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Final Business Plan 2009 Anglian Water Restricted - Commercial Strategic Management Consultants Anglian Water Final Business Plan Part B5 Maintaining the Wastewater Supply/Demand Balance 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 1 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Strategic Management Consultants Part B5 – Maintaining the wastewater supply/demand balance Commentary by REPORTER Contents Summary................................................................................................................... 4 Structure of commentary ........................................................................................ 5 Introduction .............................................................................................................. 6 Company approach.................................................................................................. 6 Reporter Approach .................................................................................................. 6 Changes since the Draft Business Plan ................................................................ 6 Expenditure projections .......................................................................................... 6 Company response to Ofwat DBP challenges ...................................................... 7 Section 1 Strategy.................................................................................................... 7 1 Company approach ........................................................................................... 7 1.1 Stage 1 Initial assessment of the probability that investment is required 7 1.1.1 Methodology for the assessment of properties and population increase at regional level 8 1.1.2 Demand forecasts 9 1.1.3 Projected populations at sewage treatment works catchment level 10 1.1.4 Assessment of current capacity 10 1.1.5 Assessment of future DWF 11 1.1.6 Assessment of the impact on the plan of the EA ‘no deterioration’ policy 12 1.1.7 Assessment of urban creep 12 1.1.8 Assessment of the impact of climate change on the plan 13 1.2 Stage 2 assessment of potential consequences 14 1.3 Stage 3 Investment modelling 14 1.3.1 Stage 3A Characterisation 15 1.4 Stage 3B Catchment investment modelling 15 1.5 Expenditure estimates 18 1.5.1 Methodology 18 1.5.2 Sewage treatment cost estimates 18 1.5.3 Sewerage schemes cost estimates 19 1.5.4 Costing of regional schemes – non specific investment 19 1.5.5 Cost benefit analysis 20 1.6 Stage 4 Business Plan preparation 20 1.7 Opex effects of Capital schemes 20 1.7.1 Schemes delivered in AMP5 20 1.7.2 Non specific operational expenditure 20 1.8 Grants and Contributions 21 1.8.1 Background 21 1.8.2 Changes since the DBP 22 1.8.3 Grants 23 1.8.4 Infrastructure charges 23 1.8.5 S104 adoptions 23 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 2 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance 1.8.6 1.8.7 Anglian Water Restricted - Commercial S98 requisitions AW developer contributions (Section 98) below industry average. 23 26 Section 2 Expenditure implications of maintaining the SDB............................. 27 2 Company approach ......................................................................................... 27 Response to Ofwat reporter guidance ................................................................. 27 2.1 Response to General Guidance 27 2.1.1 Material assumptions for table B5.4 27 2.1.2 Proportional allocation between expenditure categories 27 2.1.3 Allocation of expenditure between the new development and growth 28 2.1.4 Recovery of requisitions grants and infrastructure charges 28 2.1.5 Consistency of costs with the PR09 projects database in section C5-2. 29 2.2 Response to specific guidance for the sewerage service strategy 29 2.2.1 Consistency of the sewerage strategy with long term least cost wastewater plan 29 2.2.2 Consistency of approach for sewerage catchments and investment type 30 2.2.3 Sources of information used by the company 30 2.3 Specific reporter guidance for the sewerage service Section 2 30 2.3.1 Non specific investment 30 2.3.2 Defined and defined contingent investment 30 2.4 Schemes reviewed 31 2.4.1 Broadholme catchment 31 2.4.2 Bedford STW 33 2.4.3 Cambridge STW 34 2.4.4 Letchworth STW 35 2.4.5 Uttons Drove STW 36 2.4.6 Uttons Drove Northstowe sewerage scheme 37 2.4.7 Lincoln western growth corridor hydraulic limitations 37 Response to guidance for Tables 5.4 and 5.5 ..................................................... 39 3 Table 5.4 Sewerage service demand forecasts............................................. 39 3.1 Block A Properties lines 1 - 5 39 3.2 Block B Population total - line 6 39 3.3 Block C sewage collected volumes Lines 7 – 14 39 4 4.1 4.2 4.3 4.4 Table 5.5 Sewerage service – SDB expenditure projections and service output measures ...................................................................................... 39 Block B Sewerage service SDB - capital expenditure infrastructure 40 Block C Sewerage service SDB - capital expenditure non-infrastructure 41 Block D Sewerage service SDB - capital contributions 41 Block E Sewerage service SDB - changes in operating expenditure 41 Challenges .............................................................................................................. 42 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 3 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Strategic Management Consultants Part B5 – Maintaining the wastewater supply/demand balance Commentary by REPORTER Summary The Anglian Water region has been identified as a significant housing growth area Anglian Water has developed working relationships with planning authorities and the Environment Agency (EA) at several levels within its region to bring the issue of water supply and sewerage capacity into the Regional Spatial Strategies at an early stage The current national difficulties in the financial and housing markets have created uncertainties in the level of housing growth forecast for the region during AMP5. The Company has revised its growth forecasts since the DBP The Company has broadly followed the guidance in the UKWIR Long term/least cost planning for wastewater supply demand report As far as we can determine Anglian Water has allocated to growth and new development according to Ofwat guidance The Company anticipates a significant increase in the number and value of both on and off-site requisitions for AMP5 Anglian Water anticipates a higher take up of the Discounted Aggregate Deficit (DADS) option by developers. Consequently the Company is anticipating a large increase in the number of Section 98 requisitions compared to AMP4 Anglian Water assumes that developers requisitioning off-site services will requisition on-site services. One development site has a S98 on-site agreement in the region with proposals for a further ten sites currently with developers Anglian Water has combined on and off-site requisitions at site level and increased the forecast contributions from developers since the DBP The Company has carried out some proportional allocation for the FBP to Quality and sewer flooding The majority of schemes have been developed through scheme specific studies using available DAS, consultant reports and local knowledge Anglian Water has disaggregated two major sewerage schemes allowing deferral of some parts into AMP6. The opportunity to recover costs from developers has also been improved Anglian Water has carried out further Stage 3 reports since the DBP focussing on higher value sewerage and sewage treatment schemes Anglian Water has given a better estimate of the infrastructure/non infrastructure split of schemes The Company has provided data on additional operating costs resulting from capital expenditure at a scheme level The Company has included a scheme for non specific operating costs 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 4 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Anglian Water has previously reported the contributions for S98 requisitions as income. The Company has reviewed its accounting policy effective from 2008/09 and will now capitalise the contributions The Company has estimated £6.0m for S104 adoption fees for the FBP compared to £6.3m in the DBP The Company considers that a combination of factors such as being a high growth region, better than average capital efficiency and higher than average customer bills results in Anglian Water being able to recover lower costs than the industry average. Structure of commentary This report follows the same format as the company's submission, namely Changes since Draft Business Plan Section 1: strategy Section 2: expenditure implications of maintaining the supply demand balance. The Company has included the methodology for estimating capital expenditure for groups of schemes in Section 1 Strategy and not in Section 2 Expenditure implication of the investment programme. SMC has followed the Company format. Anglian Water has allowed additional review time to address the main issues raised by Ofwat in its response to the Company’s Draft Business Plan submission. SMC has included more detailed commentary in these areas. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 5 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Introduction Company approach Anglian Water has used the methodology in the UKWIR report ‘Long term/least cost planning for wastewater supply-demand’ to determine its investment requirements for AMP5 driven by the supply/demand balance. The Company has costed 76% of schemes by value using Asset Plus, its new cost estimation and programming system. Asset Plus was not available in full for the DBP. The Company has continued to develop its programme since the DBP completing Stage 3 reports on the more significant schemes. Anglian Water has responded to Ofwat challenges on its Draft Business Plan in its Final Business Plan submission. The Company allocated additional audit time to present its approach to forecasting Section 98 developer contributions for scrutiny by the reporter prior to the main review of B5 Supply Demand Balance. Reporter Approach SMC has aimed to follow the Guidance to Reporters version 1.1 and Company specific reporter guidance. Our overall approach is to ensure we obtain as full an understanding as possible of: the completeness, relevance and quality (accuracy and consistency) of the data being used, the principles and applicability of the systems/processes employed, and the validity of the assumptions being made. We have assessed the Company’s proposals to determine whether the approach follows the UKWIR methodology and made comment on the reasons for any deviation. We have selected examples of data we consider are material for more detailed examination. Changes since the Draft Business Plan Expenditure projections Supply demand wastewater Investment area Wastewater Infra Wastewater non Infra Total DBP Reallocated since DBP FBP 155.8 90.3 126.1 157.9 281.9 1.5 248.2 Anglian Water has adjusted its expenditure forecast since the DBP mainly due to the downturn in the housing market. The Company has reassessed the timing of projects with the result that some projects have been deferred until AMP6. Anglian Water has reassessed strategic sewer schemes and disaggregated the Broadholme, Letchworth and Peterborough schemes as a result. Parts of these schemes have been deferred to AMP6 or have attracted developer contributions 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 6 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial that were not identified for the DBP. The Company has reassessed the technical solutions for the higher value sewerage and sewage treatment schemes resulting in changes to forecast costs. The change in the allocation of expenditure between infra and non-infra is due to the assessment of the infra/non-infra proportion being made at scheme level rather than programme level as at DBP. Anglian Water has allocated £1.5m out of the £3.5m estimated for drainage area studies in the DBP into capital maintenance for the FBP. Company response to Ofwat DBP challenges The Ofwat feedback challenged the Company in a number of areas: Number of connections Allocation of costs between growth and new development Strategic sewerage schemes On-site requisitions Proportion of developer contribution against the industry average Sewage treatment costs including cost per PE increase Additional operating costs. Anglian Water has sought to address these issues in its FBP submission. Reporter comment on the issues is included in relevant sections of the following report. Section 1 Strategy 1 Company approach Anglian Water has used the methodology in the UKWIR report ‘Long term/least cost planning for wastewater supply-demand’ to determine its investment requirements for AMP5 driven by the supply/demand balance. The Company has costed 76% of schemes using Asset Plus, its new cost estimation and programming system. Anglian Water has manually costed on-site sewers, supervision of adoptions and modelling work. Asset Plus was not available in full for the DBP. 1.1 Stage 1 Initial assessment of the probability that investment is required The UKWIR methodology requires companies to carry out an initial high level assessment of the likelihood that supply demand investment will be required in the next AMP period, including preparatory work for schemes with a long lead time required in the following price review. The initial assessment stage was carried out by the Anglian Water central Growth team to determine which sewage treatment works and sewerage catchments were likely to require investment for additional capacity in the AMP5 period. The local asset planning teams also produced lists of potential projects. Workshops were held in the areas to challenge the proposed projects with respect to the risks and consequences of doing nothing and the opportunities for phasing. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 7 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial AW has assessed only those catchments where significant growth is forecast. Infill development has not been considered in general as the assessments have been based on developments above 200 properties. Small infill developments would appear to have less significance for the Anglian Region than for some other water companies due to the nature of the existing towns and the potential for large scale developments at existing relatively new towns. The assumptions that the Company has made with respect to increased hard areas, additional flows from existing customers and illegal connections have been that the issues are not material in most cases. 