Supplementary memorandum from Ofwat
(a) What is Ofwat's definition of the economic
level of leakage as used to benchmark company reports on leakage?
The level of leakage at which it would cost
more to make further reductions than to produce the water from
another source is termed the economic level of leakage (ELL).
This means that leakage reduction should be pursued to the point
where the long run marginal cost of leakage control is equal to
the long run marginal benefit of the water saved. The latter depends
on the long run marginal costs of augmenting supplies by alternative
means, including an assessment of the environmental benefits/disbenefits.
The NAO is shortly to put its report on Leakage
and Water Efficiency to the Public Accounts Committee. It has
examined all the issues of concern to this Committee in detail.
How far has Ofwat provided guidance to companies
on these issues to assist them in establishing the economic level
of leakage for their various systems?
All companies were asked to provide ELL appraisals
as part of the 1999 Periodic Review. Companies whose appraisals
were not considered to be of sufficient quality in April 1999
were given guidance by Ofwat on weak areas in their analysis asked
to submit revised appraisals with their June Returns 2000.
To what does Ofwat attribute the variable quality
of assessments of the economic level of leakage provided by the
water companies?
In general, ELL submissions vary in quality
in relation to the rigour in which companies undertake the appraisal
of the financial, social and environmental costs of their leakage,
and to the quality of the data supporting present leakage analysis.
In what ways does Ofwat believe that planning
on this matter could be improved, even before the completion of
the research project which is at present being tendered for?
It is Ofwat's plan that companies should reach
the medium term ELL by 2002-03; we set targets annually and provide
advice to ensure that this will be achieve. Where problems appear
to be developing we provide more concentrated advice and may ask
for the Reporter to become involved to ensure that the overall
objective remains in sight.
In what way do Ofwat's annual reports on leakage
and water efficiency indicate how companies have performed in
relation to their economic level of leakage (applicable to that
period)?
The Ofwat leakage report explains that we set
targets expecting companies to be at the medium term ELL by 2002-03
and it shows both the target for the year ahead and the performance
against the most recent full year's performance. It also indicates
which companies have a robust ELL. Ofwat summarises leakage performance
for the current year in press notice issued in July after receipt
of company data.
(b) What information does Ofwat have regarding
the age of pipes that have been replaced to deal with water quality?
Ofwat does not collect information on the age
of assets nor on the condition of mains which receive investment
for quality enhancement purposes.
Has Ofwat made an assessment of the relationship
between the level of spending on quality problems and the quality
of asset stock overall (mains and sewers)?
No. Ofwat has examined the relationship between
the level of total spending on the asset stock and its
condition. We have found no evidence any measurable increase of
assets in poorest condition.
How far has investment on improving quality led
to replacement of systems which are time-expired and ready for
renewal, and how far has investment for quality purposes been
on systems which are not yet time expired?
Ofwat does not collect the information required
to be able to answer this question.
Similarly, what information does Ofwat have on
the relationship between recent sewer replacement and refurbishment
and the overall condition of the sewerage network?
Ofwat Information Notes 35[1]
(January 1997) and 35a[2]
and 35b[3]
(April 2000) contain information on the amount of renewal activity
carried out by companies.
(c) What is the relationship between the serviceability
indicators used by Ofwat and asset quality and condition? How
far, and for what reasons, are the levels of service indicators
relevant to the condition and serviceability of assets?
Each year, Ofwat collects summary information
relating to the outputs delivered by company assets in terms of
service delivered to customers, the amount of renewal activity
carried out by companies to maintain service levels and also on
the amount of expenditure this activity incurs.
At price setting, summary information on asset
condition is also collected. This information has been published
in Ofwat Information Notes 35a and 35b, accompanying MD161—Serviceability
to customers. MD161 sets down the deficiencies, as seen by
Ofwat, of the justification by companies for the projections of
capital maintenance that were included in their business plans.
Information Note 35a, when read in conjunction
with Information Note 35, shows how indicators of serviceability
to customers and asset condition for water mains and sewers has
changed over time.
(d) Could you please indicate which environmental
schemes relating to North West Water Ltd, put forward by the Environment
Agency, have not been included in the Final Determination.
The following eight schemes put forward by the
Environment Agency were excluded from price limits on the grounds
that the Director is not satisfied that the company proposed in
its business plan the most cost-effective solution to achieve
the objectives for the 90km of river affected:
— Wigan STW (River Quality Objective
element only. Provision has been made in price limits for the
bathing water element of the scheme.)
If on reappraisal, such schemes are to go ahead
will they be dealt with by interim determination?
It would be a decision for the company as to
whether or not it wanted to apply to the Director for an interim
determination of price limits. Provisions in a company's operating
licence allow for an interim determination if the net additional
cost of new obligations placed upon the company between periodic
reviews exceeds 10 per cent of the company's annual turnover.
1 See p 128. Back
2
See p 134. Back
3
See p 140. Back
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