Select Committee on Environment, Transport and Regional Affairs Memoranda


APPENDIX 3

CAPITAL MAINTENANCE AND ASSET SERVICEABILITY

  The Competition Commission, in its reports on the appeals against the price determinations from two of the water only companies, was very critical of OFWAT for not working with companies and the industry in developing an approach to this complex issue:

  "Given the importance of this issue, we are disappointed that the Director and the industry have not co-operated to develop an agreed methodology for assessing both serviceability to customers and asset condition ... we believe that the Director should be more supportive of the efforts of companies to develop alternative approaches. This could be facilitated by discussions between the Director and the companies."

  The Environmental Audit Committee's report on the outcome of the 1999 Periodic Review "Water prices and the Environment" was equally critical:

  "The Committee is not satisfied that OFWAT's "no deterioration" approach to the maintenance and renewal of underground assets (sewers and water mains) is a logical or acceptable means of assessing the amount of investment which water companies need to meet these requirements. The Committee believes that this approach has amounted to intellectual neglect of this important problem ... The Committee therefore very much supports the initiative of the DETR, and the agreement by OFWAT, to develop a new approach. This approach should be forward looking and should enable companies to adequately prepare to renew and repair the cohorts of sewers and mains which will come up for renewal/rehabilitation simultaneously as a result of historical peaks in building activity."

  At the rate of investment allowed by OFWAT in the recent price determination, the sewerage assets of Yorkshire Water will take in excess of 600 years to renew.

  Yorkshire Water undertook a major programme of work leading up to the 1999 Periodic Review to gain a better understanding of its asset base and developed a risk-based approach to determining maintenance requirements. This approach has been developed further to encompass identifying an optimum economic level of service based on the cost versus customers' willingness to pay/assessed value of improving a level of service. This approach will take account of the constraints and costs of improving a level of service and it would eliminate the perverse incentive of companies improving services which customers do not value.

  The draft Water Bill explicitly requires the Director General of Water Services to take advice from others by, for example, establishing a Water Advisory Panel and also through directions issued by the Secretary of State on various matters. However, it would be helpful if specific provision were to be made in the Water Bill requiring the Director General to work with companies and DETR to develop an agreed methodology for determining the long-term maintenance requirements for the industry. Such an important issue should not be left solely to the economic regulator with the risk of maintenance investment continuing to be underestimated in order to meet the short-term desire of reducing customer bills.


 
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Prepared 29 January 2001