upstream service methodology statement 2016 - … · upstream service methodology statement 2016 ....

Thames Water Utilities 2016 Methodology Statement

Upstream Service Methodology Statement 2016


Contents

Section Page 1. Introduction 3

1.1 Purpose 3 1.2 Scope 3 1.3 Governance 3

2. Systems and structures 5

2.1 Systems 5 2.2 Structures 5

3. Guidance 7 3.1 Regulatory Accounting Guidelines 7 3.2 Information Notice 8 3.3 Changes to methodology 8

4. Anaplan methodology and allocation process 8 4.1 Methodology 8 4.2 Allocation process 8

5. Allocation assumptions – operating expenses 9 5.1 Wholesale tables – general assumptions 9 5.2 Wholesale water 9 5.3 Wholesale wastewater 10 5.4 Group Services expenditure 11

6. Capex - Allocation assumptions 12 6.1 General allocation process 12 6.2 Allocation of shared use assets 12 6.3 Data adjustments 12 6.4 Population of tables 4D and 4E 13 6.5 Reconciliation 13

7. Operating Expenditure – year on year analysis 13 7.1 Wholesale water 13 7.2 Wholesale wastewater 14


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1. Introduction 1.1 Purpose The purpose of this methodology statement (the “Statement”) is to explain the systems, processes and allocation methods that the Company has used to produce the following tables, split by Upstream Service (“US”) in the Annual Performance Report (“APR”) for the year ended 31 March 2016:

Section 4: Price review and other segmental reporting: o 4D – Totex analysis – wholesale water; and o 4E – Totex analysis – wholesale wastewater.

This Statement should be read in conjunction with the APR for the year ended 31 March 2016 which can be found on our website [www.thameswater.co.uk/results].

1.2 Scope This document relates to Thames Water Utilities Limited appointed business only, and should be read in conjunction with the following guidance:

Regulatory Accounting Guideline (“RAG”) 2.05 ‘Guideline for the classification of costs across the price controls’;

RAG 4.05 ‘Guideline for the table definitions for the annual performance report’;

Information notice (“IN”) 15/01 Future company performance reporting and assurance issued 11 February 2015 documenting regulatory reporting requirements for 1 April 2015-16 onwards; and

Information notice 15/18 Expectations for company annual performance reporting 2015-16; issued December 2015.

1.3 Governance We have a robust governance framework around the production of the APR, including the Section 4 tables. This framework supports our commitment to our customers and stakeholders to publish information that is accurate, reliable and transparent. The specific governance processes that accompany the production of the Section 4 tables are outlined below:

http://www.ofwat.gov.uk/publication/guideline-for-classification-of-costs-across-the-price-controls/

http://www.ofwat.gov.uk/publication/guideline-for-classification-of-costs-across-the-price-controls/

https://vpn.thameswater.co.uk/dana/home/index.cgi

http://www.ofwat.gov.uk/publication/in-1501-future-company-performance-reporting-and-assurance/

http://www.ofwat.gov.uk/publication/in-1518-expectations-for-company-annual-performance-reporting-2015-16/


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Step 1

•Regulatory Reporting Team provides the business with RAG training, specifically how to populate Section 4 tables

•Table templates are sent out to business areas for population at year end

•Thames Water recording systems are set up and structured so as to capture cost centre codes that then allow information to flow up to popultae the tables

Step 2

•Section 4 tables are prepared by the information providers and Information Integrity Declaration (IID) forms signed

Step 3

•Review of table information performed by the following, as evidenced by signed IID forms:

•manager/reviewer, the business area co-ordinator, the accountable senior manager/director, the Opco Managing Director and CFO; against expectations and prior year (where applicable)

•also reviewed by the Regulatory Reporting Team, Group Financial Controller, and Group Chief Financial Officer

Step 4

•Section 4 tables are reviewed by an external assurance provider who performs agreed upon procedures

Step 5

•The regulatory accounts, which include the Section 4 tables, are approved by the Board


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2. Systems and structures 2.1 Systems

There are two key systems used in the population of Section 4 tables:

SAP; the primary financial accounting and management tool used by the business, and which is the source of the data used in Anaplan; and

Anaplan; implemented in 2015, this is the system used for allocating operating expenditure to the upstream service level1.

