Boards Overview
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BOARD’S OVERVIEW Chapter 1 Key Outputs and Service Delivery - (Tables A and B) Chapter 2 Expenditure and Financial Performance Measures - (Table C) Chapter 3 Key Supporting Information - (Tables D and E) Chapter 4 Efficiencies Chapter 5 Competition
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BOARD’S OVERVIEW In 2005/06, there were again significant benefits to customers from customer service investments and benefits to the environment from the completion of environmental schemes, adding further to the considerable achievements of previous years. Highlights of the year were: •
Drinking water quality performance was the best ever at 99.96%, supported by the rehabilitation or replacement of 695 km of water mains (5% of the Company’s network) benefiting around 120,000 customers.
•
Customer demand was again met without the need for hosepipe bans or drought orders.
•
Bathing water compliance was at record levels in 2005 with 142 beaches (99.3%) meeting the Mandatory standard and 127 beaches (88.8%) meeting the tougher Guideline standard. This performance is supported by our operation of 52 UV waste water treatment plants.
•
Opex efficiencies of £4M and capex efficiencies of £10M were achieved.
•
The leakage target was again met.
•
There were over 30,000 free meters fitted in the year; the proportion of domestic metered customers has now exceeded 50%.
•
Improvements have been made to 23 sewage treatment works and 55 intermittent discharges.
•
The majority of “Early Start” schemes were completed, numbering around 45 in total, at a cost of some £20M. Only a few schemes remain to be completed in 2006/07.
•
A reduction of 25% was achieved in written complaint volumes in 2005/06 compared to 2004/05, following a 20% reduction in the previous year.
Quality Assurance The Board ensures that the information provided in this return is reliable accurate and complete by: •
Investment Planning & Control procedures (IPAC) to ensure that the principles of proper financial control are applied throughout the inception, evaluation,
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JUNE RETURN 2006 implementation and handover of the investment. These have been updated in the reporting year.
•
Setting targets and reviewing performance against key levels of service indicators and financial measures on a monthly basis at Board and executive management team level.
•
Implementing a programme of internal audits through the Quality Assurance Department as part of the Company’s ISO9001:2000 accreditation. The scope of this has been extended to include waste water services.
•
Independent review and challenge of reporting by the Regulatory Department, with special focus on perceived areas of heightened interest.
•
Endorsing and acting on audit findings from Pennon Group internal audits carried out within the Company.
•
Through the Executive Management Team, approving the June Return audit programme and reviewing weekly reports on audit progress and key issues arising.
•
Ensuring that, at all times, the Reporter is given full co-operation by Company staff and full access to all Company data and systems.
•
Ensuring that any key issues presented to the Executive Management Team, and separately to the Board, by the Reporter following June Return audits are followed up, with corrective action taken where necessary.
•
Encouraging a culture of openness, where issues can be openly discussed.
•
Putting in place and supporting a ‘Whistleblowing’ policy.
The Board confirms that sufficient processes and internal systems of control are in place to fully meet the Company’s obligations for the provision of data to Ofwat. Corporate governance and risk management The system for profiling and monitoring key risks is embedded in our normal business practices. We regularly review how we have sustained specific risk control measures, to decide if the probability and consequence of certain risks has changed, and if necessary to recommend further actions or investment to ensure the solidity of our corporate governance.
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CHAPTER 1 WATER SERVICE - KEY OUTPUTS AND SERVICE DELIVERY Drinking water quality Total drinking water quality compliance for 2005 was at its highest level to date of 99.96%. Performance against the DWI’s Operational Performance Index (6 parameters) has improved again to 99.86%. The principal driver for this is iron performance improvements, resulting from the mains rehabilitation programme. The following chart shows total and OPI performance improvements over recent years.
Water Quality Performance
%
100.0 99.92 99.9
99.92
99.95
99.88
99.96
99.86
99.85 99.79
99.8 99.72 99.69
99.7
99.6 99.52 99.5
Total Compliance OP Index
99.47
99.4 2000
2001
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2002
2003
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2004
2005
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Leakage For the seventh year running, we have met our leakage target of 84 Ml/day, which represents a decreasing trend when measured on a leakage per property or length of water main basis. Analysis undertaken for the Periodic Review 2004 (PR04) confirmed that we have gone beyond the economic level of leakage in order to meet customer and environmental expectations, with significant cost implications. DG2 – water pressure Only 0.03% of properties are below the reference level, which is a greater than ten-fold improvement since 1997/98. DG3 – supply interruptions There was an increase in unplanned interruptions to a weighted average of 0.65% of customers in 2005/06; compared to a reducing trend over a number of years with the previous year being 0.26%. The increase in the number of properties affected was entirely due to three notable main bursts in the year. Excluding these three bursts would give 0.21%. The entire length of the 1.8km PVC main which caused two of these bursts is currently being replaced. Mostly due to our mains rehabilitation programme, we issued 417,000 notifications of planned shutdowns (equivalent to 55% of our customer base) with only 0.06% of these customers having shutdowns which exceeded the notified time. Mains rehabilitation In December 2005, we completed 1,194 km in the two year period for Milestone Package 3 of our Section 19 undertaking to the DWI. In the financial year 2005/06, 695 km of mains were either replaced or renewed, benefiting around 120,000 customers. At an average of 58km per month, this is double the rate achieved in the 5 years of the K3 period. Customer contacts All DG6 billing queries were dealt with in 5 working days and 99.9% of all DG7 written complaints were dealt with in 10 working days.
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A reduction of 25% was achieved in DG7 written complaint volumes in 2005/06 compared to 2004/05, following a 20% reduction in the previous year. The following activities have improved customer satisfaction and helped to deliver the reduction in written complaints: •
Continued improvement in call centre performance and number of calls answered, including: o Implementation of automated voice recognition service for Card Payments. o Development of short and simple front end messaging services. o Improvements to the structure and use of Case Based Reasoning, to ensure direction of customer contacts to the correct field staff for early resolution. o Improved management of debt recovery activity (i.e. despatch of reminders etc) to even out peaks and troughs.
•
Process improvements with a focus on resolving customer queries in the field.
•
Implementation and delivery of the “Ambassador Programme” providing all customer facing representatives with up to date skills to deal with customer contacts.
After a difficult start to the year with the introduction of the new measures for DG9 performance, the Abandoned Calls performance for the year was 8% and All Lines Busy was 2.1%. By the end of the year, these were reduced to 3 month averages of 4.45% and 0.13% respectively. Call attempts reduced in the year as more calls were answered by advisors and more customers opted to use automated options. There was also a significant drop in complaints regarding Helpline accessibility due to continued improvement in staffing levels during the year. All Lines Busy, Table A Line 9, is calculated as Table 5 Line 14 divided by (Line 14 plus Line 13) all multiplied by 100. Which is therefore: 31,736 x 100/(1,494,753+31,736) = 2.08% DG8 - bills for metered customers Performance was maintained at 99.9%, despite a 9% increase in the number of metered accounts.
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This is an exceptionally high standard of performance in the South West region, which has a high proportion of holiday homes, where access to internal meters can be consequently difficult to arrange. Serviceability Over the K4 period (2005/06 to 2009/10), we will report on serviceability using K3 (2000/01 to 2004/05) performance as a base. In the following charts, the four Ofwat serviceability indicators have been used for each of the asset groups. In future years, the indicators used may change as a result of further work being carried in South West Water on serviceability and any updates to Ofwat serviceability indicators resulting from the UKWIR review. The following charts summarise performance over the last six years for the Ofwat serviceability indicators, by each of the clean water asset group areas. Each chart shows performance in a year divided by the average of performance over the K3 period. If performance was at the average level for K3 in 2005/06 then this would be plotted as a value of 1.0. If the indicator was above the average then it would therefore be above 1.0 and performance below average would be between 1.0 and zero. This allows the comparison of trends in performance for the four indicators in each asset group. It should be noted that all of the indicators measure adverse events or non-compliance, so downward trends represent improving performance, upward trends represent deteriorating performance.
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Water non-infrastructure serviceability Water Non-Infrastructure Serviceability Indicators 3.0
Ratio of Year to K3 Average
WTW Determinations Containing Coliforms (TA L21) Enforcement Actions Considered - DWI
2.5
Service Reservoirs with Coliforms >5% of Samples WTWs Turbidity 95th Percentile > 0.5 NTU (T11a L1)
2.0 1.5 1.0 0.5 0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance for all of these indicators has been at, or below, the K3 average for the last 2 years. No adverse trends can be identified in the data. (Analysis of individual indicators performance is given in the commentary to Table 11A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Stable Stable
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Water infrastructure serviceability Water Infrastructure Serviceability Indicators
Ratio of Year to K3 Average
3.5
DG2 Properties Below Reference Level (T2 L3/L1) DG3 Interruptions >12 hours (T2 L7/L1)
3.0
% of WIS Zones Failing For Iron Mains Bursts and Leaks per 1,000 km (T11 L11)
2.5 2.0 1.5 1.0 0.5
excludes 2 major incidents
0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance key issues as follows: •
DG2 performance is clearly stable.
•
DG3 performance on interruptions greater than 12 hours was affected by 2 major bursts, as described above under “DG3 – supply interruptions”. Excluding these a downward trend would have continued.
•
WIS zones failing for iron was the lowest figure ever last year, the improving trend resulting from our investment in water mains rehabilitation.
•
Mains bursts and leaks showed a slight increase last year, but within predictable variation.
