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THAMES WATER MAINS REPLACEMENT PROGRAMME INDEPENDENT REVIEW FINDINGS AND RECOMMENDATIONS REPORT Thames Water Utilities Limited Ofwat 02 JULY 2012

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Page 1: THAMES WATER MAINS REPLACEMENT PROGRAMME INDEPENDENT REVIEW · Thames Water| Mains Replacement Programme – Independent Review 5 1 Introduction In 2008, Thames Water Utilities Ltd

THAMES WATER MAINS REPLACEMENT PROGRAMME INDEPENDENT REVIEW FINDINGS AND RECOMMENDATIONS REPORT

Thames Water Utilities Limited

Ofwat

02 JULY 2012

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Document issue details Contract Name: Thames Water Mains Replacement Programme

Independent Review

Phase: Findings and Recommendations Report

Contract Number: 121793

Date Description Rev. Originators Checked/Reviewed Approved

02.07.12 First Issue 0 Malcolm Brandt (BV) Michelle Gumbrell (BV)

Peter Martin (BV)

Tony Green (GL) John Gavigan (CKBS)

David Port (BV)

Acceptance of Report for Public Issue

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Table of Contents 1 Introduction .................................................................................................................................... 5

1.1 Mains Replacement Programme Independent Review (MRPIR) ............................................ 5

1.2 Background to the Mains Replacement Programme .............................................................. 5

2 Mains Replacement Programme 2002 – 2010................................................................................ 7

2.1 MRPIR Scope Item 1 ................................................................................................................ 7

2.2 Performance up to March 2010 .............................................................................................. 7

2.3 Benefits and effectiveness of the Mains Replacement Programme (2002-2010) .................. 8

2.3.1 Effectiveness of the Mains Replacement Programme to 2010 ...................................... 8

2.3.2 Position at 2010 ............................................................................................................ 10

2.3.3 District Metered Area Selection .................................................................................... 10

2.3.4 Deterioration ................................................................................................................. 11

2.3.5 Independent Review of Available Data ......................................................................... 12

2.4 Findings ................................................................................................................................. 12

2.4.1 Programme Performance Assessment.......................................................................... 12

2.4.2 The Need for the Programme ....................................................................................... 13

2.4.3 Supply Demand Balance................................................................................................ 13

2.4.4 Scheme selection process ............................................................................................. 13

2.4.5 Customer Metering ....................................................................................................... 13

2.4.6 Construction Costs and productivity ............................................................................. 14

2.5 Recommendations ................................................................................................................ 14

2.5.1 Scheme selection process ............................................................................................. 14

2.5.2 Deterioration Modelling ............................................................................................... 15

2.5.3 Construction Costs and productivity ............................................................................. 15

3 2010-2015 Mains Renewal Programme........................................................................................ 16

3.1 MRPIR Scope Item 2 .............................................................................................................. 16

3.2 Investment Period 2010-2015 - Performance to date .......................................................... 16

3.3 Effectiveness of 2010-2015 Approach .................................................................................. 17

3.3.1 Performance.................................................................................................................. 17

3.3.2 Deterioration Rates and further work .......................................................................... 17

3.3.3 Delivery Contracts ......................................................................................................... 18

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3.4 Findings ................................................................................................................................. 18

3.5 Recommendations ................................................................................................................ 19

4 Future Planning and Options ........................................................................................................ 20

4.1 MRPIR Scope Item 3 .............................................................................................................. 20

4.2 Future Programme Options .................................................................................................. 20

4.2.1 Current Water Resources Management Plan ............................................................... 20

4.2.2 Definition of investment case options .......................................................................... 20

4.2.3 Scenario 1 - No Supply Demand deficit ......................................................................... 21

4.2.4 Scenario 2 - Medium Supply Demand deficit ................................................................ 22

4.2.5 Scenario 3 - Major Supply Demand deficit ................................................................... 22

4.2.6 Intervention selection ................................................................................................... 23

4.3 Recommendations ................................................................................................................ 24

4.3.1 Long Term Planning....................................................................................................... 24

4.3.2 Governance and Risk ..................................................................................................... 24

4.3.3 Unit Costs and Productivity ........................................................................................... 24

4.3.4 Cost Benefit Analysis ..................................................................................................... 25

4.3.5 Cost Benefit Analysis and Water Resource Planning .................................................... 25

4.3.6 Deterioration Modelling ............................................................................................... 25

4.3.7 Targeting ....................................................................................................................... 25

4.3.8 Metering and Pressure Management ........................................................................... 26

4.3.9 Rehabilitation Techniques ............................................................................................ 26

5 The Approach to Future Planning ................................................................................................. 27

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1 Introduction

In 2008, Thames Water Utilities Ltd prepared a draft Water Resources Management Plan giving details of the company’s strategic plans to maintain water supplies to customers over the next 25 years. Included in the plan was an ongoing requirement to reduce leakage by targeted replacement of water mains in poor condition, tagged as the Victorian Mains Replacement Programme. Following public consultation, the Water Resources Management Plan was the subject of a Public Inquiry in 2010. Ofwat submitted evidence to the inquiry stating that in its view, Thames Water had not demonstrated in its plan that it had taken sufficient account of the benefits delivered by the mains replacement programme in London to date to support future proposals to reduce leakage.

In order to better understand the costs and benefits of leakage reduction through mains replacement and to address Ofwat’s concerns, Ofwat and Thames Water agreed to jointly commission an independent third party expert review of the mains replacement programme. The scope of the Independent Review was to assess and critically review evidence on the whole life costs and benefits of the mains replacement programme carried out in London to date, drawing on the information collected from the company’s mains renewal programme that began in 2002/03.

1.1 Mains Replacement Programme Independent Review (MRPIR) In May 2011, Thames Water appointed Black & Veatch, in partnership with GL Industrial Services and Chandler KBS, to undertake the independent review with the following scope:-

Scope Item 1 Review the process, performance and benefits derived up to March 2010 based on the whole life costs and benefits, of the mains replacement programme against expectations.

Scope Item 2 Identify learning points from performance to date and how these could inform planning for more effective and efficient delivery during AMP5 and beyond.

Scope Item 3 Identify what are the incremental costs and benefits of a range of options of mains rehabilitation for improving the supply demand balance beyond maintaining base service.

The outcome of this work will inform the next iteration of the Thames Water ‘Water Resources Management Plan’ in 2013.

This report addresses the three review scope items by section.

1.2 Background to the Mains Replacement Programme Thames Water has advised that the background to the Mains Replacement Programme was as follows:-

‘In the period to 2000, leakage in the London area was reduced by finding and fixing leaks on the water mains and associated infrastructure. There was limited investment in replacing water mains.

In late 2000 and early 2001, an exceptionally wet period was followed by a prolonged very cold period, resulting in an increase in the number of bursts in the water network infrastructure in North London. Following these extreme weather events, the method of ‘finding and fixing’ leaks was not as

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effective as previously seen and Thames Water was unable to recover leakage to the previous leakage levels, even though effort and expenditure was increased.