2.2 Structures a) Operating company structure The Company is structured into four operating companies (“OpCos”) and an additional stand-alone central support function, against which operational performance is monitored:

Table 1 – Operating companies

Our main systems SAP and Anaplan use cost centres (“CC”) as a way to capture costs at the lowest possible level by service area. Where the activity of a CC is 100% attributable to one of the OpCos listed above and allocation of costs is not required, the cost centre is mapped directly within SAP and Anaplan to the Opco. Where an activity in one OpCo may be shared with other OpCos the CC is flagged to the principal OpCo and a portion of the costs are recharged to the relevant OpCos, through the use of recharge CCs using suitable cost drivers following RAG 2.05 Section 2 guidance. Where possible, Group Services operating expenses are directly attributed to the individual OpCos. All other operating expenses are allocated by expenditure type using suitable cost drivers following RAG 2.05 Section 2 guidance. The allocation process and cost drivers are detailed in section 4 below.

1 Upstream services are a further disaggregation of the value chain, below price control and are used in Section 4 of the APR. These upstream services when aggregated form the price controls which are broadly aligned to OpCos.

• Responsible for all aspects of water abstraction, treatment and distribution and some shared services with the other OpCos (aligns to the Wholesale water price control after allocation of Group Services costs and assets).

Wholesale water

• Responsible for all aspects of wastewater collection and treatment and some shared services with the other OpCos. Includes Thames Tideway Tunnel (‘TTT’)operations which, for regulatory reporting, is reported separately as it is a separate price control (align to the Wholesale waste and TTT price controls after allocation of Group Services costs and assets.

Wholesale waste

• Customer facing activities – household (aligns to the Retail Household price control after allocation of Group Services costs and assets).

Retail Household

• Customer facing activities – non-household (aligns to the Retail Non-household price control after allocation of Group Services costs and assets).

Retail Non-household

• Responsible for shared services across the wider organisation – for regulatory reporting purposes these costs and assets are fully recharged to the above five regulatory price controls.

Group Services


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b) Cost categories Each CC is flagged in SAP and Anaplan as direct, indirect, overheads or non-appointed as defined below:

Direct costs: can be clearly traced to a cost object. A cost object can be a product, contract, project or site. For example, the employment costs of a Site Manager associated with his/her site, chemicals, site maintenance and power;

Indirect Costs: cannot be traced directly to one cost object or activity. For example, the employment costs of a Regional Manager who has several sites under his/her remit that relate to the Business Unit; and

Overhead costs: costs not directly related to the operational element of the Opco. For example Head Office costs, Senior Managerial costs, and administration; and

Non-appointed: those incurred in the delivery of our non-appointed services such as billing commissions, rental income from non-appointed assets, property searches and others as defined in RAG 4.05.

In Anaplan general ledger account codes are further grouped into the operating expense line items in the RAG 3.08 Proforma tables 4D and 4E.

c) Wholesale regulatory reporting structure Table 2 below, reflects the Wholesale regulatory reporting structure as defined by Ofwat, which is reflected in the Anaplan regulatory model: Table 2 – Price Control and upstream service levels

Price Control Upstream Service Unit

Water services

Abstraction licence

Raw water abstraction

Raw water transport

Raw water storage

Water treatment

Treated water distribution

Wastewater services

Foul

Surface water drainage

Highway drainage

Sewage treatment and disposal

Imported liquor treatment

Sludge transport

Sludge treatment

Sludge disposal

For AMP 6 management revised the SAP CC hierarchy to align it to the regulatory structure down to upstream service level where possible, hence, where the activity of a CC is 100% attributable to one of the units listed above, and allocation of costs is not required, the cost centre is mapped, within SAP and Anaplan, directly to that unit. Where the activity of a CC is not 100% attributable to any of the above, the operating expenses of those cost centres are allocated based on the underlying activity of the cost centre, based on management judgement and the use of cost drivers, across the units listed above. Typically the costs that are required to be allocated are either:

costs that are held at a water treatment or sewerage treatment site level, where the activity straddles more than one of the units; or

Group Services costs, which are all general & support (“G&S”) requiring allocation using the most appropriate methodology outlined in section 5.4 of this methodology statement.

