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In 2014, Ofwat introduced outcome-based regulation into their methodology for setting water prices for the current AMP6 period. This week, Ofwat published their draft methodology for setting prices for the next five-year AMP cycle, which will begin in 2020. As anticipated, the water industry regulator will aim to ensure that companies are focused on delivering the improvements that matter most to customers, while sharpening accountability for performance.

Focus on resilience.

 



As expected, building resilience ‘in the round’ is a key theme of the draft methodology. There will be significant rewards and penalties through Ofwat’s financial outcome delivery incentives (ODIs) for water companies who outperform or fail to deliver across a wide range of KPIs, and these are likely to include both common and company-specific measures of resilience.
The methodology adopts the definition proposed by the Ofwat Resilience Task and Finish Group, as follows:

“Resilience is the ability to cope with, and recover from, disruption, and anticipate trends and variability in order to maintain services for people and protect the natural environment now and in the future.”

Resilience for water companies means planning for and anticipating risks whether they are environmental, operational or virtual, so that any disruption to service is minimised and rectified as swiftly as possible.

Predict, prepare, respond

“Managing and being prepared for environmental and operational risks that are realised infrequently is a difficult task,” commented George Heywood, Technical Director at Servelec Technologies following the publication of the methodology, who added:
“Despite recent efforts to develop standard resilience performance commitments for use at PR19, Ofwat make it clear that there is still much work to be done in this area. Companies will need to innovate to develop their own bespoke measures, and to quantify these using appropriate modelling tools and approaches.”

Long-term resilience and long-term affordability for customers must be balanced. It is clear from Ofwat’s consultation that strong affordability and cost-benefit challenges will remain for proposals that involve significant expenditure. Companies will need to make a very strong case for expenditure, backed up by robust analysis.

This will require accurate quantification of the impact of disruptions on customers, accounting for aspects such as complex network constraints, a wide range of initial conditions, and practicable operational responses. Servelec Technologies’ MISER software automatically optimises operation under failure events to ensure an auditable and objective analysis of supply interruptions and water quality impacts. Deeper understanding of risks is gained through Monte Carlo Simulation to derive consequence distributions based on the statistics of the inputs. To support the case for investment, optimal sizing of new schemes and scheme selection provide sound cost-benefit appraisals.
Operationally, MISER increases resilience through optimal network operation by maximising security of supply, taking account of outages, forecast demands, storage levels, licence usage and load balancing. Longer-term, water resource yield assessments and supply/demand analysis ensure operation is sustainable and robust into the future.

Asset health

Although not always associated with the resilience agenda, the underlying health of water company assets is a key element of providing resilient services to customers now and in the future.
Ofwat’s methodology strengthens requirements in this area, informed by the findings of their recent horizontal review. To improve transparency aggregated performance commitments will no longer be permitted, and there are a number of common measures proposed to allow for more cross-industry benchmarking.

There is a requirement for companies to forecast their performance commitments over at least a further ten years beyond the next price review period, to help customers and stakeholders engage on these longer-term issues.

George added: “If there is a need for increased investment to maintain asset health in the longer term then companies will need to build a broad consensus for this with customers. We are already working with a number of companies to support them in determining investment requirements for PR19, using our PIONEER software. This work will include forecasting of investment requirements over the required period. In most cases this is being done using company-specific models prepared by ourselves or by the company, but we also have standard models that we can use for this purpose.”

Leakage

Leakage will continue to have a high profile at PR19, as Ofwat challenge companies to set more ambitious targets for leakage reduction, at least 15% over the five-year period.

Solutions exist that enable water companies to detect and locate events on their networks such as bursts before they become a problem, signalling a shift towards more proactive leakage reduction strategies. Portsmouth Water is the latest company to seek Servelec Technologies’ assistance in this area, adopting Servelec Technologies’ self-learning anomaly detection software, FlowSure. FlowSure has previously demonstrated six-figure net savings and typically pays for itself in less than 12 months; these savings that can help finance extra network resilience in other areas.

“Ofwat’s draft methodology is challenging and ambitious, aiming to spur the industry on to greater innovation in pursuit of more affordable and resilient services. The clock is now ticking for companies to show how they will respond to these challenges at PR19 and beyond.”

George Heywood is Technical Director at Servelec Technologies, a leading provider of end-to-end data collection, control and optimisation solutions to the UK water industry. George is a mathematician and environmental engineer, who has spent over 20 years working in the water industry, mostly in asset management. He helps companies to improve their decision-making through evidence-based analysis, modelling and optimisation. Click here to connect with George on LinkedIn.

Servelec Technologies specialises in providing the water industry with expert modelling, optimisation and risk analysis consultancy, combined with software products and development services. Our team has extensive experience gained from supporting utility companies with regulatory price reviews and practical planning since 1997. We provide modelling and wide ranging analysis services covering all utility asset types and have provided our asset management software PIONEER and related services to 30% of UK Water companies during the most recent price review. Servelec Technologies is also supporting international customers with their own regulatory reviews and routine planning.

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