1.1.1 Methodology for the assessment of properties and population increase at regional level Reporter comment on the basis of the population changes for the AW region in general and for water customers in particular is in the reporter commentary for B5 Water Maintaining the Supply/Demand Balance and is not repeated here. Reporter comment on the basis of the population changes for the AW region in general and for water customers in particular is in the reporter commentary for table 5.1 and is not repeated here. The Company has based the population projections for wastewater on the same methodology as used for JR08. The projections for AMP5 for wastewater customers are based on the same assumptions as for AW water customers with the exception of population forecasts for the six other Water Companies for which AW provide a sewerage service. AW has used data from the other water companies to determine the new property numbers and the number of meter optants for each Company. The Company had commissioned work from Experian Business Strategies to prepare a forecast of properties and population using Regional Spatial Strategy material. The Company stated that the Experian data for the average trend increase in the number of domestic properties was very similar to the trend based data prepared by the Company. SMC did not view the Experian data for B5.4. The Experian work however did not produce the same total number of properties as the Company has on its billing system and, as the discrepancy could not be resolved, the Company used its own data. Details of the sources of information and assumptions made by the Company, including the assumptions made on the data from the Water companies for whom AW provide a sewerage service, can be found in the Company’s commentary. The Company has adjusted its forecasts of new properties to take account of the current uncertainty in the housing market. For the supplementary submission in November the Company forecast a 40% drop in new connections in the current year a further drop in 2009/10 and a slow recovery. The Company has not changed its forecast since the supplementary submission. AW has assumed no change in the number of non-households billed, either measured or unmeasured from the number reported in JR08. With the small numbers involved, we consider that this is a reasonable approach. The Company reports that it has been actively checking and following up voids, and the situation appears to have stabilised. Anglian Water has assumed that the percentage of voids will remain static. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 8 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance 1.1.2 Anglian Water Restricted - Commercial Demand forecasts Anglian Water has developed working relationships with planning authorities and the Environment Agency (EA) at several levels within its region to bring the issue of water supply and sewerage capacity into the Regional Spatial Strategies at an early stage. The East of England Plan is the most advanced in its region and the Company, backed by the EA, has influenced the addition of a Water Cycle Study (to take account of the availability of water supply and sewerage capacity) into the Plan. The Water Cycle studies have become a policy requirement for the Regional Spatial Strategies in other parts of the region where significant development is planned. The planning structure is currently in a state of change resulting in Local Plans (LPs) which have not been updated and Local Development Frameworks (LDFs) not yet in place. The Company has prepared its Supply Demand Balance for the FBP in an environment of significant uncertainty. The government pressure for building new homes in the region gives the Company confidence that the scale of development will go ahead but it considers that the timing of the development is uncertain at this stage. The Company has reviewed its forecasts (detailed in B5.1 of its commentary) showing a steep decline in the final years of AMP4 with a recovery in AMP5. Since the DBP Anglian Water has carried out further work to determine the likely location and timing of development, particularly the larger sites. The Growth Planning team also produces bottom up estimates of new development at catchment level using information from a number of sources: Local Plans Spatial Strategies Annual monitoring reports from each of the 65 District Councils who detail how they will meet the targets in the Regional Spatial Strategies. Information from around 70% of the councils is in sufficient detail to be used for property projections Speculative sites identified by developers when requesting information. The information was collected in the Company’s Growth database. The information in the database was taken out to workshops in the four operating areas for validation involving: Growth Planning teams Local development teams who deal with planning queries from local councils The four Business Customer Services account managers. In addition to validating the data the workshops used local knowledge to assess the probability that various developments would go ahead by 2016. The focus was on larger sites in excess of 200 properties. This equates to approximately 70% of the development sites identified for the region. In addition to area workshops and internal consultation, the Company sent the information on the Growth database to all 65 District councils for validation. From this exercise Anglian Water was able to determine which sites had planning permission or where construction was already underway. The database was further updated. AW then compared the site-specific information (for the larger sites >200 properties) in the Growth database for those Planning Authorities wholly within the Anglian 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 9 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Water region with the regional projections in MORIARTY. The data were combined in a spreadsheet (Growth Profile). The Company assumed that the difference, approximately 45% (80,000 properties) represents small sites of <199 properties and windfall development. These properties were split across the region in proportion to existing population estimates. The same unit rate of small sites (approximately 3.0 properties per thousand population) has been applied to those Districts that are only partly in the Anglian Region. The Company has assumed that approximately half of the people occupying new properties would already be resident in the area. The additional 100,000 would be new customers from outside the AW supply area. The Company has assumed an occupancy rate of 2.2 for new properties with the assumption that the occupancy rate for existing properties will reduce as new properties are occupied. 1.1.3 Projected populations at sewage treatment works catchment level The Company estimated the population served by each STW from mid-year parish estimates and its estimate of the distribution of parish between its STWs. In future Anglian Water plans to update its data on the properties and population contributing to each sewage treatment works catchment using its GIS system and matching properties to a works. This information is used for the June Return table 17. In order to determine the future contributing populations for each catchment, the Company has assumed a factor of 0.96 to reflect the reduction in occupancy rate for existing properties over the period. The reduction factor has been calculated based on ONS projections of population in the region. 1.1.4 Assessment of current capacity Measurement of DWF - compliance with current flow consents Dry weather flow (DWF) is a key measure in sewage treatment works discharge consent conditions. It is difficult to measure as in many years there are few periods that conform to the requirements of the DWF definition. Anglian Water is represented on a national group with the EA and Ofwat to develop a national policy to determine compliance with DWF conditions in sewage treatment works consents. Total daily flows for the last three calendar years have been collected and the data is being used to more accurately assess the DWF for the Company’s numerically consented works. The revised DWF is calculated by taking all available total daily flow data, removing obvious data errors and using the remaining data to determine the bottom 10%ile flows. The resulting figure is increased by 20% to allow for year on year variations in DWF. In agreement with the EA, the Company will apply for new consents before the start of AMP5 based on the 10%ile + 20% DWF calculations. It is anticipated that the revised consents will maintain the status quo with respect to flow to full treatment (FFT) and sanitary determinands in the majority of cases. If the revised DWF at the same sanitary determinand consent would result in a change in river class, a tighter discharge consent would be applied. The Company anticipates that the majority of the consent changes will be cost neutral. A capital scheme has been prepared for those sewage treatment works that require additional treatment capacity as a result of the anticipated detrimental effect on the receiving watercourse. These schemes are included in the Company’s Quality Enhancement programme. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 10 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Assessment of current headroom Assessment of available headroom is critical to the timing of schemes for both the sewerage system and sewage treatment as summarised below. In the sewerage system AW has focussed on the catchments where significant new development has been identified. It has used the existing Drainage Area Studies, most of which have been focussed on growth or flooding risk as reported in recent June Returns. The Company identified 56 catchments for investigation of which 46 have been identified as requiring investment in AMP5. This equates to 74 projects. At sewage treatment works AW has assessed all of its numerically consented STWs against design capacity or current load whichever is the greater. The Company has used a conversion factor of 65g BOD/h/d and made an allowance for sludge liquors in the calculation of required biological capacity for Sludge Treatment Centres. AW has also assumed a reduction of 25% BOD in primary treatment. We argued that these assumptions would appear to lead to conservative estimates of headroom i.e. there could appear to be less available capacity for growth. The Company stated that these are standard industry figures. We hence highlight these figures for the purpose of national comparison Where there is no growth predicted in the catchment and no current failure against consented parameters the works have not been put forward for investment. The Company identified 62 sites for investigation of which 25 STWs were identified as requiring investment in AMP5. This is a reduction from 35 in the DBP. All the schemes are allocated to general growth as the prime driver. 1.1.5 Assessment of future DWF Anglian Water has used projected DWF as an indicator of future non-compliance with consent and therefore the need for further capacity to maintain the current service level. The Company calculated the future DWF for each sewage treatment works based on its internal model for regional forecasts: Projected number of properties in the catchment by date Occupancy rate Average per capita consumption. The Company has used a figure for average consumption from its internal model for regional forecasts (based on population projections). The Company has assumed that the per capita sewage flow will reduce from 155 l/h/d to 150 l/h/d over AMP5 (this includes an allowance of 20 l/h/d for the domestic element of commercial flows) Proportion of water used returned Trade effluent flow, based on the total flows for 2007-08, is assumed to be discharged over 365 days. The Company assumes that trade effluent flows will reduce by 5% by 2015 and remain constant thereafter Average 20 l/h/d for the domestic element of commercial flows. The Company will be receiving revised DWF consents for a number of sites at the start of AMP5. However the Company has used the current consent to assess need at each site. The Company assessed STWs for further investigation at Stage 2 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 11 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial based on STWs: Currently not flow compliant and with any growth forecast before 2016 Where forecast increase in DWF to 2016 could cause the effluent discharge to exceed the current consented DWF Where the increase in DWF would exceed 10% Identified for further investigation by local planning teams due to: Significant growth in the past Small STWs with a number of small development sites planned for the catchment Works that have received increased flows over the years resulting from urban creep. The Company has assumed that sites with pe >2000 with potential to fail upper tier standards will be addressed under the Quality programme under the UWWTD U1 Quality driver. 1.1.6 Assessment of the impact on the plan of the EA ‘no deterioration’ policy The Company’s Growth Profile spreadsheet holds all available information on sites where potential new development has been identified alongside catchment information that allocates new development to specific STWs. The Growth team allocated a start and end date to each development of > 200 properties with either a ‘certain’ or a ‘probable’ status and spread the construction rate evenly between the two dates. The Company estimated the start and end dates for new developments using information from the District Council Annual Monitoring Reports where available or from best estimates. The Company has set the baseline for current performance on DWF compliance and the resulting flow schemes have been included in the Quality programme. Any projected increase in DWF over and above the 10%ile + 20% calculation, will be assumed to be growth. AW will set a trigger point at which it will apply for a new consent. The Company will negotiate a new consent based on load equivalent. AW has not identified any schemes triggered by the EA ‘no deterioration policy’ for PR09, as potential schemes have been covered by the flow schemes included in the Quality enhancement programme. The Company has stated in its commentary that it does not see this policy driving additional consented parameters. New parameters and tightening existing limits beyond load equivalence would be regarded as a potential new quality enhancement. SMC considers that this is not an issue for AW for PR09 as there are no obligations for AW under the policy. Clarity of the investment driver will be required in the future. 