The allocation process is further described in section 4 below.


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3. Guidance 3.1 Regulatory Accounting Guidelines (“RAG”) Ofwat issued revised RAGs in October 2015, of which RAG 4.05 ‘Guideline for the table definitions in the annual performance report’ and RAG 2.05 ‘Guideline for the classification of costs across the price controls’ are the primary guidance used in producing the regulatory tables. The following cost allocation principles have been applied when allocating costs to the relevant price controls and upstream services (as outlined in RAG 2.05):

1) Transparency: the attribution methods applied within the accounting separation system need to be transparent. This requires that the costs and revenues apportioned to each service and business unit should be clearly identifiable. The cost and revenue drivers used within the system should also be clearly explained to enable a review of their appropriateness.

Costs apportioned to each business unit are identifiable by CC and can be traced back to our SAP ledger. This methodology statement as well as our cost allocation tables (Tables 5 and 6) provides further transparency.

2) Causality: cost causality requires that costs (and revenues) are allocated to those activities and services that

cause the cost (or revenue) to be incurred. This requires that the attribution of costs and revenues to activities and services should be performed at as granular a level as possible.

Wherever possible costs are directly attributed to a price control. Some costs are less easily attributed (for example the costs of regulation). Where possible we have taken an activity based costing approach. The method applied to allocating indirect costs is described in this methodology statement, Section 5.4.

3) Non-discrimination: the attribution of costs and revenues should not favour any business unit within the

regulated company and it should be possible to demonstrate that internal transfer charges are consistent with the prices charged to external third parties.

Costs allocated are objective and do not favour any Opco, business unit or service within the regulated company and are undertaken at an arm’s length.

4) No cross subsidy between price controls: Following the introduction of separate binding price controls at the

2014 price review, companies cannot transfer costs between the price control units in setting prices and preparing regulatory accounting statements. In accordance with RAG 5, transfer prices for transactions between price control units should be based on market price unless no market exists, in which case transfer prices should be based on cost.

In line with the separate binding price controls introduced in 2014, costs are not transferred between price control units and are compliant with RAG 5.06 ‘Guideline for transfer pricing in the water and sewerage sectors’.

5) Objectivity: the cost and revenue attribution criteria need to be objective and should not intend to benefit any

business unit or service

Costs are allocated objectively and do not favour any OpCo, business unit or service within the regulated company.

6) Consistency: the cost and revenue attribution criteria should be consistent from year to year to enable

meaningful comparison of information over time. Changes to the attribution methodology from year to year should be clearly justified and documented.

Cost allocation methods are kept as consistent as possible. Where changes are required, these are documented in Section 4.

7) Principal use: capital expenditures and depreciation should be directly attributed to one of the five2 services for

which price limits have been set for 2015-20. Where this is not possible as the asset is used by more than one service, it should be reported in the service of principal use with recharges made to the others services that use the asset reflecting the proportion of the asset used by the other services.

Where possible we have directly attributed capital expenditure and the corresponding depreciation to the price control units and applied the principle use guidance for shared assets (Section 6).

Section 4 below details the process and section 5 the allocation assumptions outlining how the above principles have been applied.

2 There are five price controls for AMP6 including Wholesale Water, Wholesale Waste, Retail Household, Retail Non-household and Thames Tideway Tunnel.


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3.2 Information Notice (“IN”) Thames Water, through its methodology statement and the corresponding US tables are compliant with IN 15/01 issued by Ofwat February 2015 and IN 15/18 issued December 2015 which set out the requirements for company performance reporting and assurance from 1 April 2015.

