Reporter s Overview of the Northumbrian Water June Return 2011

Transcription

1 Reporter s Overview JR11 Reporting The Reporter for Northumbrian Water Ltd, Chris Turner, supported by a team of technical and operational specialists from has examined, tested and provided opinion to Ofwat on the information provided by the Company in its June Return NWL has provided full access to all the staff and information we have requested for the purposes of completing our audits. We appreciate the openness and assistance NWL has shown throughout. The basis of our opinion is detailed in Appendix A. The Board s Overview We have reviewed the Board s Overview and Appendices 1-6 dated June 2011 and checked the accuracy of relevant data to ensure it correctly reflects the audited information presented in the JR11 tables. Except as identified in the following sections, we consider that: the Company has satisfactorily explained any areas of non-compliance, material issues, material changes in methodology, changes in data confidence or exceptional issues and we have not added further comment in this Overview, but have provided a supplementary General Report to Ofwat which inter alia, details our level of scrutiny and challenge, and provides additional discussion around such issues The Board s Overview accurately reflects NWL s activities, performance and expenditure in 2010/11 The information and numerical data provided in the Board s Overview is founded on and is consistent with the JR11 tables. Customer experience Properties experiencing poor pressure (DG2) NWL has been progressively implementing a continuous pressure monitoring system across its northern region based on Netbase. This system is already in place in its southern region. Our audit confirmed a minor change to the methodology used in NWL s northern region relating to exclusion of properties from the DG2 register. Netbase is now established across approximately 75% of its northern area and therefore NWL changed its methodology to use Netbase banded property counts in these DMAs. Previously the number of exclusions was based on the numbers of properties interrupted for >3hrs. For non-netbase monitored areas, the Company continues to use its previous methodology. We consider this change to be an improvement, providing a more robust count of allowable exclusions covering abnormal demand and one-off events. The change has not materially affected headline DG2 (poor pressure) register. However, it has markedly affected the numbers of exclusions and the change is a significant driver of the reduction in reported numbers of exclusions compared to JR10. This better information indicates that the numbers of exclusions calculated for the other 25% of the northern region may be less accurately estimated by the previous method. NWL therefore agreed that a reduction to a B3 confidence grade for exclusions would be more appropriate this year. We would expect this to be improved in following years as Netbase coverage becomes more comprehensive. Interruptions to supply (DG3) We note NWL s improved performance despite the extremely challenging impact of the freeze/thaw conditions experienced over the 2010/2011 winter. 17 June 2011 Page: 1

2 Sewer flooding (DG5) Whilst the Company has a sound methodology (supported by a comprehensive integrated corporate database) in place to address all reported incidents of sewer flooding, we do not consider sufficient investigation is undertaken at the time of the incident to ensure that the full extent of the flooding incident has been determined, although we note that proposals are already in place to address this issue. NWL has prioritised and largely cleared their backlog of investigations relating to internally flooded properties but we note that they are still reporting a number of outstanding investigations, mainly relating to properties flooded in the report year and to externally flooded properties. As a result of these outstanding investigations, a number of properties remain by default on the 1-in-20 register, possibly understating the 1-in-10 and 2-in-10 registers. The company is currently in the process of restating the various Flooding Registers in order to establish the AMP4 outturn position. For internal flooding, the Company s methodology is consistent with the at risk concept that was initially promoted by Ofwat for Table 3 and also with PR09 Final Determination assumptions. Revisions of the reporting requirements have since taken place to ensure the flooding registers better reflect customer experience. Whilst all properties on NWL s register have actually flooded, their allocation to the various DG5 registers relies on the use of predominantly unverified hydraulic models to determine the return period of the rainfall event necessary to cause flooding. The Company considers its methodology to be in line with Ofwat s reporting requirements but we believe that using this approach, the frequency of flooding experienced at a particular location is not taken into account when properties are allocated to the flooding register. As such, we consider it would be good practice to adjust the methodology to account for incident frequency. The company has agreed to review its position and discuss this issue with Ofwat. It should however be noted that it appears that NWL s current method seems to over-allocate properties to the more frequent flooding registers (NWL record 44% of the properties on their registers as 2-in-10 against a typical industry average of 22%) and thereby the proportion of properties that are eligible for a capital solution at NWL is substantially greater than industry norms. Following implementation of NWL s integrated Sewer Flooding System (SFS) and a full year s operation, NWL has proposed an increase in confidence grades. We agree that implementation of the SFS, with its integrated verification process is an A grade system and consider an A3 rather than A2 is appropriate for flooding register data. Other confidence grade improvements, however, are supported. Reliability and availability Our audits confirm NWL s statements on their achievements in the Report Year. Leakage NWL note the challenges they have faced due to the extreme winter weather conditions. We confirm that the Company has not materially changed their methodology for calculating each component of the water balance and thus leakage is derived in a similar way to previous years. We have however seen some enhancements to the processes and assurances which reduce risk of error, thus confidence grades have improved on some components. The impact of the winter has however pushed some unmeasured components out of their normal ranges and we believe that NWL are also correct to consider that the confidence in this data has reduced. Their efforts to recover from missing their 2009/10 leakage target in the southern area have (despite it being uneconomic) been greatly assisted by bringing leakage down to unprecedented levels before the extreme winter impacted. Beating the target for 2010/11 has therefore been a tremendous achievement. In the northern region, we concur with NWL s assessment that the leakage target has been missed. Following the severe winter of 2009/10, NWL had managed their leakage down to within normal levels over the summer and autumn periods. The winter of 2010/11 proved more extreme right across Britain 17 June 2011 Page: 2

