http://www.nwda.co.uk/pdf/NW%20Infrastructure%20Study%20Final%20Report%20FINAL by Northwest Regional Development Agency

North West Utilities Infrastructure Study - Final Report INV129548

A report for the Northwest Development Agency by EKOS

with Utility Consultancy & Engineering (UCE)

August 2008

EKOS Lawrence Buildings 2 Mount Street Manchester M2 5WQ

North West Utilities Infrastructure Study - Final Report

TABLE OF CONTENTS 1

EXECUTIVE SUMMARY ................................................................................................... 4 KEY FINDINGS ...................................................................................................................... 4 LOW LEVEL OF UNDERSTANDING OF THE UTILITIES' INDUSTRIES ................................................... 4 THE DISCONNECT BETWEEN THE PLANNING PROCESS FOR UTILITIES AND THE DEVELOPMENT PLANNING PROCESS..................................................................................................................

TENSIONS BETWEEN THE REGULATORY FRAMEWORK AND ECONOMIC GROWTH REQUIREMENTS .... 6 THE COSTS OF DELIVERING THE NECESSARY UTILITIES INFRASTRUCTURE .................................... 7 CONSEQUENCES OF LACK OF TRANSPARENCY AND ACCOUNTABILITY IN THE UTILITIES MARKET ..... 7 POTENTIAL UTILITIES CONSTRAINTS IN THE NORTH WEST ........................................................... 8 FACTORS SPECIFIC TO THE NORTH WEST REGION .................................................................... 11 LACK OF PROGRESS IN RESOLVING UTILITIES ISSUES ................................................................ 15 KEY CONCLUSIONS ........................................................................................................... 15 CONCLUSION 1 - THE LEVEL OF MUTUAL UNDERSTANDING AND TRUST BETWEEN THE UTILITIES INDUSTRY AND KEY STAKEHOLDERS IN THE ECONOMIC DEVELOPMENT ARENA NEEDS TO IMPROVE

............................................................................................................................................. 15 CONCLUSION 2 - INVESTMENT PLANNING IN UTILITIES NEEDS TO BE BETTER ALIGNED WITH PLANNED ECONOMIC GROWTH

............................................................................................................... 16

CONCLUSION 3 - SIGNIFICANT INVESTMENT IS NEEDED IN THE REGION'S UTILITIES INFRASTRUCTURE TO MEET THE REQUIREMENTS OF PLANNED ECONOMIC GROWTH ................................................

CONCLUSION 4 - CURRENT AND POTENTIAL UTILITIES CONSTRAINTS NEEDS TO BE IDENTIFIED IN MORE DETAIL ..........................................................................................................................

CONCLUSION 5 - QUESTIONS OVER THE EFFECTIVE COMPETITION IN UTILITIES ........................... 19 CONCLUSION 6 - EXISTING AND POTENTIAL STRENGTHS IN UTILITIES IN THE REGION ................... 19 CONCLUSION 7 - THE CURRENT SYSTEM OF DEALING WITH UTILITIES ISSUES MAY NOT BE WORKING ............................................................................................................................................. 20 2

INTRODUCTION .............................................................................................................. 22 INTRODUCTION TO THE REPORT .............................................................................................. 22 REPORT STRUCTURE.............................................................................................................. 22

SUMMARY OF THE BASELINE REPORT ..................................................................... 23 THE POLICY FOR INTERVENTION .............................................................................................. 23 PLANNED AND POTENTIAL DEVELOPMENT IN THE NORTH WEST ................................................ 23 THE UTILITIES MARKET PLACE ................................................................................................ 25 REVIEW OF OTHER SIMILAR RESEARCH ................................................................................... 32 CURRENT UTILITIES INFRASTRUCTURE PROVISION ................................................................... 32 STAKEHOLDER CONSULTATION ............................................................................................... 35

North West Utilities Infrastructure Study - Final Report

CASE STUDIES ....................................................................................................................... 44 KEY MESSAGES FROM CONSULTATION..................................................................................... 44 4

KEY FINDINGS ................................................................................................................ 46 LOW LEVEL OF UNDERSTANDING OF THE UTILITIES' INDUSTRIES ................................................. 46 THE DISCONNECT BETWEEN THE PLANNING PROCESS FOR UTILITIES AND THE DEVELOPMENT PLANNING PROCESS................................................................................................................

TENSIONS BETWEEN THE REGULATORY FRAMEWORK AND ECONOMIC GROWTH REQUIREMENTS .. 49 THE COSTS OF DELIVERING THE NECESSARY UTILITIES INFRASTRUCTURE .................................. 50 CONSEQUENCES OF LACK OF TRANSPARENCY AND ACCOUNTABILITY IN THE UTILITIES MARKET ... 52 POTENTIAL UTILITIES CONSTRAINTS IN THE NORTH WEST ......................................................... 53 FACTORS SPECIFIC TO THE NORTH WEST REGION .................................................................... 56 LACK OF PROGRESS IN RESOLVING UTILITIES ISSUES ................................................................ 62 5

KEY CONCLUSIONS ...................................................................................................... 63 CONCLUSION 1 - THE LEVEL OF MUTUAL UNDERSTANDING AND TRUST BETWEEN THE UTILITIES INDUSTRY AND KEY STAKEHOLDERS IN THE ECONOMIC DEVELOPMENT ARENA NEEDS TO IMPROVE

............................................................................................................................................. 63 CONCLUSION 2 - INVESTMENT PLANNING IN UTILITIES NEEDS TO BE BETTER ALIGNED WITH PLANNED ECONOMIC GROWTH

............................................................................................................... 64

CONCLUSION 3 - SIGNIFICANT INVESTMENT IS NEEDED IN THE REGION'S UTILITIES INFRASTRUCTURE TO MEET THE REQUIREMENTS OF PLANNED ECONOMIC GROWTH ................................................

CONCLUSION 5 - QUESTIONS OVER THE EFFECTIVE COMPETITION IN UTILITIES ........................... 68 CONCLUSION 6 - EXISTING AND POTENTIAL STRENGTHS IN UTILITIES IN THE REGION ................... 69 CONCLUSION 7 - THE CURRENT SYSTEM OF DEALING WITH UTILITIES ISSUES MAY NOT BE WORKING ............................................................................................................................................. 69 APPENDIX 1 - EDITED GLOSSARY...................................................................................... 71

North West Utilities Infrastructure Study - Final Report

EXECUTIVE SUMMARY

1.1

EKOS, supported by Utilities Consultancy & Engineering Ltd (UCE), were appointed

by NWDA, in partnership with the North West Regional Assembly and Environment Agency, to undertake a study into issues and constraints relating to utilities infrastructure and supplies in the North West. The aims of the study were to:• identify the process through which utilities investment is allocated and procured and set out the role of key stakeholders • establish how resource allocation processes can be influenced • identify specific and/or geographical constraints and issues which are impacting upon the economic development of the region now, or in the foreseeable future; and • start to make suggestions on how these issues may be overcome either through dialogue, planning processes or financial investments 1.2

The Final Report provides a brief summary of the baseline report that was completed

as a first stage, and is intended to draw out in more detail the key issues and emerging conclusions. Key acronyms and industry-specific terminology used in this report is explained in the Glossary at Annexe 1. 1.3

This Executive Summary summarises the Key Findings and Conclusions of the Final

Report.

KEY FINDINGS 1.4

It is clear that the provision of utilities infrastructure and their capacity remains a key

concern for both the public and the private sector in the North West. Whilst current capacities as a whole across the region are relatively good - notably if compared to other English regions - there are some areas which need to be addressed to ensure that the current planned future development and economic growth in the region can be delivered.

Low level of understanding of the utilities' industries 1.5

There is a significant lack of understanding of how the utilities markets and the major

companies responsible for utilities infrastructure in the North West are structured, regulated and operated amongst both the public and the private sector in the region. This lack of understanding is of concern for a number of reasons:• the main utilities companies in the North West are important to the region - both as major employers, and also strategically as major players and influencers in the energy market, which is one of the region's sectoral strengths

North West Utilities Infrastructure Study - Final Report • it could be preventing key partners from ensuring that best value-for-money is being secured for public sector investment, and that the best possible solution is being pursued when delivering required utilities infrastructure or supplies • it is highly likely to be having an impact upon the planning and programming, and ultimately the delivery, of major development projects. • associated with the above, the lack of understanding of the various procurement options for obtaining costs estimates and delivering utilities works may inadvertently be contributing to issues around procurement and State Aid, where there is a need to demonstrate that resources in utilities infrastructure are being properly and efficiently defrayed • it is undoubtedly fuelling a considerable degree of frustration and current negative perceptions of both utilities companies and the regulators from the end-consumer perspective 1.6

This lack of understanding may be being compounded by the fact that the North West

Many public sector consultees recognised that their limited level of understanding

should be of concern, and whilst the vast majority expressed a desire to improve this they did not know how to go about it.

Regulatory consultees felt that they had worked hard to

persuade utilities companies to engage better with partners, notably on investment planning, but accepted this hadn't happened to the level they had hoped.

The disconnect between the planning process for utilities and the development planning process 1.8

At present the investment planning process for DNOs is tied into the 5-yearly Pricing

Control Periods (PCPs), with consultation on these 5-year forward investment plans happening approx. 18 months-2 years ahead of this Pricing Control Period coming into force. 1.9

This investment planning process is completely separate to the strategic planning

Regulators felt

constrained by both their existing remit and resources, and, to some degree, by a level of discordance within central government departments as to how the two processes should be

North West Utilities Infrastructure Study - Final Report

better joined-up. Some of the region's DNOs stated that they wanted to be more involved in the strategic planning process in economic development so that they could better align their investment planning process, but stated that they were rarely approached - although public sector consultees said DNOs were consulted but rarely responded.

Tensions between the regulatory framework and economic growth requirements 1.10

The regulatory framework for each utility is different but the fundamental underlying

principle is the same - namely, to protect the interests of consumers, where possible by promoting competition, and to regulate those areas of the market which are effective monopoly businesses.

This is achieved through a relatively straightforward supply-and-

demand control model, using price as the key controlling mechanism over 5-year periods. These 5-year pricing periods effectively also determine the 5-year forward investment plan for each DNO. 1.11

DNOs are not allowed under the terms of their licences to deviate from their agreed

price control or invest in infrastructure on a speculative basis to serve new developments. If they wish to invest in infrastructure outside of their approved business plan they must provide the relevant regulator with a robust business case which provides clear evidence of certainty1 that the anticipated development and associated additional utility usage will occur, which has to be approved in advance by the regulator. 1.12

The key downside to the price control system is that DNOs are relatively restricted in

their ability to respond to new initiatives or sudden changes impacting upon their network during the 5-year price control period.

This can work counter to the forces that govern

economic development, which seek to deliver the most efficient rates of economic growth ie. at the fastest sustainable rate, at the minimum price and to the best quality. In addition many DNOs feel that this control system does not fully enable them to take account of particular local issues or requirements,. 1.13

Some of the utilities companies are actively trying to find alternative solutions. One

DNO is considering 'special investment zones' in some of the North West's most important geographical economic drivers which would be areas of ringfenced investment which had built-in flexibility in terms of the works that were actually delivered in the 5-year control period. However the response from the regulator concerned has been lukewarm and the DNO feel it unlikely that this proposal will be approved.

although the rigour applied to the definition of 'certainty' seems to vary between the respective utilities

North West Utilities Infrastructure Study - Final Report

The costs of delivering the necessary utilities infrastructure 1.14

Almost all end-consumer consultees stated that utilities-related costs had increased

significantly since privatisation. The regulators feel that this is a fair reflection of the need of private enterprise to contribute towards the cost of delivering the region's utilities infrastructure if they were to then use that infrastructure to generate private wealth. The potential amount of planned economic growth over the next 5 to 10 years is significant, much of which will require investment in the adjacent utilities infrastructure; the overall total investment required could therefore also be significant. 1.15

In addition it was widely believed by end-consumer consultees that under the

previous public ownership system there had been a lack of sufficient investment over a number of years in the essential physical assets and networks for most utilities, leading to the increased phenomenon of 'asset sweating'. This is where ways are devised to make more efficient use of existing infrastructure capacity by findings ways of squeezing more demand on the networks. Many consultees felt this asset sweating had been prevalent in the North West for some time and that as a result they were now being asked to invest in infrastructure which should have been provided by the DNOs and/or their previous public sector incarnations. Some consultees commented that they would have less issue with the principle of contributing towards new infrastructure if they could be assured that this was bringer wider benefits to the region, and not just generating private sector profit for the DNOs. 1.16

Common feedback from both public and private sector consultees was that cost

estimates provided by DNOs could start high and reduce significantly in the process of negotiation during planning and delivering major utilities works.