Thames Water subsequently undertook a number of studies and water mains replacement trials to understand the most effective approach to returning the London water network infrastructure performance to a ‘stable’ position. Ofwat considered that the water network performance in London was ‘deteriorating’.

These studies and trials led to the development of a mains renewal programme based on the replacement of the whole infrastructure in a District Metered Area1

. This investment plan was submitted to Ofwat in 2004.

1 District Metered Areas (DMAs) are discrete areas where flows in and out are measured by district meters.

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2 Mains Replacement Programme 2002 – 2010

2.1 MRPIR Scope Item 1 Review the process, performance and benefits derived up to March 2010 based on the whole life costs and benefits, of the mains replacement programme against expectations.

2.2 Performance up to March 2010 Between 2000 and 2006, Thames Water had significant performance issues, with a ‘deteriorating’ network infrastructure, repeated failure to achieve leakage targets and high levels of find and fix operational expenditure, which were not delivering the intended results.

The Thames Water investment plan submitted to Ofwat in 2004, included proposals for reducing leakage to meet the Ofwat performance targets. The Ofwat Final Determination allowed for the following mains replacement activities:-

• A programme of 1235 km of mains replacement intended to reduce leakage by 143Ml/d (megalitres2

• A programme of 505km of mains replacement to improve network condition, 435km in London and 70km outside London (Capital Maintenance programme).

per day) by the end of March 2010 to help meet overall demand and the Supply Demand balance (Supply Demand Programme).

Ofwat considered that the two programmes overlapped with 360km common to both and, as a consequence the 2004 Final Determination provided for 1380 km of mains replacement. Ofwat set the following output targets for the period 2005 to 2010:-

1 148 District Metered Areas to be upgraded; 2 1380km of water main to be replaced; 3 Leakage reduction of 143Ml/d; 4 100% communication pipe replacement in upgraded District Meter Areas; 5 4% of customer supply pipes to be repaired; 6 Meters to be installed on all property connections as part of above work.

In 2006, as a consequence of repeated failure to meet leakage targets, culminating in the failure to meet the 2005/06 target, Thames Water offered and Ofwat agreed to a Formal Undertaking3

Finally, and in response to the Thames Water request to maintain a continuous programme of work, Ofwat agreed to a further 300km of new mains for delivery in 2009-10, to be funded by Thames Water customers, with an additional leakage reduction of 15Ml/d (5Ml/d in 2009/10 and 10Ml/d in 2010/11).

. Thames Water committed to replace an additional 368km of mains, at the expense of shareholders, and to deliver the original 2005-2010 programme twelve months early. Thames Water risked further regulatory penalties for failure to deliver the commitments of the Undertaking. Leakage reduction targets during the period were also re-profiled and the overall reduction target was increased by 5 Ml/d.

2 One Megalitre = One million litres 3 In accordance with the Water Industry Act 1991 (WIA91)

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All these outputs were in addition to 189km of new mains which were delivered in the period 2002-2005, and which also contributed to the leakage savings required by 2010.

2.3 Benefits and effectiveness of the Mains Replacement Programme (2002-2010)

2.3.1 Effectiveness of the Mains Replacement Programme to 2010

The Thames Water network comprises about 31,500km of distribution pipes and trunk mains, in 1,545 District Metered Areas, with 56% of the network and 66% of the District Metered Areas in London.

Leakage reduction activities between 2004, when leakage levels peaked at 946Ml/d, and 2010 reduced leakage by 276Ml/d. This reduction was achieved through mains replacement, known as the Victorian Mains Renewal programme, in conjunction with a number of other leakage control activities, including pressure management4

Mains replacement has generally focussed on the wholesale replacement of mains in District Metered Areas, which had records of high bursts and high leakage levels.

, network reconfiguration and optimisation, District Metering and increased activity in finding and repairing leaks (Active Leakage Control).

The Thames Water leakage and burst rate performance and length of mains replacement delivered for the ten year period from 2000 to 2010 is summarised in Table 1 and in Figure 1. The leakage performance shown in Figure 1 includes the savings realised from pressure management and zonal reconfiguration reported in Table 1.

Table 1 below also quantifies:-

• the contribution from pressure management and network reconfiguration in each year, showing a cumulative impact of the two strategies totalling 151Ml/d by 2010;

• the change in reported Security of Supply Index5

Table 1 Summary of leakage performance 2000 to 2010

over the period.

4 Pressure management is used to reduce and stabilise water pressure within pipes 5 Security of Supply Index – This assesses a water company’s ability to supply customers in line with its stated levels of service for water use restrictions. Companies with higher SoSI scores are better able to meet their service standards in dry periods (DYAA = Dry Year Annual Average).

Reporting Year

WRP04/ Leakage Target

Target Revised 04/07/06

Target Revised 29/06/07

Leakage Reported

Pressure Mgnt. &

Mains Reconfig.

Burst RateMains

RenewedNew

MainsTotal

Mains

Average Age of Mains

SoSI DYAA

Source (JR T10) Note 1 (JR T11) (JR T11) (JR T11) (JR T11) (JRT10a(i))Ml/d Ml/d Ml/d Ml/d Ml/d No/103km km km km Years

2000/01 582 - - 688 382 35 156 31,261 692001/02 - - - 865 440 22 89 30,874 70 -642002/03 850 - - 943 444 33 105 30,743 70 -562003/04 916 - - 946 30 522 72 150 30,911 71 -242004/05 886 - - 915 54 468 107 87 31,020 71 -632005/06 830 - - 862 11 479 251 63 31,093 71 222006/07 775 840 810 790 14 389 371 71 31,372 71 602007/08 740 785 755 713 19 342 631 66 31,411 71 892008/09 720 745 715 698 16 452 439 48 31,507 69 562009/10 - 725 690 670 7 312 382 69 31,453 69 100

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Figure 1 Summary of leakage, burst rate and mains replacement performance 2000 to 2010

Table 2 compares the Per Capita Consumption and leakage component data for Thames Water with the average for all water companies in England and Wales (E&W Average) and with the average of four neighbouring water only companies to the Thames Water region (SE Simple Average).

Table 2 Comparison of Per Capita Consumption and Leakage Component Data, 2000 and 2010

Table 3 summarises the relative costs of leakage reduction by activity for the periods 2000 to 2005 and 2005 to 2010.

