APPENDIX 8 WEST MIDLANDS NETWORK · APPENDIX 8 WEST MIDLANDS NETWORK A8.1 SUMMARY West Midlands Network Net Opex £m (2005/06 prices) 2008/09 2009/10 2010/11 2011/12 2012/13 Total

APPENDIX 8 WEST MIDLANDS NETWORK

A8.1 SUMMARY West Midlands Network Net Opex £m (2005/06

prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission Work Management 26.4 26.5 26.5 26.2 25.6 131.1 Emergency 5.7 7.4 8.3 7.3 7.7 36.5 Repairs 8.1 8.2 8.6 8.0 8.7 41.5 Maintenance 8.1 18.3 8.3 8.2 8.4 51.2 Other Direct Activities 1.4 1.4 1.4 1.4 1.4 7.2 Shrinkage 0.0 0.0 0.0 0.0 0.0 0.0 xoserve 0.0 0.0 0.0 0.0 0.0 0.0 Total 49.7 61.9 53.1 51.2 51.8 267.6 Normalisation Adjustments Work Management -10.6 -10.5 -10.5 -10.2 -9.8 -51.6 Emergency -0.5 -1.7 -2.5 -1.6 -1.9 -8.2 Repairs -1.2 -1.3 -1.6 -1.1 -1.8 -7.1 Maintenance -0.2 -9.4 -0.1 0.1 0.1 -9.5 Other Direct Activities -0.3 -0.3 -0.3 -0.3 -0.3 -1.5 Shrinkage 7.9 7.6 7.4 7.1 6.7 36.7 xoserve 3.1 2.9 3.3 3.2 2.9 15.4 Total -1.7 -12.6 -4.4 -2.9 -4.2 -25.9 Normalised Opex Work Management 15.7 16.0 16.1 16.0 15.7 79.5 Emergency 5.2 5.7 5.8 5.8 5.8 28.3 Repairs 6.8 7.0 6.9 6.9 6.8 34.5 Maintenance 8.0 8.9 8.1 8.3 8.4 41.7 Other Direct Activities 1.1 1.1 1.1 1.2 1.2 5.7 Shrinkage 7.9 7.6 7.4 7.1 6.7 36.7 xoserve 3.1 2.9 3.3 3.2 2.9 15.4 Total 47.9 49.2 48.6 48.3 47.6 241.7 Adjustments Work Management -0.9 -1.4 -1.8 -2.1 -2.2 -8.4 Emergency 0.8 0.2 0.0 -0.1 -0.3 0.5 Repairs 0.0 -0.2 -0.3 -0.4 -0.4 -1.3 Maintenance 0.0 7.9 -0.7 -1.1 -1.3 4.8 Other Direct Activities 0.0 0.0 0.0 0.0 0.0 -0.1 Shrinkage 0.0 0.0 0.0 0.0 0.0 0.0 xoserve 0.0 0.0 0.0 0.0 0.0 0.0 Total -0.1 6.4 -2.8 -3.7 -4.3 -4.5 Proposed Opex Work Management 14.9 14.6 14.2 13.9 13.5 71.1 Emergency 6.0 5.9 5.8 5.6 5.5 28.8 Repairs 6.8 6.7 6.6 6.5 6.5 33.2 Maintenance 7.9 16.9 7.5 7.2 7.1 46.5 Other Direct Activities 1.1 1.1 1.1 1.1 1.2 5.6 Shrinkage 7.9 7.6 7.4 7.1 6.7 36.7 xoserve 3.1 2.9 3.3 3.2 2.9 15.4 Total 47.8 55.6 45.8 44.6 43.3 237.2

Table A8 - 1

Ref No: 62533 2006 36621 (Update v1.2) Page 1 PB Power

West Midlands Network Net Opex £m (2005/06

prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed Opex Work Management 15.3 15.0 14.6 14.2 13.8 72.9 Emergency 5.4 5.3 5.2 5.1 5.1 26.1 Repairs 6.2 6.1 6.0 5.9 5.7 29.9 Maintenance 7.1 15.9 6.6 6.5 6.4 42.6 Other Direct Activities 1.1 1.1 1.1 1.1 1.1 5.6 Shrinkage 7.9 7.6 7.4 7.1 6.7 36.7 xoserve 2.9 2.9 2.9 2.9 2.9 14.5 Total 46.0 53.9 43.8 42.8 41.7 228.2

Table A8 - 2

West Midlands’ Opex projections for the forecast period 2008/09 to 2012/13, based on the updated analysis are detailed in Table A8 - 1 above. Our original recommended Opex projections are shown in Table A8 - 2.