There was extensive

scepticism about this, which further compounded the view that there was a lack of transparency in applying what should be a uniform regulatory framework. Utilities companies felt that these cost estimate changes merely reflected the increased level of detail available for a proposed scheme throughout the negotiation process, and hence increased design certainty. Costs of reinforcements and betterment being currently requested by some North West DNOs were a particular issue for end-consumers, with the lack of understanding on procurement only adding to the debate as to whether or not the costs being requested were fair and reasonable.

Consequences of lack of transparency and accountability in the utilities market 1.17

The length of time and the lack of transparency involved in eliciting responses to any

enquiries from North West DNOs - whether for information/data, cost estimates, queries relating to ongoing discussions, etc - was reported as being significant, and in many cases outside of the regulated 90-day limit that the DNOs are supposed to respond within, and caused much frustration for both public and private sector consultees.

Reports by end-

North West Utilities Infrastructure Study - Final Report

consumers of significant lead-in times for key components - up to 2 years for some key substation components in the former MANWEB area - merely exacerbated this frustration. 1.18

Utilities companies responded that the cost estimating process was difficult for them,

due to changing and/or insufficient levels of detail for a proposed scheme being available which made it difficult for them to accurately model the impact on their networks and infrastructure.

In addition two utilities companies reported that they had experienced a

significant increase in the number of applications for cost estimates, for which they had been allowed no addition resourcing under the terms of their price controls, which was adding pressure to existing internal resourcing constraints. 1.19

It was widely reported by both public and private sector consultees that the lack of

certainty or accountability on procurement and delivery of utilities infrastructure was leading to additional costs and programme delays being incurred, which for some projects was significant.

This could had adverse impacts upon not just construction programmes, but

potentially also on asset disposal and revenue income forecasts, and ultimately upon the financial viability of schemes. Many commented at the difference in levels of customer service and delivery accountability in the rest of the construction and service sector, and felt that this was in itself evidence that the current regulatory framework was not fulfilling one of its key roles - namely protecting the interests of consumers - for this situation to have persisted for so long. One of the regulators reported their frustration at the lack of improvements in levels of customer service and accountability in the market they were responsible for.

Potential utilities constraints in the North West 1.20

The Study Team endeavoured to gather information from utilities companies about

the current infrastructure provision for each utility in the region and any known capacity issues. Unfortunately not all DNOs responded to requests for information in the manner that had been hoped for - notably preventing the Study Team from identifying more definitively potential areas of concern in terms of available capacity and planned development - and hence the analysis was relatively limited and caveated accordingly.

Electricity ENW network area 1.21

There appear to be particularly high utilisation rates in the ENW network for

substations in the following areas at either Grid Supply (312 kV) or Primary (33kV) substation level:â&#x20AC;˘ parts of Central and Western Cumbria (132kV) and a small part of South-East Cumbria (33kV) â&#x20AC;˘ parts of the Fylde Coast (both 132kV and 33kV)

North West Utilities Infrastructure Study - Final Report • the Lancaster area (33kV only) • parts of Greater Manchester (both 132kV and 33kV) • the Warrington area (both 132kV and 33kV) • part of North Cheshire (132kV only) • South and Central Lancashire (33kV only) 1.22

From the above information it appears there are potential issues for the following

areas of planned major development:• Greater Manchester - Growth Point and HMR areas, and Strategic Regional Sites at Barton, Carrington and Central Park • Fylde Coast and Lancaster area - Growth Point and HMR areas, and Strategic Regional Site at Bailrigg • Central Cumbria and parts of West and South Cumbria - Growth Point, and Strategic regional sites at Kingmoor and Westlakes (Whitehaven) • Warrington area - Growth Point area and Strategic Regional site at Omega South • South and Central Lancashire - Growth Point and Strategic Regional Sites at ROF Cuerden and Chorley SP Manweb network area 1.23

The information provided by SP Manweb seems to suggest there are no capacity

issues in the part of the North West region covered by their network. This appears to conflict with consultation feedback, and frequent reports that parts of the SP Manweb network in the Merseyside sub-region in particular are operating close or at capacity. Identifying and resolving potential capacity issues 1.24

Electricity DNOs are able to model the impact that proposed regeneration and

development plans would have on their networks to identify potential constraints. This kind of activity is not a requirement under statute or of their licence conditions so they are entitled to recover the costs of this work from the Third Party requesting it. DNOs can have difficulties in resourcing this type of work, as the responses to this element of the Study would seem to suggest. 1.25

Due to the restrictions of speculative investment (as set out above) DNOs have

tended to rely upon using 'straight-line' load growth projections for their 5-year price control period investment planning, using their existing customer-base as the baseline. For DNOs to accommodate changes in demand over-and-above these 'straight-line' load growth projections is quite onerous. Under the currently regulatory regime reinforcement of networks is either partly or fully paid for by the applicant seeking a connection, rather than the DNO hence it could be argued that the driver to develop a business case for investment, when

North West Utilities Infrastructure Study - Final Report

there is the potential for some or all of that investment to be made by Third Parties, is not always strong.

Gas 1.26

In the absence of any information on capacity being provided by National Grid, the

Study Team were unable to make any analysis of the North West network's ability to respond to future planned growth.

Potable Water 1.27

In general UU consider that the potable water trunk distribution network in the North

West has adequate capacity, subject to some shortfalls in isolated areas. UU acknowledge that there are restrictions and limitations at the sub-regional and local level, but that these cannot be realistically identified with the information provided. 1.28

The key area of concern in the North West for UU is the West Cumbria and Carlisle

Resource Zones, both of which are quite sensitive to any major changes in supply and demand, with the later close to going into deficit.

As Carlisle has been identified as a

potential housing Growth Point, and there are Strategic Regional Sites at Westlakes (Whitehaven) in West Cumbria and Kingmoor, Carlisle this could be a potential constraint. Identifying & resolving potential issues 1.29

Similar to electricity DNOs, water DNOs can model the impact that proposed

regeneration and development plans would have on their networks to identify potential constraints, and can seek to recover the costs of this modelling work from the Third Party. They also appear to have difficulties in resourcing this type of work. 1.30

Under the current statutory and regulatory framework any network reinforcement and

new distribution infrastructure to accommodate increased demand from new investment has to be funded by developers, and cannot be recovered through increased customer charges.

Wastewater 1.31

UU have limitations on wastewater treatment capacity in several areas. In addition

much of the sewerage system is of Victorian vintage with severe capacity limitations, which are further exacerbated by liabilities on environmental improvements and restrictions on the network. 1.32

The areas of key concern area appear to be parts of the Fylde Coast in terms of

wastewater treatment to cope with current and future demand, and south & west Manchester to cope with any further growth in demand; in addition there are issues in Manchester with the Victorian-era combined wastewater/stormwater system. Some localised issues also arise in

North West Utilities Infrastructure Study - Final Report

parts of Lancashire, namely the Ribble Valley and the Preston area. The potential impact upon major development proposals is hence:â&#x20AC;˘ Greater Manchester - Growth Point and HMR areas, and Strategic Regional Sites at Barton, Carrington and Davenport Green â&#x20AC;˘ Fylde Coast - Growth Point and HMR areas â&#x20AC;˘ Central Lancashire - Growth Point area and Strategic Regional Sites at ROF Chorley and Cuerden Identifying & resolving potential issues 1.33

UU's investment focus is in continuing to bring these older systems up to modern

standards.

As with potable water, under the current statutory and regulatory framework

wastewater capacity for new development must be funded by developers and not funded via increased customer changes. Telecomms 1.34

There are no particular pressing geographic issues, although there is a need to

ensure that NGN roll-out does not disadvantage any of the North West sub-regions as compared to the others and enables regional centres to compete with European knowledge destinations.

Factors specific to the North West region 1.35

The baseline report identified that there are some features of the utilities markets in

the North West which are unique, and could be impacting upon the development and operation of a more competitive utilities market which, in theory, should deliver better service and better value-for-money to key stakeholders and consumers in the region.

CONSTRAINTS Age of utilities infrastructure 1.36

The North West was one of the first regions in the UK to invest heavily in utilities

infrastructure. As a result some of this infrastructure is now approaching or at the end of its usable life, and requires considerable investment for it to cope with anticipated levels of planned demand and, in some cases, to cope better with existing levels of demand. 1.37

All of the respective utilities companies have invested heavily in upgrading their

network assets but it is likely that a considerable amount of further investment will be needed to meet the demands of planned major investments in the region, and to ensure that the region remains competitive with other UK and European regions.

North West Utilities Infrastructure Study - Final Report

Unique network architecture in the SP Manweb area 1.38

The former MANWEB area has a network architecture which is unique and quite

unlike the 'standard' network architecture found in the rest of the North West region and other regions across the UK. This type of network architecture was designed to have positive attributes - namely a much higher utilisation of transformer capacity and a higher degree of security of supply - but less positive attributes, the key one being that the costs of developing, managing and maintaining it are substantially greater (approximately 5 times). This means that the costs of delivering development projects in the SP Manweb area could be proportionally higher, in particular network reinforcements. 1.39

In addition the SP Manweb network uses non-industry standard technical

components, and requires specialised technical skills and knowledge.

Feedback from

consultation seems to indicate that this is filtering through to end--consumers in terms of increased lead-in and delivery times on infrastructure works and cost premiums for nonstandard equipment. Asset sweating 1.40

For some utilities in the UK the practice of 'asset sweating' has become

commonplace, although is not unique to the utilities industry, and has been increasingly adopted by other sectors, for example manufacturing, in order to reduce costs and remain competitive. Critics of the utilities regulatory system2 say that the need to move to a more efficient system inevitably led to an imperative to sweat the assets, and has been particularly encouraged recently with the robust stance adopted on investment and pricing by the regulator, which they feel is deterring long-term commitment to infrastructure investment. 1.41

There are concerns that - whilst accepting asset seating as a short-term strategy -

this cannot continue as a long-term solution. It could be that some of the issues reported by end-consumers with outages or supply interruptions in parts of the region are a direct result of asset sweating; high non-contestable reinforcement costs may also be an indirect consequence, as the DNOs seek to squeeze more capacity out of the existing network and push it to its limits. 1.42

In addition assets that are towards the end of their lifespan may well not be as

reliable when forced to work at or above capacity than newer and more technically-advanced assets would be. Some of the region's DNOs have recently seen their performance levels either drop against previous performance or fail to meet UK benchmark targets on indicators that could be related to the degree of asset sweating - for example unplanned interruptions to service and leakages. 2

for example Prof Dieter Helm, Oxford University, in " Ownership, Utility Regulation And

Financial Structures: An Emerging Model", January 2006

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1.43

As stated above the use asset sweating is not unique to the North West, but when

added to other factors that seem to be specific to the North West region - notably relating to the timescales for delivering increased capacity - it could putting the region at a competitive disadvantage, in particular if other regions have the ability to respond more quickly to additional capacity requirements than the North West is able. Two electricity networks and two DNOs 1.44

The North West region is unique amongst English regions in having electricity

distribution networks operated by two different companies. This provides an additional layer of confusions for key stakeholders who already have limited knowledge and understanding of the utilities market and how it operates. These factors could be magnified on the SP Manweb network, where potential entrants to the market may feel that the costs of upgrading or standardising the network, plus the cost of acquiring the specific skilled staff to operate the network, cannot be recovered through the potential for revenue-generation. Competition in the utilities marketplace 1.45

Evidence provided by Ofgem, BERR and the DNOs themselves suggests that

competition in those sections of the utilities markets that open to competition is relatively good in the North West region compared to other English. Having said that, competitively-provided connections still represent an equally relatively low proportion of all connections provided in both the region and across the UK3. Ofgem has expressed disappointment that the level of market competition has not grown quite as much as expected over the past 10 years. 1.46