Overall there is no adverse trend visible from the data. (Analysis of individual indicators performance is given in the commentary to Table 11A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Stable Stable
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SEWERAGE SERVICE - KEY OUTPUTS AND SERVICE DELIVERY Bathing water compliance The Company has almost 30% of the country’s bathing beaches, but only 3% of the resident population so our environmental obligations are particularly demanding. In 2005, 99% of the region’s beaches passed mandatory standards and a record 89% passed the tighter Guideline compliance standard, improving on the high levels of compliance set in recent years. SWW Region Bathing Water Compliance
%
100 97.9
97.9
99.3
99.3
97.9
95.7 90 88.8 84.3
80
81.6
70
60
81.1
71.4
Mandatory Standard
60.7
Guideline Standard 50 2000
2001
2002
2003
2004
2005
In “The Good Beach Guide 2006”, the Marine Conservation Society recommended 111 of the beaches in our region, the best ever performance for our region. River water quality Devon and Cornwall has a higher percentage of high quality rivers (90% are classified as ‘Very Good’ or ‘Good’) than any other region in England. Since 1989, we have improved treatment standards at over 300 waste water treatment works, greatly improving the quality of treated waste water entering the region’s rivers. This has provided a major contribution to the improvement in river water quality. However, not all river water quality issues are caused by waste water discharges,
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consequently an increasing proportion of remaining problems will result from other sources such as diffuse pollution. Waste water discharges & compliance In total, 23 sewage treatment works were improved in 2005/06 as part of our Quality Programme. The Company now has UV treatment at 52 works, more than any other water and sewerage company. These works together serve more than one million people. UV treatment plants have very exacting standards on their consents. Waste water sanitary compliance (based on population equivalent) improved to the best ever 99.4% in 2005 from 99.2% in 2004. We also achieved full compliance with the Urban Waste Water Treatment Directive look-up-table requirements for BOD and the EA’s stringent 99% UV disinfection rule at all UV works. A total of 55 intermittent discharge schemes were completed in 2005/06, reducing the total of unsatisfactory discharges requiring improvement to just 17 out of a total number of 1,725 intermittent discharges. In addition, 7 environmental investigations have been completed. Sewerage and sewage treatment performance Significant performance improvements in sewerage serviceability were again made in 2005/06. There was a further reduction in the number of collapsed sewers, from 18.7 to 14.7 collapses per 1,000 km in 2005/06 as shown by the following chart:
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JUNE RETURN 2006 Sewer Collapses per 1,000 km 30
27.2 25.0
25
24.5
Collapses per 1,000 km
21.4 18.7
20
14.7
15 10 5 0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Once again, there were no Category 1 pollution incidents (there have been none in the last seven years), and the number of Category 2 incidents was only 3 non-compliant pollutions. Although slightly increased on the previous year, the total number of Category 2 and 3 pollution incidents at CSOs and foul sewers has shown a reducing trend over the last 6 years, as shown in the chart below. Pollution numbers need to be viewed in the context of the Company’s asset base of 624 sewage treatment works, 1,725 intermittent discharges, 789 pumping stations and over 9,000km of sewers. In some cases, these are substantially more than for some larger companies and represent a much higher number per head of population served.
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JUNE RETURN 2006 Pollution Incidents Category 1, 2 and 3 at CSOs and Foul Sewers 140
118 120
117 94
100
91
89 79
Incidents
80
60
40
20
0
2000
2001
2002
2003
2004
2005
The Company has produced Odour Management Plans for all sewage treatment works which have been the subject of odour complaints, with action plans in place to deal with any problems. Odour Management Plans are now being developed for all other sewage treatment works. The Company has a dedicated 0800 phone line for the reporting of pollutions and odours, in order to improve response times and thereby minimise the impact of waste water incidents. We meet regularly with the Environment Agency to review priority requirements. DG5 – properties at risk of flooding At 31 March 2006, there were 28 properties at risk of flooding twice in 10 years and 96 at risk once in 10 years, a net reduction of 15 on the previous year. In total, the number of properties at risk of flooding more than once in 10 years represented 0.02% of connected properties, half the national average figure for 2004/05. A further 40 properties are in the risk category 1 in 20 years. The following chart shows the downward trend of properties at risk of flooding more frequently than once in ten years, and the corresponding reduction in flooding incidents due to insufficient sewer capacity. Flooding incidents due to other causes showed an increase in the report year. A significant proportion of the increase was due to problems Page: 13 Date Stamp: 30 August 2006
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in Paignton at a pumping station and associated sewerage system penstock, which have since been repaired. K3 Sewer Flooding - At Risk and Actual
No 300
Properties At Risk of Flooding (>1 in 10 yrs)
245
250
244
Flooding Incidents Due to Insufficient Sewer Capacity
246
Flooding Incidents Due to Other Causes
206 200
139
150
123
113
107
122
100
145
101 124
83 56 40
50
39 25
16
0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
The Company uses an expert fire and flood cleaning contractor to assist customers by cleaning properties where internal floodings have occurred. There has been very positive feedback on the contractors from customers who have been unfortunate enough to require this service. Serviceability The following charts summarise waste water performance over the last six years for the Ofwat serviceability indicators, in the same way as the previous ones for clean water, by each of the waste water asset group areas.
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Sewerage non-infrastructure serviceability Waste Water Non-Infrastructure Serviceability Indicators 2.5
Ratio of Year to K3 Average
STWs Failing Numeric Consents (TB L22) STWs Failing LUT Consents Peq (TB L10)
2.0
STWs Forecast BOD 95%ile (T16b L1 C3) STWs Forecast SS 95%ile (T16b L4 C2)
1.5
1.0
0.5
0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance for all of these indicators has been at or below the K3 average for the last 2 years. No adverse trends can be identified in the data. (Analysis of individual indicators performance is given in the commentary to Table 16A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Stable Stable
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Sewerage infrastructure serviceability
Waste Water Infrastructure Serviceability Indicators
2.5
Ratio of Year to K3 Average
Sewer Collapses/1,000km (T16 L12) Properties Flooded Hydraulic Overload (T3 L2/L1)
2.0
Pollution Incidents (TB L21) Flooding Incidents Caused by Collapses (T3 L10/L1)
1.5
1.0
0.5
0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance key issues as follows: •
Sewer collapses – downward trend for the last four years.
•
Floodings due to hydraulic overload – stable, excluding extreme year in 2000/01.
•
Pollution incidents – slight increase in last year, but downward trend overall.
•
Floodings caused by collapses – high variability, improved performance last year on the previous year.
Overall – performance improving on these measures with three better than K3 average performance last year. (Analysis of individual indicators performance is given in the commentary to Table 16A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Marginal Stable
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OCCUPATIONAL HEALTH AND SAFETY South West Water ensures that occupational health, welfare, well-being, and safety underpin the Company’s approach to corporate responsibility, risk management and business continuity. This includes involvement in helping to set national agendas, both within the water industry and in representing the private sector in Government-led peer group reviews, whilst using innovative and cost-effective ways of implementing sound management systems for the benefit of all our stakeholders. (Further detail is given in the commentary for Table 41). Revitalising, Securing Health Together, and Clear Water 2010 South West Water continue to advocate and participate in a number of “Revitalising” ”think tanks”, and associated research publications which help the Government to deliver existing Revitalising Action Points and re-focus the regulatory regime for further progress in the UK. We maintain our efforts to publicise the benefits of effective occupational health management, continuing our major involvement in the “Securing Health Together” (SH2) with the Health and Safety Executive (HSE). In particular, our contributions include: •
Providing key management roles for the “Clear Water 2010” programme, adopting and promoting SH2 targets within the water industry.
•
Developing and arranging for continual external audit of the UK’s first verified Occupational Health Performance Measurement System, which enables water companies to provide occupational health data for Table 41.
•
Preparing the “Clear Vision 2004” report, which, records industry performance trends at the mid-point of Clear Water 2010.
•
Contributing to HSE working parties which have eventually led to the setting up of Government “national occupational health” services for small and medium sized businesses in various UK pilot regions ( and being congratulated alongside one other one other contributor by the Minister for Health and Safety at the launch )
We have consolidated business continuity and extended risk management in all areas of the business, demonstrating how corporate resilience benefits from including sound occupational health, safety and security assessments in all decisions and activities. We have also:
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•
Prepared detailed plans for capital investment for the prevention of musculo-skeletal disorders, asthma and substance-borne illness
•
Entered into a service agreement with a leading occupational health service provider, which includes the provision of a full-time occupational health adviser
Health and Safety Performance Our management of occupational health and safety during 2005/06 was developed to reflect the business benefits which will accrue from improved business management and resilience. The following chart shows reportable incidents, over-3-day accidents and major accidents for the last six years. The “Major accidents” category does not include any fatal accidents in any of the years. Lost Time Accidents & Reportable Accidents 20 18
Reportable Incidents / 1,000 employees
17
17
Over-3-Day Accidents / 1,000 employees
16
Major Accidents / 1,000 employees
Number / 1,000 Employees
16 14
14
14 13 12
12
13 13
12 11 10
10 8 6
4.5
4 2
2.6
3.0 1.5
1.2
0
0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Company Road Safety Policy South West Water has developed a robust approach to ensuring that the Company and its vehicle drivers are not putting themselves or other road users at unnecessary risk through work related driving activities. This included the establishment of a Road
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Safety Policy implementing a risk assessment approach, monitoring of performance and implementing other further control measures such as enhanced driver training. The benefits associated with this approach have been evidenced in a 30% reduction in vehicle accident costs and a 40% reduction in the number of speeding offences in the reporting year from the previous year. We have also installed 250 Telematics monitoring systems in Company vehicles, helping to improve their safe use.
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CHAPTER 2 - FINANCIAL PERFORMANCE MEASURES Accounting Policies A number of changes in accounting policies were implemented in the year and are set out in note 1 to the financial statements. The most significant change was the adoption of FRS 17 “Retirement Benefits” which resulted in an increase in profit before tax of £1.5m (2005 £3.1m) and a pension fund deficit (net of deferred tax) of £24.1m (2005 £46.7m) being reported on the balance sheet at the end of the year. Where appropriate, comparative figures given below have been restated to reflect changes in accounting policy. Financing During the year the Board decided to increase the level of gearing of the Company in order to increase the efficiency of the Company’s capital structure. The following financial restructuring activities therefore took place: •
A special interim dividend of £200m was approved, of which £145.0m was paid on 15 March 2006, with the balance of £55.0m paid on 31 May 2006.
•
£20 was paid to each South West Water customer as a one-off payment, totalling £14.5m.
•
Cash deposits of £178.9m, previously held under a defeased lease arrangement were released and utilised.
•
A loan from the parent company of £150.0m was repaid on incurring redemption costs of £50.2m, including associated advisors’ fees. This transaction matched the parent company’s retirement of its 2012 £150.0m 10.625% Bonds on recommended terms supported by an Association of British Insurers special committee.
•
A reduction of the net interest rate to 4.7% compared to Ofwat’s assumption of 6.3% in the Final Determination.
Turnover Appointed business turnover for the year increased by 14.0% to £340.0m. Turnover from main water and sewerage charges, including large user revenues, was £327.0m (2005 £287.4m).