The GDNs recommended total Opex has increased from £228.2m to £237.2m, an increase of 3.9 %, which is driven by the revised benchmarking analyses based on the 2006/07 outturn performance. The factors which affect the revised recommendations are considered in the relevant sections of this report.


A8.2 WORK MANAGEMENT

A8.2.1 SUMMARY

West Midlands Controllable Opex £m

(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 26.4 26.5 26.5 26.2 25.6 131.1 Normalisation Adjustments -10.6 -10.5 -10.5 -10.2 -9.8 -51.6 Normalised BPQ 15.7 16.0 16.1 16.0 15.7 79.5 Adjustments -0.9 -1.4 -1.8 -2.1 -2.2 -8.4 Proposed 14.9 14.6 14.2 13.9 13.5 71.1

Table A8 - 3

For comparison, the original PB Power proposals are summarised in the Table below.

West Midlands Original Controllable Opex £m

(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 15.3 15.0 14.6 14.2 13.8 72.9 Table A8 - 4

A8.2.2 2006/07 FORECAST/OUTTURN COMPARISON

The normalised outturn figure for West Midlands is £15.8m. The normalisation adjustments applied to the reported BPQ figure are shown in the following Table.

West Midlands Normalisation Adjustments

2006

/07

Cost transfer -9.6 Shrinkage -6.7 xoserve -3.0 LECG Adjustments -0.2 Ofgem Accounting Adjustments -0.3 Pension Adjustments 0.7 Removed costs -0.1 Loss of emergency meter work -0.1 Total -9.5

Table A8 - 5

Shrinkage and xoserve costs have been moved to separate specific categories. The LECG adjustment relates to skills and competency costs that have been reclassified from work management to HR

The normalised outturn is lower than the normalised forecast for 2006/07 by £0.6m.

The workload increased by 4.4% above forecast, and costs were impacted by a number of compensating factors, savings from manpower reductions being balanced by higher costs due to reduced income from meterwork, and an unallocated task being included within the 2006/07 forecast. The net result being that actual costs exceeded the forecast by 4.6%.


A8.2.3 IMPACT OF MOVEMENTS ON REGRESSION

The movements of GDNs overall have resulted in a reduction of the target costs and therefore a general reduction in the recommendations. The effect of the revised values, is to lower the target point for West Midlands Network on the regression graph, from £14.6 to £13.2m.

A8.2.4 REVIEW WORKLOAD PROJECTIONS

Opex expenditure forecasts have not been revised as part of the 2006/07 update process.

The components of the CSV for the forecast period reflect the reported figures for distribution network length and the PB Power adjusted forecasts for public reported escapes and repairs.

A8.2.5 REVISED RECOMMENDATIONS

The following table sets out the principal results of the revised analysis:

West Midlands 20

08/0

9

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 26.4 26.5 26.5 26.2 25.6 Normalised Adjustments -10.6 -10.5 -10.5 -10.2 -9.8 Normalised Submission 15.7 16.0 16.1 16.0 15.7 Combined Driver 22928 22960 22991 23024 23054 Benchmark (Ex RF RPE) 13.7 13.6 13.5 13.3 13.2 Baseline (Ex RF RPE) 15.8 15.7 15.5 15.4 15.3 Gap 2.1 2.1 2.1 2.0 2.0 Convergence 1.6 1.4 1.1 0.9 0.6 Recommended (Ex RF and RPE) 15.3 14.9 14.6 14.2 13.8 Recommended (Inc RF and RPE) 15.2 15.0 14.8 14.6 14.4 IT Productivity Adjustments -0.3 -0.5 -0.6 -0.7 -0.9 Recommended (Inc RPE) 14.9 14.6 14.2 13.9 13.5

Table A8 - 6

The result of the analysis, showing the normalised GDN forecast, the target cost and the line representing the recommended allowance cost is shown on the following graph.

Chart showing West Midlands Recommended Work Management Opex

12

13

14

15

16

17

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Total Work Management Opex £m

Ope

x £m

Normalised BPQ Benchmark Performance Proposed Baseline Performance Figure A8 - 1


Note: For comparability purposes the Benchmark and Baseline Performance lines include the Adjustments shown in Table A8 - 6 above.


A8.3 EMERGENCY

A8.3.1 SUMMARY

The proposed workloads and allowances based on the 2006/07 actuals are shown in the following table.


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 5.7 7.4 8.3 7.3 7.7 36.5 Normalisation Adjustments -0.5 -0.9 -1.4 -0.4 -0.6 -3.8 Normalised BPQ 5.2 6.5 6.9 6.9 7.1 32.6 Adjustments 0.8 -0.6 -1.1 -1.3 -1.6 -3.9 Proposed 6.0 5.9 5.8 5.6 5.5 28.8

Table A8 - 7

Our original proposed workloads and allowances based on the 2005/06 figures are shown in the following table.


