National Infrastructure Commission tells Ofwat to boost rates of network replacement

The National Infrastructure Commission (NIC) has told Ofwat underground asset replacement rates need to be “significantly higher” and that the regulator should develop a more consistent and forward-looking approach to measuring asset health.

In a letter from NIC chief executive James Heath to Ofwat chief executive David Black, Heath pointed out PR19 base expenditure funding for 0.4% water mains renewal per year implied asset lives of 180 years.

Accepting asset age is not alone the best indicator of asset condition, Heath noted companies take different approaches to determine when to repair of place their pipes and sewers (some using past failure rates while others take a more forward-looking whole life approach). Consequently “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” – especially in light of climate change. It was also impossible to draw “firm conclusions on what the appropriate level of replacement should be”.

Ofwat’s metrics to benchmark efficient replacement rates in its base cost model are lagging indicators. The NIC urged Ofwat to develop a more consistent and future looking approach to how the health of assets is measured and reported. It argued: “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…This could be in the form of a licence requirement or an appropriate incentive mechanism.”

This new approach could then be used as the basis for investment proposals, to inform the amount that will need to be allocated over multiple investment periods (AMPs) to ensure water and wastewater networks remain resilient and reliable.

The letter followed evidence submitted by 12 of the 15 water companies covering 100% of the sewer network and over 90% of the water network, to inform the NIC’s Baseline Report for its second National Infrastructure Assessment.