3 and NWL has provided clear evidence to demonstrate the major impact that this had on leakage and despite the prevailing conditions, the rapidity with which they responded to bring leakage quickly down again. However, the volumes of water lost due to burst mains as well as through the myriad of individual burst supply pipes could not be compensated for by the return to better than normal (economic) performance in the time before year end. In the circumstances, I consider that NWL responded extremely well to such extreme circumstances, and returning a performance close to target in this year should be considered as a very good outcome. Serviceability In water infrastructure, we concur with NWL s overall Stable assessment. All indicators are clearly stable but, for DG3 (interruptions to supply) we are concerned over the volatility that this measure has exhibited over recent years. Whilst weather appears to have played a significant part in this measure, we are pleased to note that NWL has reviewed and enhanced their management of associated operational activities: to pre-empt, mitigate and more quickly resolve interruptions. We also note that NWL has embarked on an initiative to review the resilience of their asset stock, which may (in time and with investment) resolve some of the vulnerabilities that currently exist in parts of their network extremities. In water non-infrastructure, all trends are stable. In wastewater infrastructure, NWL has assessed the service to be Marginal. Again, we concur. Sewer collapses shows a rising trend, but this is made up from gravity sewers (which show an improving trend) and rising mains failures (which has risen after a reasonable period of stability). Neither of these would be considered to show a sustained deterioration. The sewer flooding (other causes) indicator has been restated as agreed with Ofwat. The result shows greater volatility and we would agree that the trend, when viewed against the reference levels, is deteriorating. Other sub-service indicators are stable. For wastewater non-infrastructure, the overall assessment is clearly stable. We note however that due to the introduction of the Operator Self-monitoring regime which, for several sub-service indicators, affects the denominator as well as the numerator, we consider these to be currently unreliable for assessing serviceability trends, industry-wide. Protecting the environment Our audits confirm NWL s statements on their achievements in the Report Year. Financial performance Our audits confirm NWL s statements on water and wastewater investment in the Report Year. Operating expenditure A number of NWL s operating cost components have changed markedly from those reported in 2009/10. The vast majority of these are relatively small components and are not material. We do note that expenditure on water efficiency has increased by 1.2m; that the 2.6m costs of the Dagenham supply pipe replacement programme (which were capitalised in 2009/10) are reported as opex in table 21b line 15; and that the additional leakage costs and the impact of the freeze/thaw have been offset within the water distribution business area by reductions in the costs of power. Capital expenditure We confirm that NWL were able to demonstrate that the expenditure reported against PR04 outputs related to the completion of AMP4 quality projects. Fixed asset accounting NWL note that they have included for the PR09 asset revaluation of non-infrastucture assets in JR11. The re-valuation impact has not been included for non-depreciable assets (infrastructure) pending further analysis and satisfactory reconciliations with Final Business Plan assumptions. This is likely to have a significant impact. 17 June 2011 Page: 3