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 5.4 5.3 5.2 5.1 5.1 26.1 Table A8 - 8


The table below shows the cost of the emergency process as forecast by the GDN for 2006/07 and the comparable normalised actual costs for 2006/07 from the latest GDN submission. The forecast 2006/07 costs exclude the service relay costs transferred from Repex as part of our original report.

Expenditure breakdown (2005/06 prices) West Midlands 20

06/0

7 (fo

reca

st)

2006

/07

(act

uals

)

Contract 0.2 0.3 Direct 4.5 4.5 Materials 0.0 0.0 Other 0.6 1.2 Total 5.2 5.9

Table A8 - 9

The above table shows a 13% increase in costs with PRE workload some 9% higher than forecast.

From 2005/06 to 2006/07 actual workload increased by 5%. West Midlands has identified the following cost factors contributing to the change in costs over this period:

Increase in workload – cost impact £0.2m loss of meterwork – cost impact £0.7m (see normalisation table) higher salary and related costs, and transport and plant costs

West Midlands indicated that the loss of meterwork in West Midlands resulted in particularly high costs because it employs very few contractors whose workload could be adjusted to


match falling activity levels and that their direct resources are already at the minimum levels required to deliver its emergency obligations.

Cost normalisation applied to 2006/07 actuals

The normalisation adjustments applied to the reported BPQ figures are shown in the following table.


2006

/07

Cost transfer 0.0 Ofgem Accounting Adjustments -0.1 Pension Adjustments 0.3 Removed costs -0.7 Loss of emergency meter work -0.7 Total -0.5

Table A8 - 10

To carry out the comparative analysis of the emergency activity across all GDNs on a consistent basis we have removed the additional costs reported by GDNs as arising from the loss of meterwork as part of the normalisation adjustments applied to the 2006/07 costs


West Midlands’ Emergency costs (after normalisation and adjustment for regional factors) were £5.1m in 2005/06 and £5.3m in 2006/07. The 2005/06 cost included £0.7m of costs transferred from Repex.

As regards the regression results, our original report showed an upper quartile cost for West Midlands of £5.3m in 2005/06. Overall across all GDNs, the updated regression analysis gives upper quartile costs in 2006/07 5% below those in 2005/06, reflecting the removal of the Repex related costs from our normalisations but offset to some extent by increases in some GDN costs.

For West Midlands the regression quartile for the 2006/07 data is 15% higher than for the 2005/06 data, reflecting mainly the realignment of the regression line with the 2006/07 data. The upper quartile cost for West Midlands is £6.06m in 2006/07

In terms of the main cost driver (PREs), the updated quartile result is equivalent to a unit cost of £56.7/PRE compared to the average unit cost in 2006/07 across all GDNs of £67.4/PRE.


Section 4 of the main document sets out our proposed workload assumptions Applying the upper quartile unit costs (expressed in terms of the regression explanatory variable, ie £/CSV) to the workload projections gives the recommended operating expenditure allowance. The potential loss of meterwork through the plan period is addressed separately below.


West Midlands GDN Proposed Workloads PB Power Proposed

Workloads PB Power

Proposals% change on 2006/07

Internal PREs 2006/07 87949 87949 N/A 2008/09 80280 87949 0.0% 2012/13 79639 87949 0.0% External PREs 2006/07 18882 18882 N/A 2008/09 17122 18219 -3.51% 2012/13 16986 16963 -10.16% All PREs 2006/07 106831 106831 N/A 2008/09 97402 106168 -0.62% 2012/13 96625 104912 -1.80%

Table A8 - 11

Loss of meterwork

To meet its PRE standards of service the Network has to deploy sufficient FCOs to deal with peak workload levels. Emergency workload tends to peak in the morning and evening, leaving potentially unproductive time (i.e. waiting time) in the middle of the day. During this time FCOs are utilised for meterwork and other maintenance work. Meterwork is available via contracts with third party meter asset owners such as Onstream and NGG Metering.

In our previous report we assessed the impact of loss of meterwork on GDN’s emergency costs at £5.4 /PRE, based on an assumption that 45% of the 2005/06 meterwork will be retained across the period 2008/09 to 2012/13. We have not reviewed these costs in this update and basis of the allowance for the loss of meterwork is therefore unchanged from our previous report.

The following table shows the proposed costs for West Midlands for the loss of meterwork, with the revised PRE workloads.

West Midlands

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

PRE workload 106168 105846 105529 105218 104912 Cost of Meterwork loss £m 0.6 0.6 0.6 0.6 0.6

Table A8 - 12

Since our original report, the GDNs have provided additional information on the volume of meterwork they expect to retain and the associated costs.

