Severn Trent manager explains new AMP-cycle approach

The latest issue of Process Engineering includes a special report on how asset management programmes (AMPs) are hampering the uptake of new technologies by UK water companies. The problem relates to the stop-start effect these five-year plans are having on investment. In this follow-up Q&A, Min Bansel, business planning manager, strategy & regulation team, Severn Trent, explains his company’s approach to this issue:

PEWhy is investment weighted towards the final year or so of the five-year cycle?

MB The five-year, regulatory cycle does contribute to the overall cyclical nature of investment in the water industry, and also the cyclical nature of investment within an AMP period. Companies are often reluctant to undertake large-scale feasibility and design for major schemes ahead of the Final Determination.

This results in many schemes not commencing until the AMP has started, with contract award (the main driver of costs) not occurring until later in the period. We have tried to address this - we appointed our One Supply Chain partners a year before AMP5 started, and also invested in early start schemes*. Another contributory factor is the need to deliver efficiency by undertaking maintenance at the same time as other planned improvements, principally improvements for quality consents agreed with the EA.

It is worth noting that the Ofwat Early Start initiative for PR04 was not repeated for PR09.

*”To this end we are addressing the roller-coaster issue through a rolling capital investment programme. We promoted AMP5 projects, commenced feasibility work and engaged our AMP5 supply chain in April 2009 to begin the design and build phases. Within our AMP4 programme over £40m was allocated to this.” (Source: Page 65, Final Business Plan, Part A, Company Strategy, April 2009)

PE. To what extent has Severn Trent experienced supply/skills issues relating to the AMP investment cycle?

MB. We have moved towards a “Design and Build” model which limits our exposure to this directly.

PE. To what extent could changes, such as extending or staggering the AMP investment cycle, help the situation?

We consider that there are potential benefits from extending the price control period, through:
· Encouraging longer-term planning
· Reducing regulatory costs
· Reducing fluctuations in capex around the price-setting cycle

We support a longer-term approach being taken in the industry and that longer price review periods could be a part of such an approach. We have suggested that a minimum step would be to extend the current review period by one year, and subsequent reviews conducted every six years to align with the timetable for River Basin Management Plans. The Water Resource Plan cycle should be extended at the same time so that the bulk of the enhancement programme is clear when prices are set.

PE. What are the main barriers to changing the AMP regimes would work out?

MB. The current price setting process is set out in each companies’ instrument of appointment (its licence). Currently this amounts to a single control covering the entirety of a companies operations. Any changes to the current regime would require amendments to companies’ licences. This can be either through companies’ agreement to the change or, in the absence of agreement, the proposed changes could be referred to the Competition Commission.

Ofwat is currently consulting on the future of regulatory regime, while they are not proposing longer investment plans we welcome many of the changes being proposed.

Regulation is changing and moving to a more risk based approach, the benefits of this greater focus on high level outcomes and what customers want. This will mean that performing companies will be subject to less regulatory scrutiny, have more scope to innovate and plan effectively. A benefit of this may be to finally address the issue of smoothing the investment cycle to be able to pass on the efficiency benefits to customers.

PE. Thank you.