RD 01/02

TO REGULATORY DIRECTORS OF ALL

WATER AND SEWERAGE COMPANIES AND

WATER ONLY COMPANIES

MAINTAINING SERVICEABILITY TO CUSTOMERS – UP TO CLOSE OF 2000-01

We published our initial serviceability assessments in the 2000-01 Financial Performance and Expenditure (FPE) Report. Since then we have sought reassurances from twelve companies where the assessment was considered less than stable. This was the opportunity for these companies to bring to our attention other factors and detail which further inform our final judgements of serviceability for the period up to the close of 2000-01. We have now completed the task and variously revised or retained our initial assessments.

We have written to each of the twelve companies with the reasons for our decision and our expectations for recovery where appropriate. Action plans are in place for the two companies showing a deteriorating serviceability, which we will review in the light of performance shown in the June 2002 Return. Assessments for six of the twelve companies have been upgraded. I enclose a revised table 26 setting out our final judgements with this letter.

We think that one aspect of the assessments needs clarifying. The term 'marginal' has met an unfavourable reaction in some quarters. By marginal we mean that the conclusion we have reached is that, taken together (and where relevant with additional detail from companies), the indicators presented an uncertain picture of serviceability and therefore we are unable to conclude the position is stable. For clarity we have substituted 'uncertain' for 'marginal' and 'stable/marginal' in our updated picture.

We recognise that judgement of serviceability is difficult, and, even following discussion, differences of view may remain unresolved. One company disputes our judgement, and we have noted this in the revised table 26 .

Some companies have commented that they find it difficult to accept a less than stable judgement when their performance relative to others is significantly better, for example as evidenced in Ofwat's Levels of Service reports. They have also said that it is generally harder to maintain a stable trend at the higher levels of performance than at relatively poor levels of performance. We will look at how to clarify this presentational aspect in the future.

Companies have also commented on the weakness of some of the indicators in representing the state of the assets. We have been addressing this in our joint work with the Drinking Water Inspectorate, the Environment Agency and Water UK. This work is beginning to bear fruit, and we are consulting on enhanced serviceability measures at the moment through RD19/01. But we recognise that, even when we start to collect some of the new indicators from June 2002 it will take a few years' data points to determine trends.

We described the industry position in the FPE report as stable in all asset categories. We have upgraded some serviceability assessments in non-infrastructure categories and have made one change in our infrastructure assessments. Upgrading the position improves our confidence that the industry level assessment is stable.

This brings to a close regulatory action on serviceability assessments for the period up to the close of 2000-01.

Yours faithfully

BILL EMERY

Director of Costs & Performance

and Chief Engineer