West Midlands expects to retain of the 2005/06 workload on average across the period 2008/09 to 2012/13 at an average cost of £2.0mpa or £19.0/PRE. At this lower level of retained workload, we would expect the cost of meterwork loss to be above the unit cost figure we derived in our original report. West Midlands has also reported additional costs arising in Work Management and Indirect opex as a result of the loss of meterwork.



The proposed workloads and allowances are shown in the following table. As in our original report a productivity improvement of 1% per annum is assumed.

West Midlands

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 5.7 7.4 8.3 7.3 7.7 Normalised Adjustments -0.5 -0.9 -1.4 -0.4 -0.6 Normalised Submission 5.2 6.5 6.9 6.9 7.1 Composite Regression Driver 0.689 0.684 0.679 0.674 0.669 Benchmark (Ex RF RPE) 5.8 5.7 5.6 5.5 5.4 Baseline (Ex RF RPE) 5.1 5.0 4.9 4.9 4.8 Gap -0.7 -0.7 -0.7 -0.7 -0.6 Convergence -0.4 -0.4 -0.5 -0.6 -0.6 Recommended (Ex RF and RPE) 5.5 5.3 5.1 4.9 4.8 Recommended (Inc RF and RPE) 5.4 5.3 5.2 5.1 4.9 Allowed Adjustments 0.6 0.6 0.6 0.6 0.6 Recommended (Inc RPE) 6.0 5.9 5.8 5.6 5.5

Table A8 - 13

Chart showing West Midlands Recommended Emergency Opex

4

5

6

7

8

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Tota

l Em

erge

ncy

Ope

x £m

Normalised BPQ Benchmark Performance Proposed Baseline Performance

Figure A8 - 2

Note: For comparability purposes the Benchmark and Baseline Performance lines include allowed adjustments shown in Table A8 - 13 above


A8.4 REPAIR

A8.4.1 SUMMARY

West Midlands Net Opex £m (2005/06 prices)

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission Repairs 8.1 8.2 8.6 8.0 8.7 41.5 Total 8.1 8.2 8.6 8.0 8.7 41.5 Normalisation Adjustments Adjustments -0.3 -0.4 -0.3 -0.3 -0.2 -1.6 Removed Costs -0.9 -0.9 -1.3 -0.8 -1.6 -5.5 Total -1.2 -1.3 -1.6 -1.1 -1.8 -7.1 Normalised BPQ Repairs 6.8 7.0 6.9 6.9 6.8 34.5 Total 6.8 7.0 6.9 6.9 6.8 34.5 Adjustments Allowed Costs 0.0 0.0 0.0 0.0 0.0 0.0 Workload Adjustment 0.4 0.3 0.2 0.1 0.0 1.1 Efficiency Adjustments -0.5 -0.6 -0.5 -0.5 -0.4 -2.4 Total 0.0 -0.2 -0.3 -0.4 -0.4 -1.3 Proposed Repairs 6.8 6.7 6.6 6.5 6.5 33.2 Total Net 6.8 6.7 6.6 6.5 6.5 33.2

Table A8 - 14



2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l Proposed 6.2 6.1 6.0 5.9 5.7 29.9

Table A8 - 15

The outcome of the updated regression analysis is to increase the cost of repairs by £3.3m over the five years to 2012/13.


The normalisation adjustments applied to the reported BPQ figure are shown in the following Table


2006

/07

Cost transfer 0.0 Ofgem Accounting Adjustments -0.1 Pension Adjustments 0.2 Removed costs 0.0 Total 0.1

Table A1- 16


This section reviews the Network’s actual 2006/07 performance and compares this with the forecasts contained within the Network’s October 2006 submission.

In undertaking this review it is recognised that the Network’s forecast is made on a seasonal normal basis and that weather effects, subject to any mitigation measures open to the Network, are largely outside of the Network’s control.

We have only identified significant movements between the October forecast and the reported results.

Repair Cost £m (2005/06)

West Midlands Normalised Forecast1 Actual Change % Change

Contract 2.6 2.9 0.3 10% Direct 3.8 3.4 -0.4 -10% Materials 0.4 0.2 -0.2 -40% Other 0.6 0.6 0.0 0% Gross Cost 7.4 7.1 -0.3 -3% Income -0.4 -0.5 -0.1 27% Net Cost 7.0 6.6 -0.4 -5%

Table A8 - 17

There were minor variances from forecast in reported costs summing to an overall variance in net costs of -£0.4m (-5%). Workload increased from forecast by 11%

Repairs Workload

West Midlands Forecast Actual Change % Change

Repairs to mains (condition) 5856 5586 -270 -5% Repairs to mains (interference) 179 278 99 55% Repairs to services (condition) 5077 6722 1645 32% Repairs to services (interference) 1876 1826 -50 -3% Total 12988 14412 1424 11%

Table A8 - 18

Overall, repairs were 11% greater than forecast.