1.1.7 Assessment of urban creep Urban creep, as defined in the UKWIR report Long term/least cost planning for wastewater supply-demand, is: ‘The additional surface water load to the sewerage network caused by increased impermeable area from developments at sub-property level‘ The Company has assumed that urban creep will be most likely to impact on: The sewerage system where it would be shown as increased risk of flooding. The Company reports that it had attempted to tackle this issue reactively at PR04, but 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 12 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial found fewer instances of flooding caused by urban creep than expected. Existing DG5 flooding is not being addressed under this driver 1.1.8 Increased environmental impact from increased operation of CSOs or EOs Sewage treatment works where the effect will be seen as increased storm flows. The Environment Agency has not identified any sites in the Anglian Water area that require improvement due to excessive storm flows therefore no improvement schemes have been included Small sewage treatment works originally designed for separate sewerage systems and consequently without storm tanks and where illicit connections have caused high flows to be observed during rainfall. The Company has assumed that the indicator for this situation, and the trigger for further investigation, is the failure of upper tier limits on these works. Anglian Water considers that storm tank capacity will be required at these sites and has included five schemes to address specific problems. Assessment of the impact of climate change on the plan The Company is carrying out an assessment of the impact of climate change and how to mitigate its effects. The approach includes: Management of surface water; the Company is currently developing a Surface Water Management policy: The Company has not included additional opex for the adoption of SUDs structures for the FBP, as there are currently few adoptions on which to base a projection For the FBP Anglian Water plans to support the preparation of SWMPs in its region during AMP5 as recommended by the Pitt Review. Although specific sites have not been identified, the Company anticipates 10 in its region; and one site Canvey Island has recently been identified by Castle Point Borough Council for consideration by the government as a special case for support to develop a SWMP during 2009/10. The Company provided a copy of the letter from the Borough Council as evidence of the initiative. For the FBP the Company has included £1.6m for Surface Water Management Plans for AMP5 An assessment of peak storms; The Company has reviewed its current 1 in 30 year storm design capacity for the FBP through the Flooding team responsible for DG5 schemes. The work identified that an estimated 94% increase in the volume of storage required, equating to a 36% increase in the cost of storage. The Company estimates that this has added £6m to the programme as a whole. The volume uplift was based on a Meteorological Office Report commissioned by the Company Awareness of the Defra consultation on ‘the right to connect’; the Company will assess how this will impact. AW comments that it makes no provision in its FBP for capital expenditure for surface water drainage other than for past urban creep. Thus removing the right to connect surface water has no impact on PR09 though it could on future PRs. The Company has made an initial assessment of STWs and catchments using the criteria described above. Where Stage 1 assessment showed that there was either a probable or possible requirement for future investment due to growth or new development, the assessments were moved to Stage 2. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 13 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance 1.2 Anglian Water Restricted - Commercial Stage 2 assessment of potential consequences Under the UKWIR methodology Stage 2 is designed to identify catchments where there are high potential consequences associated with failure to allow for adequate supply/demand investment in the price review period under consideration. These catchments are then subjected to more rigorous ‘catchment investment modelling’ in Stage 3B (scheme specific investment). Rather than identifying catchments for further investigation at Stage 2, Anglian Water has carried out assessments at Stage 2 where it considers that development is probable or possible and that the sewage treatment works and catchments will be affected by significant changes in the supply/demand balance. This deviation from the guidance allows the Company to carry out further assessments within its Asset Management teams before passing the investment requirements forward to its Alliance partners for further scheme development. The Stage 2 catchment assessment carried out by the Asset management team involved: Review of the Water Cycle Study included in the relevant Spatial Strategy where available Review of existing DAS or commission of study An assessment of the impact of flooding An initial assessment of the options for the catchment Identification of the scope of work for a detailed scheme. The Stage 2 sewage treatment works assessments were also carried out by the Asset Management team and included: 1.3 Development of asset plans for each numerically consented sewage treatment works Review of each plan in the light of growth forecasts The long term strategy for each site i.e. rebuild, relocate, extend An estimate of the revised consent conditions required Current process limitations Removal of performance obstructions i.e. process optimisation or potential for increased capacity at specific points in the process The impact of infiltration and the potential for locating the source Potential for flow diversion An assessment of the risk of deferral using the Company’s risk and value methodology. Stage 3 Investment modelling The UKWIR report identifies two types of investment modelling depending on the probability and consequences identified in Stage 2: Stage 3A, Characterisation, relates to the estimation of the non specific investment required Stage 3B, Catchment investment modelling, relates to the quantification of defined scheme and contingent investment. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 14 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance 1.3.1 Anglian Water Restricted - Commercial Stage 3A Characterisation Under the UKWIR guidance, Stage 3A is used to quantify the budget which should be set aside to deal with non-specific investment. Any investment, after the initial assessment at Stage 1 of the methodology judged not to have high potential consequences and to be possible but not probable should be dealt with under the characterisation process. The Company has interpreted this as regional schemes. The Company anticipates that this non-specific investment will cover: Growth infrastructure Studies in accordance with the Urban Pollution Management manual, instead of schemes, to determine if CSOs would become unsatisfactory Improvements at pumping stations where EOs operate. The Company has made allowance for top 10 pumping stations where there is the greatest impact Modelling for growth. The Company has reassessed the £3.5m estimated for the DBP and reallocated £1.5m to capital maintenance. Anglian Water considers that a proportion of the expenditure incurred for the extension of an existing model should be allocated to growth. SMC is not aware that the Company has allocated any expenditure on DASs to growth in the current AMP period although growth has been one of the main drivers for DAS work. Regional flood alleviation scheme for mitigation of new DG5 flooding in AMP5. (£0.5m) SWMPs £1.6m. New development infrastructure Supervision of S104 adoptions, S98 self lay requisitions and connections The Company has estimated £14.5m over the 5 year AMP5 period. SMC does not have the comparative costs for AMP4 to determine whether this is a realistic assumption. Investment previously allocated to growth. Provision of vacuum pots The Company had allocated the investment to growth at DBP. Small investment of 0.5m. Provision for small (<199 properties) requisitions The Company is assuming that for smaller sites of less than 200 properties off-site services will continue to be provided via developer works agreements. The Company has estimated £3.1m for this investment reduced from £4.8 in the DBP. The investment is split 20% infrastructure and 80% non-infra. Provision for small SPS up-rating The Company has allocated £3.6m for this provision based on increasing the size of rising mains from 100mm to 150mm. Note: on-site requisitions (amounting to £37m under this heading in the DBP) are now identified against specific schemes. 1.4 Stage 3B Catchment investment modelling Where Stage 2 identifies the need for a capital scheme, the Company passed the work over to its Alliance partner to be developed as a Stage 3B scheme with the preferred solution already identified by the Company. The Stage 3B work covers further investigation into: 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 15 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Land availability Ground conditions Access Power supply Proximity of housing and the subsequent requirement for odour control Detailed scope for the scheme Temporary works Assessment of the consequences of deferral of the scheme beyond 2016. Since the DBP Anglian Water has updated costs using its Asset Plus costing and programme optimising system for all schemes where construction is involved. For the larger schemes Stage 3 reports have been prepared and subsequently scope and costs have changed. Cost benefit and the carbon footprint have been calculated in Asset Plus. The cost benefit analysis has been carried out on the preferred option for each scheme and therefore did not enable different options to be assessed for cost benefit. Similarly with the carbon footprint; the calculation was carried out on the preferred option and therefore has not influenced decisions on schemes going forward. We challenged the Company on option selection before CBA. The Company considers that engineering judgment and the feasibility of a scheme are the most important issues for scheme selection and these are carried out for the Stage 3 reports. Risk and value challenge workshops are also carried out at this stage. The company considers that the R&V process effectively take the place of CBA in that the costs and options, including options for reducing flows, diversions and optimising assets, are challenged at this stage. From an operational viewpoint SMC appreciates the Company’s argument. Definition of schemes Defined schemes In general the Company has categorised strategic sewerage and STW schemes as ‘defined’. SMC requested clarification on the definition of strategic schemes. The Company responded that it has defined strategic schemes as those serving more than one development site. Ofwat uses the UKWIR categories of ‘defined’ and ‘defined contingent’ schemes. The Company’s interpretation of the distinction for sewerage appears to relate to the timing of the scheme requirement. ‘Defined’ schemes will have either planning approval or a S98 requisition. Schemes which have not progressed so far, ie are awaiting either a S98 requisition or planning approval, are categorised as ‘defined contingent’. All sewage treatment schemes for which the discharges are deficient or will become deficient by the end of the design horizon and for which the increase in flow is linked to more than one development have been identified as ‘defined’. The Company has not identified any sewage treatment schemes as ‘defined contingent’ for the FBP. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 16 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Defined contingent schemes SMC asked what triggers would result in ‘defined contingent’ schemes going ahead. The Company responded that it is scheme specific and will generally be on S98 Requisition. The company has assumed that sewerage schemes for developments of >200 properties contingent on development going ahead will be ‘defined contingent’ schemes. The Company assumes that smaller sites <199 properties will already have sewerage infrastructure in place. Development of schemes In the UKWIR report, catchment investment modelling is used to develop solutions and cost estimates for catchments where there is a high probability that investment is required or high potential consequences associated with non-investment, as well as all significant ‘other driver’ investment potentially relevant to SDB solutions. The Company has made a number of assumptions in the development and timing of schemes: In general the Company has profiled the start of each project from the anticipated date that the asset will be under capacity. For infrastructure growth schemes where the Company considers that the lack of available capacity in the sewerage system will prevent development going ahead, these have been classified as strategic sewers and therefore ‘Defined’ under the UKWIR definition. For the DBP Anglian Water identified nine sewerage schemes as strategic. The schemes ranged in approximate cost from £1m to £25m with a total of approximately £77m. Since the DBP the Company has reviewed the schemes and has disaggregated the Broadholme and the Peterborough catchment schemes. Anglian Water has subsequently been able to defer parts of the original Broadholme scheme into AMP6 and has forecast developer contributions for other parts. The Company has also disaggregated the Letchworth sewerage catchment scheme (scheme to prevent flooding) into two schemes, both of which now fall into AMP6. The strategic schemes are: Broadholme catchment – now disaggregated into 13 schemes. This has enabled 5 schemes to be deferred until AMP6. (See detailed review of Broadholme scheme in 2.4.1) Northampton Southern trunk sewer – no costs in AMP5 Tilbury – Coalyard site, London road, Purfleet and Thames Board Mills London Road – deferred to AMP6 Peterborough catchment disaggregated into three schemes, all of which are programmed for AMP5 Grantham Manthorpe Mill - Scheme deferred Lincoln Western Growth corridor (completion 2015-16) no change Lincoln North East Growth corridor – Geetwell Quarry no change Tilbury Schofield road and Lyndale Estate West Thurrock no change Tilbury Site 4 Millfield, Aveley no change. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 17 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Most of the remaining infrastructure schemes are to prevent flooding. Where there is existing flooding in a catchment the EA are opposing development until the sewers are upgraded to prevent further flooding. The non-infrastructure schemes have been built up using available data such as current capacity assessments; design standards, asset plans and consultants process appraisal reports for example. The Company has generally tried to programme requisitions so that the first tranche of properties would be catered for by alternative means i.e. tankering or short term diversion to alternative sewers rather than providing the full capacity at an early stage. Schemes have generally been profiled over three years, one-year design and two years construction. Where there are distinct phases the Company will deliver these as separate projects. 1.5 Expenditure estimates 1.5.1 Methodology The Company has costed the preferred options from the Stage 2 and Stage 3 reports for each project using Asset Plus for 76% (by value) of the schemes, consultants estimates for studies 4% and 20% based on historic costs (mostly onsite costs and adoption fees). Anglian Water has improved the robustness of cost data for the FBP. The cost models behind Asset Plus have been created using a combination of AW and supplementary data. AW has used additional sources of cost curves as it has insufficient internal Company data to cover all scheme requirements. . Please refer to Part C5 for our commentary on costing. Local asset planners and members of the Growth team completed Asset Plus solution templates for each scheme. In addition to the process requirements, the teams assessed the potential for site-specific conditions (risk factors) which may increase the complexity of a scheme and the subsequent cost. The risk factors have been calculated as a percentage of the construction costs for schemes carried out in AMP4. The teams have used local knowledge and judgement to assess the potential risks. 1.5.2 Sewage treatment cost estimates In general AW has used scheme specific solutions for each identified investment need. The solutions have been decided at Stage 2 of the UKWIR methodology and costed through Asset Plus. The cost estimates have been subject to further challenge by the asset planning teams to examine the potential for phasing. The Company has calculated overhead costs as a percentage of the construction costs in line with the information prepared for the Company’s cost base report. Anglian Water normally aggregates schemes together for delivery as packages of work by their Alliance partners. The Company has costed schemes as individual projects not on packages of work at this stage. SMC considers that there is potential for reducing costs if projects are grouped for delivery. The Company considers that this is consistent with its approach for AMP4 and is reflected in its cost base; the level to which it already bundles schemes for capital delivery is already factored into the costs. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 18 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance 1.5.3 Anglian Water Restricted - Commercial Sewerage schemes cost estimates Anglian Water has developed sewerage schemes in the same way as the sewage treatment schemes using the UKWIR methodology staged approach. It has taken the solution from Stage 2 and costed each scheme using the template approach in Asset Plus. The Company has used cost models for sewers, rising mains pumping stations and associated sewer structures as required. The local asset planning teams assessed the potential for site-specific risks in a similar way to the non-infrastructure schemes. 1.5.4 Costing of regional schemes – non specific investment A number of schemes are regional in nature and dependant on the scale of housing growth. The Company has included these schemes as non-specific investment. AW has provided the details of each investment type in its commentary. Supervision of requisitions, adoptions, connection and diversions At our review meeting for the DBP, SMC requested the cost build up and the cost estimate of £14.25m has not changed for the FBP and is based on; The average workload for AMP4 based on 26,607 properties /year (FD) The average workload for AMP5 based on Company projections from the MORIATY database The average cost per year in AMP4 based on the average for 07/08 and forecast for 08/09 Multiplying the estimated average cost per property for AMP4 by the percentage projected increase in properties to determine the cost estimate for AMP5. The Company has assumed the costs will be profiled evenly over the AMP5 period. Anglian Water proposes to continue to treat the cost of its Developer Services team as capital expenditure as it has done since 2007/08. Provision for on site requisitions The Company has assumed that the developers of large sites (>200 properties) who are requisitioning for off-site sewers will also requisition for the on-site services. AW states that it has derived a cost per property of £2,207 by reference to the total cost of on-site infrastructure delivered by adoption agreements over the last five years against the total number of properties within those developments. Two sites in Milton Keynes have received planning approval and on-site requisitions have been signed. No further sites have requisition agreements for on-site sewers since the DBP. Provision for up-rating small SPSs The Company has described the cost estimate for this scheme in its commentary. We did not view the data or challenge the assumptions. Sewer modelling for growth The Company has stated its position for including sewer catchment modelling (£2.0m evenly profiled 5 years) as an investment proposal in the Wastewater supply demand programme rather than in IRC. We challenged the Company on the inclusion of this provision. We did not view the cost build-up for the scheme. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 19 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Vacuum pot installation The Company has described the reason for inclusion for this item in its commentary. We did not view the data or challenge the assumptions. Studies of CSO impact AW has included five catchments at a nominal £55k for UPM studies of CSO impact: Huntingdon, Kibworth, Poppy Hill, Silverstone, and St Neots. 1.5.5 Cost benefit analysis The Company has carried out cost benefit analysis of the projects costed through Asset Plus. The Company has not used CBA results to make decisions on the options selected as in general the options have been appraised outside the system and only one scheme has been input into Asset Plus. Schemes are generally required through past growth, requisition or adoption. The CBA calculation takes developer contributions into account. The Company has not been able to use CBA for prioritisation of schemes as they are driven by the timing of developments or by the requirement to remedy the effects of past growth. 1.6 Stage 4 Business Plan preparation Stage 4 is defined in the UKWIR report as the stage which ‘brings the assessments together in a portfolio analysis to create a robust estimate of the total funding requirements to deal with wastewater supply-demand, taking account of likely revenues and allocation to cost drivers’. Anglian Water has in most cases allocated the whole cost of a scheme to the prime driver in accordance with its usual practise. The Company has included commentary in ‘Stage 4 assessment – synergies’ in its Final Business Plan commentary for B5. Anglian Water has identified some schemes where there is synergy between the quality programme and the sewer flooding programme and allocated costs accordingly. The Company has not identified any synergies with the capital maintenance programme. 1.7 Opex effects of Capital schemes 1.7.1 Schemes delivered in AMP5 The Company has significantly improved the estimation of opex effects of capital schemes since the DBP. Opex has been calculated in Asset Plus based on scheme solutions with standard opex costs through a template containing for each element: power, chemicals, labour, rates etc. Costs are based on the size of the extension or scheme and the user inputs the required parameter, e.g. the power rating of pumps or the total flow through a process. 1.7.2 Non-specific operational expenditure Anglian Water has included a scheme for additional non-specific opex in AMP5 that has not resulted from capital expenditure. SMC challenged the inclusion of this item, which results in additional operating costs of £4.4m over the AMP5 period. The Company considers that there is currently no mechanism for reporting additional opex for pumping station and sewage treatment works adoptions or for the additional costs of treating sewage as a result of growth. SMC queried whether this would be picked up in the opex reported in June Returns. Only the additional costs 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 20 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial associated with capital schemes are reported. The Company considers that this results in opex efficiencies being understated. SMC were provided with a spreadsheet detailing the cost build-up for the opex estimate. Adopted STWs The Company has used an average of 15 adopted STW per year. We asked the Company for the basis of the estimate. We were provided with the information that during AMP4 the company has adopted 33 STWs from Kings Lynn and West Norfolk BC. Six have been closed and 27 reported in JR07 and JR08. The Company is currently working through an application from South Norfolk DC for 50 STWs. Three were reported in JR08. The list is likely to reduce due to the cost of refurbishment before Anglian Water will adopt. There is also an application from Colchester BC to adopt 11 sites. An estimate of 45 appears reasonable. Opex costs are based on an estimated £4000 per STW. Adopted pumping stations The average number of pumping stations adopted in AMP4 (28) based on data from 04/05 to 07/08 was used to forecast the opex resulting from the stations. The Company has used an assumed opex cost of £4390 per PS. Additional operating costs for STW due to growth in the catchment Anglian Water identified 78 sewage treatment works where growth is expected in AMP5. Of these, 13 have capital schemes identified. We viewed the spreadsheet used to estimate the additional costs for power for the 65 resulting sites. Costs are based on treatment type and include estimates for power chemicals and sludge transport costs. The biggest population increases predicted are at: Cotton Valley (Milton Keynes) pe increase of 24,932 by 2014/15 to a cost of £126k by 2015 Great Billing pe increase of 11835 by 2015 at a cost of £59k by 2015. These sites are sludge treatment centres and therefore have no additional costs for sludge transport. Reporter comment In the past the Company has not identified this additional non-specific operational expenditure. We did not review the data in detail. 1.8 Grants and Contributions 1.8.1 Background AW has assumed that there will be no receipts from grants in AMP5. The Company anticipates higher take up of the Discounted Aggregate Deficit (DADS) option by developers as they are more aware of the implications of changes to the Water Industries Act 1991 by the provisions of the Water Act 2003. Anglian Water states that it would normally use historic evidence but considers this is not useful in this case due to the change in circumstances between AMP4 and AMP5. The Company is anticipating a large increase in the number of requisitions under the 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 21 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial DADS approach. To date in AMP4 there have been six requisitions for development sites with a total cost of £5.0m and recognised contributions of £0.16m. These requisitions were based on the relevant deficit methodology (rather than DADS) and the contributions are received and recognised over several years. Therefore it would be necessary to look at the costs and contributions over the entire scheme to get a complete view of the recovery rates. Anglian Water has previously reported the contributions for S98 adoptions as income. The Company has reviewed its accounting policy effective from 2008/09 and will now capitalise the contributions. 1.8.2 Changes since the DBP Since the DBP the Company has addressed the main Ofwat challenges to its estimates of developer contributions for AMP5. The key areas of change are: The scale and timing of expected development The extent of developer requisitions and the level of contributions from developers for this work. The anticipated change from S104 adoptions to S98 requisitions for certain developments The potential for contributions from developers towards the cost of S98 on-site requisitions. The allocation of on-site costs to specific development sites rather than a regional £37m allocation at the DBP. SMC reviewed the information provided by the Company in a separate audit meeting prior to the main B5 audit meetings. The Company also presented a view of the reasons why it may receive developer contributions below the industry average. Changes from the DBP Type of contribution Infrastructure charges S104 adoption S98 requisitions on and off-site services DBP £m 41.1 FBP £m 42.7 7.5 (incl.£1.2m for connection charges) 18.9 6.0 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc 37.0 Page 22 of 42 Reason for change Profile of new connections changed to reflect market downturn in AMP4/early AMP5 and subsequent ‘bounce back’ in years 3, 4 and 5 of AMP5. Reassessed expected change to S98 requisitions. £1.2m/annum estimated to reflect AMP4 position. Reassessed on and off-site service provision together for larger sites. Separated some strategic sewerage reinforcement schemes into smaller schemes where developer contributions to downstream infrastructure reinforcements apply. £45m estimated as the net cost Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Type of contribution DBP £m FBP £m 67.5 85.7 Total contributions Anglian Water Restricted - Commercial Reason for change for the provision of on-site services. At the DBP assumed no contributions from developer; since updated with site-by-site forecast (for costs and contributions) 1.8.3 Grants The Company is assuming no grants will be available for the AMP5 period. 