3.3 Changes to methodology As a result of management review and to align more closely with RAG 2.05, the cost drivers for the following costs have changed from prior year: Table 3 – Changes to Methodology

Expenditure line Cost driver 2015/16 Cost driver 2014/15

General and Support (G&S) External affairs (excluding Customer Assistance Fund)

FTE Direct costs

G&S Health & safety FTE Direct employment costs

G&S Legal (excluding cases which can be directly attributed)

FTE Direct costs

G&S IT FTE Direct costs

Local authority rates (Wastewater – sewage and sludge works)

Non-infrastructure gross modern equivalent asset value (GMEAV) in line with Ofwat guidance

FTE or floor space

Cumulo rates (Water) Total gross modern equivalent asset value (GMEAV) in line with Ofwat guidance

FTE or floor space

4. Anaplan process 4.1 Methodology A regulatory model has been developed in Anaplan, which the Company is now using as the system solution to produce the upstream services regulatory tables 4D and 4E in the APR. Financial data is extracted from SAP for all general ledger codes containing a value for every cost centre used in the period and loaded into the regulatory model. The model uses assumption tables, which are based on the cost allocation methodology, outlined in section 5 of this document, to allocate costs to the regulatory outputs.

4.2 Allocation process Allocation tables form the basis of the attribution and allocation of costs to the regulatory outputs. There are three assumption tables that the regulatory model uses for Wholesale upstream service allocations, which are detailed in table 4 below. Table 4 – Anaplan % apportionment tables

Allocation tables Description

Wholesale cost centre apportionment

Attribution and allocation of total costs in a cost centre to one or more of the cost categories defined in RAG 4.05 for populating the APR wholesale water and sewerage tables 4D and 4E

Wholesale cost category apportionment

Attribution and allocation of costs by specific cost category as defined in RAG 4.05 for populating tables 4D and 4E

Wholesale cost centre and general ledger apportionment

Attribution and allocation of specified general ledger codes within a cost centre to one or more of the cost categories defined in RAG 4.05 for populating the tables 4D and 4E

The allocation tables are prepared from a cost centre allocation master file completed by each OpCo finance department and reviewed by senior management at least annually to ensure that the cost attribution and allocation methodology


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remains appropriate and valid, taking into account any business unit reorganisation, any operational process changes and latest Ofwat guidance. A cost centre allocation control file is maintained by the Regulatory Reporting team, which details all relevant cost centres’ regulatory information, including basis of cost allocation.


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5 Allocation assumptions – operating expenses

5.1 Wholesale tables – general assumptions The following sections describe the allocation assumptions used in the production of APR table 4D and 4E. Cost drivers are assigned to each type of cost incurred and these are shown below: The following are the cost drivers used for all expenditure lines listed in tables 4D and 4E. For general and support expenditure, the appropriate allocation basis is provided in section 5.4. Cost Driver A: costs can be attributed directly to the relevant US process.

Cost Driver B: costs can be directly attributed to a price control (water, wastewater) but a specific cost driver is required to allocate the cost to the appropriate US process within the price control.

Cost Driver C: allocations are worked out using appropriate estimates and judgements based on available data and management understanding of the business.

The following tables set out by line item the basis of allocations used to populate the tables.

5.2 Wholesale water Most costs can be directly attributed at source to an US process within water services or to water treatment sites and allocated to the relevant process. Table 5 below details the allocation basis and assumption for each expenditure line. Table 5 – Water service allocation basis

Expenditure line Cost driver

Allocation basis Allocation assumption

Power B Direct cost to site Allocated based on assessment by site management using pumping head data and power of equipment, sub-metering where available.

Service charges/discharge consents

A Actual charge from the Environment Agency directly coded to process

N/A

Bulk supply/Bulk discharge

A Directly coded to process N/A

Other operating expenditure - Employment costs A/C Directly coded to process where possible,

else allocated based on assessment of time spent

Based on split of maintenance activity

- Hired and contracted A Directly coded to process N/A - Materials and

consumables A Directly coded to process N/A

- Other direct costs B Direct cost to site Management judgement - General and support See section 5.4 - Scientific services B Allocated to wholesale US unit Based on samples - Other business

activities A Regulatory costs Equally allocated across all

units Cumulo rates B Gross Modern Equivalent Asset Value

(“GMEAV”) Based on US values for GMEAV

Third party services B Allocated to US unit Based on activity analysis

Further assumptions: Power: High lift pumps at the end of the treatment process (on site) have been reported as water treatment, with an allocation to treated water distribution for dual pumping. Scientific services: All tap sampling at water customers premises are allocated to treated water distribution.