There was a strong view from end-consumer consultees that the North West does not

have genuine competitive choice when it comes to delivering some major utilities infrastructure, in particular electricity, and notably in the former MANWEB area. It is probable that this perceived lack of competition is at least partly due to a lack of understanding about the marketplace and in particular what options there are to deliver utilities infrastructure choices, however this has not been helped by poor experiences reported by end-consumers where they had tried to work with companies other than the incumbent DNOs. 1.47

The perception that the level of competition in utilities provision is limited in the North

West may also be held outside of the region, and hence potentially act as a negative factor for investment decisions that are mobile within the UK (and beyond). In addition the resources being currently being spent by all parties could be more fruitfully focused towards building synergies and getting the best-possible solution for 'North West plc'.

approx. 10% of a total of approx. 40,000 connections in the North West, and 3.7% of a total of 492,309

connections in the UK

North West Utilities Infrastructure Study - Final Report

OPPORTUNITIES 1.48

There are some features of the North West's current utilities situation which could act

as a benefit to the region's economic development:The development of renewable energy technologies and production 1.49

The North West region has a long-established concentration of the UK's specialist

companies, facilities and staff in the nuclear sector, and it is recognised that these existing strengths and assets, combined with significant potential natural assets in renewable energy generation are of national and international importance. West Cumbria - "Britain's Energy Coast" - could provide a unique contribution to both Europe and the UKâ&#x20AC;&#x2122;s short and long term policy goals, transforming its own economy in the process, and to develop a leading sustainable approach to future energy planning and consumption. Opportunities for the roll-out of newer technologies 1.50

The region has made excellent progress in the past decade in the roll-out of newer

telecommunications technologies - for example NWDA's 'Project Access' - which has left the region for now in a good relative competitive position. Concerns were expressed that the region may suffer competitively if the roll-out of the next generation of telecommunications (NGNs) was not progressed more quickly, in particular in light of the faster rate at which these were being progressed in other parts of the UK (notably in the South East) and across Europe. Building on existing skills strengths 1.51

The region has a concentration of utilities-related skills, with particular expertise in the

nuclear sector and an emerging concentration in renewable technologies. Existing DNOs have reported issues with recruitment and retention of staff, and have stated their willingness to work with public sector partners to try to address these. There is clearly a potentially mutually beneficial set of actions and arrangements which could be put in place to augment the region's existing strengths and increase existing competitive advantages. Utilities capacities 1.52

Whilst there are some key concerns for specific utilities in specific locations, these are

relatively few and are confined to certain parts of the region rather than abundant and widespread, especially when compared to some other English regions - for example water issues in the South and East.

This should be seen as a positive for the region, and a

potential strength to build upon.

North West Utilities Infrastructure Study - Final Report

Lack of progress in resolving utilities issues 1.53

Many of the issues identified throughout this commission resonate with the findings of

other studies into utilities issues that have been undertaken over the past 6 years. The concern is that some of these studies are over 5 years old, meaning that many of the issues that were reported in the early years of privatisation in the UK utilities market have still not been resolved and are still causing real concerns and issues 'on-the-ground' for many stakeholders in the North West in both the public and the private sectors. 1.54

Whilst the Study Team has not been able to develop substantive proof of a causal

relationship, there were reports from some key stakeholders - including end-consumer consultees and public sector facilitators - that in some parts of the region the issues relating to available utilities capacity and the ability to develop additional required capacity within reasonable timescales and within reasonable costs limitations may be affecting the region's ability to retain business & investment and to attract new and/or additional business investment.

KEY CONCLUSIONS Conclusion 1 - the level of mutual understanding and trust between the utilities industry and key stakeholders in the economic development arena needs to improve 1.55

It is vitally important that all key stakeholders, and in particular public sector

agencies, develop a better understanding of the bespoke statutory and regulatory frameworks that govern each of the utilities. This will ensure that:• there is a better alignment of utilities and development policy • public sector resources in utilities infrastructure are being properly and efficiently procured, in line with 'best-value' principles • those areas of the current regulatory framework which either are in transition, or are subject of debate as to their potential unintended consequences for the consumer, can be better scrutinised by key stakeholders to again ensure that investment is the minimum required to deliver the desired outcomes; and • the appropriate level of utilities infrastructure is delivered in a timescale and quantum cost that facilitates planned economic growth 1.56

Utilities companies need to better understand how the development planning

and investment system works, and be enabled through the regulatory framework to become more closely involved in these strategic planning processes. This will enable them to demonstrate to the regulators and their customers that they are better aligning their

North West Utilities Infrastructure Study - Final Report

forward plans with their customers' requirements, and actively demonstrate to key stakeholders that they are a key and influential player. 1.57

There is a clear need for utilities companies to deliver better and more focused

customer service, and to build greater levels of trust amongst their customer base by significantly improving the transparency of cost estimating, procurement and delivery, especially on major economic development projects. At the same time public and private sector stakeholders need to understand utilities companies' concerns related to the competitive markets in which they operate. 1.58

The respective regulators also have a role to play in 'policing' utility company

performance to ensure that substandard or non-compliant behaviour is identified, steps taken to rectify this, and accountability as a whole is greatly improved. At the same time there is the opportunity for key stakeholders to work with utilities companies to improve their customer relations, and potentially to act as a facilitator where a regionallysignificant project or initiative is involved. 1.59

A more constructive longer-term mutual relationship between key stakeholders

in economic development and the region's DNOs could have many positives for the region.

Conclusion 2 - investment planning in utilities needs to be better aligned with planned economic growth 1.60

Since the creation of the utility companies as private sector entities, the investment

planning process for utilities and the statutory investment and development processes within the private and public sector have acted in relative isolation from one another. The current disconnect is not serving either party well at present, and ultimately is not supporting economic growth & regeneration. There is a need for a longer-term joined-up approach to utilities planning and investment in the region, involving all potential key stakeholders including the utilities companies, the respective regulators and local planning authorities. . 1.61

In order for this to happen there needs to be a review of the current utilities

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1.62

In order to do this utilities DNOs must be allowed to adequately resource these

activities by being enabled through the regulatory framework to invest in recruiting and employing sufficient appropriately qualified and experienced staff to lead this liaison. 1.63

Key public sector stakeholders, especially local planning authorities, need to

have the ability and expertise to engage with utilities DNOs, whether via in-house staff or independent specialist consultants - to provide the expertise and due diligence services at the planning stage to determine the impact developments would have on utility networks and prevent abortive costs being incurred.

Conclusion 3 - significant investment is needed in the region's utilities infrastructure to meet the requirements of planned economic growth 1.64

The amount of planned economic growth over the next 5 to 10 years is significant,. It

is therefore vitally important that these investing stakeholders understand the respective utilities markets and regimes in detail, to ensure that this investment is procured, defrayed and delivered in the most cost-effective manner possible. In addition key stakeholders should look to work with the utilities DNOs on investment plans to assess whether there are any economies of scale or additional value that can be added to existing planned price control investments; and in developing robust business cases for additional investment where possible. 1.65

Some of this economic development is planned for parts of the region that appear to

either already be experiencing utility capacity issues, or are likely to in the near future. The include:• parts of Greater Manchester, including the west and south-west of the core of the conurbation • Lancaster • Carlisle • West Cumbria • parts of central and south Lancashire • the Fylde Coast 1.66

Many of these areas are also anticipated to be key economic drivers for their

respective sub-regions. 1.67

Added to this are the further factors that:• the region has an ageing infrastructure, parts of which are at or beyond their expected usable lifespan. It is possible that the scale of investment required, and

North West Utilities Infrastructure Study - Final Report

the timescales it is required in, to facilitate planned economic growth will be greater than utilities companies can bear alone • the former MANWEB area of the region has inherited an electricity network with an architecture which is unique in terms of its design and component usage;

relatively costly to manage, maintain and operate (5 times more

costly compared to a more 'standard 'network design); and is also now relatively aged in terms of its useful lifespan. • the current widespread practice of asset sweating may be starting to cause reliability problems. It is not clear what ability the region's infrastructure has to work for long periods of time near or at designed capacity 1.68

The regulatory framework as it stands is very clear across all utilities that

investment in additional capacity is not to be funded by DNOs, but by those third parties promoting the development requiring the additional capacity.

In addition

utilities companies will not for the foreseeable future be allowed to speculatively invest in their infrastructure, nor invest in any projects that are outside of the pricing control period in force at the time, without providing a robust business case and clear supporting evidence to substantiate take-up of the additional capacity being created.

Conclusion 4 - current and potential utilities constraints needs to be identified in more detail 1.69

The Study Team were reliant upon each of the utility companies operating in the

region to provide the base data to facilitate this assessment, but unfortunately the information provided did not enable the analysis to be as detailed as had been hoped. 1.70

There a need for this capacity analysis to be pursued in more detail by each of

the utilities companies, and to drill-down below the sub-regional level, using the utilities companies' abilities to model the impacts of proposed new development on their existing networks. This will enable all key stakeholders to identify at a more detailed sub-regional and local level:• the precise location served by each respective utility network where there may be capacity constraints, either at present or in the foreseeable future • the nature of any potential capacity constraints, and the nature of the works required to resolve them • an outline quantum of the works involved and the likely scale of costs involved • any other potential constraints - for example the timescales likely to be needed to deliver required works • the reason for the differences in reported infrastructure issues by end-consumers and reported network capacities by DNOs - for example, in the SP Manweb area, where there was a significant level of reported issues in the Merseyside sub18

North West Utilities Infrastructure Study - Final Report

region that appear to be anomalous with the data provided by SP Manweb indicating there are no capacity issues in Merseyside

1.71

This information could also benefit the utility companies in providing evidence to their

appropriate regulator to strengthen their investment and use of system revenue predications as part of price control negotiations - in short, ensuring that their future price controls are more closely aligned with the current and projected regional picture.

Conclusion 5 - questions over the effective competition in utilities 1.72

There is a clear division in views between the regulators and utilities DNOs, and end-

consumers, as to whether there is sufficient competition in utilities the region - with the former strongly of the view that there is an acceptable level of competition, and the latter strongly feeling that there isn't an effective open market place. Whatever the reality of the situation, the fact remains that amongst the key procurers of utilities infrastructure works the prevailing perception is that there is not a truly open market in utilities in terms of competition. In addition it is likely that if this perception is held within the region, it may also be held outside of the region, and hence potentially act as a negative factor for investment decisions that are mobile within the UK (and beyond). 1.73

End-consumers felt strongly that it was the role of the utilities regulators to ensure

that competition was real and transparent: this accords with the stated role and remit of the utilities regulators. It is therefore appropriate to establish a communication channel with the regulators - and in particular this regulator - to work with them to ensure that a fully competitive market is operating within the North West region.

Conclusion 6 - existing and potential strengths in utilities in the region 1.74

On a more positive note the region has a number of potential strategic opportunities it

Incumbent DNOs in the region have reported issues with recruitment and retention of

staff with the appropriate skills and experience, and have stated their willingness to work with key public sector stakeholders to try to address these issues. 1.76

In addition there are some concerns that the region may fall behind other UK

and European regions and be at a competitive disadvantage in the roll-out of new technologies in renewable energy and telecommunications unless there is a further significant region-wide 'push'. It is important to encourage the region's existing DNOs to

North West Utilities Infrastructure Study - Final Report

work collaboratively on environmental technologies with other key institutions such as the region's plethora of Higher Education Institutions, and to take up the opportunity of initiatives such as Registered Power Zones (RPZs). 1.77

The region therefore has a significant opportunity to develop a leading

sustainable approach to future energy planning and consumption. To do this the region needs to develop technologies which can harness the region's plentiful natural assets (wind, wave and water); build upon the experience and expertise garnered with the development and delivery of the telecommunications in the region for the roll-out of NGNs; and build upon existing skills strengths in parts of the utilities markets.