0

100

200

300

400

500

600

700

800

900

1000

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10Leakage (Ml/d) Burst Rate (No/1000km) Mains replacement (km)

Unmetered MeteredHousehold Household Unmetered

householdMetered

household Average

householdl/head/d l/head/d l/head/d l/head/d l/head/d l/prop/d l/prop/d l/prop/d m3/km/day

T10b(ii) E42 T10b(ii) E46 T10b(i) E42 T10b(i) E46 c c c T10b(ii) F55 c2000/01Thames Water 192.5 163.2 166.6 154.4 164.8 54.9 144.8 199.7 21.6E &W Average 168.6 143.6 151.7 133.9 148.9 37.7 101.5 139.2 9.8SE Simple Average 183.6 157.1 166.5 146.5 163.3 40.0 69.4 109.4 8.52009/10Thames Water 195.7 151.5 170.5 141.8 163.0 51.5 134.5 186.0 21.3E &W Average 170.0 137.9 154.8 128.0 146.1 31.9 101.2 133.1 9.7SE Simple Average 188.9 157.9 174.9 147.4 165.8 32.4 66.3 98.7 8.2Legend: c = Figure reported in JR Tables, calculated from other data in tables Sources:1 Leakage and the efficient use of water 2000-2001 report, Ofwat 2001.2 Service and delivery - perfomance of water companies in England and Wales 2009/2010, Supporting information, Ofwat 2010

Reporting Year

Water delivered Per capita consumption Total Leakage(excluding supply pipe leakage Total

supply pipe leakage

Distribution losses

Total leakage

Total Leakage

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Table 3 Cost of Leakage Saved 2000–2010

2.3.2 Position at 2010

When the mains replacement programme started in 2002, leakage was 865Ml/d, having increased from 688Ml/d in 2000/01. Thames Water advised that there had been significant increases in leakage expenditure, primarily find and fix, for several years from 1999 to 2003, and that this level of expenditure was approximately 3 to 4 times more per property than other companies.

As a consequence of the mains replacement programme in conjunction with a number of other initiatives and programmes, including pressure management and zonal reconfiguration, Thames Water bettered the leakage target of 2006/07 by 20Ml/d and recovered its position on water mains deterioration to a ‘stable’ position in 2007/08. Subsequent to the recovery between 2006 and 2008, Thames Water has continued to meet or better the leakage target and maintained stable serviceability of its water mains.

By the end of 2009/10, Thames Water had reduced leakage to 670Ml/d; outperforming its leakage target by 20Ml/d and replacing 1868km of mains between 2005 and 2010. Without this level of mains replacement, the percentage of distribution mains in London in excess of 100 years old would have risen from 32% in 2004 to 42% in 2010. The mains replacement programme to 2010 maintained the level of distribution mains in London in excess of 100 years old at 32% of the total asset stock6

2.3.3 District Metered Area Selection

. However, the age of the network is but one of many factors used to determine investment options and mains in excess of 100 years old do not necessarily perform worse than newer mains. Any pipe replacement investment decision needs to address specific serviceability issues and pipe condition factors.

The proposals to achieve and maintain supplies to customers in the 2004 Water Resources Management Plan and Business Plan included leakage reduction through mains replacement. Individual schemes were assessed using a net present cost approach based predominantly on Average Incremental Cost7

6 The mains replacement programme to 2010 maintained the company level of distribution mains in excess of 100 years old at 23% of the total asset stock. Without this level of mains replacement, the percentage of distribution mains in Thames Water as a whole in excess of 100 years old would have risen from 22% in 2004 to 29% in 2010.

. This approach compares the relative costs of mains replacement

7 Average Incremental Cost of an option as defined in ‘The Economics of Balancing Supply and Demand’ (Environment Agency and UKWIR, 2002)

Reporting Period

km 1

Original actual cost

£m

COPI adjusted

£m 2

Predicted savings

Mld

Measured savings

Mld

Original actual cost

£m

COPI adjusted

£m 2

Measured savings

Mld2000/01 to 2004/05 189 98.7 117.0 37.2 27 32.1 38.3 842005/06 to 2009/10 1,868 852.9 849.6 183.7 147 3 30.5 31.0 67Total 2,057 951.6 966.7 220.9 174 62.6 69.4 151Notes1 Does not include Distribution Mains Replacement w hich targets individual streets w ith high burst rates and has no measureable DMA leakage benefit 2 COPI adjustment to December 2011; all f igures in 2011/12 prices 3 Forecast Ml/d savings based on actual leakage savings measured to-date for completed schemes

DMA Mains Replacement Pressure Management & Network Reconfiguration

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schemes and then compares mains replacement, intended to reduce leakage, against other options such as desalination and other water resource schemes.

The Formal Undertaking determined the pace of construction from 2007/08, with a need to deliver the additional 368km of mains in the latter half of the investment period while completing the original 2005-2010 programme. During the period 2005-2010, the emphasis changed from setting a maximum ‘Average Incremental Cost’ for individual District Meter Areas to setting an average ‘Average Incremental Cost’ for all of the District Meter Areas together, with a much higher maximum Average Incremental Cost for individual District Metered Areas. From this Independent Review, it appears that District Metered Areas with higher Average Incremental Costs were selected in order to complete the programme because lower Average Incremental Cost District Metered Areas could either not be identified or were not available for renewal. As the investment period progressed, the rate of construction challenged the design and planning processes to the extent that there was a lag on the production of post project appraisals, which meant that the most up-to-date post project appraisals data were not available to adequately inform the programme definition. This lag was a factor that impacted on delivery efficiency.

Thames Water states that the complexities of working in London, including the working restrictions and constraints imposed in many London locations by Local Authorities, Transport for London and other bodies result in lower than ‘normal’ productivity. These stakeholders are largely independent of each other and have differing approaches which can often conflict. Since 2010, Thames Water has invested effort in improving relationships with stakeholders to assist in the efficient delivery of infrastructure work in highways within all London boroughs.

Although only touched upon during this Independent Review, a factor in the choice between mains renewal and continuing with significant Active Leakage Control driven repairs is the reputational risk and associated environmental and social impacts, disruption, etc., of the frequency of digging up London streets, together with the operational risk associated with high levels of find and fix repairs on a network with an average age of 69 years8

2.3.4 Deterioration

, which may not deliver sustainable reductions in leakage.

All water mains deteriorate over time as the individual assets are subject to a host of different issues, whether they be due to the deterioration of the pipe material itself (pipe corrosion), the operating regime within which the pipe is operating (pressure and surge effects) and the impact of the external environment within which the pipe is situated (ground movement, temperature effects such as frost as well as structural effects such as ground and traffic loading). The diverse nature of the asset base means that the water mains asset base is made up of many different materials, ages, ground types and conditions, vehicle loadings and operating regimes. Each of these groups of water mains are performing and also deteriorating at different rates. Water pipes are relatively long lived assets and therefore need a long life span of performance data in order to establish deterioration rates with confidence (typically 20 years).

The water industry in England and Wales uses performance deterioration through the number of bursts per year to understand the performance of the network and the impact of such failures on

8 Refer to Table 1 in Section 2.3.1 of this report.

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customer service and the environment. As the number of bursts increase, economic decisions are made with regard to the life of the pipe and whether to replace or continue to repair and return to operation. Performance deterioration has been used as the primary means of determining the deterioration of water mains by Thames Water, and all other water companies, for a number of years.

For the Strategic Business Plan in 2004, Thames Water commissioned a number of studies to look at the performance deterioration of its water pipe assets, using burst rates as the performance measure. These studies estimated a range for the annual rate of performance deterioration from 1% to 5% per annum for Inner London. Thames Water used components of each study to support its business plan for mains replacement for the period 2005-2010. Although the number of bursts events was estimated to have increased by this range, the number of water mains which are required to be replaced is much lower as multiple bursts occur on the same water main.

