions years Non ops Hardware years Non ops Software 220 7years Operations Hardware years Operations Software years Network infra years Laptops The cost centre for IT is 20,000, as opposed for example to for Telemetry. The spreadsheet used for the development of the PR09 computer data was for the cost centre 20,000 including the above assets classes. The costs are split between Page 60 of 61 October 2010

61 hardware and software. All costs of a project including those to develop, deploy, implement and build, including capital recharge of time, are allocated to a project as appropriate. The data for the cost centre 20,000 and asset class 210 to 235 were transferred to a spreadsheet and the GMEAV calculated from the acquisition costs and the NBV summed down the whole list. We were shown that each asset has an asset number and a capitalisation date, an acquisition value and from this the cumulative depreciation and net book value (NBV). Checking this data live on the screen it appeared that the assets that were fully depreciated had a NBV of zero. Actual cost information is captured in SAP and these costs were used to calculate the GMEAV for the computer assets identified. has assumed that the cost of replacing computer equipment will be the same as the original cost to acquire it and has given its reasons for this in its commentary. We would challenge this approach in that replacing computer assets greater than 15 years old would not be at equivalent cost M&G Other has given a nil return. Principal Challenges Ref. Status Challenge Ch 1 Reasons for increase in valuation of mobile plant Not fully explained. Company agrees that some obsolete stock is likely to have been included in valuation. Prepared By: PD Date: 6 th April 2009 Page 61 of 61 October 2010