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The effect of meter option switchers was to reduce turnover by £7.9m, £1.6m more than in 2005, benefiting 30,696 customers by, on average, about £250 each. Operating Costs Total Appointed business historic cost operating costs, including depreciation, rose from £181.6m to £220.7m, after exceptional charges of £14.5m (2005 £3.4m) which comprised a one-off payment of £20 per customer following financial restructuring. Operating efficiencies of £4.0m made a strong contribution to offsetting other additional costs, mainly arising from increased depreciation and operating costs from new and improved works (£6.2m), infra renewals charge (£6.3m), inflation (£8.4m) and the reclassification of leakage and UV costs from capital (£6.0m). The inflation figure includes for major increases in energy, fuel and chemical costs as well as several other above RPI increases. Operating costs, before depreciation and exceptional charges, were £127.0m (2005 £111.2m), an increase of £7.4m after inflation. Profit Historic cost operating profit after exceptional charges was £120.7m (2005 £117.8m). Net interest payable increased to £96.6m (2005 £52.6m), including an exceptional charge of £42.3m. This comprised the cost of early redemption of the £150m loan from Pennon Group PLC (£50.2m), partially offset by receipts on transfer of a finance lease (£7.9m). Excluding exceptional items, net interest payable increased by £1.7m, reflecting higher borrowings to fund the capital expenditure programme. Net profit before taxation amounted to £24.3m (2005 £65.5m). Before exceptional charges, the equivalent figures were £81.1m and £68.9m. The Appointed business's taxation position results in a credit to mainstream corporation tax of £10.6m (2005 £1.8m charge) for the year. This position mainly reflects a credit of £7.8m resulting from a re-assessment of the corporation tax due for prior periods following submission and/or agreement of detailed computations and the surrender of £4.0m of taxable losses to other Pennon Group companies. The Company continues to benefit from substantial capital allowances generated by the capital expenditure programme, but changes to the tax regime have resulted in lower allowances than Page: 21 Date Stamp: 30 August 2006
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previously and the tax impact of capital allowances being in excess of depreciation being reduced (£3.8m for 2005/06, down from £16.0m in 2004/05). A discounted provision for deferred tax has been made resulting in a charge of £6.7m in the year (2005 £10.0m). Dividends and retained profit Dividends totalling £197.9m (2005 £79.5m) were paid to the parent undertaking. This included £145m of the £200m special dividend related to the financial restructuring undertaken during 2005/6. The balance of £55m was deferred until 31 May 2006. The remaining £52.9m was in line with the K4 Price Determination. The Company has established a dividend policy, which involves the following components: •
a sustainable level of base dividend growth, determined by a number of factors including the shareholder’s investment and the cost of capital.
•
a further level of growth funded by efficiency out-performance.
•
consistency with the assumptions made by Ofwat in setting prices for the K4 period.
Dividend payments are designed to ensure that key financial ratios are not prejudiced and that the ability of the Appointee to finance its Appointed Business is not impaired. Cash Flow Net cash inflow from operating activities decreased to £184.7m (2005 £194.1m), reflecting the pension prepayment made during the year partially offset by working capital movements and the increase in operating profit. Financial Ratios
Historic cost dividend cover Current cost dividend cover Gearing
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04/05 (restated)
05/06
0.7 0.8 54.4%
1.3 1.3 62.5%
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Note: The 2005/6 figures exclude the £145m financial restructuring dividend and exceptional changes in the calculation of dividend cover. Including this dividend and the exceptional changes would result in a dividend cover of 0.1 under historic cost accounting and 0.2 under current cost accounting. Financial needs and resources Significant funding facilities are in place to cover both medium and long term requirements, including loans from the European Investment Bank. The long term loan from Pennon Group Plc was repaid in 2005/6 as part of the financial restructuring undertaken by the company. In addition, short term facilities exist with a range of financial institutions. Loans and finance lease obligations amounted to £1,359m (2005 £1,269m). Current asset investments of £52m (2005 £238m) were held at the Balance Sheet date. Short term facilities in place at 31 March 2006, but not utilised, totalled £90m (2005 £115m). These resources form part of the funding strategy put in place to finance the future investment expenditure needs of the Company. The Directors confirm that the Company can meet its short term requirements from existing facilities without breaching covenants or other borrowing restrictions.
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CHAPTER 3 WATER SERVICE - KEY SUPPORTING INFORMATION Integrated Management System The Company is in the process of implementing an integrated management system across all of its operational activities. This will add ISO14001:2004 to the Company’s existing ISO9001:2000 accreditation under one management system. The system to be established will avoid bureaucracy and focus on reinforcing good practice in the operation and improvement of our assets. It will support progress and encourage further initiatives on waste water compliance, energy saving, sustainability and waste minimisation. The system, available to all staff and partners via our Intranet, will allow a regional approach to managing environmental issues and will involve suppliers in best environmental practice and the operation of quality systems. The integrated system will be the basis for the Company’s Drinking Water Safety Plans, which are becoming mandatory through DWI instructions. Water Resources, Supply and Demand As in recent years customer demand was met without the need for hosepipe bans or any drought restrictions. Total reservoir storage reached a minimum value of 52% in September 2005 at the same time as some observation boreholes recorded historic minimum levels. Wimbleball, Colliford and Stithians pumped storage schemes were used over the winter 2005/06 to supplement natural refill of these reservoirs and thereby significantly removing the risk of customer restrictions. Pumping increased the storage in these reservoirs by 11%, 7% and 17% respectively. Total reservoir storage at the end of March 2006 was 2% higher than at the end of March 2005.
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Water efficiency measures In the autumn of 2005 the Company started a major water efficiency pilot study in the Roadford Strategic Supply Area. This involved installing water saving equipment in 500 households and monitoring changes in usage against a control sample of 100 households. Initial results of this study should be available in late 2006. We are also continuing to implement a variety of domestic and commercial water efficiency initiatives, working with various partners including councils, environmental organisations and manufacturers to promote water efficiency as widely as possible. Meter optants There were 30,696 free meter optants in the year. Over 50% of domestic customers are now metered. Cryptosporidium compliance In spite of the rural nature of the South West, and high impact of agriculture in the Region, there have again been no failures of the cryptosporidium standard since the Cryptosporidium Regulations were introduced in April 2000. Lead compliance Phosphate dosing is operational at 18 water treatment works; 100% of samples met the lead standard (25 µg) in 2005 and compliance against the 10 µg standard to be introduced in 2013 was 99.28%. The dose optimisation programme is still ongoing. Water distribution iron compliance The Company is continuing to improve serviceability to customers, and iron compliance results demonstrate the positive effect of the water mains rehabilitation programme. This indicator and several other related measures have improved over successive years, as shown by the DWI’s Operational Performance Index (OPI): Year
2000
2001
2002
2003
2004
2005
OPI (6 parameters) %
99.47
99.50
99.69
99.72
99.79
99.86
75
59
29
14
12
4
Tests failed for Iron
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There is a similar improving trend in the new OPI measure which uses only iron, turbidity and manganese. Performance improved from 99.2% in 2000 to 99.85% in 2005. Distribution operation and maintenance project In addition to the mains rehabilitation programme, the Company has a programme of water mains cleaning, using flushing, swabbing and air scouring techniques. In the last year, the total length of mains that were cleaned and maintained was 1,068km. To ensure that the mains cleaning processes are undertaken in an effective manner, whilst minimising the effect on customers and avoiding damage to property and the environment, over 400 new valves and washout positions have been added to the water-main network. In addition to these new installations, nearly 150 remedial works, apparatus upgrades and information gathering investigations have been carried out by the Company’s contracting partners as part of the operation and maintenance process. This considerable number of additions and enhancements to the water-mains provide significant long term benefits to the operation and control and effectiveness of the distribution network.
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SEWERAGE SERVICE - KEY SUPPORTING INFORMATION Key supporting information for waste water treatment and sewerage are discussed in Chapter 1 under Key Outputs and Service Delivery. Sludge strategy The Company meets HACCP requirements on sludge treatment and disposal, with compliance on disposal at 100%, in advance of the legal requirement to meet this standard. ASSET MANAGEMENT In early 2005, a restructuring was implemented through the Customer Focused Asset Management (CFAM) project. This structure is now fully embedded within the organisation, with benefits being gained from enhanced planning, asset data and performance analysis and asset development in an integrated asset management function. Asset Management Plans have now been produced that detail the key investment points in asset lives. The plans also examine the current and future environment that assets operate in and address pinch points and capacity/headroom issues at site level. The following initiatives have been put in place to support the use of the Common Framework for Capital Maintenance: •
Reliability Centred Maintenance – to focus our Capital and Preventative Maintenance further away from reactive to proactive, we have completed detailed analysis at two waste water sites and one clean water site, generating significant savings on annual operational budgets. These will be used as a template to transfer to other sites generating further savings.
•
Whole Life Costing – to ensure the correct intervention is initiated at the right time, with the correct maintenance strategy. This has been applied to pumping stations enabling us to carry out Level of Repair Analysis (LORA) and determine the correct intervention level for different assets
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•
Investment Optimisation – to ensure that we target the right investment and deliver the right outputs to meet the business needs. We have applied our improved methodology to optimise investments for 2006/07. This has enabled us to focus very clearly on what is important to customers and to the Company.
•
Risk Analysis – to ensure that we know, measure and define what risk the Company is carrying and what is acceptable (or not). We have reappraised risk at all our sites except for water treatment, which will be complete by the end of this year. This has enabled us to quantify risk in financial terms at individual site level, which has directly fed into the Investment Optimisation process, enabling stronger targeting of investments.