1.8.4 Infrastructure charges Anglian Water has estimated infrastructure charges for the FBP based on its reassessment of the rate of new development in the region. The Company has changed the profile of new connections to reflect market downturn in AMP4/early AMP5 and subsequent ‘bounce back’ in years 3, 4 and 5 of AMP5. This has resulted in higher forecast income from infrastructure charges than forecast in the DBP. SMC has no way of determining whether the forecast will prove to be correct in the current economic climate. The company has used the maximum allowable charge of £276 per property. 1.8.5 S104 adoptions The Company has revised its estimate of S104 adoption fees for the FBP to £1.2m per year based on the estimated £1.344m for 2009/10. We did not test the estimate. SMC considers that this is a reasonable assumption although we understand that the Company believes that this may be an overestimate as developers change to S98 requisitions in line with the forecast. 1.8.6 S98 requisitions The scale and timing of expected development Anglian Water has reviewed the scale of development and has concluded that, since the government housing growth targets for the region have not been reduced the overall projected increase in new housing remains valid. The timing of the developments and the construction time on-site are subject to change due to the current collapse of the housing market. The Growth team developing the SDB programme has assessed which schemes to include in the programme for AMP5 using the profile of new connections produced by the Income and Tariffs team (projecting a market downturn in AMP4/early AMP5 and subsequent ‘bounce back’ in years 3, 4 and 5 of AMP5). The Growth team reviewed the progress of developments through the planning process to assess the likelihood that developments will go ahead in AMP5. For sites greater than 200 properties the Company has made judgements based on market research with developers and local knowledge resulting in the following standard slippage estimates: 3 years for sites under construction or with detailed planning approval 4 years for new sites. SMC requested and was provided with a list of sites where proposals had been made to the developer. No S98 on-site requisition agreements, apart from HMP 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 23 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Gartree, have been signed other than the Redlawns (Milton Keynes) agreement. The Company states that the revised start and end dates have been reviewed by Account managers and the Growth Planning team and apparently anomalous results manually adjusted. We did not view the manually adjustments to the standard slippage. The large sites have been programmed and sufficient small sites added to give a smooth profile and best fit to the Income and Tariffs projections. Anglian Water has assessed on-site construction time from the District Council annual monitoring reports from December 2007. The Company has assumed a linear construction profile. The extent of developer requisitions and the level of contributions from developers for this work Anglian Water anticipates requisitions under S98 for 24 out of the 515 large development sites (>200 properties) in its region for the FBP. This work accounts for £75.3m (30%) of the total capital expenditure for SDB schemes. The Company assumes that: These will be larger sites where there is clear financial benefit for the developer to requisition rather than the self-lay and adoption route Developers will requisition where they require Anglian Water’s powers for crossing land etc. Where developers requisition off-site services they will also requisition on-site services. The Company has estimated developer contributions of £37m for S98 requisitions, an average recovery rate of £49.1%. Financial benefit to the developer We challenged the Company on the basis by which it had determined the financial benefit to the developer and therefore whether S98 requisition was to be expected. Anglian Water uses a model (Service Site Contribution Model) to calculate the developer contribution under DADS. The model uses the estimated cost of the development including provision of on and off-site services and sewer reinforcement to calculate the company and developer contributions under the various options. The model also calculates the relevant deficit for comparison. The Company uses the outputs from this calculation model for the larger sites (>200 properties), along with the assumptions that developers will requisition if they require Anglian Water powers to cross third party land to connect to the system, to gauge the probability that the developer will requisition the work. For the Poplar Farm example viewed at the review meeting the developer contribution was calculated as £4.2m under Relevant Deficit and £4.0m ((3.2m plus 0.8m interest) under DADS. The Company outlined the process it goes through in its discussions with developers who have expressed an interest in requisitioning for services for the more significant development sites in the Anglian region. Anglian Water prepares the cost estimates for the different delivery methods. Developers choose the option best suited to the circumstances, including the preference to be in control of the construction of the on-site services. For the smaller development sites the Company states that the options are available on the Company’s website so developers can easily assess the benefits. The Company considers that accessibility of this information and greater awareness in the market will lead to a better understanding of the options and a higher uptake of S98 requisitions. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 24 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial For the DBP Anglian Water estimated the off-site costs of S98 requisitions based on the site-specific solution selected for each site. The developer contribution was estimated based on the Discounted Aggregate Deficit (DADS) option. The Company estimated on-site costs as a regional scheme based on £2,207/per property. This equates to 16,765 properties (20,390 including Milton Keynes WEA). For the FBP the Company has estimated 13,000 properties for AMP5 with 36,000 in later years. SMC understands the basis that the Company has used to make its assumptions and agree that there appears to be a financial benefit for some developers to take up the DADS option. Contributions for sewer reinforcement The company defines work on the sewerage system as sewer reinforcement: To protect existing customers from increased flooding risk due to the impact of new development To protect the environment from increase pollution through unsatisfactory CSOs Anglian Water has assumed that where developers use the right to connect the Company will be unable to secure contributions for reinforcement work. The Company also assumes that where there is more than one developer discharging into a catchment through a S98 requisition agreement there will be no opportunity to recover costs for sewer reinforcement work. The same assumptions have been applied to sewage treatment capacity. The Company has split the Broadholme scheme (see 1.4 above) into smaller schemes partly to enable the schemes to be linked to specific development in terms of timing and the opportunity to secure contributions for the work. This approach appears to have been advantageous. The Company has similarly disaggregated the Letchworth and Peterborough catchment schemes. S98 Requisition for on-site services The requisition of on-site services is relatively new. The precedent was set with the appeal decision on the HMP Gartree case that S98 requisition and DADS arrangements applied to both on and off-site sewers. The Company considers that the agreement it has reached for developer contribution for the Redlawns development is a way to apply S98 of the WI Act to the new circumstances of onsite requisitions. The Company is basing its assessment of the demand for on-site requisitions on the precedent of this agreement, correspondence from Redlawns and Taylor Wimpey and discussions with other developers. For the FBP Anglian Water has estimated the on and off-site costs together for each scheme, again using DADS for the estimate of the off-site contribution and £2207 per property for the on-site work. The on-site costs have been estimated for each development and spread over the life of the development rather than the AMP5 period, reducing the estimated cost in AMP5. SMC asked the Company for the basis of the estimated £2,207 per property estimate for the on-site work. Anglian Water responded that there is a large variation in the scale and cost of on-site services dependant on the site. In order to determine a cost per property Anglian Water has used an estimating system developed to estimate the cost of on-site works for S104 adoptions for which the Company charges a 2.5% fee. The Company used the submitted design for around 470 S104 adoption sites for 1998/99 up to 2007/08 to estimate the cost of the on-site work by imputing the elements of the design into the estimating spreadsheet. The costs have 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 25 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial been adjusted for COPI. The cost per property has been averaged over the 470 sites. The Company stated that it had validated the estimate against the developers costing for the Redlawns development site. We requested and were provided with the comparison data. The data showed close agreement (all around £15m) between the developer estimate, the estimate produced by the estimating database and the PR09 methodology of £2207 per property. We were satisfied that the estimate was on a sound basis. The Company pointed out that the commitment and expenditure to provide the onsite services would carry over into AMP6 and beyond dependant on the life of the development site. SMC selected seven schemes to review scheme solutions and cost estimates as part of the main review. Our observations can be found in 2.4 of this commentary. Calculation of developer contributions Anglian Water uses the Service Site Contribution Model developed for water service requisitions during AMP3 to calculate the developer contributions under DADS. It was first used on the Wixams development site at Bedford (on site water service for the ex Elstow barracks site 4 or 5 years ago) and has since been used to base accepted offers for the Redlawns and West of Bedford sites. The model: Splits the development into equal annual parcels over the planned life of the site. This has advantages to the Company and to the developer in that the planned life may be longer than the 12 years RD calculation. Each parcel is classed as a separate DADS calculation with income and capital costs apportioned accordingly Shows total off-site costs incurred in year 1 On-site costs are split evenly over the life of the development. The model uses all costs at year 0. The income and the ‘cost of the loan’ are inflated over time using the interest and discounted rates set by Ofwat Uses the same assumptions for each year i.e. no allowance is made for interest rate changes for example. SMC viewed an example calculation in the model for Poplar Farm Grantham. The model adds up the DADS contribution for each parcel of the development and then calculates the interest due to off-site capital in year 1 to determine the total contribution to the scheme. SMC viewed the model live using schemes on the system. We did not review the assumptions in detail. We carried out simple sensitivity testing by changing the assumed RPI + K and interest rate, neither of which affected the output to any extent. The model calculates the contributions by the company and the developer for each option. Anglian Water has used the outputs from the model to estimate the level of S98 contributions for AMP5 on a site-by-site basis. As far as we could tell the company had used the model in a consistent way to determine the estimate of contributions for the FBP. 1.8.7 AW developer contributions (Section 98) below industry average. In its response to the Company following the DBP, Ofwat assumed that companies would recover 64% of new development costs for wastewater services based on the industry average. Anglian Water predicts a recovery rate of around 49% of requistionable costs for AMP5, which is less than the industry average. The 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 26 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Company presented several worked examples (previously presented to Ofwat) to illustrate its argument that the Company will recover less than the average. SMC viewed the examples and understood the Company’s argument that the level of expected contributions goes down from the average where: The build rate goes up to reflect the regions high build rate. The Company has assumed an average of 3 years to build a ‘1,000 house’ site for the Anglian Water region and 5 years for a typical WaSC. The assumption is based on 2007/08 data from the ONS The average water bill goes up - Anglian Water wastewater bills are higher than average at £187 compared to the average £174. The Company has calculated the sewerage bill based on the average no. of customers at 2.4 persons/property AWS capital efficiency better than average at 3.15 compared to the industry average of 3.8. SMC was provided with the calculations and assumptions for the average build rate and the average sewerage bill. The assumptions appeared reasonable. The calculations and the argument supported the Company’s case. Section 2 Expenditure implications of maintaining the SDB 2 Company approach The Company approach to expenditure estimates is detailed in the reporter commentary for Section 1 to align with the Company commentary. In Section 2 of its commentary the Company has included information on proposed investment compared to historic costs. The Company has added more detailed discussion in its commentary for part C5. Response to Ofwat reporter guidance 2.1 Response to General Guidance 2.1.1 Material assumptions for table B5.4 Comment on the basis of population changes, in particular whether the population forecast figures have been derived from the most recent Office of National Statistics (ONS) estimates or local authority estimates or the company's update of these estimates. If the company has revised the most recent ONS or local authority estimates, the reporter must determine the basis for the changes and to assess whether they are robust The commentary on the basis of population forecasts can be found under Stage 1 above with more detail in the reporter commentary for the B5 Water Service. 