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5.3 Wholesale wastewater Most costs can be directly attributed at source to an US process within waste services or to sewage treatment sites and allocated to the relevant process. Table 6 below details the allocation basis and assumption for each expenditure line. Table 6 – Wastewater service allocation basis

Expenditure line Cost driver

Allocation basis Allocation assumption

Power A/B Direct cost to process by sub metering where it exists, else allocated

Allocated based on assessment of site activity by site management. All savings from self-generation of power in the sludge process are allocated to Sludge Treatment.

Income treated as negative expenditure *

A All income reported in Sludge treatment N/A

Service charges/discharge consents

A Actual charge from the Environment Agency for discharge consents directly coded to process

N/A

Bulk supply/Bulk discharge

A N/A N/A

Other operating expenditure - Employment costs A/C Directly coded to process where possible,

else allocated based on assessment of time spent

Estimate based on time spent on process

- Hired and contracted

A/C Directly coded to process where possible, else allocation. Sludge disposal costs fully allocated with exception of ash disposal which is directly coded

Allocated based on assessment of site activity by site management

- Materials and consumables

A/C Directly coded to process, else coded to site and allocated between sewage and sludge treatment

Allocated based on assessment of site activity by site management

- Other direct costs A/B Direct cost to site, else allocated Management judgement depending on the type the cost reported in this category

- General and support

See section 5.4

- Scientific services B Allocated to wholesale US units Based on samples - Other business

activities A Regulatory costs Equally allocated across all units

Local authority rates B GMEAV for non-infrastructure assets. Sewer networks and pumping stations are not rateable.

Allocated based on GMEAV for each US level

Third party services B Allocated to US unit Based on activity analysis

* Income treated as negative expenditure; includes income from sludge cake sales and Renewable Obligation Certificates (ROC), levy exemption certificates and the national grid reserve, in line with guidance provided in RAG 4.05.


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5.4 Group Services expenditure These costs reflect the Group Services functions within the Company, which are detailed below in Table 7 with an explanation of the appropriate allocation method used. The costs allocated to the US units are net of any recharges of costs that the support services functions provide to associate companies of the group and recharges to the non-appointed business of the Company. All General and support costs are shown within the ‘Other operating expenditure’ line category of the US tables; none are shown as direct expenditure. The allocation methodology has been updated to reflect management’s review of cost allocation undertaken during the 2015/16 financial year. Management considers that the allocation assumptions and methodology detailed in section 5 are compliant with the cost allocation principles contained in RAG 4.05.

Table 7 – Allocation of Group Services expenses

Group Services function

Activity and type of expenditure incurred

Allocation Basis Used

Executive remuneration

Total remuneration including bonuses, pensions and other benefits of executive directors

Direct for executives of price controls; for other executives including Chairman, CEO and CFO allocated based on full time equivalent (FTE) number of employees of each of the price controls

Non-executive remuneration

Total remuneration of non-executive directors

Allocated based on FTE of price controls

General Management Consultancy costs managed within the Chairman, CEO and CFO’s offices

Allocated based on the level of the FTEs of each of the price control.

Finance

Internal audit, taxation, financial control and treasury functions. Costs include employment, audit fees and subscription fees


Finance (Provisions) For example: bad debt, pollutions and cancellation provisions

Directly allocated to price control, where possible.

Otherwise allocated based on FTE of price controls

Supply Chain Management of outsourced supply chain provider and other supply chain related costs

Efficio3 costs allocated based on gains share agreement; P2P costs allocated based on estimated number of POs per business;

Contract Management (“CM”) allocated based on percentage of time

Fleet

Fleet management costs and fuel costs Allocated to price control in which the vehicle is used

Legal & secretariat Management of outsourced legal service provider, management of board and related committees

Directly allocated to price control by case, where possible.

Otherwise allocated based on FTE of price controls

Human Resources Employment costs, training costs and other HR business support costs


IS

Employment and telephony costs All other costs including management of outsourced IT support costs


External Affairs (excluding Customer Assistant Fund)

This activity includes corporate communications, shareholder engagement and corporate responsibility.


Facilities and Maintenance

This function includes office supplies, security, facilities and building maintenance costs.