Whilst condition repairs to mains were lower than forecast, there was an increase in repairs to services, however, many of these reported repairs may be minor repairs to the meter control valve.

The Network commented that the increase in repair workload is partly a consequence of its predominately ‘clocked’ pressure control systems. This type of control system has a manually set input pressure and does not manage the extremity pressures in real time. Consequently, during periods of unseasonably low demand, operating pressures over the whole system are higher than otherwise would have been the case.

Assumptions and Adjustments

2006/07 costs have been adjusted as in Table A8-15 but we have made no adjustments to the associated workload.

1 GDN, Ofgem and Network adjustments have been attributed to the categories above to aid comparison.



Repair Opex v Total Repairs Comparison

WWWM

So

Sc NW No

LonEoE

579

1113151719212325

4000 6000 8000 10000 12000 14000 16000 18000 20000 22000 24000

Weighted Average Workload

Tota

l Rep

air O

pex

£m

2006/07 2005/06 Linear (2005/06) Linear (2006/07) Figure A8 - 3

Change in the Regression 2005/06 to 2006/07

The Network Network’s costs have increased slightly towards the regression line because its costs have increased whilst workload has marginally declined.2. On a year to year basis, normalised gross costs have increased from £6.8m to £7.1m (+£0.3m; +4%) whilst repairs have increased by 416 (+3%)3. No unit costs are available for repairs, but we have evaluated the change in workload (principally services condition repairs, offset by a reduction in mains condition repairs) using the weighted average workloads used within the regression analysis, and found that the value of this change is negligible and the real change in cost is as above.


GDN Proposed Volumes West Midlands

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Repairs to mains (condition) 5711 5641 5570 5501 5432 Repairs to mains (interference) 174 172 170 168 166 Repairs to services (condition) 4952 4890 4829 4769 4710 Repairs to services (interference) 1829 1807 1784 1762 1740 Total 12666 12510 12353 12200 12048

Table A8 - 19

The Network’s revised forecast is unchanged from its October 2006 submission.

In our last report we assumed that condition repairs would on average fall by 3% per annum and that interference repairs would fall by 1% per annum. We have reviewed the 2006/07 reported workload and the workload trends for all Networks since 2002/03, considered comments by the Network, and concluded that this remains a reasonable assumption.

2 Weighted average workload for 2005/06 was calculated using an assumed frequency for the size of mains condition repairs. The 2006/07 calculation uses reported repairs by size. 3 Changes to costs and repairs calculated on a corrected basis.


2006/07 included an exceptionally warm summer and some Networks4 recorded a reduced number of repairs. We have taken an average of the 2005/06 and 2006/07 repairs in each category as the starting point for our forecast which assumes repair numbers reducing as explained above.

PB Power Forecast Repair Volumes

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Repairs to mains (condition) 5369 5208 5051 4900 4753 Repairs to mains (interference) 287 284 281 279 276 Repairs to services (condition) 5978 5799 5625 5456 5293 Repairs to services (interference) 1814 1796 1778 1760 1743 Total 13449 13087 12736 12395 12064

Table A8 - 20

Our revised workload forecast, adjusted to reflect the 2006/07 reported workload, is higher than that in our previous report. Our previous forecast was based on 2005/06 repair volumes which the Network has revised adding 909 service condition repairs. There was a further increase in service condition repairs in 2006/07.



2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission Repairs 8.1 8.2 8.6 8.0 8.7 41.5 Total 8.1 8.2 8.6 8.0 8.7 41.5 Normalisation Adjustments Adjustments -0.3 -0.4 -0.3 -0.3 -0.2 -1.6 Removed Costs -0.9 -0.9 -1.3 -0.8 -1.6 -5.5 Total -1.2 -1.3 -1.6 -1.1 -1.8 -7.1 Normalised BPQ Repairs 6.8 7.0 6.9 6.9 6.8 34.5 Total 6.8 7.0 6.9 6.9 6.8 34.5 Adjustments Allowed Costs 0.0 0.0 0.0 0.0 0.0 0.0 Workload Adjustment 0.4 0.3 0.2 0.1 0.0 1.1 Efficiency Adjustments -0.5 -0.6 -0.5 -0.5 -0.4 -2.4 Total 0.0 -0.2 -0.3 -0.4 -0.4 -1.3 Proposed Repairs 6.8 6.7 6.6 6.5 6.5 33.2 Total Net 6.8 6.7 6.6 6.5 6.5 33.2

Table A8 - 21

The outcome of the revised forecast and regression analysis is to increase the cost of repairs by £3.3m (over the five years to 2012/13) from that recommended in our previous report.