Conclusion 7 - the current system of dealing with utilities issues may not be working Many of the issues identified throughout this Study resonate with the findings of other studies into utilities issues over the past 6 years; with those raised in the Case Studies; and with those reported by consultees from elsewhere in the UK. The concern is that many of these issues are long-standing, with some going back to the years following privatisation, yet clearly have not been resolved fully as they are still causing real 'on-the-ground' issues for many public and private sector stakeholders in the region. Whilst this Study has not been able to categorically develop proof of a causal relationship, there is anecdotal evidence from some sub-regions that issues with existing utilities' supply and developing the necessary capacity in reasonable timescales and costs may be affecting business and investment retention and attraction. 1.78

In addition end-consumer consultees held a wide number of views and theories on

the reasons for the problems they were facing, including:• there had been a lack of forward planning and investment by DNOs since the utilities were privatised • the current system of regulation seeks merely to drive down unit prices for electricity for domestic users, which developers end up paying far more through additional reinforcement charges • current regulation of utilities DNOs is weak and only focuses on domestic consumers • utilities DNOs were using their effective monopoly positions to their advantage, by using the complicated pricing and regulatory framework to defer giving clear and unequivocal advice on works and costs required, and refusing to be accountable on delivery of works to pre-agreed timescales • utilities DNOs were recouping the cost of essential investment on existing capacity (as opposed to additional new capacity requested by a third party) from

North West Utilities Infrastructure Study - Final Report

developers by adding a surcharge to other unrelated cost estimates in the same vicinity 1.79

The conclusion is that there is a need for key stakeholders - including

government - to establish in the short-to-medium term how they can work together to ensure that better progress is made.

North West Utilities Infrastructure Study - Final Report

INTRODUCTION

Introduction to the Report 2.1

EKOS and Utilities Consultancy & Engineering Ltd (UCE) were appointed by NWDA,

in partnership with the North West Regional Assembly and Environment Agency, to undertake a study into issues and constraints relating to utilities infrastructure and supplies in the North West. The aims of the study were to:• identify the process through which utilities investment is allocated and procured and set out the role of key stakeholders • establish how resource allocation processes can be influenced • identify specific and/or geographical constraints and issues which are impacting upon the economic development of the region now, or in the foreseeable future; and • start to make suggestions on how these issues may be overcome either through dialogue, planning processes or financial investments

2.2

This report is the Final Report. It sets out a brief summary of the baseline report that

was completed as a first stage, and is intended to draw out in more detail the key issues and emerging conclusions. An edited Glossary is provided as an Annexe to explain key acronyms and industry-specific terminology used in this report.

Report Structure 2.3

The report is structured as follows:• Chapter 2 provides a summary of the baseline report • Chapter 3 sets out the key findings of the study • Chapter 4 sets out the key conclusions from the study

North West Utilities Infrastructure Study - Final Report

SUMMARY OF THE BASELINE REPORT

3.1

This chapter sets out the key findings from the baseline report, a comprehensive

report which sets out the evidence base and consultation responses, providing the context to this final paper. Further detail on all of these issues is provided in the final Baseline Report.

The Policy for Intervention 3.2

A review of the relevant policies at the national, regional and local level relating to the

provision of utilities infrastructure in the development process reveals there is a clear focus on the importance of delivering adequate 'infrastructure' to support new development.

particular the importance of improvements to road and rail infrastructure, IT and environmental infrastructure, are supported by emerging policy and initiatives eg. Growth Points, Multi-Area Agreements (MAAs), the Community Infrastructure Levy (CIL) and the new Infrastructure Planning Commission (on large-scale projects).

However there is less

emphasis on the importance of utilities infrastructure, as opposed to other types of infrastructure such as transport infrastructure. 3.3

Planning policy, in particular PPS12, makes particular reference to the need for

infrastructure providers to contribute to the preparation of local development documents, but in the case of utilities fails to acknowledge the lack of a statutory or regulatory driver for utilities companies to do so. There appears to be little policy guidance as to how the public sector can or should engage with utilities companies to develop a better understanding of their respective investment and development programmes, to ensure that maximum benefit can be derived through economic growth and regeneration. There is also little guidance on how utilities infrastructure issues which cross administrative boundaries - which occurs frequently - are dealt with. 3.4

The importance of utilities infrastructure is less well articulated at a regional/sub-

regional policy level, with little about the role, or potential role, of respective stakeholders in influencing utilities infrastructure development to support new development.

Planned and Potential Development in the North West 3.5

In order to set the spatial context for future development within the region details of

planned major development projects within the North West, including those arising from the RES, RSS, Housing Growth Point bids and relevant sub-regional action plans, were collated and mapped using GIS. This revealed that the focus of development in each sub-region presently is:Greater Manchester

North West Utilities Infrastructure Study - Final Report • in & around the regional centre incorporating Manchester City Centre and parts of Salford and Trafford • Housing Market Renewal (HMR) areas of Manchester, Salford, Oldham and Rochdale • potential additional housing growth as part of the Greater Manchester Growth Point proposal (Manchester, Salford, Trafford and Bolton) • Strategic Regional Sites at Ashton Moss, Barton, Carrington, Central Park, Davenport Green and Kingsway

Merseyside • Liverpool City Centre, along with the Mersey Ports and Airport, supported by an expanded URC • HMR in inner Liverpool • additional housing growth as part of the Mersey Heartlands (Liverpool and Wirral) and the Mid-Mersey Growth Point proposals (St Helens and Halton) • Strategic Regional Sites at Liverpool Science Park, Estuary, Wirral International Business Park, Kings Business Park Knowsley, Ditton, Daresbury, Liverpool University Edge, Parkside and Birkenhead Twelve Quays.

Lancashire • in and around Preston, Blackburn, Burnley and Preston • economic development in Preston and Blackburn, tourism and housing led regeneration in Blackpool (supported by the URC) and regeneration and restructuring in East Lancashire. • Strategic Regional Sites at Cuerden, Bailrigg, ROF Chorley and Whitebirk • HMR in East Lancashire HMR programme • additional housing growth as part of the Central Lancashire Growth Point bid (Preston, South Ribble, Chorley and Blackpool)

Cumbria • West Cumbria and Furness, notably Barrow, Carlisle, Workington and Westlakes (Whitehaven) • Strategic Regional Sites at Kingmoor, north of Carlisle and Westlakes • additional housing growth as part of the Carlisle Growth Point proposal

Cheshire • Strategic Regional Sites at Omega (Warrington), Basford, Chester Business Park and Alderley Park (Macclesfield) • economic growth for Crewe and Warrington

North West Utilities Infrastructure Study - Final Report â&#x20AC;˘ additional housing growth as part of the West Cheshire (Vale Royal, Chester, Ellesmere Port and Neston) and Mid-Mersey (Warrington) Growth Point proposals

3.6

The work also highlighted that development planned for the region over the coming

years is at rates which are significantly higher than in previous years, emphasising the importance of utilities infrastructure planning and delivery being aligned with these strategic growth ambitions. At a more local level it was highlighted that there is a need for utilities providers to be effectively engaged in the LDF process so that the provision of utilities infrastructure is given a key focus in the planning of new development.

The Utilities Market Place 3.7

The break-up of former public sector utilities monopolies in the UK was undertaken in

order to open up the market to private sector competition to drive better service provision and lower prices for consumers. The framework put in place to regulate these new markets is extensive, complicated and bespoke to each individual utility. The need for private sector interests to contribute towards the network infrastructure for each utility is enshrined in each respective regulatory framework. It is important to understand the regulatory framework for each utility in order to better understand the issues at hand, and better engage with and influence utilities companies in the future. Key points include:-

Electricity 3.8

The electricity industry comprises generation, transmission, distribution and supply

companies. The industry is regulated by Ofgem, whose primary duty is to protect the interests of consumers, where possible by promoting competition (Ofgem is also the regulator of the UK's gas industry). In order to protect the interests of existing and future customers Ofgem agrees price controls with Distribution Network Operators (DNOs) covering a 5-year period, which also determine their investment plans and programme for that period. 3.9

The North West has two separate electricity distribution networks which serve

designated areas of the region. Two licensed DNOs - SP Manweb4 and Electricity North West (ENW)5 - are responsible for each of these networks.

The region also has four

independent network operators (iDNOs) and a number of independent connection providers (ICPs). The two DNO network's have very different architectures - that operated by ENWs being the 'standard' architecture used by almost all other electricity DNOs in the UK, but that operated by SP Manweb being unique. One of the key consequences of this difference is 4

SP Manweb is part of ScottishPower plc, which was acquired in 2007 by the Iberdrola SA group of

companies. 'SP Manweb' is the operating name for the company which holds the DNO licence for the former MANWEB area, covering parts of Cheshire, Merseyside and North Wales 5

ENW were formerly known as 'United Utilities - Electricity'

North West Utilities Infrastructure Study - Final Report

that whilst the SP Manweb network was designed with the intention of making it more stable and secure, it has significantly higher costs of maintenance, management and operation than more 'traditional' networks. 3.10

Costs of electricity-related works associated with development fall into three main

categories:- infrastructure investment, reinforcement and connections. There are a variety of ways by which these can be procured, but some works are deemed by statute and/or licence 'non-contestable' ie. not open to competition and can only be carried out by the incumbent DNO. Where works are 'contestable' there are a number of potential procurement routes, including using iDNOs and licensed independent connection providers (ICPs). It is important to note that where a DNO is undertaking works, costs often have to be paid upfront in advance of the works being carried out. In certain instances these payments are nonrefundable, for example if reserved electricity capacity is not taken up within 5 years. All utility companies operate to a 'first developer pays' principle ie. the first developer who requests works will be charged for the full investment required, regardless of whether or not they will utilise all of the benefits. 3.11

Once the 5-year price control (and incorporated investment programme) is agreed

there is relatively little flexibility for a DNO to make changes to it unless a robust business case for that specific investment - including evidence of certainty of user demand - is agreed with Ofgem. This is a key issue for DNOs in terms of their ability to respond to local changes in electricity demand. DNOs are not allowed by the terms of their licences to speculatively invest in developing infrastructure - a safeguard put in place in order to ensure that the electricity customers are protected from increased charges associated with investment in infrastructure which ultimately may not be used or needed. In addition physical components within cables degrade if not used ('energised') for a long period after being laid, leading to reduced performance and functionality of that part of the network, and so it is not in either the DNOs or the generic electricity customers interests to invest in infrastructure unless there is a proven demand for it. 3.12

Ofgem require that each DNO updates progress annually on their 5-year

programmes, however the way in they are required to report on these programmes means it is very difficult to establish progress on individual investment projects. 3.13

The current 5-year price control (DCPR4) ends 31 March 2010. DCPR5 commences

1 April 2010. Ofgem and the region's two DNOs are currently in the midst of consultation on their proposals for DCPR5, and have welcomed the involvement of key public sector stakeholders such as NWDA - although the window of opportunity for this is small and will effectively close towards the end of 2008. Ofgem have stated they wish to review a number of areas throughout the DCPR5 consultation process, including DNO customer service and transparency in pricing and delivery, which they feel DNOs currently perform poorly on.

North West Utilities Infrastructure Study - Final Report

3.14

Significant changes to the connections charging procedures and policy used in the

electricity industry have occurred since 2005. The key consequence has been that the costs of delivering investment in the network have increased significantly for the end-customer. Ofgem feel this is a fair reflection of the contribution private interests should be making to the UK's electricity network infrastructure. In addition there have been recent further complicated changes to charging and investment reimbursement procedures: these changes are notably on System Use Charges and Tariff Support Allowances which affect DNOs and third-parties requisitioning works from DNOs (see the full Baseline Report for full details). Neither the regulator nor the DNOs are happy with these changes, and the regulator has stated their intention to re-address these under DCPR5. 3.15

A further area that Ofgem have said they will monitor is the impact of these changes

on connections charges to customers. The regulatory framework has been established to ensure that DNOs only recover reasonable costs of connections. It is not intended that DNOs earn profit from this activity. Income earned by the UK's DNOs from customer connections has increased by 21.7% between 2004-5 and 2005-6; one of the region's DNOs saw a 124% increase in income between 2005-6 and 2006-7. The Study Team have as yet been unable to establish a conclusive reason for this increase, despite consultation with both the DNO involved and Ofgem. Ofgem have stated that they will be scrutinising this area more closely to ensure that the recent changes to the investment pricing & reimbursement system have not inadvertently led to end-consumers being asked to contribute more than they should to network investment & reinforcement. 3.16

In order to comply with their electricity distribution licence, each DNO is required to

meet specific performance requirements and targets. These are monitored by Ofgem, and fines can be levied for poor performance. The report includes a summary of the performance of the region's two DNOs against these standards, which is relatively good compared to other DNOs in other UK regions, although both performed below the UK benchmark on unplanned interruptions to customer service in 2006/7 (which is attributed by both DNOs to significant adverse weather events). 3.17

Although the competitive market for the provision of electricity connections has

existed for over ten years there are still relatively few connections being provided by companies other than the incumbent DNOs or wholly-owned subsidiaries of theirs.