All of the above have enabled us to understand and capture with more confidence the condition and serviceability grade for our asset base. In addition, we are using Scenario Based Planning from 2006/07 in order to make the right investment from an analysis of the widest range of future operating environments. All of these projects will deliver economic, customer focused, risk based, holistic, and structured investments that will make optimum use of future capital investments. SUSTAINABLE PROCUREMENT South West Water is moving towards the inclusion of all aspects of sustainability in its procurement processes. The assessment of suppliers for their financial sustainability, approach to occupational health and other societal issues, working conditions in the supply chain, corporate governance, sustainability of their products and services, issues of natural capital and environment etc., which are all becoming part of South West Water’s supplier assessment criteria. We aim to work with the best companies whose forward thinking approach to sustainability gives reassurance that environmental, social and ethical risks are minimised. In addition to ethical and financial considerations, this approach will further support our business continuity objectives. We have therefore developed Environmental Procurement and Supply Chain Social and Ethical Policies that set out the principles by which the Company purchases goods and services. Changes in the European Union Procurement Directives from January 2006 contain provisions that are broadly supportive of sustainable procurement. We welcome the
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changes to the Directives as an opportunity to integrate further sustainability criteria into the procurement process. We are currently working closely with Achilles UVDB (Utilities Vendor database) and other utility companies in developing a corporate social responsibility strategy for sourcing goods and services via the Achilles web based procurement system. This will include a basic assessment of supplier approaches to ensuring that labour standards are met in the supply chain, in line with relevant International Labour Organisation Conventions. We have updated our pre-qualification procedures in line with the proposed developments within the Achilles system. The pre-qualification questionnaires now include assessments of supplier company’s social and ethical credentials, as well as the standard set of environmental questions. This more rigorous approach invites suppliers to look further down the supply chain and was first used on the major construction partner contracts tendered last year. We have instigated an annual supplier risk review procedure to assess the environmental, social, ethical, quality, health and safety, commercial and financial risks key and strategic suppliers pose to South West Water. Each key and strategic supplier is scored and ranked according to the level of risk. High risk companies are flagged up as requiring further review in order to satisfy us that those risks are adequately managed between ourselves and the supplier. We have been working closely with UK Water Industry Research Ltd (UKWIR) and Water UK in developing an industry wide approach to reporting using a set of sustainability indicators. This includes sustainable procurement indicators that record progress towards responsible contracting and the sustainable use and the management of key materials. An increasing aspect of our approach to sustainable procurement is in the use of whole life costing in purchasing, therefore including initial cost of goods, on-going operating costs and eventual disposal costs. This approach moves us a step closer to using environmental accounting in purchasing decision making. In energy we continue the special arrangement with an electricity supply company to procure over 90% of electricity from high efficiency “good quality” combined heat and power plants. This allows the Company to use a CO2 emissions conversion factor at a lower value than if we had purchased standard grid supplied electricity, thereby holding
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down CO2 emissions from energy use to under 100,000 tonnes. CHAPTER 4 - EFFICIENCIES Operating costs Operating efficiency savings totalling £4.0m were achieved in the reporting year, c.£1m ahead of the profiled savings included in the Final Determination. The above target efficiencies are helping to mitigate the impact of significant price increases to the cost base. Energy prices have risen 42%, chemical increases average 15% and fuel 10%. There have also been above RPI increases in rates, EA charges and other areas. In overall terms we estimate that from the original K4 2002/3 base, real price increases are approaching £10m (8%) higher than specifically allowed in the determination or funded through the cumulative RPI addition to the cost base. The £4.0m efficiency savings were broadly achieved in the following areas:•
Manpower costs – reduction in numbers and overtime levels, absorption of additional work, increased productivity through mobile working and more planned rather than reactive work.
•
Use of Materials and Contracted Services – improved material selection, including use of chemicals, optimisation of internal/external resource, reduced usage through improved planning, sharing of risk and ongoing price management. We continue to maintain and refresh our integrated partnering and strategic supplier arrangements and in the year have been particularly successful in managing our sewerage contractor and UV supplier costs down. Savings are also starting to come through from our move to more proactive asset management and having more robust performing assets.
•
Overhead costs – telephony costs, transport and other establishment costs, including the retirement of some older expensive, leased, IS systems.
Capital costs In the first year of K4 we have continued delivery of the significant Mains Rehabilitation programme. This and other key programmes and projects are being delivered via the partnering strategy developed in 2004 for K4, building on the successes of this approach in K3. The change in emphasis of K4 with fewer large projects and many smaller investments has driven a revised partnering structure with, two contractors for
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mains rehabilitation and two for planned programme and five consulting engineers. Strategic sourcing strategies have also been developed for equipment, supplies and services to promote standardisation and consistency of approach. Our capital efficiency targets for K4 are again primarily programme based with achieved efficiencies of just under £7m indicated arising from the mains rehabilitation programme in the first year. A significant contribution of £3m from the Urban Waste Water Treatment programme has already been identified as being achieved and offset by overhang expenditure on projects delivered in K3. To support the collection of cost data to monitor and deliver improved unit cost analysis and benchmarking, and hence drive further efficiency, South West Water have implemented a data capture and analysis approach “Cost Availability for Continuous Timely Improvement”, CACTI. Continuous Improvement Service+ This project is currently being delivered and focuses on operational contacts, provision of information, geographically based information to aid early call resolution, mobile computing for efficiencies and work management for the field staff. The objectives are to provide a measurable improvement in customer satisfaction, reduce the costs of dealing with reactive operational contacts and reduce avoidable contacts (such as repeat calls for information on progress of work). Service+ will achieve these objectives by: •
New and enhanced information and IT solutions such as an integrated view of the data held in corporate systems, which will be updated in real time by the use of mobile devices for all customer-facing staff, including our partners.
•
The establishment of a Service Centre to improve handling and routing of customer work requests, including more availability of specialist advice.
•
Providing timely and accurate information to customers on enquiry and work progress.
•
Improved ways of working with our partners.
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Customer contact strategy This strategy includes the implementation of a new telephony platform and associated applications such as workforce management, call recording and an outbound dialler. Further work will focus on the method of customer contacts, web/self-service, etc, the quality of responses to customer either in writing or via the telephone, reducing unnecessary contacts and further developing Company literature and standard letters and notices. In the last year, this has resulted in a reduction in written complaints of 25%, following a 20% reduction last year. Further details are given in Chapter 1. Debt management Good progress has been made on a number of debt related project strands, which aim to ensure that by autumn 2007 South West Water is at the forefront of good practice in debt management. This work includes: •
Selection, purchase and implementation of a leading commercial credit and debt management system to provide full back office automation, reporting and recovery of debt via segmented pathways based on information about an individual customer and her or his payment behaviour. Implementation and beneficial use will be in 2007.
•
Reorganisation and refreshment of credit and debt management structures and office working practices in advance of the implementation of the credit and debt management system.
•
Use of customer data to determine collections strategies – in particular the online Land Registry facility to check home ownership has allowed debt to be collected, or secured, by way of Charging Orders from property owning customers owing charges from more than one financial year.
•
Enhanced management information and operational reports have been developed to better inform the business of the structure and nature of debt and prioritise types of debt to be targeted.
WorkOutTM In 2005 we implemented WorkOutTM in Operations. WorkOutTM is a structured
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continuous improvement process that involves a cross section of people in eliminating unnecessary work, duplication in business processes and removing non-productive activities from their day to day jobs. It delivers rapid results improving every day operational issues. Two pilot projects were successfully carried out, followed by another three events with two further events are due. This will complete the skills transfer required to enable SWW to resource and deliver future events internally, thereby creating a self-supporting capability for continuous improvement Work Out™ was developed and trademarked at General Electric. It has since been successfully applied in many other organisations. New technology The Company has used opportunities from developments in new technology to help deliver business efficiencies and improvements in business processes. In the last year we have further expanded the use of IT solutions to: •
Improve working with Sewerage Management Contractors by implementing the use of Personal Digital Assistants (PDAs) for automated work order routing and job feedback.
•
Expand mobile computing to water distribution staff.
•
Provide Company network access to water treatment works operators at remote sites.
•
Install 250 Telematics monitoring systems in Company vehicles to improve operational data, monitoring of the efficient use of transport and helping to improve the safe use of vehicles.
Energy efficiency Energy consumption continued to remain stable over the reporting year, even allowing for additional pumped storage activities due to lower rainfall. Energy costs for the year were contained through the early purchase of the major part of our portfolio, ensuring that we were at or below the market throughout the year. Important developments have been made in the areas of monitoring, controls and sourcing of our electricity requirements:
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•
Our advanced monitoring and targeting system reports on daily consumptions and exceptions so that operational activities can be regulated to achieve targets wherever possible.
•
Energy Risk Management has been successfully integrated into the Company, supported by external advisors, and ensures Board level involvement with purchasing decisions in the volatile energy market.
•
Our energy sourcing from Total Gas & Power continues, from Good Quality CHP sources, and we have secured a 'green' renewable energy supply contract for our smaller sites for the next two years. This supplements the renewable energy that the Company generates forming a package of measures to reduce our carbon emissions impact from energy use.
We are implementing plans for increased use of automatic electricity metering at site level, this will increase the consumption measured through 'self-reading' meters to 96% of our total electricity consumption. Also, at process level, a number of sub-meters are being used to support the process efficiency benchmarking work that we are undertaking. Process benchmarking is one of the key activities being undertaken by the Water UK energy management forum, which our Energy Manager continues to chair. SWW's use of this process benchmarking has enabled reporting of energy efficiency and carbon labelling for our largest 100 waste water sites, and this will be extended further. Human resources The Company is putting in place four major training programmes to further develop our staff: •
Senior Management Development Programme - to increase the number of senior managers who can provide Executive Management Team level contributions to the business;
•
Management Development Programme - to provide middle managers with a broader range of management skills and experience and to enable those with ambition to progress to more senior positions;
•
First Line Manager/Team Leader Programme - to ensure that we have consistent values and behaviours across our first line managers, and provide them with the
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•
Graduate Development Programme - to provide recent graduates with the opportunity to fulfil their potential by providing a broader based experience of the organisation.
This targeted series of programmes will enable our managers and staff to meet the challenges ahead, in delivering ever increasing standards of customer service.
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CHAPTER 5 - COMPETITION The Company has received no proposals for inset appointments or common carriage in the last year. No water supply licensing applications for common carriage or wholesale supplies of water have been received following the commencement of the new competition regime on 1 December 2005. The Company has signed one confidentiality agreement with a licensee under the water supply licensing arrangements and has provided a draft wholesale master agreement for negotiation with a licensee. The Company published its Water Supply Licensing Access Code, including indicative prices for wholesale and common carriage supply, at the end of August 2005, meeting the required timescale. The Company ensured that preparations for the new regime were in place by carrying out a simulation exercise that tested the new internal processes for dealing with applications from licensees. During the last year the self lay policy was also updated to reflect changes in Ofwat guidance to water companies on dealing with developers who wish to lay their own water mains and service pipes.
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Confidentiality We consider that Tables 18a, 18b, 30, 31, 35b, 36b and 39 in the Return should be classified as confidential, as disclosure of their data and the respective commentaries to third parties would be prejudicial to South West Water’s commercial interests. We request that they remain as ‘Commercial-in-Confidence’ within the Information Capture System and should be excluded from the versions of the Return in the public domain. Board Endorsement The contents of this overview are endorsed by the Board of South West Water Ltd.