Health and safety Cost of the advisors providing support to Company employees and contractors


Insurance premiums Costs include public liability, employers’ liability, construction and property damage

Directly allocated to price control by type of insurance, where possible. Otherwise allocated based on FTE of price controls

3 Efficio, our supplier, provide us with procurement consultancy services.


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Capex - allocation assumptions 6.1 General allocation process The following documents the process adopted by the Company to comply with Ofwat’s guidance for allocation of capital expenditure across US units. The methodology detailed in this section covers the assumptions, adjustments and method of analysis applied to populate the capital expenditure sections of tables 4D and 4E. As the relevant sections of these two tables require the allocation of capital expenditure to US units, the primary driver for allocation is the asset class in use on the capital project. Our asset class structure has been renewed for AMP6 to align more readily with the US structure, which means a significant amount of data can be assigned to US units immediately from the asset class entered into SAP. A number of asset classes however do not map directly to the US units. An example of such an asset class would be ‘Treatment works plant & machinery – 20 year life’. Depending on the specific asset in question, this could sit within any one of the following US units: Water Treatment, Sewage Treatment & Disposal or Sludge Treatment. In these cases we assign an US unit based on the purpose code(s) allocated to the project. Our purpose codes for AMP6 have similarly been rebuilt to reflect the US structure, so the vast majority of the data left unallocated from the asset class review can be assigned through the purpose codes recorded on the capital projects. The data that then remains unallocated comprises largely management & general (M&G) assets. Examples include Fleet and IT assets as well as office buildings on non-operational sites. Assets produced from these projects are reviewed manually in order to assign them to the most appropriate US unit. In some cases such assets are used by multiple US units and so are deemed ‘shared use assets’.

6.2 Allocation of shared use assets

As mentioned above, a number of these M&G assets are used by more than one US unit and indeed in a number of cases are used for the activities of more than one price control unit. In accordance with RAG 4.05, such assets have been wholly allocated in tables 4D and 4E to the price control of primary use, which in almost all cases for the Company is the wholesale wastewater price control (based on the total cost incurred by the Opco as well the number of full time employees historically). The main examples of such assets are, as per above, IT systems and office buildings on non-operational sites. Once allocated to the price control unit of primary use, these assets are allocated across the US units according to a suitable driver. In most cases the driver used is headcount of the directly attributable employees within each of the US units, as the M&G activities are supporting the rest of the business as carried out by the staff within each operational business unit. In some cases a more bespoke allocation is possible, e.g. our main laboratory building is primarily carrying out sample testing of effluent from the sewage treatment process, hence asset expenditure is allocated wholly to the ‘Sewage Treatment & Disposal’ US.

6.3 Data adjustments

A number of adjustments are made to the raw data as extracted from the SAP system to ensure correct allocations are made to the US units as well as to the categories of infrastructure and non-infrastructure assets and between capital maintenance and enhancement expenditure. A selection of the adjustments are explained below.

Sludge centres adjustment: a manual review of all capital expenditure allocated to sludge-related US units is

undertaken to ensure that only assets at our dedicated sludge centres (or assets involved in transporting sludge

to our dedicated sludge centres) are allocated to these categories. Similarly, a review of allocations within the

sludge-related US units is carried out to ensure correct assignment, for example, between sludge treatment and

sludge disposal.

Infrastructure at treatment works sites: a manual review is undertaken to ensure no infrastructure assets are

coded to the Water Treatment or Sewage Treatment & Disposal US units as any underground pipework within

treatment work sites should be classed as a civil structure.

Raw water storage reservoirs: in accordance with RAG 4.05, only storage reservoirs without an abstraction

license should be coded to the ‘Raw water storage’ US unit. As all of the Company’s storage reservoirs have

associated abstraction licenses a manual check is carried out to ensure all assets associated with our storage

reservoirs are allocated to the ‘Raw water abstraction’ US unit. As such there is no capital expenditure assigned

to the ‘Raw water storage’ US unit.

Following completion of the manual data checks, a bulk adjustment is made to include unallocated capital overheads that cannot be allocated through the three steps mentioned in section 6.1 above. As in previous years this is done on the basis of a simple percentage uplift across the US units.


