The UK Water Industry, guided by OFWAT, has made considerable progress since its privatization in 1989. The quality of drinking water has vastly improved and the ill effects that wastewater discharges had on the environment has been significantly reduced.
The latest Asset Management Plan (AMP6) outlined by OFWAT, which would be operational for the duration of 2015-2020, helps companies recalibrate the management of water and sewerage assets, while ensuring that price regulation and enhanced customer and investor expectations are monitored.
AMP6 Re-imagining the Scope, Capabilities, and Potential
The new Asset Management Plan (AMP6) will ensure that companies are assessed based on the outcomes of the long term measures proposed by each company after consulting with their customers. This makes it suitable to adopt a Totex-based approach, one in which we look at the total expenditure (Totex) rather than at separate operational expense (Opex) and capital expenditure (Capex) budgets. Under AMP6, water companies are to propose a proportional split of Totex, which will determine the ratio between Capex and Opex. The water companies will then be incentivized for optimizing their Totex in the most efficient way possible, irrespective of whether the best solution is either Capex or Opex-based. This presents us with an opportunity to focus on creating long-term value to the customer, without forgoing direct financial benefits.
Gaining a deeper perspective into AMP6
- Limit on Capital Investment
Against industry expectations, OFWAT has mandated the capital investment limit at a lower amount of GBP 44.3 billion, which will likely be utilized in avoiding leakages, addressing gaps in supply, and overhauling the infrastructure in general. To tackle the challenges presented by this limit, companies must now look to improve their productivity and water asset management, and also optimize their overall customer experience.
- Change of focus from Capex to Totex
As mentioned above, AMP6 marks a transition from the previous Capex outperformance model to a new and streamlined Totex (Capex+Opex) model. Companies will now have a stronger incentive to effectively manage their total expenditure - both capital and operational - against the limit set by OFWAT.
- Retail Household Margins
In a move designed to reward investors, OFWAT has applied a one percent net margin for costs incurred on retail household customers. The regulator has mandated a reduction in costs incurred on retail household customers by around GBP 900 million, which is to be achieved by improving the average cost to serve, rather than automatically indexing retail price controls to the RPI (Retail Price Index).
- Non-household retail customers
Apart from fixing a 2.5 percent Net profit margin on costs, OFWAT has mandated a reduction of almost GBP 54 million in costs for non-household retail customers. This indicates a move towards greater discipline in managing cost. Further, as part of its drive to promote competition and free market economics, the AMP6 framework will allow non-household retail customers to choose their retailer from 2017.
- Price Limits
The way in which OFWAT is to set its prices is likely to cause an almost five percent fall in the national average bill for water and sewerage companies - from GBP 396 billion in 2014-15 to GBP 376 billion in 2019-20. Water companies can therefore expect a rising pressure on their bottom-lines by almost 9 percent, and must look for ways to increase the effectiveness of their operations.
Moving towards AMP6 With the HCL Roadmap
Over the years, HCL has garnered rich domain expertise in the utilities space, which it leverages to deliver customized solutions that add value to customers, by:
- Helping them comprehend the model and easily link it to their business objectives and identify the opportunities that they bring
- Seamlessly integrating water asset management with business goals
- Aiding decision making by proving accurate, regularly updated asset data, which covers each assets performance, risk and cost
- Helping them adopt a tailor-made Totex optimization strategy and focus on asset management
- Aligning their procurement and supply chain strategy to their Totex optimization strategy
- Integrating Totex decision making with their long-term business measures
- Redesigning processes with the aim of reducing handoffs and increasing first contact resolution
- Adopting a scalable cost structure for GA expenditure in all shared services such as Finance, HR, IT, Legal and Procurement
- Enhancing revenue assurance capabilities across all phases of a customers lifecycle
- Adopting new technologies within Customer Interaction Services (CIS) platforms such as IVR Optimization and Self Service on the Web and Mobile
The AMP6 Framework demands a revised and re-imagined order of things. Water and sewerage companies must therefore envision an invigorated business model and redesign their offerings, in order to reduce cost and improve efficiency without negatively impacting customer satisfaction. HCL recognizes this and helps customers in their quest for a revitalized AMP6 management platform, by driving innovation, efficiency, and technology leadership which enables them succeed in the new avenues that lie ahead.