R J Baty, OBE Chief Executive 13 June 2006
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BOARD’S OVERVIEW Chapter 1 Key Outputs and Service Delivery - (Tables A and B) Chapter 2 Expenditure and Financial Performance Measures - (Table C) Chapter 3 Key Supporting Information - (Tables D and E) Chapter 4 Efficiencies Chapter 5 Competition
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BOARD’S OVERVIEW In 2005/06, there were again significant benefits to customers from customer service investments and benefits to the environment from the completion of environmental schemes, adding further to the considerable achievements of previous years. Highlights of the year were: •
Drinking water quality performance was the best ever at 99.96%, supported by the rehabilitation or replacement of 695 km of water mains (5% of the Company’s network) benefiting around 120,000 customers.
•
Customer demand was again met without the need for hosepipe bans or drought orders.
•
Bathing water compliance was at record levels in 2005 with 142 beaches (99.3%) meeting the Mandatory standard and 127 beaches (88.8%) meeting the tougher Guideline standard. This performance is supported by our operation of 52 UV waste water treatment plants.
•
Opex efficiencies of £4M and capex efficiencies of £10M were achieved.
•
The leakage target was again met.
•
There were over 30,000 free meters fitted in the year; the proportion of domestic metered customers has now exceeded 50%.
•
Improvements have been made to 23 sewage treatment works and 55 intermittent discharges.
•
The majority of “Early Start” schemes were completed, numbering around 45 in total, at a cost of some £20M. Only a few schemes remain to be completed in 2006/07.
•
A reduction of 25% was achieved in written complaint volumes in 2005/06 compared to 2004/05, following a 20% reduction in the previous year.
Quality Assurance The Board ensures that the information provided in this return is reliable accurate and complete by: •
Investment Planning & Control procedures (IPAC) to ensure that the principles of proper financial control are applied throughout the inception, evaluation,
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JUNE RETURN 2006 implementation and handover of the investment. These have been updated in the reporting year.
•
Setting targets and reviewing performance against key levels of service indicators and financial measures on a monthly basis at Board and executive management team level.
•
Implementing a programme of internal audits through the Quality Assurance Department as part of the Company’s ISO9001:2000 accreditation. The scope of this has been extended to include waste water services.
•
Independent review and challenge of reporting by the Regulatory Department, with special focus on perceived areas of heightened interest.
•
Endorsing and acting on audit findings from Pennon Group internal audits carried out within the Company.
•
Through the Executive Management Team, approving the June Return audit programme and reviewing weekly reports on audit progress and key issues arising.
•
Ensuring that, at all times, the Reporter is given full co-operation by Company staff and full access to all Company data and systems.
•
Ensuring that any key issues presented to the Executive Management Team, and separately to the Board, by the Reporter following June Return audits are followed up, with corrective action taken where necessary.
•
Encouraging a culture of openness, where issues can be openly discussed.
•
Putting in place and supporting a ‘Whistleblowing’ policy.
The Board confirms that sufficient processes and internal systems of control are in place to fully meet the Company’s obligations for the provision of data to Ofwat. Corporate governance and risk management The system for profiling and monitoring key risks is embedded in our normal business practices. We regularly review how we have sustained specific risk control measures, to decide if the probability and consequence of certain risks has changed, and if necessary to recommend further actions or investment to ensure the solidity of our corporate governance.
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CHAPTER 1 WATER SERVICE - KEY OUTPUTS AND SERVICE DELIVERY Drinking water quality Total drinking water quality compliance for 2005 was at its highest level to date of 99.96%. Performance against the DWI’s Operational Performance Index (6 parameters) has improved again to 99.86%. The principal driver for this is iron performance improvements, resulting from the mains rehabilitation programme. The following chart shows total and OPI performance improvements over recent years.
Water Quality Performance
%
100.0 99.92 99.9
99.92
99.95
99.88
99.96
99.86
99.85 99.79
99.8 99.72 99.69
99.7
99.6 99.52 99.5
Total Compliance OP Index
99.47
99.4 2000
2001
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2002
2003
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2004
2005
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Leakage For the seventh year running, we have met our leakage target of 84 Ml/day, which represents a decreasing trend when measured on a leakage per property or length of water main basis. Analysis undertaken for the Periodic Review 2004 (PR04) confirmed that we have gone beyond the economic level of leakage in order to meet customer and environmental expectations, with significant cost implications. DG2 – water pressure Only 0.03% of properties are below the reference level, which is a greater than ten-fold improvement since 1997/98. DG3 – supply interruptions There was an increase in unplanned interruptions to a weighted average of 0.65% of customers in 2005/06; compared to a reducing trend over a number of years with the previous year being 0.26%. The increase in the number of properties affected was entirely due to three notable main bursts in the year. Excluding these three bursts would give 0.21%. The entire length of the 1.8km PVC main which caused two of these bursts is currently being replaced. Mostly due to our mains rehabilitation programme, we issued 417,000 notifications of planned shutdowns (equivalent to 55% of our customer base) with only 0.06% of these customers having shutdowns which exceeded the notified time. Mains rehabilitation In December 2005, we completed 1,194 km in the two year period for Milestone Package 3 of our Section 19 undertaking to the DWI. In the financial year 2005/06, 695 km of mains were either replaced or renewed, benefiting around 120,000 customers. At an average of 58km per month, this is double the rate achieved in the 5 years of the K3 period. Customer contacts All DG6 billing queries were dealt with in 5 working days and 99.9% of all DG7 written complaints were dealt with in 10 working days.
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A reduction of 25% was achieved in DG7 written complaint volumes in 2005/06 compared to 2004/05, following a 20% reduction in the previous year. The following activities have improved customer satisfaction and helped to deliver the reduction in written complaints: •
Continued improvement in call centre performance and number of calls answered, including: o Implementation of automated voice recognition service for Card Payments. o Development of short and simple front end messaging services. o Improvements to the structure and use of Case Based Reasoning, to ensure direction of customer contacts to the correct field staff for early resolution. o Improved management of debt recovery activity (i.e. despatch of reminders etc) to even out peaks and troughs.
•
Process improvements with a focus on resolving customer queries in the field.
•
Implementation and delivery of the “Ambassador Programme” providing all customer facing representatives with up to date skills to deal with customer contacts.
After a difficult start to the year with the introduction of the new measures for DG9 performance, the Abandoned Calls performance for the year was 8% and All Lines Busy was 2.1%. By the end of the year, these were reduced to 3 month averages of 4.45% and 0.13% respectively. Call attempts reduced in the year as more calls were answered by advisors and more customers opted to use automated options. There was also a significant drop in complaints regarding Helpline accessibility due to continued improvement in staffing levels during the year. All Lines Busy, Table A Line 9, is calculated as Table 5 Line 14 divided by (Line 14 plus Line 13) all multiplied by 100. Which is therefore: 31,736 x 100/(1,494,753+31,736) = 2.08% DG8 - bills for metered customers Performance was maintained at 99.9%, despite a 9% increase in the number of metered accounts.
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This is an exceptionally high standard of performance in the South West region, which has a high proportion of holiday homes, where access to internal meters can be consequently difficult to arrange. Serviceability Over the K4 period (2005/06 to 2009/10), we will report on serviceability using K3 (2000/01 to 2004/05) performance as a base. In the following charts, the four Ofwat serviceability indicators have been used for each of the asset groups. In future years, the indicators used may change as a result of further work being carried in South West Water on serviceability and any updates to Ofwat serviceability indicators resulting from the UKWIR review. The following charts summarise performance over the last six years for the Ofwat serviceability indicators, by each of the clean water asset group areas. Each chart shows performance in a year divided by the average of performance over the K3 period. If performance was at the average level for K3 in 2005/06 then this would be plotted as a value of 1.0. If the indicator was above the average then it would therefore be above 1.0 and performance below average would be between 1.0 and zero. This allows the comparison of trends in performance for the four indicators in each asset group. It should be noted that all of the indicators measure adverse events or non-compliance, so downward trends represent improving performance, upward trends represent deteriorating performance.
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Water non-infrastructure serviceability Water Non-Infrastructure Serviceability Indicators 3.0
Ratio of Year to K3 Average
WTW Determinations Containing Coliforms (TA L21) Enforcement Actions Considered - DWI
2.5
Service Reservoirs with Coliforms >5% of Samples WTWs Turbidity 95th Percentile > 0.5 NTU (T11a L1)
2.0 1.5 1.0 0.5 0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance for all of these indicators has been at, or below, the K3 average for the last 2 years. No adverse trends can be identified in the data. (Analysis of individual indicators performance is given in the commentary to Table 11A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Stable Stable
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Water infrastructure serviceability Water Infrastructure Serviceability Indicators
Ratio of Year to K3 Average
3.5
DG2 Properties Below Reference Level (T2 L3/L1) DG3 Interruptions >12 hours (T2 L7/L1)
3.0
% of WIS Zones Failing For Iron Mains Bursts and Leaks per 1,000 km (T11 L11)
2.5 2.0 1.5 1.0 0.5
excludes 2 major incidents
0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance key issues as follows: •
DG2 performance is clearly stable.
•
DG3 performance on interruptions greater than 12 hours was affected by 2 major bursts, as described above under “DG3 – supply interruptions”. Excluding these a downward trend would have continued.
•
WIS zones failing for iron was the lowest figure ever last year, the improving trend resulting from our investment in water mains rehabilitation.
•
Mains bursts and leaks showed a slight increase last year, but within predictable variation.