This

situation exists across the UK - in fact the North West performs relatively well compared to other regions in terms of the amount of competition in connections, with approx. 10% of new connections being provided by non-DNOs or companies not affiliated with DNOs. This runs contrary to perceptions of end-customers stated in the course of consultation (see below for more detail).

North West Utilities Infrastructure Study - Final Report

Renewables 3.18

The North West has the third largest renewable energy production of all English

regions, and the highest in terms of wind/wave power generation. The region also has the largest number of sites producing renewable energy, which would seem to suggest that sites in the North West on average are either smaller or generate less energy than renewable energy sites elsewhere in England. Having said this, the region is currently behind schedule to achieve its target of generating 10% of its energy from renewable sources, and may miss this target by some considerable margin. 3.19

Introducing generation of electricity within the existing electricity distribution network

(referred to as 'embedded energy'), as renewables do, poses a number of technical challenges to electricity DNOs. Many of the problems associated with embedded generation can be a particular issue in networks where there is a high degree of 'asset sweating' - ie. running utilities assets at or above 100% capacity - which is known to be prevalent in both of the DNO networks covering the North West. 3.20

Take-up of Registered Power Zones (RPZs) - where DNOs can establish projects to

drive and test technical innovation in embedded generation - has been disappointing, with only 3 in total in the UK, and none currently in the North West, since the scheme was introduced in 2005.

Nuclear Energy 3.21

The North West region has a world-leading nuclear energy sector, with major nuclear

assets and internationally-competitive expertise and skills in a range of related activities, including environmental remediation, engineering and decommissioning. West Cumbria has the highest concentration of nuclear Research & Development (R&D) activities in the UK, with employment in R&D double the regional average. In addition virtually all the support infrastructure for the UK's civil nuclear sector is located in the region, with around 300 companies based in the North West who are part of the nuclear supply chain. 3.22

The region has the potential to make an important contribution to both British and

European energy policy with its unified and leading-edge approach to both energy security and climate change. In recognition of the particular importance of the Cumbrian sub-region key partners, led by NWDA, have developed a masterplan for West Cumbria, entitled "Britainâ&#x20AC;&#x2122;s Energy Coast". This will assist the region to address the unified approach to the twin challenges of energy security and climate change, and ensure the development of a sustainable national economy.

North West Utilities Infrastructure Study - Final Report

Water 3.23

The water industry has many similarities with the electricity market in terms of how it

is structured and regulated, although competition is less developed at present in the water market (having only been introduced in 2003), and the interface with the Environment Agency - notably on water resource management - is unique amongst the individual utilities. The industry in the UK is regulated by OFWAT, whose primary role is very similar to that of Ofgem, namely to protect the interests of consumers and encourage competition. 3.24

United Utilities is the distribution network owner and operator for both potable water

and wastewater in the North West. The majority of the region falls within what is called the 'Integrated Resource Zone', which has a highly interconnected system; there are 3 smaller resource zones covering the north, west and eastern parts of Cumbria which effectively operate as standalone systems. The latter are not connected to the wider Integrated Zone and provide greater challenges in terms of balancing supply and demand. Currently no areas within the North West are 'in deficit' ie. where there is greater demand for potable water than there is available supply (unlike many water resourcing zones in the South, South East and East of England), although the Carlisle Resource Zone is of some concern at present, as it is close to going into deficit (forecast in the next 3-5 years). UU are actively looking at a series of measures to prevent this from happening. 3.25

As in the electricity and gas industries, forward planning and investment is controlled

and regulated via 5-year price control periods and business plans known as 'Asset Management Plans' (AMP). A first stage in agreeing AMPs is for water DNOs to produce a 'Strategic Direction Statement' (SDS), which sets out their forward vision and aspirations over the next 25 years, and which OFWAT must approve. Neither the SDS or the AMP are public documents, and water DNOs are not obliged to consult on them. Since 2007 water DNOs have to produce a draft Statutory Water Resources Management Plan (WRMP) for public consultation, in which they are required to forecast growth and new development, and set out how the company will use its resources to restore and maintain the balance between supply and demand beyond the AMP period and over a forward 25-year period. 3.26

As in the electricity and gas industries, water DNOs have little flexibility to deviate

from the investment programmes set out in their 5-yearly AMPs and are not allowed by the terms of their licences to speculatively invest in developing infrastructure. This is to ensure the customer is protected from increased charges associated with investment in infrastructure which may not be used or needed, and to prevent water quality issues. However this does mean that they are restricted in their ability to respond to new initiatives or sudden changes impacting upon their networks that arise during the AMP. As with the electricity and gas industries, DNOs have to provide OFWAT with a robust business case and provide clear evidence of certainty for schemes they wish to invest in that are not within their approved

North West Utilities Infrastructure Study - Final Report

AMP. Feedback from water DNOs that the level of certainty required from them is much greater than in the electricity industry has led to UU adopting a policy to date that only to respond to infrastructure requests on new schemes that have full planning consent. 3.27

The current pricing control period PR04 ends in 2010. Consultation is underway on

the new AMP for PR09, which will commence in 2010 but will be agreed in 2009.

published their Statutory Water Resources Management Plan in April 2008: the formal consultation period ended 25 June, although UU are willing to discuss this further until earlyautumn. There is therefore relatively limited time remaining for the Agency and other key stakeholders to influence UU's new AMP. 3.28

Under statutory requirements water DNOs cannot refuse to provide a connection for

either potable water or wastewater for a residential scheme once planning consent has been granted, nor can they put any restrictions on the usage of either, regardless of the potential impacts upon local supplies or infrastructure. Water DNOs are not obliged to provide similar connections for non-residential uses. Water DNOs are entitled to recover reasonable costs for them carrying out network reinforcement required as a result of new infrastructure being developed, but have to justify the scale and extent of works. It is important that the Agency and key stakeholders scrutinise costs to ensure that this requirement is being complied with, and to raise with the utility company involved any concerns they may have that it isn't. 3.29

There are three potential options in terms of procurement for delivering new

distribution network assets: two using the incumbent DNO, and a further 'Self Lay' option using a WIRS-approved contractor. For the Self Lay' option water DNOs are entitled to recover reasonable costs incurred in overseeing this process and making the final new mains connection.

On connections only the DNO undertake new connections to existing

infrastructure in an existing street due to risks of contamination and/or leakage (new connections on new infrastructure not on an existing street can be carried out by either the DNO or a WIRS-approved Independent Connections Provider (ICP)).

It is vital that the

Agency and other key stakeholders in the public and private sector fully understand these different delivery options 3.30

Inset appointments are seen by OFWAT as an important means of introducing

competition to the water market.

This is when another water supplier other than the

incumbent DNO applies to OFWAT to become the sole supplier of water for one or more customers in a specific geographical area. These appointments can only be granted in 3 specific circumstances.

To date these have not been widely used due to considerable

potential technical and legal issues, however OFWAT is keen to promote them. 3 Inset applications are currently under consideration on the North West region, none of which at present have the support of UU.

North West Utilities Infrastructure Study - Final Report

3.31

UUs performance on long-term stewardship of its assets & environmental

performance is strong and currently the best of all DNOs in England, as assessed by OFWAT. However sewer flooding in particular is affecting is overall performance, as are to a lesser extent levels of customer service and leakages.

Gas 3.32

Up to 2004 the UK was a net exporter of natural gas; since then the UK has been a

net importer. The UK gas industry is organised into 4 Gas Distribution Networks (GDNs), which has 12 Local Distribution Zones (LDZs). In addition there are a number of smaller networks owned and operated by licensed Independent Gas Transporters (IGTs), mostly for residential developments. 3.33

The National Grid is the distribution network owner covering the majority of the North

West, although some small parts of Cumbria fall under the remit of Northern Gas. Similar to electricity, the UK gas industry is regulated by Ofgem to protect customers from monopoly via 5-year price control periods, incorporating 5-year investment plans.

A new price control

period commenced 1 April 2008. 3.34

As with electricity, there are three main categories of costs associated with

development:- infrastructure investment, reinforcement and connections, and a variety of means through which these can be procured, including using the incumbent DNO; an independent distribution network operator; or an independent connection provider. As with the electricity industry, certain types of works are deemed to be non-contestable, and the gas industry uses the 'first developer pays' principle on downstream network costs ie. specific Reinforcement costs associated with works up to the Connection Charging Point (see the Glossary for a full explanation of these terms). 3.35

Competition in gas connections was introduced in 1995, though unlike the electricity

market, competition has flourished, with over half now being performed by iGTs.

Telecomms 3.36

The main players in the telecommunications market in the North West are BT, Thus,

Virgin Media and CLEO. In terms of issues, there are few pressing problems thanks to significant investment by key private sector players (eg. BT and Virgin Media), and the public sector including the NWDA. However the North West still appears to be behind some other European regions in terms of broadband provision, notably in some rural communities; there are concerns that unless there is rapid investment in the next generation of networks (4GN) the gap between the North West and other European regions - which has been narrowed may open up again, with rural areas again at most risk of being disadvantaged. In Greater Manchester, there is a fear that lower cost high speed telecommunications in European

North West Utilities Infrastructure Study - Final Report

locations such as Paris and Amsterdam may impact upon the locational decisions of knowledge based industries.

Review of Other Similar Research 3.37

There has been a limited amount of similar research relating to the provision of

utilities infrastructure and the development process, including:• Northern City-Regions and Critical Infrastructure - Centre for Urban and Regional Futures, 2007 for the Northern Way; and • Utilities Infrastructure Study - Vantagepoint and English Partnerships, 2002

3.38

The studies have highlighted a series of concerns and issues relating to the provision

of utilities and the development process, in particular the need for a more strategic approach to be adopted. One study highlighted the Manchester City-Region as a particular area of concern within the North West in terms of electricity and water. A key conclusion is that many of the issues highlighted within these reports are still in force today, suggesting that the interventions proposed to address these issues have either not worked or haven’t been implemented.

Current Utilities Infrastructure Provision 3.39

In order to provide a starting point from which potential utilities capacity issues can be

identified all North West DNOs were asked to provide information on current capacity for each utility in the North West at regional level down to top sub-regional level only. The Study Team were wholly reliant upon the cooperation of each individual utility company to provide the information for their respective capacities, and in a format that would enable the Study Team to make an assessment of potential issues for areas already identified as the focus for major development (as outlined in Chapter 3). 3.40

Unfortunately information was not provided by all DNOs, and none of the information

provided was in a format in which the Study Team could establish the precise location of potential issues. The Study Team have therefore endeavoured to make 'best guesses' and the following information should be read with this in mind. The main findings were:Electricity 3.41

Information provided by the ENW and SP Manweb provided a useful overview of the

utilisation and the spare capacity of their main HV substations at 132kV and 33kV. Additional information provided by SP Manweb gave an indication of the investment they would like to make in the 2010-2015 price control period to address current capacity issues. In summary

North West Utilities Infrastructure Study - Final Report

there appear to be particularly high utilisation rates in the ENW network for substations in the following areas at either Grid Supply or Primary substation level:• parts of Central and Western Cumbria (132kV) and a small part of South-East Cumbria (33kV) • parts of the Fylde Coast (both 132kV and 33kV) • the Lancaster area (33kV only) • parts of Greater Manchester (both 132kV and 33kV) • the Warrington area (both 132kV and 33kV) • part of North Cheshire (132kV only) • South and Central Lancashire (33kV only)

3.42

As set out above ENW have unfortunately not provided the information in a format in

which the Study Team can easily identify the precise locations where these high utilisation rates are occurring. However it does appear likely that there may be some crossover of these areas with major development proposals as follows:• Greater Manchester - Growth Point and HMR areas, and Strategic Regional Sites at Barton, Carrington and Central Park • Fylde Coast and Lancaster area - Growth Point and HMR areas, and Strategic Regional Site at Bailrigg • Central Cumbria and parts of West and South Cumbria - Growth Point, and Strategic regional sites at Kingmoor and Westlakes (Whitehaven) • Warrington area - Growth Point area and Strategic Regional site at Omega South • South and Central Lancashire - Growth Point and Strategic Regional Sites at ROF Cuerden and Chorley

3.43

It is not clear from the data provided how frequently or for how long these utilisation

rates are in effect. Where utilisation is shown to be greater than 100% it might be that ENW have decided not to reinforce the network to increase capacity since if the amount of time the substation is operating at that level is limited, and has a limited impact. 3.44

The above also need to be caveated in that it is not clear from the data provided by

ENW what the time period these utilisation rates apply to. Different types of consumers have different load profiles over a 24-hour period, and so their impact on the network would be different - for example from Monday-Friday residential load profile peaks in the morning and evening, whereas commercial loads rise during office hours; at the weekend residential loads increase and are more evenly spread throughout the day, whereas commercial loads drop considerably. Therefore the timing of these capacity measurements could have a significant influence upon the information generated, and the potential inferences.

