1. Review of the water industry UKWIR project – when to repair, refurb or replace assets ICS Consulting November 2011 :diagnostics/ :transformation/ :investment planning/ :portfolio optimisation/ :investment economics/ :regulation and economics/ :training/

2. Page : 2 © ICS Consulting Ltd 2011 Agenda Intro to the UKWIR project Objectives Deliverables Key findings of the project Application Demo of the tool

3. Page : 3 © ICS Consulting Ltd 2011 Project Objectives Project commenced in Spring 2011 Development of a robust modelling and costing guidance: Identify potential intervention strategies for different types of assets Identify and justify asset policy decisions Identify intervention cost approaches Map best practice approaches to Common Framework structure Focus primarily on non-infrastructure assets Practical examples Develop Excel Tool Costing and deterioration examples

4. Page : 4 © ICS Consulting Ltd 2011 What are the challenges to address? Limited scope of interventions considered – used to answer: At what point do we stop reactively repairing assets and replace it due to cost considerations? Should we proactively invest to get a better level of service? Limited use of asset attributes Lack of maintenance, environment, location, asset history, etc. Hard to understand impact of some intervention if only have ‘age’ only Optimal asset policy may be a mix of interventions Optimal asset policy may not be optimal across the asset base COTS - time consuming for a single intervention strategy, and may not be well suited to a range of different interventions strategies Focus has been on next 25 years, rather than next 5 years.

5. Page : 5 © ICS Consulting Ltd 2011 Summary of the Risk Modelling Process

6. Page : 6 © ICS Consulting Ltd 2011 The guidance centres on the development and build of a risk modelling framework The framework must start with considering the TOP DOWN priorities Top down priorities are generally communicated in terms of service performance (though some may be asset performance) Many of these will be ‘valued’ – using WTP for example We also need to model up to these service performance metrics Corporate Priorities and Constraints Customer and Environmental Values Asset Performance Physical Assets Investment Service Performance

7. Page : 7 © ICS Consulting Ltd 2011 Developing a modelling approach involves a number of stages 1 Asset and Intervention definition 1 Asset and Intervention definition 2 Asset deterioration modelling 2 Asset deterioration modelling 3 Service Consequence modelling 3 Service Consequence modelling 4 Determining costs 4 Determining costs 5 Decision making 5 Decision making

8. Page : 8 © ICS Consulting Ltd 2011 The modelling approach involves a number of stages Stage 1: Identify assets to be modelled and the range of interventions Consideration of the triggers for intervention Intervention when a trigger is hit can be manually set or determined by optimisation process Modern equivalence may be relevant to capture 1 Asset and Intervention definition 1 Asset and Intervention definition 2 Asset deterioration modelling 2 Asset deterioration modelling 3 Service Consequence modelling 3 Service Consequence modelling 4 Determining costs 4 Determining costs 5 Decision making 5 Decision making

9. Page : 9 © ICS Consulting Ltd 2011 The modelling approach involves a number of stages Stage 2: Estimate asset performance profile Fix on fail baseline Range of alternative intervention strategies To model interventions and triggers – not just age only models Ideally need some measure of condition/performance – helps identify intervention impacts 1 Asset and Intervention definition 1 Asset and Intervention definition 2 Asset deterioration modelling 2 Asset deterioration modelling 3 Service Consequence modelling 3 Service Consequence modelling 4 Determining costs 4 Determining costs 5 Decision making 5 Decision making

10. Page : 10 © ICS Consulting Ltd 2011 The modelling approach involves a number of stages Stage 3: Estimation probability of service failure given asset failure Estimate severity of the service failure For the intervention strategies need to estimate: Number of asset failures; number of interventions; asset base profile; expected service levels Validation techniques needed 1 Asset and Intervention definition 1 Asset and Intervention definition 2 Asset deterioration modelling 2 Asset deterioration modelling 3 Service Consequence modelling 3 Service Consequence modelling 4 Determining costs 4 Determining costs 5 Decision making 5 Decision making

11. Page : 11 © ICS Consulting Ltd 2011 The modelling approach involves a number of stages Stage 4: Cost of interventions Impact of interventions on operational costs Inclusion of social costs and benefits and private costs in the costing framework Discounting and NPV 1 Asset and Intervention definition 1 Asset and Intervention definition 2 Asset deterioration modelling 2 Asset deterioration modelling 3 Service Consequence modelling 3 Service Consequence modelling 4 Determining costs 4 Determining costs 5 Decision making 5 Decision making

12. Page : 12 © ICS Consulting Ltd 2011 The modelling approach involves a number of stages Stage 5: Selection of the optimal asset policy Selection of the optimal programme of investment Use of corporate tools to support decision making is preferable Understand sensitivity and uncertainty around the modelling inputs and assumptions Clear explanation of the choices made about investment 1 Asset and Intervention definition 1 Asset and Intervention definition 2 Asset deterioration modelling 2 Asset deterioration modelling 3 Service Consequence modelling 3 Service Consequence modelling 4 Determining costs 4 Determining costs 5 Decision making 5 Decision making