Overall there is no adverse trend visible from the data. (Analysis of individual indicators performance is given in the commentary to Table 11A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Stable Stable
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SEWERAGE SERVICE - KEY OUTPUTS AND SERVICE DELIVERY Bathing water compliance The Company has almost 30% of the country’s bathing beaches, but only 3% of the resident population so our environmental obligations are particularly demanding. In 2005, 99% of the region’s beaches passed mandatory standards and a record 89% passed the tighter Guideline compliance standard, improving on the high levels of compliance set in recent years. SWW Region Bathing Water Compliance
%
100 97.9
97.9
99.3
99.3
97.9
95.7 90 88.8 84.3
80
81.6
70
60
81.1
71.4
Mandatory Standard
60.7
Guideline Standard 50 2000
2001
2002
2003
2004
2005
In “The Good Beach Guide 2006”, the Marine Conservation Society recommended 111 of the beaches in our region, the best ever performance for our region. River water quality Devon and Cornwall has a higher percentage of high quality rivers (90% are classified as ‘Very Good’ or ‘Good’) than any other region in England. Since 1989, we have improved treatment standards at over 300 waste water treatment works, greatly improving the quality of treated waste water entering the region’s rivers. This has provided a major contribution to the improvement in river water quality. However, not all river water quality issues are caused by waste water discharges,
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consequently an increasing proportion of remaining problems will result from other sources such as diffuse pollution. Waste water discharges & compliance In total, 23 sewage treatment works were improved in 2005/06 as part of our Quality Programme. The Company now has UV treatment at 52 works, more than any other water and sewerage company. These works together serve more than one million people. UV treatment plants have very exacting standards on their consents. Waste water sanitary compliance (based on population equivalent) improved to the best ever 99.4% in 2005 from 99.2% in 2004. We also achieved full compliance with the Urban Waste Water Treatment Directive look-up-table requirements for BOD and the EA’s stringent 99% UV disinfection rule at all UV works. A total of 55 intermittent discharge schemes were completed in 2005/06, reducing the total of unsatisfactory discharges requiring improvement to just 17 out of a total number of 1,725 intermittent discharges. In addition, 7 environmental investigations have been completed. Sewerage and sewage treatment performance Significant performance improvements in sewerage serviceability were again made in 2005/06. There was a further reduction in the number of collapsed sewers, from 18.7 to 14.7 collapses per 1,000 km in 2005/06 as shown by the following chart:
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JUNE RETURN 2006 Sewer Collapses per 1,000 km 30
27.2 25.0
25
24.5
Collapses per 1,000 km
21.4 18.7
20
14.7
15 10 5 0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Once again, there were no Category 1 pollution incidents (there have been none in the last seven years), and the number of Category 2 incidents was only 3 non-compliant pollutions. Although slightly increased on the previous year, the total number of Category 2 and 3 pollution incidents at CSOs and foul sewers has shown a reducing trend over the last 6 years, as shown in the chart below. Pollution numbers need to be viewed in the context of the Company’s asset base of 624 sewage treatment works, 1,725 intermittent discharges, 789 pumping stations and over 9,000km of sewers. In some cases, these are substantially more than for some larger companies and represent a much higher number per head of population served.
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118 120
117 94
100
91
89 79
Incidents
80
60
40
20
0
2000
2001
2002
2003
2004
2005
The Company has produced Odour Management Plans for all sewage treatment works which have been the subject of odour complaints, with action plans in place to deal with any problems. Odour Management Plans are now being developed for all other sewage treatment works. The Company has a dedicated 0800 phone line for the reporting of pollutions and odours, in order to improve response times and thereby minimise the impact of waste water incidents. We meet regularly with the Environment Agency to review priority requirements. DG5 – properties at risk of flooding At 31 March 2006, there were 28 properties at risk of flooding twice in 10 years and 96 at risk once in 10 years, a net reduction of 15 on the previous year. In total, the number of properties at risk of flooding more than once in 10 years represented 0.02% of connected properties, half the national average figure for 2004/05. A further 40 properties are in the risk category 1 in 20 years. The following chart shows the downward trend of properties at risk of flooding more frequently than once in ten years, and the corresponding reduction in flooding incidents due to insufficient sewer capacity. Flooding incidents due to other causes showed an increase in the report year. A significant proportion of the increase was due to problems Page: 13 Date Stamp: 30 August 2006
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in Paignton at a pumping station and associated sewerage system penstock, which have since been repaired. K3 Sewer Flooding - At Risk and Actual
No 300
Properties At Risk of Flooding (>1 in 10 yrs)
245
250
244
Flooding Incidents Due to Insufficient Sewer Capacity
246
Flooding Incidents Due to Other Causes
206 200
139
150
123
113
107
122
100
145
101 124
83 56 40
50
39 25
16
0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
The Company uses an expert fire and flood cleaning contractor to assist customers by cleaning properties where internal floodings have occurred. There has been very positive feedback on the contractors from customers who have been unfortunate enough to require this service. Serviceability The following charts summarise waste water performance over the last six years for the Ofwat serviceability indicators, in the same way as the previous ones for clean water, by each of the waste water asset group areas.
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Sewerage non-infrastructure serviceability Waste Water Non-Infrastructure Serviceability Indicators 2.5
Ratio of Year to K3 Average
STWs Failing Numeric Consents (TB L22) STWs Failing LUT Consents Peq (TB L10)
2.0
STWs Forecast BOD 95%ile (T16b L1 C3) STWs Forecast SS 95%ile (T16b L4 C2)
1.5
1.0
0.5
0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance for all of these indicators has been at or below the K3 average for the last 2 years. No adverse trends can be identified in the data. (Analysis of individual indicators performance is given in the commentary to Table 16A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Stable Stable
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Sewerage infrastructure serviceability
Waste Water Infrastructure Serviceability Indicators
2.5
Ratio of Year to K3 Average
Sewer Collapses/1,000km (T16 L12) Properties Flooded Hydraulic Overload (T3 L2/L1)
2.0
Pollution Incidents (TB L21) Flooding Incidents Caused by Collapses (T3 L10/L1)
1.5
1.0
0.5
0.0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Performance key issues as follows: •
Sewer collapses – downward trend for the last four years.
•
Floodings due to hydraulic overload – stable, excluding extreme year in 2000/01.
•
Pollution incidents – slight increase in last year, but downward trend overall.
•
Floodings caused by collapses – high variability, improved performance last year on the previous year.
Overall – performance improving on these measures with three better than K3 average performance last year. (Analysis of individual indicators performance is given in the commentary to Table 16A). Ofwat’s Assessment 2004/05: SWW Assessment 2005/06:
Marginal Stable
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OCCUPATIONAL HEALTH AND SAFETY South West Water ensures that occupational health, welfare, well-being, and safety underpin the Company’s approach to corporate responsibility, risk management and business continuity. This includes involvement in helping to set national agendas, both within the water industry and in representing the private sector in Government-led peer group reviews, whilst using innovative and cost-effective ways of implementing sound management systems for the benefit of all our stakeholders. (Further detail is given in the commentary for Table 41). Revitalising, Securing Health Together, and Clear Water 2010 South West Water continue to advocate and participate in a number of “Revitalising” ”think tanks”, and associated research publications which help the Government to deliver existing Revitalising Action Points and re-focus the regulatory regime for further progress in the UK. We maintain our efforts to publicise the benefits of effective occupational health management, continuing our major involvement in the “Securing Health Together” (SH2) with the Health and Safety Executive (HSE). In particular, our contributions include: •
Providing key management roles for the “Clear Water 2010” programme, adopting and promoting SH2 targets within the water industry.
•
Developing and arranging for continual external audit of the UK’s first verified Occupational Health Performance Measurement System, which enables water companies to provide occupational health data for Table 41.
•
Preparing the “Clear Vision 2004” report, which, records industry performance trends at the mid-point of Clear Water 2010.
•
Contributing to HSE working parties which have eventually led to the setting up of Government “national occupational health” services for small and medium sized businesses in various UK pilot regions ( and being congratulated alongside one other one other contributor by the Minister for Health and Safety at the launch )
We have consolidated business continuity and extended risk management in all areas of the business, demonstrating how corporate resilience benefits from including sound occupational health, safety and security assessments in all decisions and activities. We have also:
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•
Prepared detailed plans for capital investment for the prevention of musculo-skeletal disorders, asthma and substance-borne illness
•
Entered into a service agreement with a leading occupational health service provider, which includes the provision of a full-time occupational health adviser
Health and Safety Performance Our management of occupational health and safety during 2005/06 was developed to reflect the business benefits which will accrue from improved business management and resilience. The following chart shows reportable incidents, over-3-day accidents and major accidents for the last six years. The “Major accidents” category does not include any fatal accidents in any of the years. Lost Time Accidents & Reportable Accidents 20 18
Reportable Incidents / 1,000 employees
17
17
Over-3-Day Accidents / 1,000 employees
16
Major Accidents / 1,000 employees
Number / 1,000 Employees
16 14
14
14 13 12
12
13 13
12 11 10
10 8 6
4.5
4 2
2.6
3.0 1.5
1.2
0
0 2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
Company Road Safety Policy South West Water has developed a robust approach to ensuring that the Company and its vehicle drivers are not putting themselves or other road users at unnecessary risk through work related driving activities. This included the establishment of a Road
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Safety Policy implementing a risk assessment approach, monitoring of performance and implementing other further control measures such as enhanced driver training. The benefits associated with this approach have been evidenced in a 30% reduction in vehicle accident costs and a 40% reduction in the number of speeding offences in the reporting year from the previous year. We have also installed 250 Telematics monitoring systems in Company vehicles, helping to improve their safe use.
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CHAPTER 2 - FINANCIAL PERFORMANCE MEASURES Accounting Policies A number of changes in accounting policies were implemented in the year and are set out in note 1 to the financial statements. The most significant change was the adoption of FRS 17 “Retirement Benefits” which resulted in an increase in profit before tax of £1.5m (2005 £3.1m) and a pension fund deficit (net of deferred tax) of £24.1m (2005 £46.7m) being reported on the balance sheet at the end of the year. Where appropriate, comparative figures given below have been restated to reflect changes in accounting policy. Financing During the year the Board decided to increase the level of gearing of the Company in order to increase the efficiency of the Company’s capital structure. The following financial restructuring activities therefore took place: •
A special interim dividend of £200m was approved, of which £145.0m was paid on 15 March 2006, with the balance of £55.0m paid on 31 May 2006.
•
£20 was paid to each South West Water customer as a one-off payment, totalling £14.5m.
•
Cash deposits of £178.9m, previously held under a defeased lease arrangement were released and utilised.
•
A loan from the parent company of £150.0m was repaid on incurring redemption costs of £50.2m, including associated advisors’ fees. This transaction matched the parent company’s retirement of its 2012 £150.0m 10.625% Bonds on recommended terms supported by an Association of British Insurers special committee.
•
A reduction of the net interest rate to 4.7% compared to Ofwat’s assumption of 6.3% in the Final Determination.
Turnover Appointed business turnover for the year increased by 14.0% to £340.0m. Turnover from main water and sewerage charges, including large user revenues, was £327.0m (2005 £287.4m).