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6.4 Population of tables 4D and 4E

Now that the data set has been fully allocated to US units it can be mapped into the capital expenditure sections of tables 4D and 4E by way of three specific data columns. These data columns distinguish between the following criteria in order to populate tables 4D and 4E:

infrastructure and non-infrastructure;

capital maintenance and enhancement expenditure; and

US units. The additional lines for third party services are, for 2015/16, showing a nil value as there has been no capital expenditure on projects relating to bulk supplies, non-potable water supplies or rechargeable works for other monopoly suppliers.

6.5 Reconciliation

Once all of the data has been reviewed and the necessary adjustments made, a final reconciliation is carried out to ensure no capital expenditure has been omitted or included when it should not have been. There are a number of capital expenditure categories that are removed during the allocation process that form reconciling items between our initial data set from SAP and tables 4D and 4E. These are listed below:

Thames Tideway Tunnel capital expenditure – this is excluded from table 4E as it is included as a separate

column of data in table 2B;

Non-regulatory capital expenditure; and

Retail capital expenditure.

7 Operating Expenditure – year on year analysis

7.1 Wholesale water

Table 8 – Wholesale water year on year comparison

Key: lower year on year costs are shown as negative values. Explanation of movements above 10%

£376.2m 2015/16 Vs. £302.7m 2014/15; increase of £73.5 due to:

1) Abstraction licence

£13.6m abstraction licence costs where prior year included a one-off refund of Environmental Improvement Unit Charges.

2) Raw water abstraction

Increase of £10.2m due to:

Power increase due to reclassification of £3.9m abstraction pumping costs classified in raw water distribution in prior year; £0.8m general increase due to higher electricity unit costs;

Hired and contracted costs increased by £2.2m due to IFRS conversion resulting in previously capitalised costs now being expensed; and

General & support (G&S) costs increased by £2.2m due to IFRS conversion resulting in previously capitalised IT costs now being expensed and AMP6 Transformation project.

3) Raw water transport

Decrease of £4.4m principally reflects the reclassification of power costs relating to abstraction pumping from raw water transport to raw water abstraction for 2015/16.

Water

treatment

Treated water

distribution

Abstraction

Licence

Raw water

abstraction

Raw water

transport

Raw water

storage

Water

treatment

Treated water

distribution

Total operating

expenses 2015/16376.2 13.3 36.8 12.3 0.0 92.8 221.0

Total operating

expenses 2014/15302.7 (0.3) 26.6 16.7 0.0 72.3 187.3

Variance £ 73.5 13.6 10.2 (4.4) 0.0 20.5 33.7

Variance % 24.3% (4,530.2%) 38.1% (26.4%) - 28.3% 18.0%

£m

Water Resources Raw water distribution

Water Service

Total


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4) Water treatment


Power £5.3m increase due to continued improvement in allocation of power costs resulting in a reclassification to Water treatment from Treated water distribution and Waste;

Other operating expenditure - £7.2m relates to G&S costs due to IFRS conversion resulting in previously capitalised IT costs now being expensed and AMP6 Transformation project spend;

£3.6m relating to employment, contract and materials costs as a result of improved allocation accuracy; and

Rates £4.5m increase due to change in allocation methodology - now using gross modern equivalent asset value in line with Ofwat guidance.

5) Treated water distribution


£2.1 reclassification of bulk supply costs to treated water distribution in line with Cambridge Economic Policy Associates (CEPA) targeted review performed in 2016;

£16.6m increase in hired and contracted and employment costs Vs. last year due to a mix of: change in accounting policy whereby under UK GAAP these costs were recognised on the balance sheet and a representative charge (the infrastructure renewals charge) included in the income statement in the year, and increased job costs from AMP5 to AMP6 (including initial inefficiencies in mobilising the Infrastructure Alliance); and

£15m increased spend on below ground work in order to meet leakage and supply interruption performance commitments.

7.2 Wholesale wastewater

Table 9 – Wholesale waste year on year comparison

Key: lower year on year costs are shown as negative values. Explanation of movements above 10% (to be read in conjunction with Table 10 below):

1) Sewage Collection In total, Sewage Collection has increased £44.0m Y/Y due primarily to:

increase of £50.6m in Other Operating Expenses particularly Employment and Hired and Contracted costs due to spend previously capitalised under UKGAAP now being expensed; and

offset by a decrease in the provision for pollution fines of £7.1m (the provision was allocated to Foul in the prior year but the addition provision booked in the current year is allocated 77% Sewage Treatment / 23% Foul due to the nature of the incidents.

