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PR09/23
To Regulatory Directors of all
water and sewerage companies
and water only companies
Dear Regulatory Director
Asset Management Assessment (AMA) and baseline setting
This letter sets out further details of the Asset Management Assessment process (AMA) that we implemented as part of the draft CIS baseline setting process for capital maintenance expenditure. The draft baseline was sent to companies in December 2008.
As companies prepare their final business plan submissions, it is important that there is sufficient feedback from Ofwat so that companies have the opportunity to balance their plans and improve the quality of their submissions. To support this goal we have discussed a number of generic issues which apply to the industry as a whole, and provided company-specific feedback on the AMA scoring applied within the draft baseline setting process.
We believe that this letter, together with company-specific feedback and the CIS report issued in December, should help companies prepare their final business plan submissions with respect to capital maintenance expenditure. We expect companies to respond by not only improving the quality of evidence and presentation of their capital maintenance plan but also to revisit the scale, scope and cost of their proposals where there are significant challenges. We will take account of new evidence when we reset our view for the draft and final determinations later this year.
The principles of Asset Management Assessment (AMA)
Our expenditure assumptions for capital maintenance included in the draft baseline represent our central view of capital expenditure for each company. In reaching our view we have carefully considered and challenged all companies’ proposals, so that we can secure best value for consumers. We have also taken into account the comments of each company’s reporter, as well as queries and correspondence with companies since the submission of the draft business plans.
Our Asset Management Assessment (AMA) is a modified version of the Asset Management Plan Assessment Process (AMPAP), which was developed in conjunction with UKWIR in 2006 following the 2004 price review. AMPAP was designed as a self assessment approach for companies. We have taken this approach and adapted it to provide an assessment of the quality of the business plan submitted, the business planning processes used to develop the plan and the manner in which the plan has been presented in accordance with the Capital Maintenance Planning Common Framework (CMPCF).
In applying AMA we are assessing our confidence that a company’s plan is based on a central forecast of expenditure. The first stage of such a process is a common understanding about what a central forecast for capital maintenance expenditure is. We set out our view on this in the March 2008 paper ‘Setting price limits for 2010-15: Framework and approach’. In considering the expenditure plans for capital maintenance we have defined ‘a central forecast’ as follows:
1. Achievement of stable serviceability criteria, defined in RD15/06, for each sub-service area. In each company’s CIS baseline report in December 2008, we clearly set out the measures, reference levels and control limits for each sub-service area that companies should achieve as a minimum throughout 2010-15. Planned capital maintenance investment for the period should be targeted to achieve these reference levels.
2. Balancing and maintaining a stable risk profile throughout the period across the asset base. It is evident from submissions that some companies are proposing significant risk reduction proposals funded through capital maintenance as part of their draft business plan submissions. We expect all companies to be able to clearly demonstrate their risk profiles in both 2010 and 2015. Capital maintenance expenditure should be targeted at ensuring that risk levels between these two periods are broadly stable. Planned capital maintenance expenditure within business plan submissions should not be targeted to reduce the risk to the business.
Both of these objectives are not always mutually achievable, and where this is so we expect companies to clearly set out how these issues have been balanced and managed within their final business plan submissions.
Should companies wish to propose marked improvements in either serviceability and/or risk profiles as part of their final business plan submissions, then these cases should be clearly presented as service enhancements. Such proposals should clearly state the benefits to customers, be cost beneficial and/or supported by customers’ willingness to pay.
We encourage all companies to challenge their business plan submissions against these two objectives for capital maintenance. Companies that can clearly demonstrate compliance with the above objectives, through well-founded and robust final business plans submissions, will achieve higher scores in the Asset Management Assessment.
Companies should demonstrate in their final business plans how the expenditure decisions presented have been reviewed and challenged by senior managers, board members and stakeholders.
Application of the AMA process
The application of the AMA process is covered in detail in appendix A of this letter.
Outcome of the AMA scoring process
In order that companies can understand their comparative performance with regard to the AMA scoring process, we have included details of industry performance in terms of minimum, average and maximum challenge that resulted from the AMA scores applied as part of the draft CIS baseline setting in December 2008.
AMA challenge % | Water infrastructure | Water non-infrastructure | Sewerage infrastructure | Sewerage non-infrastructure |
Maximum | 70.4 | 62.6 | 62.3 | 67.5 |
Mean average | 45.6 | 50.6 | 47.4 | 48.7 |
Minimum | 32.9 | 38.1 | 36.4 | 40.5 |
The same data is also represented as a spider diagram detailing scores for each of the nine high-level areas assessed. These are included in appendix B.
Company-specific versions of the spider diagrams are included in appendix C, detailing company performance for the same criteria.
Using the information included in appendices A to C, we believe companies have sufficient information to understand the scoring process applied, their relative performance to industry scores and their own scoring in detail. These appendices form an important reference point for companies to review in preparing their final business plan submissions, with respect to capital maintenance expenditure.
Expectations for the final business plan submissions
The AMA process has been designed to challenge companies’ central forecast of expenditure for capital maintenance. We expect companies to challenge their proposals and improve the quality of their final business plans submissions.
Capital maintenance business cases should be clearly and concisely presented in part B3 of the business plan, as detailed in the information requirements.
We expect companies to set out in section 1 of part B3 how they have balanced risk in their plans and arrived at the conclusion that the plan submitted is the most effective and efficient capital maintenance programme.
We expect plans to:
- maintain stable serviceability;
- produce a broadly stable risk profile between 2010 and 2015; and
- include a central forecast of expenditure.
Companies should demonstrate in their final business plans how the expenditure decisions presented have been reviewed and challenged by senior managers, board members and stakeholders.
Part B11 of the business plan should clearly and concisely set out a reconciliation between the draft and final business plans and the company’s response (if any) to the draft CIS baseline.
Evolution of the AMA approach
We are currently reviewing aspects of the AMA approach to ensure it can be robustly applied as part of the draft and final determinations.
We have identified some amendments against the scoring mechanism within AMA, these are relatively minor and will not fundamentally affect the overall scoring approach.
The review is primarily focused on the how the AMA score is applied to determine capital expenditure levels. Areas of consideration include:
- reviewing historic investment, risk and performance levels across companies to define the lower level of expenditure exposed to challenge;
- further calibration of the scoring mechanism against frontier companies that have submitted efficient, robust and balanced business plans; and
- challenges for those companies that are unduly risk averse when estimating capital maintenance requirements.
Further queries
Please contact Mark Worsfold at mark.worsfold@ofwat.gsi.gov.uk or phone 0121 613 1313 if you have further queries about the AMA process.
Yours sincerely
Mark Worsfold
Head of Asset Strategy