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The effect of meter option switchers was to reduce turnover by £7.9m, £1.6m more than in 2005, benefiting 30,696 customers by, on average, about £250 each. Operating Costs Total Appointed business historic cost operating costs, including depreciation, rose from £181.6m to £220.7m, after exceptional charges of £14.5m (2005 £3.4m) which comprised a one-off payment of £20 per customer following financial restructuring. Operating efficiencies of £4.0m made a strong contribution to offsetting other additional costs, mainly arising from increased depreciation and operating costs from new and improved works (£6.2m), infra renewals charge (£6.3m), inflation (£8.4m) and the reclassification of leakage and UV costs from capital (£6.0m). The inflation figure includes for major increases in energy, fuel and chemical costs as well as several other above RPI increases. Operating costs, before depreciation and exceptional charges, were £127.0m (2005 £111.2m), an increase of £7.4m after inflation. Profit Historic cost operating profit after exceptional charges was £120.7m (2005 £117.8m). Net interest payable increased to £96.6m (2005 £52.6m), including an exceptional charge of £42.3m. This comprised the cost of early redemption of the £150m loan from Pennon Group PLC (£50.2m), partially offset by receipts on transfer of a finance lease (£7.9m). Excluding exceptional items, net interest payable increased by £1.7m, reflecting higher borrowings to fund the capital expenditure programme. Net profit before taxation amounted to £24.3m (2005 £65.5m). Before exceptional charges, the equivalent figures were £81.1m and £68.9m. The Appointed business's taxation position results in a credit to mainstream corporation tax of £10.6m (2005 £1.8m charge) for the year. This position mainly reflects a credit of £7.8m resulting from a re-assessment of the corporation tax due for prior periods following submission and/or agreement of detailed computations and the surrender of £4.0m of taxable losses to other Pennon Group companies. The Company continues to benefit from substantial capital allowances generated by the capital expenditure programme, but changes to the tax regime have resulted in lower allowances than Page: 21 Date Stamp: 30 August 2006
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previously and the tax impact of capital allowances being in excess of depreciation being reduced (£3.8m for 2005/06, down from £16.0m in 2004/05). A discounted provision for deferred tax has been made resulting in a charge of £6.7m in the year (2005 £10.0m). Dividends and retained profit Dividends totalling £197.9m (2005 £79.5m) were paid to the parent undertaking. This included £145m of the £200m special dividend related to the financial restructuring undertaken during 2005/6. The balance of £55m was deferred until 31 May 2006. The remaining £52.9m was in line with the K4 Price Determination. The Company has established a dividend policy, which involves the following components: •
a sustainable level of base dividend growth, determined by a number of factors including the shareholder’s investment and the cost of capital.
•
a further level of growth funded by efficiency out-performance.
•
consistency with the assumptions made by Ofwat in setting prices for the K4 period.
Dividend payments are designed to ensure that key financial ratios are not prejudiced and that the ability of the Appointee to finance its Appointed Business is not impaired. Cash Flow Net cash inflow from operating activities decreased to £184.7m (2005 £194.1m), reflecting the pension prepayment made during the year partially offset by working capital movements and the increase in operating profit. Financial Ratios
Historic cost dividend cover Current cost dividend cover Gearing
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04/05 (restated)
05/06
0.7 0.8 54.4%
1.3 1.3 62.5%
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Note: The 2005/6 figures exclude the £145m financial restructuring dividend and exceptional changes in the calculation of dividend cover. Including this dividend and the exceptional changes would result in a dividend cover of 0.1 under historic cost accounting and 0.2 under current cost accounting. Financial needs and resources Significant funding facilities are in place to cover both medium and long term requirements, including loans from the European Investment Bank. The long term loan from Pennon Group Plc was repaid in 2005/6 as part of the financial restructuring undertaken by the company. In addition, short term facilities exist with a range of financial institutions. Loans and finance lease obligations amounted to £1,359m (2005 £1,269m). Current asset investments of £52m (2005 £238m) were held at the Balance Sheet date. Short term facilities in place at 31 March 2006, but not utilised, totalled £90m (2005 £115m). These resources form part of the funding strategy put in place to finance the future investment expenditure needs of the Company. The Directors confirm that the Company can meet its short term requirements from existing facilities without breaching covenants or other borrowing restrictions.
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CHAPTER 3 WATER SERVICE - KEY SUPPORTING INFORMATION Integrated Management System The Company is in the process of implementing an integrated management system across all of its operational activities. This will add ISO14001:2004 to the Company’s existing ISO9001:2000 accreditation under one management system. The system to be established will avoid bureaucracy and focus on reinforcing good practice in the operation and improvement of our assets. It will support progress and encourage further initiatives on waste water compliance, energy saving, sustainability and waste minimisation. The system, available to all staff and partners via our Intranet, will allow a regional approach to managing environmental issues and will involve suppliers in best environmental practice and the operation of quality systems. The integrated system will be the basis for the Company’s Drinking Water Safety Plans, which are becoming mandatory through DWI instructions. Water Resources, Supply and Demand As in recent years customer demand was met without the need for hosepipe bans or any drought restrictions. Total reservoir storage reached a minimum value of 52% in September 2005 at the same time as some observation boreholes recorded historic minimum levels. Wimbleball, Colliford and Stithians pumped storage schemes were used over the winter 2005/06 to supplement natural refill of these reservoirs and thereby significantly removing the risk of customer restrictions. Pumping increased the storage in these reservoirs by 11%, 7% and 17% respectively. Total reservoir storage at the end of March 2006 was 2% higher than at the end of March 2005.
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Water efficiency measures In the autumn of 2005 the Company started a major water efficiency pilot study in the Roadford Strategic Supply Area. This involved installing water saving equipment in 500 households and monitoring changes in usage against a control sample of 100 households. Initial results of this study should be available in late 2006. We are also continuing to implement a variety of domestic and commercial water efficiency initiatives, working with various partners including councils, environmental organisations and manufacturers to promote water efficiency as widely as possible. Meter optants There were 30,696 free meter optants in the year. Over 50% of domestic customers are now metered. Cryptosporidium compliance In spite of the rural nature of the South West, and high impact of agriculture in the Region, there have again been no failures of the cryptosporidium standard since the Cryptosporidium Regulations were introduced in April 2000. Lead compliance Phosphate dosing is operational at 18 water treatment works; 100% of samples met the lead standard (25 µg) in 2005 and compliance against the 10 µg standard to be introduced in 2013 was 99.28%. The dose optimisation programme is still ongoing. Water distribution iron compliance The Company is continuing to improve serviceability to customers, and iron compliance results demonstrate the positive effect of the water mains rehabilitation programme. This indicator and several other related measures have improved over successive years, as shown by the DWI’s Operational Performance Index (OPI): Year
2000
2001
2002
2003
2004
2005
OPI (6 parameters) %
99.47
99.50
99.69
99.72
99.79
99.86
75
59
29
14
12
4
Tests failed for Iron
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There is a similar improving trend in the new OPI measure which uses only iron, turbidity and manganese. Performance improved from 99.2% in 2000 to 99.85% in 2005. Distribution operation and maintenance project In addition to the mains rehabilitation programme, the Company has a programme of water mains cleaning, using flushing, swabbing and air scouring techniques. In the last year, the total length of mains that were cleaned and maintained was 1,068km. To ensure that the mains cleaning processes are undertaken in an effective manner, whilst minimising the effect on customers and avoiding damage to property and the environment, over 400 new valves and washout positions have been added to the water-main network. In addition to these new installations, nearly 150 remedial works, apparatus upgrades and information gathering investigations have been carried out by the Company’s contracting partners as part of the operation and maintenance process. This considerable number of additions and enhancements to the water-mains provide significant long term benefits to the operation and control and effectiveness of the distribution network.
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SEWERAGE SERVICE - KEY SUPPORTING INFORMATION Key supporting information for waste water treatment and sewerage are discussed in Chapter 1 under Key Outputs and Service Delivery. Sludge strategy The Company meets HACCP requirements on sludge treatment and disposal, with compliance on disposal at 100%, in advance of the legal requirement to meet this standard. ASSET MANAGEMENT In early 2005, a restructuring was implemented through the Customer Focused Asset Management (CFAM) project. This structure is now fully embedded within the organisation, with benefits being gained from enhanced planning, asset data and performance analysis and asset development in an integrated asset management function. Asset Management Plans have now been produced that detail the key investment points in asset lives. The plans also examine the current and future environment that assets operate in and address pinch points and capacity/headroom issues at site level. The following initiatives have been put in place to support the use of the Common Framework for Capital Maintenance: •
Reliability Centred Maintenance – to focus our Capital and Preventative Maintenance further away from reactive to proactive, we have completed detailed analysis at two waste water sites and one clean water site, generating significant savings on annual operational budgets. These will be used as a template to transfer to other sites generating further savings.
•
Whole Life Costing – to ensure the correct intervention is initiated at the right time, with the correct maintenance strategy. This has been applied to pumping stations enabling us to carry out Level of Repair Analysis (LORA) and determine the correct intervention level for different assets
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•
Investment Optimisation – to ensure that we target the right investment and deliver the right outputs to meet the business needs. We have applied our improved methodology to optimise investments for 2006/07. This has enabled us to focus very clearly on what is important to customers and to the Company.
•
Risk Analysis – to ensure that we know, measure and define what risk the Company is carrying and what is acceptable (or not). We have reappraised risk at all our sites except for water treatment, which will be complete by the end of this year. This has enabled us to quantify risk in financial terms at individual site level, which has directly fed into the Investment Optimisation process, enabling stronger targeting of investments.