Thames Water, like all other water companies at that time, was only able to base its deterioration assessments on historic asset performance, predominantly burst history, and results between studies can be influenced by fluctuation of burst rates over the different relatively short time-span of the datasets used for their specific analyses. Any analysis of historic data will be influenced by the company’s leakage find and fix policy and the targeting of mains replacement during the analysis time span. There have been large fluctuations in the levels of these activities over the last 15 years in Thames Water.

2.3.5 Independent Review of Available Data

During the Independent Review, sample datasets were analysed to assess programme performance. The analysis was based on available District Meter Area data sets where mains replacement had been completed and for which post appraisal performance data had been compiled for the period 2003 to 2010. At the time of the analysis, between June and September 2011, full data sets were available for 81 completed District Meter Areas from a total of 160 schemes in the 2002-2010 investment programme.

2.4 Findings The following are the key findings from the Independent Review of historical performance.

2.4.1 Programme Performance Assessment

• The initial prioritisation process in 2005-2010 was not always effective at predicting the savings actually achieved in individual District Metered Areas or predicting the most beneficial District Metered Areas for renewal.

• The data for predicted and delivered leakage savings suggests that benefits delivered were an average of 80% of the original estimates, with a decline in the benefits delivered for schemes completed in the latter part of the period 2005 to 2010.

• From the sample dataset, the construction out-turn costs were within 1% of the final pre-construction target cost estimates. The cost of the benefit is 8% higher than estimated and the leakage saving is 9% lower than estimated. Hence, although outturn costs are comparable to the target costs, the actual level of benefits was lower than projected, indicating that the true cost of the actual benefits was higher.

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• The total network length was reduced by approximately 700km (4.5%) over the period and the total length of mains in completed District Metered Areas was rationalised by approximately 20%.

• Post project appraisals for completed schemes, where available, provide valuable data for assessing the cost benefit of future schemes in the current and future investment periods. The data should however be augmented by current network performance data to understand ongoing performance and trends.

2.4.2 The Need for the Programme

• Early analysis on comparator information and serviceability indicators identified that Thames Water had deteriorating serviceability leading into 2005/06, as illustrated in Figure 1.

• Mains replacement, in conjunction with pressure management and zonal reconfiguration, was an appropriate course of action for resolving the increasing leakage and supply demand deficit issues in London.

2.4.3 Supply Demand Balance

• The mains replacement programme for 2005-10 was selected ahead of other interventions to address leakage reduction. Although more expensive than the other interventions, the Thames Water rationale was that mains replacement was a more sustainable option and more likely to deliver the outcomes than lower cost alternative interventions. The approach was accepted by Ofwat through the Final Determination.

• The Thames Water preconstruction estimate of 2005-10 investment period leakage savings from the Victorian Mains Replacement Programme overstated the actual savings made. This overstatement is due, at District Meter Area level, to a combination of previously unknown consumption and the overestimation of reductions linked to Customer Side Leakage.

2.4.4 Scheme selection process

• The methodology for selecting areas for mains replacement to go forward for further analysis in 2005 – 2010 was robust, but the programme governance was found to be inconsistent.

• Thames Water has identified a number of areas for process improvement from the previous programmes (2002-2010). These improvements cover the inclusion of all recorded properties in the initial water balance, comparing top-down and bottom-up leakage levels and logging of meters pre-renewal to assess customer-side losses.

2.4.5 Customer Metering

• The LeakFrog9

9 Leakfrog: Developed in partnership with Thames Water and rolled out as part of the Victorian Mains Renewal programme, Leakfrog allows water companies to monitor their domestic customers’ homes for water leaks by monitoring minimum flow rates.

device, developed with Thames Water and introduced in 2008, has assisted with the understanding of the post-construction water balances and the identification of customer supply pipe leakage.

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• The installation of boundary boxes and meters has, to date, generally been carried out in conjunction with mains and communication pipe replacement, when installation costs can be minimised. However, it is clear that full metering of all property connections in advance of mains replacement would be beneficial for a fuller understanding of the water balance, and would address the issue of overestimating the forecasts of customer side leakage.

2.4.6 Construction Costs and productivity

• Thames Water identified four cost zones within London for planning purposes in 2004 and 2009, derived from the 2000-2005 and 2005-2010 periods respectively. The average unit cost rates for District Metered Areas were established and adjustment factors applied to these rates, to reflect London working.

• In 2005-2010, approximately 60% of mains replacement was undertaken using open trench pipe construction technique. This is the most expensive of the construction techniques used by Thames Water during this period compared with No-dig approaches, for example, pipe insertion, pipe bursting and directional drilling. However, during the Independent Review, there is no evidence presented to suggest that alternative lower cost techniques would have been more suitable in any given situation.

• The working restrictions and constraints imposed by Local Authorities, Transport for London and other bodies impact the planning process. With the imposition of tighter constraints, such as the impacts of the London 2012 Olympics and Lane Rental scheme being enforced for working within London, it is important these London specific issues are identified and quantified as these could affect efficient programming of works and productivity rates.

2.5 Recommendations The following are the recommendations arising from the Independent Review of historical performance.

2.5.1 Scheme selection process

• The process for selection of District Metered Areas for mains renewal should be reviewed, and clearly defined and documented, to ensure that all parties understand the process and their role within it.

• Thames Water should consider using the actual costs and benefits from the 2005-2010 mains replacement programme, allowing for the process improvements already implemented in 2010/11, to assess the costs and benefits of the future renewal programme at both programme and individual District Metered Area levels.

• Thames Water should take account, in the current and future investment periods, of the actual leakage savings compared to the original estimates of the leakage savings available.

• Thames Water addresses trunk main leakage via the Trunk Main Leakage Programme. There may be opportunities for efficiencies by aligning this programme with the mains replacement programme.

• Areas fed by private mains are a challenge when targeting District Meter Areas for mains renewal. It is recommended that Thames Water reconsider such District Meter Areas, once

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the private mains flow has been metered, and develop a policy for dealing with leakage in private mains. At present, Thames Water is not considering mains replacement in District Meter Areas with more than 5% of private mains. This is a pragmatic decision by Thames Water but does not tackle the basic problem of leakage on private mains or Customer Side Leakage on properties fed from private mains.

2.5.2 Deterioration Modelling

• Historically, deterioration models have been used by Thames Water to determine the quantity of mains replacement required, rather than targeting mains to be replaced. While burst rates have been used as a good surrogate at District Metered Area level, and significant improvements have been achieved to date, clearly an enhancement for the next investment period will involve the use of the deterioration models to focus and target replacement schemes for improved cost/benefit at sub-District Metered Area level.

2.5.3 Construction Costs and productivity

• With the emergence and development of alternative techniques, it is recommended that Thames Water review appropriate less expensive techniques for the future.

• Productivity and factors affecting productivity have been identified as areas of concern by Ofwat. Thames Water should review its processes and procedures, with regular review periods, to ensure that all factors that adversely affect productivity are accurately recorded in the estimating system.

• Regular benchmarking of costs would inform Thames Water of areas of good practice and waste and allow Thames Water to target areas for improvements in efficiency of programme delivery.