The change in methodology mentioned in Section 3.3 above has also resulted in Y/Y movements between Foul/Surface water drainage/Highway drainage.

2) Sewage Treatment and Disposal

Total increase of £36.2m due to:

increase of £10.5m due to conversion to IFRS as mentioned above and higher employment costs due to use of contractors while recruiting permanent staff;

increase of £16.0m due to reclassification of all power savings generated by Sludge being allocated to Sludge treatment following the Ofwat targeted review recommendation;

increase of £9.2m due to increase in provision for Pollution fines as mentioned above;

increase of £3.0m due to reallocation of Rates between Upstream Services due to change in methodology to allocate Rates by GMEAV;

Foul

Surface

water

drainage

Highway

drainage

Sewage

treatment &

disposal

Imported

sludge

liquor

treatment

Sludge

transport

Sludge

treatment

Sludge

disposal

Total operating

expenses 2015/16392.4 99.8 28.8 16.3 189.8 0.4 12.1 28.2 17.0

Total operating

expenses 2014/15333.0 65.9 26.5 8.5 153.6 1.2 10.6 42.7 24.0

Variance £ 59.4 33.9 2.3 7.8 36.2 (0.8) 1.5 (14.5) (7.0)

Variance % 17.8% 51.4% 8.8% 91.2% 23.6% (65.0%) 13.8% (34.0%) (29.0%)

Sludge

£mWaste Service

Total

Sewage collectionSewage treatment &

disposal


16

increase in other G&S costs of £8.7m primarily due to new facilities maintenance contract with broader scope, increase in IT opex due to IFRS conversion (previously capitalised costs now in opex) and new Transformation project; and

offset by Beddington landfill tax provision release (£6.4m) and reallocation of power costs to Water (£5.3m).

3) Sludge Treatment

Total decrease of £14.5m due to:

decrease of £16m due to reclassification of all power savings generated by Sludge being allocated to Sludge treatment following the Ofwat targeted review recommendation;

increase in ROC income of £1.6m; and

decrease of £2.0m due to reallocation of Rates between Upstream Services due to change in methodology to allocate Rates by GMEAV; and

offset by increase in Other G&S of £5.7m due to increased central IT and Transformation spend mentioned above under Sewage Treatment and Disposal.

The above variances and other minor variances have been summarised in Table 10 below.

Table 10 – Wholesale waste analysis of variances by upstream service levels

Foul

Surface

water

drainage

Highway

drainage

Sewage

treatment

& disposal

Imported

sludge

liquor

treatment

Sludge

transport

Sludge

treatment

Sludge

disposal

Change in Sewage collection

allocation methodology - other

direct/indirect opex

- 6.2 (8.1) 1.9 - - - - -

Change in Sewage collection

allocation methodology - power- 1.0 (1.3) 0.3 - - - - -

Conversion from UK GAAP to IFRS 58.4 33.7 11.4 5.5 10.5 (0.4) 0.9 0.3 (3.5)

Sludge cake sales reclass from

revenue(0.6) - - - - - - - (0.6)

Increase in ROC income (1.6) - - - - - - (1.6) -

Power - change in allocation

between water/waste(5.3) - - - (5.3) - - - -

Power savings - allocate 100% to

sludge- - - - 16.0 - - (16.0) -

G&S - movement in provision and

accruals(4.3) (7.1) - - 2.8 - - - -

G&S - other 13.0 (0.3) 0.5 (0.3) 8.7 - 0.8 5.7 (2.1)

Rates - decrease and change in

allocation methodology(0.9) 0.1 - - 3.0 (0.3) (0.8) (2.0) (0.9)

Other 0.8 0.3 (0.2) 0.4 0.6 (0.1) 0.6 (0.9) 0.1

Total Variance 59.4 33.8 2.3 7.8 36.3 (0.8) 1.5 (14.5) (7.0)

£mWaste Service

Total

Sewage collectionSewage treatment &

disposalSludge

upstream service methodology statement 2016 - … · upstream service methodology statement 2016 ....

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