4 The number of repairs in each year is similar for West Midlands Network, but we have taken the 05/06 & 06/07 average for consistency.


Proposed Against BPQ Submission - West Midlands

6

7

8

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Tota

l Rep

air O

pex

£m

Normalised BPQ Benchmark Performance ProposedBaseline Performance Workload Adj Net BPQ

Figure A8 - 45

5 Workload Adjusted Net BPQ: The normalised BPQ adjusted for the workload changes recommended by our consultants. The key to this and other charts is at section 2.3.2 of the Introduction to this report. There is a full explanation of the terms in our report of June 2007.


A8.5 MAINTENANCE

A8.5.1 SUMMARY

This has now been compiled from the Total Maintenance regression analysis, and not, as previously, the summation of LTS, Storage, and Other Maintenance.


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 8.1 18.3 8.3 8.2 8.4 51.2 Normalisation Adjustments -0.2 -9.4 -0.1 0.1 0.1 -9.5 Normalised BPQ 8.0 8.9 8.1 8.3 8.4 41.7 Adjustments 0.0 7.9 -0.7 -1.1 -1.3 4.8 Proposed 7.9 16.9 7.5 7.2 7.1 46.5

Table A8 - 22



(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 7.1 15.9 6.6 6.5 6.4 42.6 Table A8 - 23

A8.5.2 2006/07 OUTTURN

The normalised outturn figure for West Midlands is £6.4m. The normalisation adjustments applied to the reported BPQ figure are shown in the following Table


2006

/07

Cost transfer -0.2 Filter replacement transfer to Repex -0.2 Ofgem Accounting Adjustments -0.1 Pension Adjustments 0.2 Removed costs -1.4 Holder painting -0.8 COMAH costs -0.1 OLI costs -0.5 AGI painting costs 0.0 Total -1.4

Table A8 - 24

The removed costs are detailed in following sections, under the related activity heading.

A8.5.3 IMPACT OF MOVEMENTS ON RECOMMENDATIONS

The impact of the movements is to increase the recommendation over the review period by £3.9m. The impact of the latest reviews is to increase benchmark unit costs for both Storage and LTS, where improved data has become available.



Opex expenditure forecasts have not been revised as part of the 2006/07 update process. The same applies to the components of the CSV used for the regression analysis. The components of the CSV for the forecast period have been updated to reflect the latest forecasts for workloads and cost drivers.


The result of the Maintenance analysis, showing the normalised GDN forecast, the target cost and the line representing the recommended allowance cost is shown on the following table.

West Midlands Controllable Opex (£m)

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 8.1 18.3 8.3 8.2 8.4 Normalised Adjustments -0.2 -9.4 -0.1 0.1 0.1 Normalised Submission 8.0 8.9 8.1 8.3 8.4 Unit Cost Driver 4.9 4.8 4.8 4.8 4.7 Benchmark Unit Cost 0 0 0 0 0 Benchmark (Ex RF RPE) 7.0 6.8 6.7 6.7 6.6 Baseline (Ex RF RPE) 6.5 6.4 6.3 6.3 6.1 Gap -0.4 -0.4 -0.4 -0.4 -0.4 Convergence -0.2 -0.3 -0.3 -0.4 -0.4 Recommended (Ex RF and RPE) 6.8 6.6 6.4 6.3 6.1 Recommended (Inc RF and RPE) 6.7 6.6 6.6 6.6 6.5 Recommended (Inc RPE) 7.9 16.9 7.5 7.2 7.1

Table A8 - 25

The comparison between the normalised BPQ forecast, the target and recommended expenditure is shown in the following figure:

Figure A8 - 5


A8.5.6 LTS ANALYSIS

The 2006/07 LTS costs feeding into the Maintenance regression have been adjusted to take account of major non-routine costs. The costs that have been removed in 2006/07 and for the 5 years of the review period are shown in the table below:

West Midlands LTS costs removed

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

On Line Inspection 0.5 0.3 0.4 0.3 0.0 0.0 Pipeline repairs 0.0 0.0 0.0 0.0 0.0 0.0 AGI Painting 0.0 0.3 0.4 0.3 0.4 0.4 Crack remediation 0.0 0.0 0.0 0.0 0.0 0.0 Total 0.5 0.6 9.8 0.7 0.5 0.5

Table A8 - 26

Note: Replacement Filter costs, have been removed and transferred to Capex Other Plant and Equipment

PB Power has identified the appropriate non routine LTS costs that should be added back into the recommended allowances following the analysis, these costs for 2006/07 and for the 5 years of the review period are shown in the table below:

West Midlands LTS costs added back

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

On Line Inspection 0.5 0.3 0.4 0.3 0.0 0.0 Pipeline repairs 0.0 0.0 0.0 0.0 0.0 0.0 AGI Painting 0.0 0.3 0.4 0.3 0.4 0.4 Crack remediation 0.0 0.1 0.1 0.0 0.0 0.0 Total 0.5 0.7 9.9 0.6 0.4 0.4

Table A8 - 27

The allowance for crack remediation in small bore pipework has been reduced to 50% of that requested. Some other GDNs following surveys, believe this to be a minor matter, in most instances, able to be dealt with within normal maintenance routines Further justification is required, to increase these figures to the levels indicated in forecasts.