• Thames Water should consider regularly evaluating the following information in order to demonstrate the effectiveness of the mains renewal programme:

• Reduction of Opex costs

• Reduction of active leakage control detection and repair costs

• Reduction in overall mains length as a result of network rationalisation

• Social/ environmental benefits including the impact on customers

• Reduction in number of customer complaints and disruption due to pipe bursts.

• Thames Water and its contract partners need to continue to improve relationships with their stakeholders through communication and greater visibility of future programmes to assist in the efficient delivery of infrastructure work in highways within all London boroughs.

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3 2010-2015 Mains Renewal Programme

3.1 MRPIR Scope Item 2 Identify learning points from performance to date and how these could inform planning for more effective and efficient delivery during 2010-2015 and beyond.

3.2 Investment Period 2010-2015 - Performance to date Through the Final Determination for the current investment period, Ofwat assumed in Price Limits a Mains Replacement Programme of 1,097km to manage serviceability, of which 581km is committed to date. Less than two years into the current investment period, Thames Water advises that the current programme is not the definitive programme for the whole 2010-2015 period.

Thames Water has reassessed the capital maintenance component activities, given that the original supply demand leakage reduction schemes, including mains replacement, pressure management and trunk mains leakage repairs, were excluded by Ofwat in the Final Determination on the grounds of insufficient evidence of the impact of climate change. Thames Water is proposing more pressure management and zonal reconfiguration in 2010-2015 than originally planned to address serviceability. Active Leakage Control is also being targeted to manage leakage recurrence.

The Independent Review assessment of projected performance to date in the current investment period suggests that by 2015, burst numbers could out-turn at c.9,900 and leakage could be as low as 650Ml/d. This would be a significant improvement against the 2010-2015 Serviceability Reference Level10 of 11,000 bursts and Leakage Target of 673 Ml/d. However, as the current programmed replacement length of mains is less than that detailed in the Final Determination, there is a risk that this programme will not mitigate the Thames Water projected rate of deterioration11

The Serviceability Reference Level for bursts, as set by Ofwat for the 2010-2015 period, was based on company performance in 2006 and 2007 in accordance with the regulatory guidelines. The assessment of the reference level was based on the average burst numbers from the Thames Water 2007 and 2008 June Returns, less 130 bursts to account for the ongoing mains replacement programme to 2010. As a consequence, the reference levels do not appear to reflect the full benefits of a significant proportion of the Mains Replacement Programme, which included serviceability enhancement through burst and leakage reduction.

in serviceability of approximately 300 bursts per year, potentially leading to a rise in bursts by the end of the five year investment period from the current JR11 figure.

At present, Thames Water has given no indication of the potential benefit of the proposed pressure management programme on burst rates.

10 Serviceability Reference Level - All companies must maintain their asset systems so that they remain fit for purpose over the long term. This is so the companies can continue to maintain the flow of services to consumers, while protecting the environment and public health. Ofwat have defined values for reference levels and control limits for each serviceability indicator that will underpin, and inform assessment of, the achievement of the required output of stable serviceability. 11 Taken from Thames Water Final Business Plan Section B3.2 Table 6 (http://www.thameswater.co.uk/cps/rde/xbcr/corp/archived-business-plan-b3-2.pdf)

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The improvement in performance since the June Return submission in 2008 demonstrates that Thames Water has developed and implemented appropriate plans to manage serviceability and leakage. These plans, combined with the mains replacement programme in 2002-2010, have enabled Thames Water to successfully manage performance during the recent severe winters with no adverse impact on burst and leakage performance.

3.3 Effectiveness of 2010-2015 Approach

3.3.1 Performance

Although only two years into the current investment period, the apparent over-performance benefits both Thames Water and the shareholders and indicates an overall improvement in the infrastructure assets. In the absence of comprehensive cost benefit analysis for the mains replacement schemes and the overall programme, no detailed evidence has been provided to demonstrate the benefits of the programme to the customers. However, a general reduction in mains bursts should result in a benefit to customers, through reduced interruptions to service, reduced traffic disruption and improvements in water quality. Thames Water also considers that customers have already benefitted from efficiency savings included in the Ofwat 2009 Final Determination.

3.3.2 Deterioration Rates and further work

During the preparation of the 2009 Strategic Business Plan for the 2010-2015 period, Thames Water commissioned a new deterioration model which estimated the annual performance deterioration in the number of bursts to be in the mid-range of the studies completed for the 2005-2010 period. For Inner London this provided an estimated performance deterioration rate of 3.5%, compared with 2.3% for the remainder of the Company’s area, giving an overall average of 2.75% per annum for burst mains.

Ofwat, in their Final Determination, stated that it had concerns that Thames Water had not robustly explored the sensitivities around the burst deterioration rate, and had not established where the highest bursting mains were in relation to their strategy of renewing whole DMAs. This challenge called into question the scale and magnitude of the programme proposed by Thames Water and Ofwat reflected these uncertainties within its final determination of prices in 2009.

It is understood that Thames Water intends to undertake further independent studies to improve its performance and material deterioration modelling and that the findings from these studies will inform the next draft Water Resources Management Plan and the next Strategic Business Plan.

3.3.2.1 Performance Deterioration Models

Historically, performance deterioration models have been used by Thames Water to determine the quantity of mains replacement required, rather than targeting specific mains to be replaced. An enhancement for the next investment period would be to develop the performance deterioration models to focus at street level and to target replacement schemes for improved cost/benefit.

3.3.2.2 Material Deterioration Models

In the past, Thames Water has assessed the material condition, due to the impact of pipe corrosion, of its water mains through the analysis of pipe cut-out samples, although it is recognised that

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pipe cut-outs are only as useful as the length of pipe exposed, as the condition several metres either side of a cut-out can be radically different. Material deterioration is one of the factors which contribute to the performance of water mains.

Thames Water has stated that it will be adopting a twin track approach to future material deterioration assessment. Firstly it has commissioned an external consultant to review literature, analyse existing sample data and make recommendations for further work.

Thames Water recognises the limitations of this approach, but the technology available for water companies to measure material deterioration (asset condition) over time, and over whole pipe lengths is in its infancy. Secondly, therefore, Thames Water is researching, and intending to trial, non-destructive techniques to determine asset condition, including devices inserted into the mains to measure actual pipework condition over the full length of the pipe under consideration. This will improve both the determination of material deterioration and targeting of replacement in the future.

3.3.3 Delivery Contracts

Thames Water states that it has addressed contract risk through the current Network Contracts, thereby allowing them to have a degree of certainty in the delivery costs of the 2010-2015 programme.

3.4 Findings The findings of the Independent Review in respect of the current 2010-2015 programme are:-

• Thames Water has improved the 2005-2010 processes and is driving commercial efficiency through well defined contract arrangements in the 2010-2015 investment period.

• Thames Water engaged the external market and carried out a highly competitive tender process for the selection of the current contractors.

• Thames Water is committed to delivering the serviceability objectives defined in the 2009 Business Plan more efficiently.