2.1.2 Proportional allocation between expenditure categories Comment on the method the company has used to proportionally allocate expenditure between categories and the reasons given for its. Is the approach used appropriate and the explanations provided sound? The Company has allocated expenditure to investment categories based on the prime driver. For example, the Company has assumed that growth at sites where there is an identified capital maintenance scheme will be included in that scheme and growth will not be identified separately. SMC considers that pressures on capital maintenance expenditure and changing priorities may result in the capital maintenance scheme not going ahead within the required timeframe. It was unclear 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 27 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial whether the Company plans to allocate the additional investment required to growth. If not, we consider that there will be unacknowledged investment in growth. In the course of the review SMC noted that a number of sewage treatment schemes had comments in the Stage 2 and 3 reports inferring that some assets on the site were in need of refurbishment. The solution costed for one site, Swinderby STW, is a rebuild. We challenged the Company on why there had been no proportional allocation at sites where assets were to be renewed. The Company stated that it was difficult to assess at this stage whether assets have been included for capital maintenance expenditure in AMP5. If the expenditure was planned in AMP6 for example, how could an allocation be made to reflect this? SMC acknowledges that proportional allocation to capital maintenance is not easy but the Company does not attempt it. SMC questioned whether the Company applies proportional allocation at scheme delivery stage or whether prime driver still applies. The Company responded that expenditure is allocated by purpose in line with its BIC manual v12 and so all expenditure necessary for prime driver is allocated to that driver with extra over expenditure allocated to secondary drivers. Thus if a screen is replaced due to maintenance and oversized for future growth the extra cost for oversizing would be coded for growth. If it was replaced for growth the whole cost would be coded to growth. 2.1.3 Allocation of expenditure between the new development and growth Comment on the allocation of expenditure between the new development and growth categories. Has the company included schemes under growth that it should allocate to new development where the costs relate to the provision of local distribution assets to provide water services and sewerage network assets for new customers? The reporter should comment on the consistency of the schemes included under new development with the requisitioning provisions in sections 43 and 100 of the Water Industry Act 1991; The Company has changed the categorisation of new development and growth from that carried out at DBP. As far as we can determine the Company now categories schemes required as a result of development in the catchment as new development regardless of whether the Company will be able to recover costs from the developer. 2.1.4 Recovery of requisitions grants and infrastructure charges Comment on the assumptions that the company has made about recovery of requisitions, grants and infrastructure charges. Are these realistic and justified? General The assumptions made by the Company about expected contributions and infrastructure charges are outlined above. In summary, we consider that the most material assumptions are based on the scale of new development, the rate of the housing market recovery, the number of S98 requisitions the company will receive and the potential for recovery of sewerage and sewage treatment costs. Although historically there has been little evidence that developers will move towards S98 requisitions in AMP5, particularly for the on-site work, the company believes that there is evidence to support its view that this will change for AMP5 for certain specified sites. The Company presented correspondence from Redlawns and Taylor-Wimpey showing how expectations concerning provision of on-site sewerage services have changed. We note that the Company appears to have made great efforts to assess developer intentions. Anglian Water supports its view of the scale of change to S98 requisitions in AMP5 through the ten draft proposals it has made for large sites where customers have expressed an interest in requisitioning on-site services. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 28 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Anglian Water appears to be taking a proactive approach working with developers, planners and the EA to understand and influence the impact of new development in its region. SMC considers that because of the lack of any historical precedent on a significant scale the company may be overestimating the take up of the DADS option and therefore potentially overestimating the costs and contributions. On the other hand, if the Company is correct in its assessment of the future level of S98 requisitions it may equally have underestimated the costs and contributions. However, on balance Anglian Water appears to have made its assumptions in a logical manner based on its understanding of the market. Specifically, there is evidence that cash deposits have been paid by developers for several developments where they intend to requisition sewers, and this appears to support the company’s view of the future. By building the schemes at a site specific level Anglian Water has attempted to arrive at a central estimate of the capital cost, requisition uptake and contributions. We understand that the Company is proposing to Ofwat the use of the change protocol at scheme specific level as a means of managing the uncertainty. Contributions for strategic sewers We challenged the Company to show where it could be possible to disaggregate larger sewerage reinforcement schemes (as it did for the Broadholme catchment) with a view to gaining contributions from developers where the impact of specific sites can be clearly shown. The work on the Broadholme scheme has resulted in deferral of parts of the scheme to AMP6 but at an overall increase in scheme cost. Similarly the Company has disaggregated the Letchworth scheme into two parts, both of which have been deferred to AMP6, and the Peterborough scheme into three parts. None of the Peterborough schemes (two PS upratings and a minor sewer upsizing) are requistionable, 2.1.5 Consistency of costs with the PR09 projects database in section C5-2. Confirm or otherwise the consistency of costs with the PR09 projects database in sections C5-1 and C5-2. SMC has viewed the reconciliation made by the Company of the costs in the tables with the PR09 projects database in sections C5. As far as we can determine the costs are consistent. 2.2 Response to specific guidance for the sewerage service strategy 2.2.1 Consistency of the sewerage strategy with long term least cost plan wastewater Confirm or otherwise that the companies explanation of its sewerage strategy is consistent with its approach to its the long term least cost wastewater plan The Company does not appear to have previously had a formal regional sewerage strategy although it states that it has strategies at catchment level. AW has developed its long-term least cost wastewater plan in response to the requirements of the Draft Business Plan using the UKWIR methodology. The strategy does not follow the UKWIR methodology in detail but it does follow it in essence. AW states that it has found the methodology a useful format to follow to identify future investment requirements. We understand that the Company plans to use the Water Cycle Studies as the vehicle for planning its long-term wastewater strategy at a Regional and catchment level in the future. To date one water cycle study has been 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 29 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial completed out of 35 studies underway. The Company hopes to move from the UKWIR methodology to the use of the studies by 2014. The Company has determined its potential investment based on the assumptions and methodologies described in the commentary above. SMC has reviewed the information provided by the Company and considers that the Company appears to have carried out its assessments in the way that it describes. 2.2.2 Consistency of approach for sewerage catchments and investment type Confirm or otherwise if the approach was consistently applied, as described, for each sewerage catchment. As far as we can determine the Company has applied the methodology and assumptions consistently. 2.2.3 Sources of information used by the company Explain what sources of information have been used if the company have not included this in their summary in Part B5 and comment if the company has not utilised all pertinent available information. In the course of the review the Company provided examples of information it had used in the build up of its business plan. We are not aware of any pertinent available information that the Company has not used. 2.3 Specific reporter guidance for the sewerage service Section 2 2.3.1 Non specific investment Scrutinise whether the company has identified the most appropriate cost categories and whether the solution required and unit costs are based on the most robust and pertinent data including information about costs of recent similar schemes. The Company has defined regional schemes as non-specific. SMC has described the schemes in detail in stage 3a categorisation above. The Company has described its assumptions in its commentary. The Company has used comparison with current costs for AMP4 as a guide to the costing of some schemes as described above. 2.3.2 Defined and defined contingent investment Confirm or otherwise whether all feasible options have been appropriately considered for each option appraisal; Scrutinise the estimates of costs and benefits included in each project appraisal and comment on the robustness of these estimates including a comparison with the costs of recent similar schemes; and Comment if the least cost scheme was not selected. General SMC does not have sufficient knowledge of the Company’s assets to determine whether all feasible options have been considered for each scheme. Where we have reviewed selected schemes it would appear that a number of options have been considered with the focus on engineering feasibility and the solution of the problem. Schemes are not costed until the solution has been selected and therefore SMC is not clear where the least cost solution has been selected in every case. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 30 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial We did not compare the cost estimates with costs from recently completed schemes at this time. Selection of the most likely outcome The Company has selected potential options for schemes which would appear to have been considered in a logical manner by the local asset planning teams. Most scheme solutions are based on desk top studies and as such have had little detailed design at this stage. Some of the bigger catchments or STW schemes are backed in some cases by Drainage Area Studies, Drainage Area plans or consultant studies. SMC does not the knowledge of the assets to assess whether the preferred option would be the one to be delivered. For example the Whilton catchment scheme for the proposal has five large development sites of which four are considered probable. The Company considers that the developers will requisition on-site services for three of the sites. The proposal is for a new trunk sewer capable of accepting flows from the eastern side of Daventry to feed directly into Whilton STW. The solution needed to allow for: crossing of three minor roads the Grand Union canal the main railway line tunnelled sections of the M1. The solution was costed at £5m. The Company has considered a number of options. SMC is not in a position to comment on whether the solution proposed is the most likely outcome but would suggest that the Company would undoubtedly give great consideration to other options when the scheme reaches detailed design. There are a number of similarly complex schemes for which the Company has made a judgement on which developments will proceed and the best options for serving the developments. The decision between different choices for each scheme The Company has adopted a series of single solutions in building up the plan, it does not put forwards options for optimisation in investment Manager. With the nature of new development on the scale projected for the region it will be difficult to decide the location of the development in every case. There has been a large degree of judgement in the choice of individual solutions. The Company acknowledges that detailed design may provide a different solution. The Company has carried Stage 3 assessments for most of the sewage treatment schemes and for the high value sewerage schemes. The Company has a large and complex programme which will undoubtedly change and a ‘change protocol’ or equivalent may well be appropriate. 2.4 Schemes reviewed SMC selected seven mainly high value schemes for review as detailed in the text below. 