The National Infrastructure Commission (NIC) has written to Ofwat expressing its concern about the present approach to managing ageing underground assets, highlighting a “lack of consistent cross-sector understanding of the rate of likely asset deterioration over time.”

The focus of the letter relates to so-called ‘base cost’ maintenance budgets for ensuring day-to-day services (e.g. replacing water mains pipes), rather than the kind of major capital enhancements envisaged to tackle storm overflows etc.

Writing to Ofwat CEO David Black, James Heath Chief Executive at the Commission says Ofwat needs to develop a more consistent and future looking approach to how the health of assets is measured and reported. This should then in turn inform the amount that will need to be allocated over multiple investment periods (AMPs) to ensure water networks remain resilient.

The letter highlights that at the last price review (PR19), Ofwat allowed company investment based on plans to renew water mains at a rate of 0.4 per cent per year. Bearing in mind that around 40% of assets were renewed or replaced over the previous 30 years, this suggests assumed asset lives of up to 180 years for the rest.

According to the NIC, the data water companies had supplied to the Commission suggested that asset replacement rates need to be significantly higher.

The NIC Chief says that in response to his request for information from water companies in England on how they manage underground asset renewal and replacement, the Commission received responses from twelve of the fifteen companies, which covered 100% of the sewer network and over 90% of the water network.

The responses showed that companies have different approaches to how they determine when to replace or repair assets. Some of these are backward-looking, focusing on past failures rates, while others take a more forward-looking whole life approach.

“However, the different approaches taken by companies to estimate asset lives means the Commission cannot make firm conclusions on what the appropriate level of replacement should be”, James Heath warned.

He goes on to explain that the Commission recognises that asset age on its own is not the best indicator of asset condition and that asset deterioration is dependent on a range of factors including the interaction between soil type and pipe material and company asset management interventions.

The Commission also recognises that it is challenging to establish the appropriate replacement rate as Ofwat will not want to incentivise asset replacement when it is not needed, he added.

However, he went on to warn that the metrics Ofwat uses to incentivise maintaining asset health and to understand industry performance when benchmarking efficient replacement rates in its base cost model – mains repairs, unplanned outages and sewer collapses - are lagging indicators.

The letter states:

“While they provide information about the condition of assets today, they do not on their own give insights into the future condition of assets because their only data point is the point of failure. At present there does not appear to be a comprehensive and consistent understanding of asset condition across the sector and how this may change in the future. A more complete view of asset health in the sector would support a multi-AMP view of the investment required to maintain asset health and, consequently, service performance and reliability.”

Welcoming the work Ofwat has done with companies on the Asset Management Maturity Assessment, and that Ofwat is gathering more data on asset health as part of the PR24 process, Heath suggests that this information should be used to inform a more in depth and forward-looking understanding of asset health in future.

In addition, he points out that the Commission believes that Ofwat should take a lead on asset health and, building on its work on asset management maturity, develop consistent forward-looking metrics for defining and measuring asset health.

“This could be underpinned by a regulatory mechanism requiring companies to develop a longer term and more in depth understanding of the health of their assets, which is used as the basis for investment proposals. This could be in the form of a licence requirement or an appropriate incentive mechanism,” the letter suggests. .

He concludes by saying the NIC would be happy to meet with Ofwat to discuss potential approaches to improving the sector’s understanding of asset health further.