• Thames Water has expanded the data captured from construction on productivity, which will allow a better understanding of the factors affecting improvements to construction efficiency. This data can be used to inform future decisions.

• Thames Water current performance in water infrastructure serviceability has surpassed the projections made during the 2009 planning process for 2010/11, as evidenced in the June Return 2011 (JR11) Tables. Bursts were reported as 9,404 against the 2010-2015 Serviceability Reference Level of 11,000 and the reported leakage level was 665Ml/d against a target of 674Ml/d.

• Thames Water is currently programmed to deliver lower levels of mains replacement than Ofwat had assumed within the Final Determination in 2009. However, Thames Water is currently delivering against the objective of maintaining stable serviceability.

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3.5 Recommendations The recommendations are:-

• Thames Water should develop a common platform for and understanding of the suite of benefits derived from the different activities. Use current data to assess future schemes and programmes of work.

• Thames Water should calculate Whole Life Costs12 and undertake Cost Benefit Analysis13

• Thames Water should develop deterioration models, based on long term robust datasets, and use these models for investment planning and to target high risk mains.

as part of all assessment processes.

• Thames Water should quantify and measure the wider benefits associated with the overall infrastructure programme and use the results to target the programme to meet serviceability and deterioration objectives of both burst rates and leakage.

• In order to ensure that Thames Water continue to develop programmes to address serviceability and deterioration, comprehensive data analysis is required to understand deterioration and performance and where the optimum benefits are being derived. Thames Water needs to adopt a more integrated investment approach to defining the right schemes to deliver the benefits for the least cost to ensure that it continues to meet its obligations and deliver a stable service to its customers through a resilient network.

12 Whole Life Costs - The total amount a company spends on an asset over its entire usable life 13 Cost Benefit Analysis (CBA) – an analysis of the cost effectiveness of different alternatives in order to see whether the benefits outweigh the costs. Process of quantifying costs and benefits of a decision, programme or project (over a certain period), and those of its alternatives (within the same period), in order to have a single scale of comparison for unbiased evaluation. CBA estimates the net present value (NPV) of the decision by discounting the investment and returns. Though employed mainly in financial analysis, a CBA is not limited to monetary considerations only. It often includes those environmental and social costs and benefits that can be reasonably quantified.

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4 Future Planning and Options

4.1 MRPIR Scope Item 3 Identify what are the incremental costs and benefits of a range of options of mains rehabilitation for improving the supply demand balance beyond maintaining base service.

4.2 Future Programme Options

4.2.1 Current Water Resources Management Plan

The Thames Water Final Draft Water Resources Management Plan 2009, amended and submitted to Defra in March 2012, quantifies the potential deficit ranging from no deficit in 2009-10 to a deficit of 344Ml/d by 2034-3514

The current plan is based on 2007/08 data and predominantly on leakage savings delivered through mains replacement to address the projected supply demand deficit. Other options are limited to Active Leakage Control and customer side metering offering much lower benefits.

. The range of deficit reduction options in the preferred supply-demand balance plan suggests mains replacement could deliver 134Ml/d leakage reduction by 2020.

4.2.2 Definition of investment case options

In principle, the investment case for distribution improvements, including mains renewal, should be based on an integrated approach assessing all options and business drivers on an equal basis, ultimately selecting the most cost beneficial options for implementation.

The two main drivers for future planning will be serviceability to customers and any supply demand deficit. These two drivers have different sets of options. While options for maintaining or improving serviceability are mostly within the distribution systems; the options for supply demand improvement are wider reaching, including demand management, and supply and distribution system optimisation.

Historically, the benefits of supply demand options on serviceability have not been quantified by Thames Water.

The interdependencies between capital maintenance planning and supply demand planning makes it more difficult to justify the separation of the two planning processes and the benefits. Definition of the exact relationship between the two planning processes is dependent on the relative sizes of the supply demand deficit and the serviceability situation for the planning horizons.

The range of supply demand deficit scenarios for future planning can be summarised as:-

1. No/Minor Supply Demand (S/D) deficit ( < 10Ml/d deficit)

2. Medium Supply Demand (S/D) deficit ( < 75Ml/d deficit)

3. Major Supply Demand (S/D) deficit ( > 75Ml/d deficit)

14 Taken from Table 6.2 in the Thames Water ‘Final Draft Water Resource Management Plan 2009’, amended December 2011

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The Independent Review Team was required to propose how options to address the above scenarios, including costs and benefits, could be integrated by Thames Water in planning processes for the remainder of the 2010-2015 investment programme and beyond 2015.

The Independent Review Team has attempted to develop a generic approach, described below (section 4.2.3 to section 4.2.6), that sets out the elements for consideration in future planning to meet specific objectives. However, further development of this approach is dependent upon the clear definition and understanding of the Thames Water future long term strategy and objectives. Any suite of options to reduce a supply demand deficit will include both operational and capital expenditure interventions.

4.2.3 Scenario 1 - No Supply Demand deficit

With either a zero or negligible supply demand deficit, the planning objective is to mitigate the Natural Rate of Rise15

The issue is therefore one of minimising the cost of meeting serviceability requirements without increasing the risk of a supply demand deficit. Leakage target uncertainty, combined with unacceptable burst rates (interruptions to supply), may trigger some system optimisation to minimise pressures in the network (operational expenditure) and Capital Maintenance activity to replace poor performing mains (capital expenditure) to offset deterioration.

of leakage recurrence. Operational expenditure solutions tend to dominate managing the status quo. Typically Active Leakage Control is used to manage the Natural Rate of Rise. Increasing Active Leakage Control activity can marginally reduce leakage levels, but generally will not deliver large reductions cost effectively.

The suite of supply and distribution interventions can be compared using only direct financial risks, specifically to identify the combination of interventions that achieve the stated serviceability target at the minimum cost. All costs would need to be considered including the direct costs of leakage reduction. The outcome of this scenario may still include some mains replacement to reduce leakage, but is considered likely to focus on pressure management opportunities in areas with excessive pressure, reducing trunk mains leakage and network reconfiguration/optimisation, in conjunction with Active Leakage Control, to maintain serviceability and leakage levels.

Sensitivity analysis must consider the ‘known’ unknowns, such as the impact of weather, future reductions in abstraction licences, the variables associated with asset deterioration, ethnicity demand issues and any predicted changes in the Natural of Rate of Rise of leakage.

It is important to ensure that the interactions between the benefits of pressure management, mains replacement and Active Leakage Control expenditure are fully explored. There are significant savings to be made in Active Leakage Control expenditure through pressure management, as well as those already seen from mains replacement. Pressure management can extend the operational life of the mains and defer the need for mains replacement.

Therefore, where there is a negligible supply demand deficit, investment in mains replacement addresses serviceability through Capital Maintenance expenditure; the overall objective being to maintain core services to customers and the environment, through a stable asset base and stable risk profile, in the most economic and efficient manner. 15 Natural Rate of Rise – The leakage increase that would occur if no leakage control activities were undertaken during the year.