2.4.1 Broadholme catchment The Broadholme catchment comprises a number of towns and villages draining to Broadholme STW to the east of Wellingborough town centre. There is significant proposed new development in the catchment and any proposed solutions have engineering complexity. Desborough, the town at the top of the catchment, has a 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 31 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial potential 50% increase in population forecast. Sewage from the Desborough area is pumped into the Rothwell sewer. The original scheme was also linked to a stage 3 scheme for upsizing the Broadholme STW to receive the additional flows. Further stages of growth are expected for the catchment and therefore the STW for AMP6. Ofwat challenged the Company over the apparent strategic role of some of its sewer reinforcement schemes. The Company has reviewed the main scheme, for Broadholme catchment, and presented a revised scheme report at the review meeting. The scheme was at Stage 2 for the DBP. The Company has revised both the scope and the timing of the scheme since the DBP. Following completion of the stage 3 and its review of the rate of development likely in AMP5, the Company has reviewed the need for the STW scheme in AMP5 and has deferred investment to AMP6. This is due to the disaggregation of the sewerage scheme into six separate schemes associated with new developments, some of which are now considered unlikely to go ahead in the period, Ofwat challenged the Company on the need for the scheme in AMP5 and whether the scheme was least cost. The Company has addressed the need in its report to Ofwat. A joint planning unit is in place for the area to produce a Local Development framework. The EA has objected to the Core Strategy to ensure that the wastewater infrastructure issue is addressed. SMC viewed the least cost report prepared by the Alliance. The Alliance had been asked to prepare a report to: Appraise the strategic sewerage and other network improvements developed by Halcrow as part of the North Northamptonshire Water Cycle Study to cater for the planned growth in the Broadholme catchment Model the catchment sewerage and develop proposals into robust options Provide costs implementation strategies and statements of benefits Develop solutions for S98 sewer requisitions for selected proposed sites in the catchment. The report contained the Stage 3 report, maps of the catchment showing options 2 and 4 of the report. Appendix 7 of the report is a summary of proposals that have been presented to the developer of three of the major sites in the catchment. The report is in C4 of the Company’s FBP submission. The report states that numerous options for required strategic reinforcement were considered during the ‘network modelling’ phase of the study. Some of the options were discounted as not technically feasible. A preliminary UPM study has been carried out that demonstrates all the options considered were feasible but that options 3 and 4 provide greatest flexibility for future changes. The Company presented the options at the review meeting and option 4 estimated to cost £17.5m has been put forward for the FBP. This has a number of advantages, is least cost and has a lower operating cost than some of the alternative solutions. The solution can be implemented as development takes place. There are engineering challenges associated with the chosen option, although with the complexity of the catchment there appear to be challenges with each option. The Company had proposed option 1 for the DBP at 24.6m. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 32 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial We consider that the Company has responded quickly to the challenge to reconsider the proposed scheme at the DBP. It does not appear to have chosen the easy option if indeed the catchment has one. We did not view the costs for the separate schemes at the review. We asked the Company to confirm how the cost has been built up. The Company stated that all options had been costed using Asset Plus. 2.4.2 Bedford STW This scheme addresses a site which is considered high risk and the Company anticipates a start in 2010. At the DBP the scheme cost was estimated at £19m. This scheme now has a Stage 3 report. The Company provided the risk and value meeting notes for the site as part of the Stage 3 information. The Company has used available data for the site including a detailed report prepared by Halcrow in January 2007. The report concluded that: The existing STW has insufficient capacity for future projected growth The works currently meets its sanitary consent conditions Additional capacity will be required at the earliest opportunity although realistically this would not be before 2011 Land purchase would be desirable in the longer term and preferably in the short term regardless of the option selected for the scheme The sludge digestion and dewatering facilities are at the end of their design life. SMC viewed the asset plan for the site. The issues at the works are shown as: Biological process capacity sufficient for only 1 or 2 years growth (Halcrow appraisal) The works may take additional flows from de-commissioned STWs in Marston Vale depending on the growth strategy in the region but no allowance has been made at this stage. The consented DWF is exceeded by 8%. Application for a new DWF consent to be submitted to the EA as part of the flow compliance project The works suffers high infiltration. During our review of the scheme SMC noted that capacity had been included for sludge liquors from the proposed sludge treatment improvements. Capacity for additional liquor treatment is already included in the Bedford biosolids scheme. The Company realised the error, corrected the design capacity requirement and recosted the scheme. Changes between Stage 2 and Stage 3 report The Stage 3 report concluded that there is insufficient capacity to rely on additional aeration lanes. It recommends that the existing filters be converted to plastic media filters to gain extra capacity particularly during the construction of the plant. There is currently a capital scheme (S073) for the site involving replacement of the treated sewage flow meter, plus refurbishment of the SAS thickening plant, site dewatering and wash water systems. From the description of the scheme and of the proposed AMP5 scheme there does not appear to be duplication. The new flow meter should give a better understanding of flows to the site and therefore the assumed DWF and infiltration levels. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 33 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial The site meets its current consent apart from the DWF consent that will be corrected through the flow project carried out with the EA for the quality programme. The DWF consent will be reissued but the numeric consent for sanitary parameters will not be tightened at this stage based on river need. A new tighter consent will be required in AMP5 as expected new development progresses. Costs for the scheme Scheme costs have risen from £19m at DBP to £22m for the FBP. We challenged the increase in cost. The Company responded that this was due to: Forecast population increase (increased from 19,000 at 2018 to 24,000 at 2021) Current load - Halcrow noted it as 13,800kg/d but used the theoretical figure of 12,500kg/d in design Impact of iron dosing (which increases the inert fraction of mixed liquor) Requirements for nitrification (which is the limiting parameter for the existing plant) Comment The Company has used the existing Stage 2 report to further develop a Stage 3 option using local knowledge and experience. We challenged the Company on the change of scope of the scheme. The Company explained the original Stage 2 was carried out by consultants to assess the need for extensions at the works. Their remit was not to design the work but to put forward options for appraisal with a recommendation. We consider the proposed scheme is a realistic engineering solution. There would appear to be some opportunity for capital maintenance benefits from advance replacement of some elements, for example the refurbishment of the thickeners, but the bulk of the proposed scheme is new tanks and aeration plant. 2.4.3 Cambridge STW Anglian Water provided the Stage 2 (May 2008) and Stage 3 reports (January 2009) for Cambridge STW. The current load, 148,829 pe, comprises domestic flows, trade effluent and sludge liquors from the on-site sludge treatment centre. The works comprises 2 streams, an activated sludge plant and two biofilters 2 storm tanks and 6 sand filters. There is a sludge treatment centre catering for imported sludge at the site. The reports state that expenditure is required to replace aging assets. The inlet works and screens are undersized and flooding is a significant problem. The inlet flow is limited to 800 l/s. There is a third final tank currently under construction. The biological filter stream has large media that cannot consistently remove ammonia. There is an application in progress to increase the DWF from 36,000 m3/d to 37,330m3/d. No tightening of sanitary parameters is expected. From January 2009 the works must also meet 1mg/l P and a limit on total Fe. Phosphorus removal will be by chemical precipitation. The Stage 2 report proposed one additional final and an aeration lane with a second lane during AMP6. Various options were reviewed including do nothing. The Stage 3 report updated the growth profile to 2026. The report states that if the plant is improved as described in the options it will have capacity to accommodate flows to 2016 with space available to allow further development to 2021 and beyond. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 34 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial The proposed works include: Extensions to the inlet works, with additional screening and bypass facilities. Two new biofilters for B works 14 sandfilters to B works to treat all the flows from B works releasing the existing sandfilters for A stream. The report recommends a complete new inlet rather than tying in to the existing inlet works. The work has been costed through asset plus at £10m capex with an increase in opex of £384.5k per annum. The largest items of expenditure are £3m for sandfilters and £1.9m for biofilters including media. The Company has allocated this project to SDB with no proportional allocation to capital maintenance. There would appear to be capital maintenance benefits to carrying out the project, particularly the inlet works renewal. As well as the deficiency in hydraulic capacity, there also appears to be a deficiency in biochemical capacity that appears to be exacerbated by the sludge liquors from the on-site sludge treatment centre. 2.4.4 Letchworth STW SMC received the Stage 3 report. The works is a sludge treatment centre including digestion. Sludge is imported for treatment from twelve surrounding sites. Sludge cake is produced on site and the resulting sludge liquor is treated in the sewage treatment works. The sewage treatment works is undersized and past and future growth needs to be catered for. The current load is 43,864 pe and capacity assessed at 22,288 pe. The design is for 47519 by 2021. The current works comprises two AS plants (A and B, with 5 tanks in each plant) 6 final tanks, two storm tanks, two digesters and associated tankage with 2 centrifuges and a centrate tank. Anglian Water has estimated this project at £6.63m in AMP5. The proposed works from the Stage 3 report included: An increase in aeration capacity to allow mixed liquor to be held at a level sufficient for nitrification and to increase the hydraulic retention time in the ASP An increase in final effluent capacity. Anglian Water is currently maintaining consent by managing the facilities when ammonia compliance is at risk. SMC was provided with the cost estimate from Asset Plus and noted that the following items were included in the cost: Additional aeration capacity 3 final tanks Drum thickener. SMC assumes required for the increased activated sludge production due to the additional activated sludge capacity. Standby generator (standard Anglian Water design for activated sludge plants plant over 30,000pe) Washwater pumping station Roads. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 35 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial SMC considers that there appears to a deficiency in biological capacity similar to the Cambridge STW exacerbated by the presence of the on-site sludge treatment plant and associated sludge liquors for treatment. We assume that the load relating to sludge liquors would not have been included in the original design when the treatment works was built. 2.4.5 Uttons Drove STW SMC was provided with the Stage 3 report, updated from Stage 2 in January 2009. The sewage treatment works is a small to medium sized works but significant growth is planned in the area mainly arising from Northstowe, Home Farm and further development in Cambourne. Population equivalent is projected to rise from 16,525 to 31,650 by 2026. The report states that the plan is a staged increase in capacity through a parallel AS plant to eventually treat 42,000 pe on the existing site. The plant comprises eight biofilters, two primary tanks and 12 final clarifiers. There is P removal at the site with a current P consent of 2mg/l. Anglian Water has designed the proposed plant to a predicted consent based on equivalent load using the current consented DWF, the predicted future DWF and the current consent values. The design consent is 20mg/l SS, 10mg/l BOD, 5mg/l NH3 and 3mg/l Fe (current consent 25mg/l SS, 17mg/l BOD, 9mg/l NH3 and 4mg/l Fe). Anglian Water has also designed the plant to meet a 1mg/l P consent on the basis that it believes a Habitats Directive consent will come into force as soon as a new consent is granted. We question whether the plant should be designed for the tighter P consent unless there is clear evidence that it will be required. There does not appear to be a Habitats Directive consent revision in the Final NEP. The Company has costed the proposed project through Asset Plus at £11.717m The cost estimate includes: Belt presses for sludge Sludge storage tanks Standby generation (standard Anglian Water design for activated sludge plants above 30,000 pe Washwater pumps 1 aeration tank 3 final tanks 2 primary tanks P removal plant Odour control New inlet works including grit removal, screens and storm tanks Roads. The Company has calculated the additional opex costs of £580k through Asset plus. Costs include rates (upper estimate), routine maintenance, power, chemicals and biosolids. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 36 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance 2.4.6 Anglian Water Restricted - Commercial Uttons Drove Northstowe sewerage scheme The Company provided the Stage 3 report for the project, updated on 09/02/09. The project is to provide capacity for 9,500 properties at Northstowe new town. The report did not show the options to be considered as they were identified as part of project SEWS 05186 and reported in Northstowe development highlight report (not viewed). The Stage 3 report includes a catchment summary and a catchment strategy. It notes that there is a current flooding issue within the Cambourne catchment due to poor quality of workmanship leading to large amounts of infiltration within the foul catchment. At the time of writing the report Northstowe had not commenced and therefore did not impact on the network. The report states that the proposed strategy is to stage the infrastructure required in 4 stages: Stage 1 - Upgrade pumps at Long Stanton SPS to deal with Home Farm development flows. This work is now complete Stage 2 - New SPS and rising main to transfer flows temporarily from Northstowe into Willingham catchment and to Over STW. It is assumed that this will be constructed by the developer and would serve the first approximately 1,000 homes. Over 1,000 the flows would be diverted to Stage 3 pumping station Stage 3a – New TPS and associated rising main to transfer flows from Northstowe development direct to Uttons Drove STW to serve the full development of 9,500 homes would require twin rising mains to Uttons Drove at an estimated cost of £6.1m Stage 3b – transfer flows from Longstanton into Northstowe catchment via new rising main. Upgrades to existing Ramptons Drift PS and new rising main. Resolve flooding in Northstowe. Anglian Water has split the cost between new development requisition sewer extension (15% to WRE8) and new development non-requistionable sewer extension (85% to WRE14). We asked the Company for the basis of the split of costs. Anglian Water has explained the basis of the split in its commentary for part C5. The Company has allocated on the basis of how much of the cost is covered by contribution. Contribution for Northstowe is low due to the high numbers of properties and therefore high income. The project is due to start in 2014 and complete in 2034. The expenditure planned in AMP5 is £4.46m. 2.4.7 Lincoln western growth corridor hydraulic limitations The project is driven by a development for 3,000 houses in the Canwick catchment. It is reported as a new development non-requisition project to prevent sewer flooding (WRE 11). The project is planned to start in 2013/14, total cost £5.89m, cost in AMP5 £3,54m. The Company provided a copy of the draft Stage 3 report. The project driver is described as strategic sewerage to accommodate growth comprised of new development of 3,000 properties at site reference 0903/SP4 – Swanpool. There is a second development at Woodfield Avenue which the report states should not stress the network sufficiently to require additional network reinforcement. The latest DAP is the Canwick Infoworks 2008, status - to be verified late 2008. The Canwick catchment covered by the DAP has 51 foul pumping stations, 7 surface water pumping stations and 1 vacuum PS. There were reported to be 29 internal and 39 external DG5 properties or areas at the time of the report. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 37 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial The Stage 3 report evaluated four options which included: Option a - Construct a storm retention sewer between the development site and St Botolph’s Green OLPS within a green field site. Option b – Send all flows to Skellingthorpe STW (approx 1.8km) and increase capacity of the STW Option c – Split drainage within the catchment utilising the currently available capacity in the trunk sewer that may be sufficient for growth up to 2016. All development beyond this should be connected to the existing network beyond the pinch point through a secondary sewer with storm attenuation incorporated into the design Option d – Split drainage across 2 catchments by utilising the current available capacity in the Western trunk sewer that should be sufficient for growth to 2016. All development beyond this should be pumped to Skellingthorpe STW. The report did not include costs for any of the options. The chosen option was for a combination of (a) and (c) to build attenuation storage with a pumped return and a new 375mm dia.4.2km gravity sewer laid at between 3 and 5m depth. Flows will then be conveyed to the St Botolph’s Crescent PS. At this stage the report states that the most robust solution is to continue with the new sewer another 2.2km to connect to the 1,200mm dia. combined sewer that continues to Canwick STW. The report goes on to say that the construction of the new sewer through the St Botolph’s Crescent PS may cause significant disruption to the community and the provision of attenuation storage with a pumping station and telemetry to return flows to the existing sewer on-site appears to be the most cost effective solution. Anglian Water provided the high level output from asset plus for the scheme, which included the cost of 988m of 1,800mm sewer in grassland at 3m depth. There was insufficient detail to enable SMC to determine whether a pumping station had been costed. The cost did not appear to represent the preferred option. We were subsequently told that the scheme had been costed based on the recommendations of the Stage 2 report, ie to construct a storm retention sewer between the development site and St Botolphs OLPS. We challenged Anglian Water over the scheme content. The costed scheme will provide approximately 2,500 m3 of storm storage compare to 2,000 m3 in the Stage 3 report. In summary, the solution appears to be unclear for this scheme. At this stage it is not to be expected that a full design would have been completed. There is however a lack of clarity over which option has been costed. There is a note in the stage 3 report that the preferred option should include for the construction of a section of 1,800mm sewer upstream of Canwick STW to remove a restriction in the flow to the works to relieve the upstream system. it is not clear whether this opportunity has been taken in the scheme design. SMC did not pursue the detail further but could do so if required. SMC noted that the report suggested, in the section headed ‘Programme of implementation’ that the scheme could be delivered within 17 months of the signed Section 98 agreement (to be confirmed). The company does not consider that this work is requistionable. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 38 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Response to guidance for Tables 5.4 and 5.5 3 Table 5.4 Sewerage service demand forecasts 3.1 Block A Properties lines 1 - 5 The Company has assumed a net annual average rate of new connections of 24,500 properties. The pace of development is uncertain. AW has outlined its assumptions on new connections and the assessment of losses of housing stock (assumed higher than national figures due to the higher rate of development in the Anglian region) in its commentary. The number of voids is estimated as approximately 4.5% of properties connected. 3.2 Block B Population total - line 6 The population total included 284,000 for non-resident population. The company has not updated the assessment of non-resident population for the FBP. 3.3 Block C sewage collected volumes Lines 7 – 14 AW has based the sewage collected volumes on the same assumptions as for water irrespective of whether the sewerage customers are AW water customers or are supplied by other water companies. The Company has assumed a return rate of 90% as in the June Return. The Company has assumed that non-household wastewater volumes (including trade effluent) will continue to fall at the same average rate as the past six years (details in Company commentary). Without further insight into the trade effluent situation in the region SMC considers that this is reasonable. The Company has also taken into account the recent trend in reducing trade effluent strength for income purposes. 4 Table 5.5 Sewerage service – SDB expenditure projections and service output measures SMC reviewed the draft for Blocks B, C, D and E. SMC were provided with a breakdown of the information to be input into the table. We checked samples of the data provided. As far as we can ascertain the Company has followed the Ofwat definitions of defined, defined contingent and non-specific schemes. The company has also followed the WRE definitions for the new cost drivers for the C5 database. Infra/non infra split The Company has carried out a scheme specific assessment of the split between infrastructure and non-infrastructure resulting in a higher allocation to noninfrastructure than at the DBP. Operating cost effects of capital expenditure For the FBP the Company has estimated the opex on a scheme solution basis through Asset Plus. This is a significant improvement on the generic 5% of capital expenditure for sewage treatment and 3% of the non-infrastructure investment for sewerage. SMC was provided with the build up of operational costs at a joint presentation prior to individual audits. The presentation covered the Company’s costing methodology, opex costs, CBA and carbon. The opex has been built up from AMP4 costs. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 39 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance 4.1 Anglian Water Restricted - Commercial Block B Sewerage service SDB - capital expenditure infrastructure Lines 5-7 capex growth-defined sewage treatment infrastructure The Company does not have any planned investment in sewage treatment infrastructure for AMP5. Line 8 Capex growth – Defined schemes - sewerage (infrastructure) Costs for the infra portion of the Latchingdon pollution and flooding historic growth scheme (60/40% infra/non-infra split by value) £1.888m. Major change from DBP £57.431m allocated to new development for FBP. Also change in infra/non-infra split for FBP – scheme specific allocation has led to less allocation to infra, more to non-infra. Line 9 Capex growth – Defined contingent schemes - sewerage (infrastructure) Stewartby reported under this line in the DBP. Category for Stewartby changed to new development for the FBP. Line 10 Capex growth – Non-specific schemes - sewerage (infrastructure) Total capex £4.826 Pumping stations where EOs operate; the Company has made allowance for top 10 PS sites for regional EO improvements 0.572m. Top down estimate of catchments where there is limited environmental capacity and proposed new development Sewer modelling for growth £2.044m Regional flood alleviation scheme (mitigation for DG5 flooding £0.55m) SWMPs £1.66m Line 11 Capex new development – Defined schemes - sewerage (infrastructure) New development infra portion of schemes £31.5m from nil in DBP. UPM for six catchments (£55k estimate per UPM). Sewer reinforcements at 16 sites including: Kettering (Broadholme) trunk sewer, Lincoln schemes and Tilbury and Basildon schemes. The largest scheme is the Kettering East trunk sewer at £17.462m. Line 12 Capex new development – Defined contingent schemes – sewerage (infrastructure) Requisitions £35.3m down from £43.4m in DBP. The proportion of non-infra is reported in line 23. Line13 Capex new development – Non-specific schemes – sewerage (infrastructure) Adoptions £2.85m/annum Vacuum pot installation £0.1m/annum Requisitions for small sites (split 80/20 non-infra/infra) £0.6m 5 PSs and rising mains Uprating small PSs from 100mm to 150mm dia. (split 40%/60% infra/non-infra) 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 40 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Based on costs in Asset Plus rounded to nearest 5% - current policy On-site requisitions now against individual schemes 4.2 Block C Sewerage service SDB - capital expenditure non-infrastructure Line 16 Capex growth – Defined schemes - sewage treatment (noninfrastructure) £96.5m. Sewage treatment works extensions, PS and storage. SMC queried whether storage in sewerage system should be non-infra. Response from Company should be non-infra - not considered to be material. The largest single scheme is Bedford STW (reviewed) at £22.16m. Line 19 Capex growth – Defined schemes - sewerage (non-infrastructure) Kettleburgh PS storm sewage, Latchingdon pollution and historic growth (Split infra/non-infra) and Wrangle Church Lane OLPS improvements. Line 23 Capex new development – Defined contingent schemes – sewerage (non-infrastructure) Includes provision for on-site sewers (non-infrastructure element) 4.3 Block D Sewerage service SDB - capital contributions Line 27 Requisitions and other contributions This line includes £37m for Section 98 developer contributions (including contributions for on-site sewers not included at the DBP) and £6.0m for Section 104 adoption fees. Line 28 Grants The Company has assumed no grants will be available for AMP5. Line 29 Infrastructure charges Anglian Water has used £276 per property for infrastructure charges. 4.4 Block E Sewerage service SDB - changes in operating expenditure In general additional operating costs have been estimated using the opex template in Asset plus e.g. for power, labour, chemicals rates etc. Line 32 entry is for the additional costs of operating adopted STWs and SPSs as described in 1.7 above. 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 41 of 42 Strategic Management Consultants October 2010 Final Business Plan 2009 Part B5 – Maintaining the wastewater supply/demand balance Anglian Water Restricted - Commercial Challenges Ref. Ch.1 Status Response received Challenge Option selection before CBA We challenged the Company on option selection before CBA Ch.2 Response received Modelling We challenged the Company on the inclusion of this provision Ch.3 Response received Non specific operating expenditure SMC challenged the inclusion of this item, which results in additional operating costs of £4.4m over the AMP5 period Ch.4 Response received S98 requisitions We challenged the Company on the scale and number of S98 requisitions predicted for AMP5 Ch.5 Response received On-site S98 costs We asked for justification of the £2,207 per property estimated cost of on-site services Ch.6 Response received Strategic sewer reinforcements We challenged the Company on whether other large sewer reinforcement schemes could be split into smaller schemes similar to the Broadholme scheme Prepared by: SB Date: April 2009 22/04/2009 08:42 SMC AW FBP09 B5 S v1.3 RTG.doc Page 42 of 42 Strategic Management Consultants October 2010