4 The accuracy of the overall depreciation charge stated in table 33 could also be impacted on by the fact that a modelled GMEAV (with a 10% reduction for NMEAV) is being used for JR11 which will gradually be replaced by a survey-based GMEAV and NMEAV. Depending on the variance of GMEAV and NMEAV of the survey based methods compared to the modelled methods this could have a medium/high materiality impact on the reported depreciation data. NWL Governance of the June Return process The Company has well established procedures for collecting and reporting the required information consistently and accurately. As a result of Ofwat s change to exception-based reporting, NWL has further enhanced their governance and QA processes and applied them to the preparation of this submission. We have carefully considered the Company s Statement on June Return information integrity provided in Appendix 1 of the Board s Overview. We confirm that the measures and procedures they describe are consistent with those we have observed being implemented during our audits of the JR information. Any departures from their prescribed methodologies that we have identified during the course of our work are brought to the Company s attention and, where material, are noted in this Overview, or are otherwise included in our detailed supporting General Report to Ofwat. We have been impressed by the coordinated way in which relevant data is marshalled and managed. With few exceptions, we have been satisfied that adequate reviewing and checking processes are in place and would expect to see these exceptions removed next year. However, this has not caused concern over the information reported, as all issues identified have been incorporated into the information submitted. Systems are generally well integrated and provide audit trails which are easy to follow. The Economic Regulation Team provides a knowledgeable core to the process and an additional layer of assurance, with a breadth of relevant experience and knowledge to understand the reporting requirements and to identify and challenge areas of uncertainty. Internal reporting of the information now takes the form of summaries which explain the background to the data, especially where there is a material change to previous trends, data quality or performance. These are reviewed and challenged by senior management and any material concerns are escalated to ensure that, at Board level, Directors are satisfied that the processes applied and their implementation are sufficient to produce reliable, accurate and complete information such that they can accept responsibility for it. CWJ Turner Reporter for Northumbrian Water Ltd Halcrow Management Sciences Limited 17 June 2011 Page: 4

5 Appendix A: Basis of Opinion The Role of Ofwat Ofwat is the economic regulator of the water industry in England and Wales and aims to make sure that water companies provide good quality service at a fair price. Ofwat collects information to monitor progress towards achieving environmental and drinking water quality objectives; to compare performance and costs; to ensure that customers' bills avoid undue preference and undue discrimination and are in line with the price limits; to approve charges schemes; to make sure standards of service are protected; and to prepare for price reviews. The Company s June Return All Appointed water companies are required to make an annual return each June covering their activities in the previous financial year (ending on 31 March). The June Return is the primary source of monitoring and provides information in the following key areas: Key outputs (levels of service indicators) Customer experience Reliability and availability Environmental impact Financial performance The Company s Directors are responsible for the preparation of data in the June Return and associated statements. Ofwat s monitoring is based on data that has been scrutinised by independent professionals, Reporters and auditors who examine, test and report on the reliability of the information provided by Companies. A full description of the scope of the June Return and the reporting requirements is given on Ofwat s website at: The Role of Reporters In accordance with its Instrument of Appointment, Northumbrian Water Ltd has appointed Halcrow Management Sciences Ltd, a ring-fenced member of the Halcrow Group, to provide reporting services to Ofwat. Ofwat regulates the appointment and work of Reporters by a Protocol which formally sets out the mechanism for appointment and the tasks that the Ofwat Board requires of Reporters. For the 2011 June Return, Ofwat has extensively revised the guidance and whilst Ofwat expect Reporters to continue to examine company information and data, they are not requiring detailed commentaries on each of the tables as in previous years. For the 2011 June Return, Ofwat require a report setting out material issues and material changes in methodology and data that the Reporter has found during the audit. Reporters are required to: check that Companies have complied with the process of submissions or have included a commentary as to why the guidance has not been followed or the underlying methodology has changed from the previous year, identify material changes to company systems, processes and models which have not been highlighted by the company, report by exception and comment on confidence grades provided in the ICS where the Reporter feels the grade is inappropriate. We are required to report on exceptions from the general procedures above in all areas of the Company s June Return apart from: Response to written complaints DG7 and telephone contact DG9 (table 5a) Consumer experience measures (table 5b) Bad debt (table 6a) Regulatory Accounts: Historical Cost Accounting (tables 18, 18c, 18d, 19) Regulatory accounts: Current Cost Accounting (tables 20, 23, 24, 26, 27, 28, 29) Regulatory Accounts: Transactions with Associated Companies (tables 30 and 31) Proceeds from disposal of protected land (table 39) Health and Safety (H&S) activity (table 41) The full scope of the Reporters audit is given on the Ofwat web-site at: The Reporter for Northumbrian Water Ltd, Chris Turner, supported by a team of technical and operational specialists from Halcrow, has examined, tested and provided opinion to Ofwat on the information provided by the Company in its June Return The Reporter s audit has followed Ofwat s requirements and the approach presented in our Audit Plan of 25 th February We have included checks on the Company s methodologies, processes, controls and assurance arrangements for preparing their submission and checked that these have been satisfactorily implemented. We have challenged the Company extensively on areas of materiality and have considered the responses to determine the content of this Overview and other supporting submissions. Our report is made to Ofwat and Northumbrian Water in accordance with Ofwat s statutory duties and the audit has been undertaken to report on those matters we are required to report to Ofwat and for no other purpose. To the extent permitted by law, we do not accept or assume responsibility to anyone other than Ofwat or Northumbrian Water for our audit, for this report or for the opinions we have formed. 17 June 2011 Page: 5