North West Utilities Infrastructure Study - Final Report

3.45

In the SP Manweb area the information provided seems to suggest there are no

capacity issues in the North West region. This is somewhat at odds with anecdotal feedback that the Study team have received both formally and informally, where reports of parts of the network operating close or at capacity in the Merseyside area were frequent. Gas 3.46

In the absence of any information on capacity being provided by National Grid, the

Study Team were unable at this stage to make any analysis of the North West network's ability to respond to future planned growth. Potable Water 3.47

The responsibility of water DNOs lie with ensuring adequate capacity for the

treatment of potable and wastewater, adequacy of the trunk distribution networks and water resources.

In general UU consider that the potable water trunk distribution network has

adequate capacity, subject to some shortfalls in isolated areas. At present no areas within the North West are 'in deficit' ie. where there is greater demand for potable water than there is available supply. This is a positive for the region, as there are many water resourcing zones in the South, South East and East of England have experiences periods of being in deficit or are forecast to be in deficit within the first quarter of this century. 3.48

The key area of concern in the North West for UU is the West Cumbria and Carlisle

Resource Zones, both of which were quite sensitive to any major changes in supply and demand, with the latter close to going into deficit in the next 3-5 years: UU are actively working on implementing water management plans to prevent this from happening. The potential implications on planned major developments is as follows:â&#x20AC;˘ West Cumbria and Carlisle - Growth Point area and Strategic Regional Site at Westlakes (Whitehaven)

3.49

At this level it is not the responsibility of the water company to provide network

reinforcement to accommodate increased demand from new development: under the current statutory and regulatory framework any network reinforcement and new distribution infrastructure has to be funded by developers, and cannot be recovered through increased customer charges. Wastewater 3.50

UU have limitations on wastewater treatment capacity in several areas. In addition

much of the sewerage system is of Victorian vintage with severe capacity limitations, these are exacerbated by liabilities on environmental improvements and restrictions on the network.

North West Utilities Infrastructure Study - Final Report

3.51

The areas of key concern appear to be parts of the Fylde Coast in terms of

wastewater treatment to cope with current and future demand, and south & west Manchester to cope with any further growth in demand. In addition there are issues in Manchester with the Victorian-era combined wastewater/stormwater system. Some localised issues also arise in parts of Lancashire, namely the Ribble Valley and the Preston area. The potential impact upon major development proposals is as follows:• Greater Manchester - Growth Point and HMR areas, and Strategic Regional Sites at Barton, Carrington and Davenport Green • Fylde Coast - Growth Point and HMR areas • Central Lancashire - Growth Point area and Strategic Regional Sites at ROF Chorley and Cuerden

3.52

UU's investment focus is in continuing to bring these older systems up to modern

standards.

As with potable water, under the current statutory and regulatory framework

wastewater capacity for new development must be funded by developers and not funded via increased customer changes. Telecomms 3.53

There are no particular pressing geographic issues in terms of current capacity,

although there is a need to ensure that future NGN roll-out is progressed quickly and does not disadvantage any of the North West sub-regions as compared to the others in terms of access or capacity.

Stakeholder Consultation 3.54

This Chapter summarises the experiences and views of over 60 consultees from a

variety of organisations including local authorities, sub-regional partnerships, utilities companies, regulators, private sector companies and key facilitators in the region and the UK. As with all other stakeholder comments, the comments summarised within the report are those as reported by the consultees, and do not necessarily reflect the views of the Study Team or the NWDA. Consultation with sub-regional partners on capacity issues for each utility 3.55

Key feedback included:• Electricity capacity in Merseyside, central Manchester and parts of Lancashire, notably West Lancashire, the Fylde Coast and Lancaster areas • Electricity reliability/consistency in Merseyside and parts of west & central Lancashire

North West Utilities Infrastructure Study - Final Report • Potable water supply in parts of central and western Cheshire and Greater Manchester • Wastewater capacity in parts of central Cheshire, Greater Manchester and parts of central Lancashire • Mains gas supply in parts of Cumbria • Telecomms ADSL 'last mile' connectivity in parts of Cumbria, Lancashire and Cheshire; and • Telecomms SSDL/NGN roll-out across the region Key national and non-North West agencies 3.56

Consultation was undertaken with national agencies and other agencies operating

outside of the North West region in order to provide a benchmark against the North West situation, and to establish 'best practice' or 'lessons learned' that the region could benefit from. Key feedback included:• there were differing views as to whose role it was to scrutinise and/or challenge utilities-related issues and associated costs on schemes. Some consultees felt it was not within their remit, and some felt that they had neither the resources nor the specialist skills to do this. Interestingly, the closer staff were to the operational 'frontline' the greater the level of concern expressed at the potential lack of scrutiny and value-for money for public sector investment in utilities infrastructure • all consultees reported that costs of providing utilities infrastructure had risen significantly over the past 5-8 years, and were far in excess of inflation or construction-specific inflation; and that they faced increasing difficulties in obtaining and finalising cost estimates. As a result most had increased their use of specialist consultants to assist due to either the lack of expertise or the lack of capacity n-house, and difficulties in recruiting staff with the required skills • operational

consultees

reported

increased

delays

delivering

utilities

infrastructure, right from negotiation through to the on-the-ground delivery. This caused problems for those who needed a level of cost estimating certainty in order to gain public sector funding approvals, and may have deterred use of special investment programmes (SIPs) established specifically to deliver utilities infrastructure • most consultees expressed concern about a lack of transparency on cost estimating • some felt that the current regulated system for reserving capacity was felt good use of public sector resources

3.57

In terms of potential 'best practice' and 'lessons learned' the following comments were

made:-

North West Utilities Infrastructure Study - Final Report • there was widespread support in national agencies for a regional strategic approach to dealing with utilities issues • a view that upfront liaison with utilities companies leads to better solutions, and that responses were better if the RDA leads • some consultees felt that the option of a joint-venture (JV) arrangement should have been explored with the utilities companies involved in order to share risk & reward • the use of OJEU process to ensure best value in procurement and compliance with State Aid • potential for regional and sub-regional utilities 'super-corridors' to be developed • potential to use the national rail network as a connection point into the National Grid • the need to improve skills in assessing future utilities load requirements • the need to invest in 'minimum' utilities solutions or light energy networks (eg. area-wide combined heat & power systems), which could take advantage of existing underused industrial capacity or processes

Consultation with end-users in the North West 3.58

The views of end-consumer stakeholders were sought on their perception of the key

utilities-related issues affecting them and the region. Common generic responses were:• a limited understanding of how the respective roles and responsibilities operating within the utilities market and regulatory system by the public and the private sector; and the relatively limited understanding utilities companies have of the framework for economic growth & regeneration • the disconnect between the planning and investment systems that govern utilities investment, and planning and development systems that govern economic development and regeneration • the constraints and limited flexibility of the current regulatory framework for utilities companies, in particular to respond to the economic development and regeneration agenda outside of their regulated investment plans and pricing control periods, and the ability to respond to specific local needs • the ability, and/or willingness, of utilities regulators to properly regulate and a sense that the interests of non-domestic consumers were not a priority for them • the significant costs of delivering the necessary infrastructure and/or additional infrastructure capacity to enable planned economic growth • poor delivery and customer service experiences by utilities DNOs, combined with a sense of a lack of transparency, and the consequential negative impacts that had upon delivery of key economic growth & regeneration initiatives

North West Utilities Infrastructure Study - Final Report • issues with staffing within DNOs, including skills levels, consistency of advice, retention and turnover; and • confusion on State Aid as applied to infrastructure projects Issues felt to be specific to the North West by end-users 3.59

Issues which were identified as unique and/or particularly acute to the North West by

consultees include: • the relatively advanced age of utilities infrastructure in the North West, as compared to some other UK regions • the existence of 2 separate distribution networks in the North West, operated by 2 different DNOs • the unique network architecture of the former MANWEB area and the associated above-norm costs of maintenance, repair and reinforcement • the extensive degree of 'asset sweating' in the region, and the effects this might have on an aged infrastructure • perceived limited 'real' competition in the delivery of major utilities infrastructure; and • the potential issue looming for the North West on the Growth Point agenda, associated with the generic issues highlighted above about the current regulatory framework and its disconnect from the statutory planning & development process and the difficulties utilities DNOs have in responding to local need outside of their regulated investment plans.

Consultation with regulators 3.60

The primary role of the respective regulators for all utilities is to ensure that the

regulatory framework is being adhered to and through this, protect the utility consumer and their interests. The principle of the private sector contributing towards the development of the necessary infrastructure required to facilitate their activities is inherent within the current regulatory framework of all the individual utilities. The regulators were not set up with a role to support economic development, although they acknowledged that there was a considerable crossover, with many of their activities indirectly impacting upon economic development. 3.61

On the whole the regulators all felt that their respective regulatory frameworks were

working well and had achieved many of their objectives, notably in protecting consumers' interests and delivering the best possible prices for end-consumers whilst facilitating the investment necessary in the country's infrastructure to deal with current and planned demand. All of the regulators consulted felt that there was sufficient interrogation of DNO business plans to ensure they were in line with accepted (ie. adopted) growth assumptions. However 38

North West Utilities Infrastructure Study - Final Report

two of the three regulators acknowledged there were areas within the respective current regulatory frameworks for each utility that currently weren't working as had been intended and could be improved, with those with pending price controls intending to address these issues through that process. 3.62

One regulator felt that their current remit did mean there were at times gaps with

other areas of economic policy and strategy, and was actively trying to persuade DNOs to address this themselves, with some difficulty. Another regulator held a very different view, in that so long as DNOs complied with their statutory and licence conditions they had not remit to compel companies to do anything beyond that. 3.63

Specific items highlighted were:• one of the regulators in particular recognised the disconnect between the statutory planning process and the utility regulatory systems, and the potential issues and lost opportunities arising as a result.