A8.5.7 STORAGE ANALYSIS

The 2006/07 Storage costs feeding into the Maintenance regression have been adjusted to take account of major non-routine6 costs. The costs that have been removed in 2006/07 and for the 5 years of the review period are shown in the table below

West Midlands Storage costs removed

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

Holder handrails 0.0 0.3 0.0 0.0 0.0 0.0 HP Non routine 0.0 0.0 0.0 0.0 0.0 0.0 HP routine 0.0 0.0 0.0 0.0 0.0 0.0 Holder decommisioning 0.0 0.0 0.0 0.4 0.4 0.4 COMAH 0.1 0.1 0.1 0.1 0.1 0.1 Holder painting 0.8 0.4 0.4 0.0 0.0 0.0 Total 0.9 0.8 0.5 0.5 0.5 0.5

Table A8 - 28

PB Power has identified the appropriate non routine Storage costs that should be added back into the recommended allowances following the analysis, these costs for 2006/07 and for the 5 years of the review period are shown in the table below:

West Midlands Storage costs added back

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

Holder handrails 0.0 0.0 0.0 0.0 0.0 0.0 HP Non routine 0.0 0.0 0.0 0.0 0.0 0.0 HP routine 0.0 0.0 0.0 0.0 0.0 0.0 Holder decommisioning 0.0 0.0 0.0 0.0 0.0 0.0 COMAH 0.0 0.0 0.0 0.0 0.0 0.0 Holder painting 0.2 0.2 0.2 0.1 0.1 0.1 Total 0.3 0.2 0.2 0.2 0.1 0.1

Table A8 - 29

All allowed costs are based on benchmark costs.

6 For this purpose includes HP Routine and COMAH activities


A8.5.8 OTHER MAINTENANCE ANALYSIS

The 2006/07 Other Maintenance costs feeding into the Maintenance regression have been adjusted to take account of major non-routine costs. The costs that have been removed in 2006/07 and for the 5 years of the review period are shown in the table below:

West Midlands Other Maintenance costs removed

2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

DSEAR 0.0 0.0 0.0 0.0 0.0 0.0 Other non routine maint 0.0 0.0 0.0 0.0 0.0 0.0 Total 0.0 0.0 0.0 0.0 0.0 0.0

Table A8 - 30

PB Power has identified the appropriate non routine Other Maintenance costs that should be added back into the recommended allowances following the analysis, these costs for 2006/07 and for the 5 years of the review period are shown in the table below:

West Midlands Other Maintenance costs added

back 2006

/07

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

DSEAR 0.0 0.3 0.2 0.1 0.1 0.1 Other non routine maint 0.0 0.0 0.0 0.0 0.0 0.0 Total 0.0 0.3 0.2 0.1 0.1 0.1

Table A8 - 31

The forecast costs have been allowed in full.


A8.6 OTHER DIRECT ACTIVITIES

A8.6.1 SUMMARY


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 1.4 1.4 1.4 1.4 1.4 7.2 Normalisation Adjustments -0.3 -0.3 -0.3 -0.3 -0.3 -1.5 Normalised BPQ 1.1 1.1 1.1 1.2 1.2 5.7 Adjustments 0.0 0.0 0.0 0.0 0.0 -0.1 Proposed 1.1 1.1 1.1 1.1 1.2 5.6

Table A8 - 32

For comparison, the original PB Power proposals are shown in Table A1- 33 below.


(2005/06 prices) 2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 1.1 1.1 1.1 1.1 1.1 5.6 Table A1- 33


The normalised outturn figure for West Midlands is £1.5m. The normalisation adjustments applied to the reported BPQ figure are shown in the following Table


2006

/07

Cost transfer 0.0 Ofgem Accounting Adjustments -0.1 Pension Adjustments 0.0 Removed costs 0.0 Total -0.1

Table A8 - 34

In addition to the Ofgem accounting adjustment, there is also a small pension adjustment, which is not apparent due to rounding.

