The developing regulatory environment for asset management

1
The developing regulatory environment for asset
management

• Water UK Asset Management Forum
• 18th May 2006
• George Day
• Head of Capital Maintenance

2
Overview

• The PR04 experience
• The post-PR04 response
• MD211 is 5 years right?
• The capex roller coaster
• Promoting long-term planning

3
Capital expenditure trends
4
PR04 and asset management

• Developments of the regulatory environment for
  asset management at PR04
• Long term plans (water resources, capital
  maintenance)
• Early start programme
• Common framework assessment
• Cost benefit objective
• Change protocol
• Output definitions
• Shift to capital maintenance and supply demand

5
Changing shape of the programme
of determination (gross capex)
6
Post PR04 response so far

• Reviews
• Baker (Independent Steering Group)
• Capital maintenance common framework, Mott
  Macdonald
• Other RD effort e.g. serviceability
• Consultations
• MD212 on asset management planning
• Water Industry Forward Look
• financial and bill scenarios

7
Some headline themes

• Baker
• clarity of roles, powers and rules of the game
  (including decisions on scope of environment
  programme)
• long term planning and the review cycle
• review of tools and methods
• MD212
• Delivery on serviceability
• Business as usual
• Go on improving analysis and data to support
  forward looking plans

8
Consultations

• MD211 Is 5 years right?
• review cycle issues
• Financing networks
• financeability issues around continued investment
  needs
• Sustainable development
• regulating for sustainability
• Capital maintenance (RD04/06)
• Ofwats process and promoting good asset
  management

9
MD211 Is five years right?

• Our objectives
• clarity for consumers, businesses, households and
  investors about when and how price limits will be
  set
• appropriate incentives to the companies to
  deliver high quality services more efficiently,
  which benefits consumers and investors
• an appropriate degree of certainty which
  encourages investors and enables the companies to
  finance large programmes
• an appropriate balance between the various
  drivers for investment (for example, long term
  resource requirements, the WFD, sewer flooding
  and other improvements)
• a framework that fosters the objectives of
  sustainable development in relation to long and
  short term investment programmes
• the need to contain the costs of regulation, both
  direct and indirect, to a necessary minimum in
  line with the principles of better regulation.

10
MD211 response emerging themes

• Little appetite to change review period
• limited response from outside the industry
• Yes to long term planning
• but this can be reconciled with 5 year review
  period
• keep working on the roller coaster
• Handling longer term outputs
• indicative assumptions?
• projects over 2 or more review periods
• regulatory commitment
• but.. how to gain greater certainty over quality
  requirements?

11
The roller coaster

• Early start programme introduced at PR04
• but idea floated relatively late?
• relatively limited uptake
• difficult to scrutinise for Ofwat

• AMP4 experience so far
• issue of peaks and troughs not yet overcome
• anecdotal evidence suggests impact different for
  different suppliers - design vs construction
• but is this a culture issue, rather than one
  necessarily driven by regulation?

12
or the pedalo?

• Identify the ESP earlier?
• parts of the investment programme?
• Build in a year 6?
• Commitment to continue work on this
• Regular high level contact with supply chain
• UKWIR project being considered

13
Promoting long term planning

• RD 04/06, March 2006
• We want to see companies providing consistent
  best value in the service they deliver to
  consumers and the environment. This means that
  companies need to take account of both costs and
  benefits and to consider both capital and
  operating expenditure, across base service and
  enhancements, in an integrated and coherent
  manner.
• Our periodic review process should offer
  incentives for this, promote sound asset
  management planning and challenge poor value
  investment.

14
Promoting long term planning

• Better communication and confidence
• e.g. Yorkshire nutrient removal (see SD
  consultation)
• make the case for projects or policy changes that
  deliver long-term value (capex, opex, long term
  benefits)
• Further development of guidance and best
  practice?
• use of scenarios?
• common framework
• but note dilemmas in developing the assessment
  process
• cost benefit analysis
• long term wastewater planning

15
Industry ownership of the agenda

• A range of issues to explore and resolve, but
  sound foundations to build on.
• Ofwat has signalled commitment to a regime that
  delivers best value over the long term.
• Regardless of the finer details of regulatory
  methodology, companies can and should be
  pro-active in developing their strategic planning
  and objectives.

16
Thank you www.ofwat.gov.uk