In addition they commented that this

situation was probably not helped by the apparent occasional discordance between central government departments on such issues • one of the regulators felt that to date DNOs haven’t been good at properly engaging with their customer base in developing future investment plans. Another regulator felt that so long as DNOs could prove they had met their licence conditions that was sufficient • significant changes in consumer representation in the gas and electricity markets are shortly to be put in place. Energywatch - the existing independent gas and electricity watchdog - will close on 1 October 2008, and be replaced by a new complaint handling procedure overseen by a newly-constituted national consumer council. It was expected this would improve DNOs' attitudes towards customer complaint resolution, notably on accountability and delivery issues, as DNOs would have to take ownership of disputes themselves. However it is also thought that this will lead to an inevitable dilution in focus on business consumers, as opposed to domestic consumers • two of the regulators were aware that some DNOs were interested in developing ‘special investment zones’ or 'areas'. Neither felt these were necessary as there were sufficient flexibilities within the regulatory framework. One commented that DNOs didn't use the inbuilt flexibilities available to them as they were unwilling to invest the necessary time and energy necessary • at least one of the regulators had previously tried to persuade DNOs to work with multiple developers, rather than using the ‘first developer pays’ principle, but had had difficulty in achieving this within the current regulatory framework

North West Utilities Infrastructure Study - Final Report • the debate over the definition of what constituted a ‘zero carbon’ dwelling in order to achieve Level 6 of the Code For Sustainable Housing is also an ongoing issue for Ofgem

Consultation with utilities companies 3.64

As with end-customers, one of the key themes emerging from the consultations with

utilities companies was their admitted lack of understanding of how the public sector was structured and operated in relation to economic development, planning and regeneration. Utilities companies stated they were keen to be involved in policy & strategy development, but after a decade of significant pressures to reduce their cost base, including staffing levels, plus increased demand on their services (as illustrated in the increase for Section 16 quotations for works - see Glossary for definition) their shared perception is that the volume of policies, strategies and growth plans has increased significantly. All stated that they were struggling to understand where their efforts should be prioritised when responding to such documents. All but one DNO had little or no awareness of the LDF process and PPS12. 3.65

Another common theme was the reliance upon relatively limited and/or relatively old

information contained within adopted Unitary Development Plans (UDPs) to account for future development. Some DNOs used a combination of UDP information plus a 'straight line' 3-4% growth rate on current network loads to calculate future likely demand, with one augmenting this with details of schemes with full planning consent. Only one DNO was using the draft RSS figures for housing growth as a basis for the strategic regional planning, supplemented with use of a commercially-available economic forecasting model - for non-residential development. Most DNOs felt their terms of their licences would not allow them to use data that wasn't 'approved' ie. adopted. 3.66

Other key points included:• at least 2 DNOs were concerned that the current regulatory framework does not allow DNOs to invest speculatively without a confirmed business case being in place, and has little in-built flexibility to respond to regionally-specific issues or features.

One was keen to develop the case to the regulator for 'strategic

investment zones' as an integral component of the new pricing control period negotiations, and were keen to gain the support of key agencies such as NWDA to take these negotiations forward. • Issues around the age of the existing asset base in the North West varied according to utility. Some had issues with significant investment being required to either improve capacity or improve network performance; others had benefited from original infrastructure having been oversized.

North West Utilities Infrastructure Study - Final Report • some markets had been subject to significant changes in their regulatory environment, notably electricity. DNOs felt the impact had been to increase their share of the costs of asset investment (not a view shared by end-users of the regulator). • the electricity market had been significantly adversely affected by the high price of copper over the past 5 years. Not only had this led to a significant increase in costs, but also lead-in times. DNOs stated that this had had a direct knock-on effect onto end-consumer charges and delivery • the impact of climate change varied between the respective utilities, with varying degrees of concern. Most companies reported that they had experienced times of severe difficulties as a result of exceptional weather events in the past 2 years, although conceded that the experiences of DNOs in other UK regions were probably much worse • some expressed issues with balancing a desire to be more open and transparent with the need to protect themselves from making too much commercially-sensitive information available to competitors and suppliers • for some frequent changes in ownership, control and management over the past 10 years were recognised to have caused confusion, which they conceded may have affected levels of customer service • all DNOs reported skills shortages and issues in terms of high levels of turnover, and difficulties in recruiting and retaining suitably experienced and qualified staff.

Other key issues 3.67

Other key issues identified by consultees but not mentioned elsewhere included:• potential competitive disadvantage for the SP Manweb area of the North West, as a result of the considerably higher costs for infrastructure works and long lead-in times (and consequent lack of ability to respond quickly to changing electricity demand or use patterns) for key parts as a result of its unique network architecture. • particular inconsistency in the cost estimating process in all utilities.

Quotes

received from DNOs could vary quite widely over time, with the common pattern that costs would often reduce significantly from the opening cost estimate provided by the DNO following negotiations with specialist advisers.

This added to

suspicions around transparency and the proper processes being applied. DNOs attribute this to the varying amount and quality of information provided by developers, which they need to assess the nature and quantum of works an individual development project requires

North West Utilities Infrastructure Study - Final Report • particular lack of certainty and accountability on DNO delivery, quoted as a particular issue in the SP Manweb network area. The utilities fared differently on this, with electricity getting by far the most negative reports, followed by water, gas then telecomms. This was quoted by end-users as causing significant problems for the public sector in terms of procurement and capital spend programmes; and for the private sector in terms of cashflows, investor interests & disposals; and considerable additional costs to due to abortive works, knock-on impacts on the remaining construction & lettings programmes, etc. • capacity issues reported by end-customers did not fully match up potential capacity issues suggested in the information provided by utilities companies. It was not clear why this was, but may be a reflection of the differing interpretations of what constituted a priority issue by each - with end-consumers possibly being more locally-focused and DNOs being more strategically/network-wide focused • end-consumers identifying particularly helpful key individuals within each utility company, whilst struggling to understand or extract information from DNOs on their company structures • at least three private sector consultees rated their experiences with North West DNOs poorly against their experiences in other regions with other DNOs, notably in electricity in terms of experiencing fewer problems and delays; costs being more reasonable and transparent; and better customer service • perceived ineffective regulation by end-consumers, and that as a result utilities companies were not being stopped from taking advantage of their effective monopoly positions. Interestingly this was a view held widely amongst consultees with no direct experience of liaising with any of the regulators and could not substantiate their views with anything other than secondary anecdotal experience of colleagues. This suggests that there is currently a general lack of trust in the current utilities framework, perhaps borne out of a combination of a lack of understanding of how the utilities market works and less-than-positive experiences on the ground being reported by peers and colleagues. • many comments from end-users that the regulators were more concerned with domestic users, and did not provide sufficient support to non-domestic users. Such comments were made by both those who were more knowledgeable and direct experience with the utilities industry and the regulators, and those who had lesser knowledge and experience. • calls for support for development and roll-out of renewables and newer technologies, including environmental technologies and NGN telecommunications infrastructure

North West Utilities Infrastructure Study - Final Report

Consultees views on potential ways forward 3.68

As a key element of the consultations, participants were asked how they felt key

stakeholders may be able to support them in planning, developing and influencing the utilities infrastructure required to facilitate planned economic growth and to achieve regeneration objectives in the region. This section sets out the responses received, which were broadly classified as being either Strategic or Operational; with a sub-classification of Influencing or Enabling:• Strategic / Influencing - suggestions included lobbying central government and the respective utilities regulators to set out the case for the North West; acting as champion for the region's concentration of utilities companies; lobbying for a change within the current utilities regulatory framework to enable a better connectivity in the utilities companies’ investment planning process and statutory planning & development process; lobbying for better connectivity within central government on utilities issues; commissioning further research on the potential economic impact of utilities issues in the region (including identification of potential lost opportunities for DNOs); and more formal and regular liaison with the respective utilities regulators. • Strategic / Enabling - suggestions included establishing a regional utilities network where local authorities and other public sector agencies could access to discuss strategy and policy; establishing a Utilities Observatory; establishing a senior-level Utilities Working Group; encouraging the establishment of a joint protocol with the region's DNOs and possibly regulators setting out clearly methods of operating, pricing, delivery, etc, for the entire region; exploring the potential of the new Community Infrastructure Levy (CIL) to resolve utilities issues, either by individual authority area or at a sub-regional level; and working with key agencies (eg. the emerging Housing and Communities Agency) on utilities issues. • Operational / Influencing - suggestions included supporting renewables technology development; encouraging collaboration amongst the region's utilities companies in new energy and waste technologies and processes; acting as 'broker' to facilitate issue resolution on major strategic projects; encouraging Business Link to cascade intelligence on utilities to businesses in the region; lobbying for early rollout of SSDL; investigating and potentially trialling new techniques on risk/cost/profit-sharing JVs with utility companies • Operational - Enabling - suggestions included providing details of the structure of utilities companies operating in the North West and key contacts within each one; providing a 'demystification' programme of training to the public sector; funding

North West Utilities Infrastructure Study - Final Report

research to identify future utilities capacities at a detailed sub-regional level; developing a strategic forward funding programme for utilities investment across the North West; being more strategic in using funding for infrastructure; championing best practice existing in the region and elsewhere; supporting the development and retention of specialist skills required for the utilities industries; funding 'last mile' ASDL connectivity and funding SSDL/next-generation (NGN) telecommunications roll-out.

Case Studies 3.69

Six development case studies, and the key utilities infrastructure challenges facing

each, were examined.

Some of these case studies were projects which have been

completed, some are for projects which are partially-complete or under development currently.

A mixture of locations, site sizes and development types & quantums were

selected as case studies in order to give a full flavour of the potential impact of utilities in different contexts. 3.70

It was found that many of the issues arising from these studies reflect the

experiences and views expressed via the wider consultation process including:• the costs, both in terms of the quantum and transparency of estimates notably on non-contestable works (ie. works not open to competition under the statutory or regulatory framework) • difficulties in achieving value for money and the best solution for the customer • issues of engagement with DNOs to develop plans and proposals • a lack of clarity re: DNO structures and responsibilities in terms of authority and decision-making • inconsistency in advice from DNOs, notably technical advice and guidance on regulatory requirements; and • the approach to risk by DNOs

Key Messages from consultation 3.71

In the North West there are still concerns that the rate of economic growth in the

region will lead to issues relating to utilities supply and capacity. The proactive sweating of assets may be having less acceptable impacts indirectly on the customer. A total of eight key messages are highlighted as follows:• a number of potential strategic opportunities for the region to develop a competitive advantage, including its existing and potential increased strengths in the nuclear and renewable energies and the stated willingness of many of the

North West Utilities Infrastructure Study - Final Report

region's DNOs to work more closely with key public sector agencies to more closely align respective planning and investment activities and strategies • a lack of understanding on how utilities markets are structured, regulated and operated by the public sector; and a lack of understanding by utilities companies on how planning and development is taken forward • specific issues with supply and capacity within parts of the North West, notably in electricity, potable water and wastewater • the delays and additional costs associated with the delivery of the required utilities infrastructure on major projects within the North West, and the consequential programme and cost implications this is having (and anecdotal but as-yetunproven impacts upon retention and/or attraction of investment and business in the region) • the fact that many of the same issues in respect of utilities have been identified by previous research over the past 5 years yet still remain an issue, reflecting a lack of progress in terms of resolving identified problems • the pressing need for a joined-up approach to utilities planning and investment in the region to encourage a more localised focus to strategic utilities planning • the need for more focused and responsive customer service by utilities companies

North West Utilities Infrastructure Study - Final Report

KEY FINDINGS

4.1

This chapter sets out the key findings of the Study.

4.2

It is clear that the provision of utilities infrastructure and their capacity remains a key

concern for both the public and the private sector, in terms of their endeavours to deliver longer-term economic development and regeneration objectives. Whilst current capacities as a whole across the region are relatively good - notably if compared to other English regions there are some areas of concern which need to be addressed to ensure that the current planned future development and economic growth in the region can be delivered.

Low level of understanding of the utilities' industries 4.3

There is a significant lack of understanding of how the utilities markets and the major

companies responsible for utilities infrastructure in the North West are structured, regulated and operated amongst both the public and the private sector in the region. This lack of understanding is of significant concern for a number of reasons:â&#x20AC;˘ the main utilities companies in the North West are important to the region - both as major employers (which combined is in excess of 10,000 employees), and also strategically as major players and influencers in the energy market, which is one of the region's sectoral strengths.