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4.2.4 Scenario 2 - Medium Supply Demand deficit

In the context of this scenario, a medium-size deficit can have a local impact; at District Meter Area or Supply Area or a regional impact. Although local supply demand deficits can often be managed through local transfers from adjacent areas with surplus resources, it is not always the case and therefore the same planning processes should be used to address a deficit wherever it occurs.

Where there is a medium deficit, it is likely that only lower cost distribution solutions will be required and that capital intensive water resource solutions are not likely to be cost beneficial. A balanced portfolio of cost beneficial distribution solutions may include pressure management, reducing trunk mains leakage, network reconfiguration/optimisation and mains replacement, in conjunction with Active Leakage Control. However, the interdependency between supply demand and serviceability must be considered in conjunction with optimizing asset performance.

Interventions must address both the Natural Rate of Rise of leakage and the supply demand deficit. Active Leakage Control will manage the Natural Rate of Rise, as described in Section 4.2.3 above, and increased levels of targeted Active Leakage Control can be used to reduce minor deficits. Other Operational Expenditure options, including optimisation of water resource and storage assets, network/system, pressure and demand management, may also be more efficient for eliminating the deficit.

In these circumstances, it should be possible to assess the costs, serviceability and leakage benefits arising from a mix of distribution solutions and to select the combination that addresses both targets at lowest cost, using one of a number of established risk-assessment and optimisation methods. This could be explained for regulatory purposes using a relative cost of water approach, where the benefits of the avoided serviceability failures are included; for example the Average Incremental Social Cost parameter required by the Environment Agency16

As with Scenario 1 in Section

for comparing resource options.

4.2.3, mains replacement will contribute to maintaining serviceability, with some secondary leakage reduction benefits, and with an underlying consequential Opex reduction opportunity.

4.2.5 Scenario 3 - Major Supply Demand deficit

Large projected supply demand deficits will be addressed though a combination of Operational Expenditure and increasing Capital Expenditure interventions. Deficit reduction options will be assessed against consistent cost benefit criteria. In addition to the interventions described for the two previous scenarios, large resource development options, i.e. storage reservoirs, desalination, reuse, imports, etc., will need to be considered. Current Regulator expectations are that solutions are identified and appraised using the Economics of Balancing Supply and Demand and the Average Incremental Social Cost concepts.

However, it is increasingly clear that the risks associated with major schemes need to be appraised in a different way. Large water resource schemes often require long lead times, but the need is based on uncertain projections of both supply and demand. Therefore, making early decisions can potentially lead to the risk of stranded assets or for the actual risks being much higher than assessed at the planning stage.

16 Environment Agency - Water Resources Planning Guidelines

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All intervention options must be appraised using consistent methodology, processes and assessment parameters and based on current data to ensure that costs and benefits of the suite of options are balanced to address the risks associated with the supply demand deficit. The revisions to the Environment Agency Water Resource Planning Guidelines in 2012, along with the report of the UKWIR project17

Between 2006 and 2010, Thames Water reduced the level of leakage per property from 244 litres to 186 litres as a consequence of the mains replacement programme and other network activities. Customer supply pipe leakage accounts for 52 litres per property of the 2010 level. Despite a significant improvement in performance over that period, Thames Water remains an outlier in the industry, where the average level of leakage per property is 133 litres and the lowest is 68 litres. This measure of leakage is not ideal for making direct comparisons between the companies or normalising performance, as there are a number of company and geographic factors that need to be taken into account. The main aim is that the companies should meet their sustainable economic leakage targets.

on Water Resource Planning, may provide some guidance in this area.

18

The 2005-2010 programme of mains replacement targeted the District Metered Areas with high levels of leakage and reductions averaged approximately 80% of the initial estimates. As the programme progressed, it became difficult for Thames Water to identify schemes that met both the cost and estimated benefit selection criteria for leakage reduction, indicative of a diminishing return on leakage benefit. This is corroborated by the proposals submitted in the Water Resources Management Plan and the projected leakage savings associated with mains replacement in the periods 2010-2015 and 2015-2020. In the period to 2010, Thames Water achieved an average leakage saving of 1Ml/d for each 12km of mains replaced

19

4.2.6 Intervention selection

. Based on the projections in the Thames Water Final Draft Water Resources Management Plan 2009, amended and submitted to Defra in March 2012, the leakage savings associated with mains replacement are projected to reduce to 1Ml/d for approximately 13km of mains replaced for the period 2010-2015 and 1Ml/d for approximately 33km of mains replaced for the period 2015-2020. On the basis of the information reviewed, leakage reduction through mains replacement is unlikely to be cost beneficial, without customer support, or provide the leakage savings necessary to compensate for a large supply demand deficit.

Irrespective of the size of a deficit, the choice of intervention or suite of interventions for any single scheme output will depend on the cost benefit of interventions specific to the characteristics and objectives for that water resource zone, supply area or District Metered Area.

Within broad and overlapping deficit size bands, there will be a generic hierarchy of interventions for a range of solution options. However, area specific characteristics will dictate cost benefit differentials that will need to be quantified during option evaluation and selection. Therefore, although the following sequences suggest increasing costs of intervention, individual scheme specific

17 To be published 18 Statistics extracted from Ofwat report ‘Service and delivery – performance of the water companies in England and Wales 2009-10’ (http://www.ofwat.gov.uk/regulating/reporting/rpt_los_2009-10supinfo.pdf) 19 Refer to Table 3 of this report

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characteristics and programme efficiencies may result in different intervention orders for similar schemes in different zones or even within a zone.

1. Operational Expenditure → Capital Expenditure 2. Active Leakage Control → Demand Management → network optimisation and reconfiguration

without or with pressure management → optimize existing source outputs → mains renewal (to reduce leakage) → develop new source (borehole/local river intake → storage reservoir → water reuse → desalination).

4.3 Recommendations The recommendations from the Independent Review for future programmes of mains replacement are:-

4.3.1 Long Term Planning

• Based on the analysis undertaken during the Independent Review and the leakage savings achieved to date, it is recommended that the Water Resources Management Plan is re-evaluated to reflect the learning from, and the process changes introduced as a result of, the recommendations set out in the Independent Review.

• The current Thames Water initiative to update the Internal Business Plan annually demonstrates its commitment to developing and sustaining a long term strategy.

4.3.2 Governance and Risk

• We recommend that Thames Water review its asset management policy and strategy, and associated documents, to ensure that it is aligned to the corporate objectives. Where appropriate, these documents should be revised, updated and communicated.

• We recommend that Thames Water considers mapping its asset and risk management approach to the specific detailed processes identified in this Independent Review, including analysis of the data, model verification, the integration of solutions for a set of assets, governance and benefits, in order to present to the regulator, customers and other stakeholders a comprehensive and structured justification for future mains renewal programmes. This needs to be considered in conjunction with proposed changes to regulatory requirements for outcome based investment when guidance becomes available.

• There needs to be changes within the organisation to move from discrete scheme selection, based on asset needs, to the identification of true business risk and a clear understanding of the resultant business outcomes and benefits, including the impact on serviceability.