The normalised outturn figure compares with a normalised forecast of £1.2m. In response to a supplementary question, NGG has indicated that the part of the increase is due to increased compensation payments of £0.1m (insourced domestic connections work), plus additional building maintenance of £0.1m against a nil forecast. Ofgem has removed £0.2m from compensation as an accounting adjustment.

The variance is not deemed significant.


Regression analysis no longer provides a robust basis on which to prepare future expenditure allowances for Other Direct Activities. Recommended expenditure projections in this report have therefore been based on GDN Projections of expenditure for the period 2008/09 to 2012/13 with the GDN assumed real price effects removed and equivalent PB Power real price effects applied.



Opex expenditure forecasts and workload driver data relevant to Other Direct Activities has not been revised as part of the 2006/07 update process.


The following table sets out the principal results of the revised analysis:

West Midlands Controllable Opex (£m)

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

GDN BPQ Submission 1.4 1.4 1.4 1.4 1.4 Normalised Adjustments -0.3 -0.3 -0.3 -0.3 -0.3 Normalised Submission 1.1 1.1 1.1 1.2 1.2 Recommended (Ex RPE) 1.1 1.1 1.1 1.1 1.1 Recommended (Inc RPE) 1.1 1.1 1.1 1.1 1.2 Allowed Adjustments 0.0 0.0 0.0 0.0 0.0 Recommended (Inc RPE) 1.1 1.1 1.1 1.1 1.2

Table A8 - 35

The comparison between the normalised BPQ forecast, the target and recommended expenditure is shown in the following figure:

Chart showing West Midlands Recommended Other Direct Activities Opex

1.05

1.15

1.25

1.35

1.45

1.55

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Tota

l OD

A O

pex

£m

Normalised BPQ Proposed Figure A8 - 6


A8.7 SHRINKAGE

A8.7.1 SUMMARY

West Midlands Controllable Opex £m (2005/06 prices)

2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 0.0 0.0 0.0 0.0 0.0 0.0 Normalisation Adjustments 7.9 7.6 7.4 7.1 6.7 36.7 Normalised BPQ 7.9 7.6 7.4 7.1 6.7 36.7 Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Proposed 7.9 7.6 7.4 7.1 6.7 36.7

Table A8 - 36

Ofgem are developing a separate incentive for shrinkage costs. We are therefore not proposing allowances for shrinkage. For comparison purposes the table above repeats the figures included in our original report.


A8.8 XOSERVE

A8.8.1 SUMMARY


2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

BPQ Submission 0.0 0.0 0.0 0.0 0.0 0.0 Normalisation Adjustments 3.1 2.9 3.3 3.2 2.9 15.4 Normalised BPQ 3.1 2.9 3.3 3.2 2.9 15.4 Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Proposed 3.1 2.9 3.3 3.2 2.9 15.4

Table A8 - 37

For comparison, the original PB Power figures are shown in the table below


2008/0

9

2009/1

0

2010/1

1

2011/1

2

2012/1

3

Tota

l

Proposed 2.9 2.9 2.9 2.9 2.9 14.5 Table A8 - 38


Normalisation adjustments for 2006/07 and succeeding years have been developed and applied to the BPQ reported figures, these are shown in the following Table:


2006

/07

2007

/08

2008

/09

2009

/10

2010

/11

2011

/12

2012

/13

5 ye

ar

Tota

l

Cost transfer 3.0 2.9 2.9 2.9 2.9 2.9 2.9 14.5 Transfer from Work Management 3.0 2.9 2.9 2.9 2.9 2.9 2.9 Adjustment (based on xoserve turnover) -0.2 0.1 0.2 0.0 0.4 0.3 0.0 0.9 Total 2.8 3.0 3.1 2.9 3.3 3.2 2.9 15.4

Table A8 - 39

The 2006/07 GDN expenditure returns, which were prepared before information was available on the xoserve dividend distributions, have been normalised to reflect the xoserve reported turnover for each GDN less the allocated dividend.

For the period 2007/08 to 2012/13, as the accounting treatment of xoserve expenditure is still unclear, we have used the xoserve BPQ to allocate the IS projects cost contributions as Capex, removing the same sums from the turnover forecast provided by xoserve.

Having established the net Opex contribution in 2006/07 from the xoserve return we have projected the future year’s net contribution in proportion to the forecast turnover provided by xoserve.


Cost normalisation applied to 2006/07 actualsLoss of meterworkRepair Cost £m (2005/06)Repairs WorkloadAssumptions and AdjustmentsChange in the Regression 2005/06 to 2006/07

Documents

APPENDIX 8 WEST MIDLANDS NETWORK · APPENDIX 8 WEST MIDLANDS NETWORK A8.1 SUMMARY West Midlands Network Net Opex £m (2005/06 prices) 2008/09 2009/10 2010/11 2011/12 2012/13 Total