All of the above have enabled us to understand and capture with more confidence the condition and serviceability grade for our asset base. In addition, we are using Scenario Based Planning from 2006/07 in order to make the right investment from an analysis of the widest range of future operating environments. All of these projects will deliver economic, customer focused, risk based, holistic, and structured investments that will make optimum use of future capital investments. SUSTAINABLE PROCUREMENT South West Water is moving towards the inclusion of all aspects of sustainability in its procurement processes. The assessment of suppliers for their financial sustainability, approach to occupational health and other societal issues, working conditions in the supply chain, corporate governance, sustainability of their products and services, issues of natural capital and environment etc., which are all becoming part of South West Water’s supplier assessment criteria. We aim to work with the best companies whose forward thinking approach to sustainability gives reassurance that environmental, social and ethical risks are minimised. In addition to ethical and financial considerations, this approach will further support our business continuity objectives. We have therefore developed Environmental Procurement and Supply Chain Social and Ethical Policies that set out the principles by which the Company purchases goods and services. Changes in the European Union Procurement Directives from January 2006 contain provisions that are broadly supportive of sustainable procurement. We welcome the
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changes to the Directives as an opportunity to integrate further sustainability criteria into the procurement process. We are currently working closely with Achilles UVDB (Utilities Vendor database) and other utility companies in developing a corporate social responsibility strategy for sourcing goods and services via the Achilles web based procurement system. This will include a basic assessment of supplier approaches to ensuring that labour standards are met in the supply chain, in line with relevant International Labour Organisation Conventions. We have updated our pre-qualification procedures in line with the proposed developments within the Achilles system. The pre-qualification questionnaires now include assessments of supplier company’s social and ethical credentials, as well as the standard set of environmental questions. This more rigorous approach invites suppliers to look further down the supply chain and was first used on the major construction partner contracts tendered last year. We have instigated an annual supplier risk review procedure to assess the environmental, social, ethical, quality, health and safety, commercial and financial risks key and strategic suppliers pose to South West Water. Each key and strategic supplier is scored and ranked according to the level of risk. High risk companies are flagged up as requiring further review in order to satisfy us that those risks are adequately managed between ourselves and the supplier. We have been working closely with UK Water Industry Research Ltd (UKWIR) and Water UK in developing an industry wide approach to reporting using a set of sustainability indicators. This includes sustainable procurement indicators that record progress towards responsible contracting and the sustainable use and the management of key materials. An increasing aspect of our approach to sustainable procurement is in the use of whole life costing in purchasing, therefore including initial cost of goods, on-going operating costs and eventual disposal costs. This approach moves us a step closer to using environmental accounting in purchasing decision making. In energy we continue the special arrangement with an electricity supply company to procure over 90% of electricity from high efficiency “good quality” combined heat and power plants. This allows the Company to use a CO2 emissions conversion factor at a lower value than if we had purchased standard grid supplied electricity, thereby holding
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down CO2 emissions from energy use to under 100,000 tonnes. CHAPTER 4 - EFFICIENCIES Operating costs Operating efficiency savings totalling £4.0m were achieved in the reporting year, c.£1m ahead of the profiled savings included in the Final Determination. The above target efficiencies are helping to mitigate the impact of significant price increases to the cost base. Energy prices have risen 42%, chemical increases average 15% and fuel 10%. There have also been above RPI increases in rates, EA charges and other areas. In overall terms we estimate that from the original K4 2002/3 base, real price increases are approaching £10m (8%) higher than specifically allowed in the determination or funded through the cumulative RPI addition to the cost base. The £4.0m efficiency savings were broadly achieved in the following areas:•
Manpower costs – reduction in numbers and overtime levels, absorption of additional work, increased productivity through mobile working and more planned rather than reactive work.
•
Use of Materials and Contracted Services – improved material selection, including use of chemicals, optimisation of internal/external resource, reduced usage through improved planning, sharing of risk and ongoing price management. We continue to maintain and refresh our integrated partnering and strategic supplier arrangements and in the year have been particularly successful in managing our sewerage contractor and UV supplier costs down. Savings are also starting to come through from our move to more proactive asset management and having more robust performing assets.
•
Overhead costs – telephony costs, transport and other establishment costs, including the retirement of some older expensive, leased, IS systems.
Capital costs In the first year of K4 we have continued delivery of the significant Mains Rehabilitation programme. This and other key programmes and projects are being delivered via the partnering strategy developed in 2004 for K4, building on the successes of this approach in K3. The change in emphasis of K4 with fewer large projects and many smaller investments has driven a revised partnering structure with, two contractors for
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mains rehabilitation and two for planned programme and five consulting engineers. Strategic sourcing strategies have also been developed for equipment, supplies and services to promote standardisation and consistency of approach. Our capital efficiency targets for K4 are again primarily programme based with achieved efficiencies of just under £7m indicated arising from the mains rehabilitation programme in the first year. A significant contribution of £3m from the Urban Waste Water Treatment programme has already been identified as being achieved and offset by overhang expenditure on projects delivered in K3. To support the collection of cost data to monitor and deliver improved unit cost analysis and benchmarking, and hence drive further efficiency, South West Water have implemented a data capture and analysis approach “Cost Availability for Continuous Timely Improvement”, CACTI. Continuous Improvement Service+ This project is currently being delivered and focuses on operational contacts, provision of information, geographically based information to aid early call resolution, mobile computing for efficiencies and work management for the field staff. The objectives are to provide a measurable improvement in customer satisfaction, reduce the costs of dealing with reactive operational contacts and reduce avoidable contacts (such as repeat calls for information on progress of work). Service+ will achieve these objectives by: •
New and enhanced information and IT solutions such as an integrated view of the data held in corporate systems, which will be updated in real time by the use of mobile devices for all customer-facing staff, including our partners.
•
The establishment of a Service Centre to improve handling and routing of customer work requests, including more availability of specialist advice.
•
Providing timely and accurate information to customers on enquiry and work progress.
•
Improved ways of working with our partners.
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Customer contact strategy This strategy includes the implementation of a new telephony platform and associated applications such as workforce management, call recording and an outbound dialler. Further work will focus on the method of customer contacts, web/self-service, etc, the quality of responses to customer either in writing or via the telephone, reducing unnecessary contacts and further developing Company literature and standard letters and notices. In the last year, this has resulted in a reduction in written complaints of 25%, following a 20% reduction last year. Further details are given in Chapter 1. Debt management Good progress has been made on a number of debt related project strands, which aim to ensure that by autumn 2007 South West Water is at the forefront of good practice in debt management. This work includes: •
Selection, purchase and implementation of a leading commercial credit and debt management system to provide full back office automation, reporting and recovery of debt via segmented pathways based on information about an individual customer and her or his payment behaviour. Implementation and beneficial use will be in 2007.
•
Reorganisation and refreshment of credit and debt management structures and office working practices in advance of the implementation of the credit and debt management system.
•
Use of customer data to determine collections strategies – in particular the online Land Registry facility to check home ownership has allowed debt to be collected, or secured, by way of Charging Orders from property owning customers owing charges from more than one financial year.
•
Enhanced management information and operational reports have been developed to better inform the business of the structure and nature of debt and prioritise types of debt to be targeted.
WorkOutTM In 2005 we implemented WorkOutTM in Operations. WorkOutTM is a structured
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continuous improvement process that involves a cross section of people in eliminating unnecessary work, duplication in business processes and removing non-productive activities from their day to day jobs. It delivers rapid results improving every day operational issues. Two pilot projects were successfully carried out, followed by another three events with two further events are due. This will complete the skills transfer required to enable SWW to resource and deliver future events internally, thereby creating a self-supporting capability for continuous improvement Work Out™ was developed and trademarked at General Electric. It has since been successfully applied in many other organisations. New technology The Company has used opportunities from developments in new technology to help deliver business efficiencies and improvements in business processes. In the last year we have further expanded the use of IT solutions to: •
Improve working with Sewerage Management Contractors by implementing the use of Personal Digital Assistants (PDAs) for automated work order routing and job feedback.
•
Expand mobile computing to water distribution staff.
•
Provide Company network access to water treatment works operators at remote sites.
•
Install 250 Telematics monitoring systems in Company vehicles to improve operational data, monitoring of the efficient use of transport and helping to improve the safe use of vehicles.
Energy efficiency Energy consumption continued to remain stable over the reporting year, even allowing for additional pumped storage activities due to lower rainfall. Energy costs for the year were contained through the early purchase of the major part of our portfolio, ensuring that we were at or below the market throughout the year. Important developments have been made in the areas of monitoring, controls and sourcing of our electricity requirements:
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•
Our advanced monitoring and targeting system reports on daily consumptions and exceptions so that operational activities can be regulated to achieve targets wherever possible.
•
Energy Risk Management has been successfully integrated into the Company, supported by external advisors, and ensures Board level involvement with purchasing decisions in the volatile energy market.
•
Our energy sourcing from Total Gas & Power continues, from Good Quality CHP sources, and we have secured a 'green' renewable energy supply contract for our smaller sites for the next two years. This supplements the renewable energy that the Company generates forming a package of measures to reduce our carbon emissions impact from energy use.
We are implementing plans for increased use of automatic electricity metering at site level, this will increase the consumption measured through 'self-reading' meters to 96% of our total electricity consumption. Also, at process level, a number of sub-meters are being used to support the process efficiency benchmarking work that we are undertaking. Process benchmarking is one of the key activities being undertaken by the Water UK energy management forum, which our Energy Manager continues to chair. SWW's use of this process benchmarking has enabled reporting of energy efficiency and carbon labelling for our largest 100 waste water sites, and this will be extended further. Human resources The Company is putting in place four major training programmes to further develop our staff: •
Senior Management Development Programme - to increase the number of senior managers who can provide Executive Management Team level contributions to the business;
•
Management Development Programme - to provide middle managers with a broader range of management skills and experience and to enable those with ambition to progress to more senior positions;
•
First Line Manager/Team Leader Programme - to ensure that we have consistent values and behaviours across our first line managers, and provide them with the
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•
Graduate Development Programme - to provide recent graduates with the opportunity to fulfil their potential by providing a broader based experience of the organisation.
This targeted series of programmes will enable our managers and staff to meet the challenges ahead, in delivering ever increasing standards of customer service.
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CHAPTER 5 - COMPETITION The Company has received no proposals for inset appointments or common carriage in the last year. No water supply licensing applications for common carriage or wholesale supplies of water have been received following the commencement of the new competition regime on 1 December 2005. The Company has signed one confidentiality agreement with a licensee under the water supply licensing arrangements and has provided a draft wholesale master agreement for negotiation with a licensee. The Company published its Water Supply Licensing Access Code, including indicative prices for wholesale and common carriage supply, at the end of August 2005, meeting the required timescale. The Company ensured that preparations for the new regime were in place by carrying out a simulation exercise that tested the new internal processes for dealing with applications from licensees. During the last year the self lay policy was also updated to reflect changes in Ofwat guidance to water companies on dealing with developers who wish to lay their own water mains and service pipes.
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Confidentiality We consider that Tables 18a, 18b, 30, 31, 35b, 36b and 39 in the Return should be classified as confidential, as disclosure of their data and the respective commentaries to third parties would be prejudicial to South West Water’s commercial interests. We request that they remain as ‘Commercial-in-Confidence’ within the Information Capture System and should be excluded from the versions of the Return in the public domain. Board Endorsement The contents of this overview are endorsed by the Board of South West Water Ltd.
R J Baty, OBE Chief Executive 13 June 2006
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