13. Page : 13 © ICS Consulting Ltd 2011 Designing the framework Top down needs to align with bottom up Failure Modes Analyses needed to develop the bottom up approach: Modes – mechanical asset failure: repairable or not Causes – maintenance, age, usage, corrosive environment… Effects – supply interruption, pollution….. Need to consider the impact of duty standby and duty assist Data gaps are likely – may need to group failure modes, result asset attributes, etc in light of that There is only so many gaps in data that can be dealt with elicitation and other techniques

14. Page : 14 © ICS Consulting Ltd 2011 Designing the framework Consistency in the framework is desirable Data gaps may mean that the robustness across the whole analysis is not uniform Deal with this using sensitivity analysis and uncertainty Actual time and effort in modelling some elements depends on the size of the programme in relative terms – the more the expenditure, the more effort should be put in It’s a journey PR09 was a key learning point. The time and resources to make the change to adapt to the learning could be considerable – and may not always be worth it.

15. Page : 15 © ICS Consulting Ltd 2011 The key messages in risk modelling Need to estimate pre- and post-investment profiles Data gaps are inevitable and infill commonplace Uncertainty around data should be explicitly considered in the analysis. Survival analysis is most popular in modelling end-of-life failures for assets Best practice is to use the Weibull distribution AND many assets are repairable in nature A mix of interventions should be included in the modelling framework Proactive and reactive; Repair, refurbish and replace Different levels of the asset hierarchy The restoration times for the different types of interventions – rather than assets! Intervention impacts articulated in terms of asset attributes and history Performance, energy consumption, condition, nrs failures / refurbishments Need better intervention benefits tracking

16. Page : 16 © ICS Consulting Ltd 2011 Key messages in risk modelling NI assets…. need to capture system reliability BUT some reliability modelling techniques are resource and time consuming – need to be pragmatic given this All service impacts need to be expressed in monetary figures Aim for Cost Benefit Analysis (CBA) for all investments Decisions based on CBA need to be made at the programme level even though the modelling is at asset group level. Uncertainty and sensitivity analysis are crucial Understand robustness of decisions and the impact of data gaps and modelling errors

17. Page : 17 © ICS Consulting Ltd 2011 Examples and Demo of the Tool

18. Page : 18 © ICS Consulting Ltd 2011 The Example in the Tool Asset Selection by the Steering Group Rapid Gravity Filter Simplified to the four major assets Actuator Blower Tank Pipework Demo of costing and deterioration modelling principles

19. Page : 19 © ICS Consulting Ltd 2011 What does the data need to look like? Excerpt of the failure data for actuator….. Need to model qualitative data as a dummy Asset IDAGENr OperationsLocationReplacedRepairedTime StartTime End A1414Outdoor0120072011 A2811Indoor1220052011 A3812Indoor1220062011 A4715Outdoor1420072011 A5615Indoor0120052011 A686Outdoor1520072011 A7816Indoor0220052011 A849Outdoor0120062010 A912Indoor0020042005 A1037Indoor0020052008 A11121Indoor0420052011 A12215Indoor0020052007 A13419Outdoor1120072011

20. Page : 20 © ICS Consulting Ltd 2011 Weibull modelling…. Stata and R Weibull model Stata estimates the shape parameter (b and 1/b); R estimates (1/b) only Intercept and predictor coefficients in R are scaled by b. Hence for the constant in Stata of -10.28, the equivalent in R is -10.28/3.595 = 2.861 Key: Know the parameterisation of the software and the modelling tool !

21. Page : 21 © ICS Consulting Ltd 2011 What about repairable rates Again, know the parameterisation of the software and the tools Need to use count data regression – note: the offset/exposure Choice between exponential and power model – need to be sure which you are modelling – depends on the nature of the age variable

22. Page : 22 © ICS Consulting Ltd 2011 Looking at the Tool…..

23. Page : 23 © ICS Consulting Ltd 2011 Summary of inputs and outputs Service measures and social values Discount rates Energy prices & carbon prices Asset lists – age and attributes Deterioration models Weibull end of life survival rates Repairable failures Service impacts Interventions – costs and impacts Intervention strategies Age based triggers (Repairable) failure based triggers Pre and post simulation strategies Age profile Numbers of failures Numbers of interventions Intervention costs, energy costs Service WTP, carbon costs Cost benefit assessment of each strategy Change in risk/service benefits (between pre and post) PV of Benefits PV of Costs NPV Graph of breakdown of NPV by asset Ranking of strategies – to select ‘best’ one

24. Page : 24 © ICS Consulting Ltd 2011 Review of the water industry UKWIR project – when to repair, refurb or replace an asset ICS Consulting November 2011 :diagnostics/ :transformation/ :investment planning/ :portfolio optimisation/ :investment economics/ :regulation and economics/ :training/