4.3.3 Unit Costs and Productivity

• A demonstrable understanding of company specific factors affecting unit cost rates is critical to Thames Water’s decision making and informing any future business case. In order for Thames Water to provide this, we recommend an overall process is developed to meet the specific objective of determining the company specific factors, based on the following activities:

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• Collate cost data and information on construction and non-construction activities at a suitable level of granularity.

• Produce unit cost models by zone (this can also inform Cost Benefit Analysis).

• Carry out internal benchmarking, to identify specific factors relating to each zone.

• Carry out external benchmarking of construction activities, non construction activities and the business planning processes to further understand the impact of dealing with constraints in London.

4.3.4 Cost Benefit Analysis

• Thames Water needs to establish a common platform and language for cost benefit analysis, related to a more integrated companywide common single process.

4.3.5 Cost Benefit Analysis and Water Resource Planning

• If the Environment Agency and Ofwat require water companies to continue using Average Incremental Cost in order to present supply demand investment cases, or even as part of an optimisation process, Thames Water will need to regularly update the assessment of Average Incremental Cost for renewal and for other demand reduction schemes.

4.3.6 Deterioration Modelling

• We recommend that Thames Water conducts a comprehensive sensitivity analysis on pipe deterioration rates. Past analyses have demonstrated that the results can vary significantly based on the data utilised and the period over which the analysis is performed.

• Future deterioration models should consider a pipe level approach, and incorporate background factors. As asset condition improves overall it will become increasingly difficult to prioritise pipes and compile schemes.

• We recommend that Thames Water continue to evolve its deterioration models, by development of one new model using the longest possible time span and the most current available data and rerun the same model periodically.

• We recommend that Thames Water take account of the UKWIR report on ‘Distribution: Development of National Deterioration Models’ to compare the failure rates in Thames Water against the national average20

4.3.7 Targeting

.

• Thames Water is currently analysing a sample set of data to establish the percentage lengths of pipe replaced under full replacement, compared with reduced length through design rationalisation, and changes in burst rates in the original un-renewed pipework during and after construction. One outcome of this analysis will be to understand the mechanisms

20 Further deterioration modelling work has been commissioned to be undertaken independently and will be available for audit by Ofwat. The output will be contained in the next Water Resource Management Plan and as such will be in the public domain.

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associated with changes in burst rates, which could have a significant impact on the future Thames Water strategy for renewal of the network.

• We recommend that Thames Water adopt a risk based analysis approach for targeting both individual pipes and groups of pipes with high impact risks of serviceability failure.

• We recommend that Thames Water carries out a systematic review of the following:-

• The change in failure rates in the un-renewed areas of partly renewed District Metered Areas, where possible linking failures to incidents or construction events.

• The change in leakage levels and failure rates in District Metered Areas neighbouring renewed District Metered Areas.

• The change in leakage levels in Flow Monitoring Zones (FMZs) that are partly renewed.

4.3.8 Metering and Pressure Management

• We recommend that Thames Water reviews all of the potential benefits that Advanced Metering Infrastructure offers over Automated Meter Reading currently being trialled in six District Metered Areas. A possible extension to the current trials would be to evaluate the benefits of pressure management within these District Metered Areas to understand pressure related demands in more detail.

• We recommend that Thames Water reviews the effects and benefits of pressure management with targeted mains replacement on the network in more detail.

4.3.9 Rehabilitation Techniques

• We recommend that the following rehabilitation techniques are considered for future mains rehabilitation programmes to ensure that the most cost effective and appropriate techniques to minimise disruption to customers are adopted.

• Fully structural lining

• Semi-structural lining

• Spray applied linings

• Condition assessment

• Some of these techniques have already been used for water mains replacement in London, but productivity, cost and other construction performance data are currently not available to undertake an objective assessment. The application of semi-structural linings and spray applied linings need investigation to understand its applicability to the Thames Water specific conditions.

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5 The Approach to Future Planning

Mains renewal schemes completed between 2003 and 2010 delivered leakage reductions and improved serviceability in that period. Although the leakage savings have not been delivered entirely through the mains replacement programme, other activities, including pressure management, network reconfiguration, ALC and a reduction in apparent water loss, have contributed to reducing the deficit. However, over the 2005-2010 investment period and for the 2010-2015 output targets, it has been increasingly difficult for Thames Water to identify schemes that meet both the cost and estimated benefit selection criteria for leakage reduction. Network serviceability criteria and benefits are not comprehensively used to support scheme selection.

The conclusion of the Independent Review, based on the currently available performance data and the selection and delivery processes, is that mains replacement in isolation cannot be economically justified as cost beneficial at the present time. Mains replacement should be considered as a component part of an overall investment programme necessary to address a Supply Demand deficit. It should be noted that, if mains replacement is appropriate to address a supply demand deficit, it will deliver corresponding serviceability benefits, which will potentially lead to an improvement in serviceability to customers through a reduction in mains bursts and disruption to supply. However, the evidence to quantify the secondary benefits attributable to the mains replacement programme is incomplete. It has not been possible during this Independent Review to establish the size of a mains replacement component, as this will depend on the size of the deficit, the level of benefits contribution from each component and the evaluation of the full cost benefit.

A conclusion from the Independent Review noted that in order to ensure that Thames Water continues to develop programmes to address serviceability and deterioration, more comprehensive data analysis is required to understand these factors and where the optimum benefits are being derived. This data should be used to inform future plans to ensure that Thames Water targets investment appropriately to mitigate and manage the risks to serviceability and thus ensure best value for customers.

Thames Water needs to optimise integrated programmes to benefit from synergies. There is potential for synergies in the areas of water quality, operational performance improvements and efficiencies, network rationalisation, metering, customer side issues (leakage, complaints etc.) and the find and fix of leaks/bursts. Synergies will impact the different components of the capital programme and the interface between capital and operating expenditure, such as efficient and sustainable operating regimes, meter reading and burst and leak repairs. However, if the programmes are not established through an integrated asset management approach with clearly defined policies, strategies and targets, the outputs will be difficult to justify and the benefits of the investment will be difficult to measure and articulate to customers.

To be sustainable, the impacts of investment decisions on performance need to be considered and managed against agreed plans that have outcomes that remain consistent during the short term of a five year investment period and also contribute to the longer term aims of a strategic plan. If decisions are made on shorter timescales there is a danger that early apparent outperformance could result in investment being curtailed or made on a “stop-start” basis to the extent that plans are not ultimately realised.

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The Independent Review has made recommendations to improve a number of processes and methodologies either in use by Thames Water or currently in development. However, the fundamental conclusion from this Independent Review is that Thames Water needs to ensure that the asset management process is end-to-end and clearly defined. Without clearly defined policies, strategies targets and objectives and a comprehensive understanding of the level of business risk, establishing programmes that ensure maximum benefits to customers and stakeholders is difficult to achieve. This recommendation is not limited to water infrastructure aspects within the business, but should be considered as a business-wide issue.

Thames Water is committed to making improvements and is developing a number of initiatives based on recommendations emanating from this Independent Review. It is important that Thames Water considers these initiatives in the wider context of the whole asset management lifecycle and not in isolation. Improvements will only be wholly beneficial if applied to the whole process.