Key public sector agencies need to fully

understand the way these businesses operate in order to exploit synergies on areas such as renewable energy, and ensure that other key stakeholders such as central government and the regulators can be effectively influenced â&#x20AC;˘ it is highly likely that the lack of understanding of the utilities markets and in particular the differing options for open competitive procurement that exists in each of the individual utilities markets is preventing key regional stakeholders from using this to ensure that best value-for-money is being secured for public sector investment, and that the best possible solution in terms of delivery and timescales is being pursued â&#x20AC;˘ it is highly likely to be having an impact upon the planning and programming, and ultimately the delivery, of major development projects. There are a number of processes and procedures that control and regulate the respective utilities markets. A lack of understanding of these may mean that insufficient time and resource is built-in upfront at the project planning stage to deal with all of these, and unrealistic delivery timescales may be being set for the delivery of those projects. This has a further knock-on consequence for projects where the public

North West Utilities Infrastructure Study - Final Report

sector is involved as delivery agent and/or part-funder, as it is then difficult to successfully operate within the rigorous financial procurement and expenditure regimes that operate within the public sector. The relatively poor take-up of the Special Investment Programme funding allocated specifically for utilities-related works in Merseyside in 2007/8 is a good example of this. â&#x20AC;˘ associated with the above, the lack of understanding of the various procurement options for obtaining costs estimates and delivering utilities works may inadvertently be contributing to issues around procurement and State Aid, where there is a need to demonstrate that resources in utilities infrastructure are being properly and efficiently defrayed â&#x20AC;˘ it is undoubtedly fuelling a considerable degree of frustration and current negative perceptions of both utilities companies and the regulators from the end-consumer perspective. Whilst it is apparent that utilities companies are not always entirely blameless in terms of the transparency of their procedures and activities - a view shared by some of the regulators - it is clear from consultations that the level of distrust is not a healthy situation for the region. There is a need to reverse this to ensure that there is a constructive two-way dialogue between key stakeholders that works in synergy for the benefit of 'North West plc'

4.4

This lack of understanding may be being compounded by the fact that the North West

is unique amongst the English regions in having two electricity distribution networks, which operate in distinct parts of the region, and which are owned and operated by two different Distribution Network Operators (DNOs) companies - United Utilities and SP Manweb. As already demonstrated customers have very limited knowledge and understanding of the utilities market and how it operates - there is a further layer of potential confusion, and for agencies & organisations operating in both the former MANWEB and NORWEB areas there are two different sets of organisations structures and operational procedures to deal with. 4.5

Many public sector consultees recognised that their limited level of understanding

should be of concern, and whilst the vast majority expressed a desire to improve this they did not know how to go about it.

Some had tried to engage with DNOs and other utilities

companies in the region to try to improve their understanding, yet had struggled to do so in a consistent way across each of the utilities, with some being more receptive and engaged than others.

Trying to engage utilities companies in the new Local Development Framework

process, even when bespoke structures were put in place to facilitate this engagement, was a particular point of concern for many public sector consultees - especially given the requirements of recent guidance such as PPS12. Regulatory consultees felt that they had worked hard to persuade utilities companies to engage better with partners, notably on

North West Utilities Infrastructure Study - Final Report

investment planning, but accepted this hadn't happened to the level they had hoped, and were proposing changes to the new pricing control period which would require utilities companies to demonstrate that they had more widely engaged on their investment planning process.

The disconnect between the planning process for utilities and the development planning process 4.6

At present the investment planning process for DNOs is tied into the 5-yearly Pricing

Control Periods (PCPs), with consultation on these 5-year forward investment plans happening approx. 18 months-2 years ahead of this Pricing Control Period coming into force. Both water and electricity DNOs are currently at varying stages of their consultation process on their new pricing control periods which will start in 2010 and run to 2015 (referred to as 'PRO9' and 'DCPR5' respectively). 4.7

This investment planning process is completely separate to the strategic planning

process for economic development and regeneration, and has historically not aligned with the timescales for the preparation of the Regional Economic Strategy, the Regional Spatial Strategy and Sub-Regional Action Plans, nor more recent initiatives such as Housing Growth Points and EcoTowns. Concern was expressed by many consultees - both public and private - at the lack of alignment of these, given the fundamental reliance one has upon the other, and the need to ensure there was better two-way understanding, engagement and shared investment planning in future. Particular concerns were raised with respect to the new Local Development Framework planning process, which has as one of its core tests the need to be able to demonstrate deliverability of strategic planning proposals. However many consultees added that they found it difficult to envisage how this improved relationship could be achieved in reality given the lack of capacity, resource and - in some cases - the specialist skills and knowledge in almost all key partners. 4.8

These concerns were shared by some of the utilities regulators, who recognised the

potential shortcomings of the current regulatory framework, but felt constrained by both their existing remit and resources; and, to some degree, a level of discordance within central government departments as to how the two processes should be better joined-up. 4.9

Some local authorities in the North West had tried hard to involve DNOs and other

utilities companies in the region in the LDF consultation and development process, yet had met with a poor response, except from the region's water DNO. This was the case even when bespoke structures were put in place to facilitate this engagement. More concerning was the fact that some local authorities - when asked - appeared to have no strategy or tactics as yet to engage or consult with utilities DNOs on their emerging LDFs, despite the relatively short timescales remaining to undertake such consultation.

North West Utilities Infrastructure Study - Final Report

4.10

In addition the disconnection between the investment planning process for utilities

and the investment and development processes within the public sector, combined with the low level of understanding by the public sector of how the utilities industries operate, had probably added to the perception by customers that DNOs were poor at strategic planning. Ironically some - though not all - of the region's DNOs stated that they wanted to be more involved in the strategic planning process in economic development so that they could better align their investment planning process, but stated that they were rarely approached. One of the regulators expressed their frustration that utilities companies did not engage better with local authorities and other key stakeholders within their areas of operation, and did intend to propose changes to the new pricing control system to try to ensure that this would happen in future.

Tensions between the regulatory framework and economic growth requirements 4.11

In addition to the above disconnect at the strategic planning level, the Study has

revealed that there are tensions at a more fundamental level between the existing regulatory framework for utilities and the requirements of economic growth.

As has been set out

previously the regulatory framework for each utility is different but the fundamental underlying principle is the same - namely, to protect the interests of consumers, where possible by promoting competition, and to regulate those areas of the market which are effective monopoly businesses. The regulatory frameworks do this through a relatively straightforward supply-and-demand model, using price as the key controlling mechanism over 5-year periods. 4.12

These 5-year pricing periods effectively also determine the 5-year forward investment

plan for each DNO: DNOs submit their proposed business plans, complete with proposed charging structures and investment plans, to their respective regulators, which the regulator then uses to set pricing limits and, in turn, the investment plan and programme for that 5-year period. 4.13

The price control system is intended to protect the end-consumer from increased

charges arising from DNOs undertaking infrastructure investment which has not been proven to be necessary and will not be used; in some industries there are additional quality drivers. As a result DNOs are not allowed under the terms of their licences to deviate from their agreed price control or invest in infrastructure on a speculative basis to serve new developments - if they wish to invest in infrastructure outside of their approved business plan they must provide the regulator with a robust business case which provides clear evidence of 'certainty' that the anticipated development and associated additional utility usage will occur (although the rigour applied to the definition of 'certainty' seems to vary between utilities). This then has to be approved in advance by the relevant regulator

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4.14

The key downside to price control system is that, as in the electricity industry, DNOs

are relatively restricted in their ability to respond to new initiatives or sudden changes impacting upon their network during the 5-year price control period. Whilst understanding the reasons for this system, it can work counter to the forces that govern economic development, which seeks to deliver the most efficient rates of economic growth ie. at the fastest sustainable rate, at the minimum price and to the best quality. For these reasons the property development industry - which is a huge driver for economic growth - is also very heavily fuelled by the forces of speculation. The regulatory framework in utilities actively prevents speculative activity, and makes responding to sudden changes - which are the type of changes that often happen in the economy - extremely difficult, resource-consuming and lengthy ie. the opposite of all of the conditions for optimum economic growth. In addition many DNOs feel that this system does not fully enable them to take account of particular local issues or requirements,. 4.15

Some of the utilities companies involved in this study recognise the shortcomings of

this aspect of the regulatory framework, and are currently actively trying to find alternative solutions. One is considering the concept of 'special investment zones' in some of the North West's most important geographical economic drivers (for example the Greater Manchester City-Region): these would be geographically ring-fenced areas in which the DNO would be have additional freedoms and flexibilities to adapt investment programmes in order to respond to rapid economic changes, up to a pre-agreed maximum investment level. However the response from the regulator concerned has been lukewarm and the DNO feel it unlikely that this will be approved.

The costs of delivering the necessary utilities infrastructure 4.16

Investing in new utilities supplies and facilitating infrastructure is a significant cost for

key stakeholders in the region, both public and private. Almost all end-consumer consultees stated that the costs incurred in delivering economic development and regeneration objectives had increased significantly since privatisation, in terms of the time and efforts and the specialist expertise that now had to be employed to bring forward the necessary utilities supply and facilitating infrastructure; in addition these consultees felt that many of these costs did not arise prior to privatisation. 4.17

Both the utilities companies and regulatory consultees accepted this was the case.

Regulators felt that this was a fair reflection of the need of private enterprise to contribute towards the cost of delivering the region's utilities infrastructure if they were to then use that infrastructure to generate private wealth. In addition the electricity market was being affected by global market conditions which were pushing up prices and restricting supply of key component materials.

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4.18

The potential amount of planned economic growth over the next 5 to 10 years is

significant.

Looking forward there is a real potential that many of the planned major

development will require investment in the adjacent utilities infrastructure; the circumstances of some sites may mean they require significant investment (possibly into 6 figures) to ensure that they can deliver the quantum supply and consistency of supply that will be needed in the future. 4.19

In addition it was widely believed by end-consumer consultees that under the

previous public ownership system there had been a lack of sufficient investment over a number of years in the essential physical assets and networks for most utilities, in terms of upgrading/modernising/extending systems and improving efficiency. The increased use of 'asset sweating' was assumed to be the result of this by many end-consumer consultees. In addition many expressed the view that utilities assets in the North West have been 'sweated' for a considerable period, and many now felt that they - the customer - were effectively now being asked to invest in infrastructure which should have been provided by the DNOs and/or their previous public incarnations (regional electricity, gas or water boards were mention in particular). 4.20

A further almost unanimous issue raised by consultees was the fact that throughout

the duration of developing, planning and delivering a major utilities works, cost estimates received from DNOs could vary quite widely. The most commonly-expressed view by endconsumers was that costs would often reduce significantly from the opening cost estimate provided by the DNO following negotiations (often with the support of with specialist advisers). This compounded the feeling of many that there was a lack of transparency and clarity in the way in which DNOs were applying the regulatory framework. Utilities companies felt that this merely reflected the level of detail available for a proposed scheme throughout the negotiation process, with cost estimates being 'tightened up' as the level of available detail, and clarity on the quantum and nature of new demand/capacity, increased. 4.21

Many end-consumer consultees commented that - in spite of the inherited asset

legacy issues - they had fewer issues with the principle of contributing towards new infrastructure as they understood the wider benefits this would bring to the region. However the costs of reinforcements and betterment being currently requested in the region by some DNOs were a particular issue for many end-consumer consultees, with the lack of understanding of the complex procurement process only serving to fuel their difficulties in forming a view as to whether or not the costs being requested were fair and reasonable.

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Consequences of lack of transparency and accountability in the utilities market 4.22

A frequent frustration expressed was the timescales and effort required to deal with

utilities companies in trying to deliver required utilities infrastructure.

The length of time

involved to elicit responses to any enquiries - whether for information/data, cost estimates, queries relating to ongoing discussions, etc - was reported as being significant, and in many cases outside of the regulated 90-day limit that the DNOs are supposed to respond within. There were some reports of requests for information and/or data receiving no response at all, despite repeated attempts, including - concerningly - information which DNOs have a statutory duty to provide.

Reports by end-consumers of significant lead-in times for key

components - up to 2 years for some key sub-station components in the former MANWEB area - merely compounded this frustration. 4.23

Whilst costs and timescales were important, one of the most provocative issues

raised by almost all end-consumer consultees was the perceived lack of certainty or accountability on procurement and delivery of utilities infrastructure. As set out above, many commented that the very complex and technical nature of procurement processes made it very difficult to interrogate necessary information and assess whether or not value-for-money was being achieved. The consequences could be significant in terms of the additional costs incurred and resources required to correct the situation, in particular for private sector developers, who would not only feel the adverse impacts upon their construction programmes, but potentially also on their forecast asset disposal and revenue income streams and ultimately upon the financial viability of their schemes. Some end-consumer consultees went as far as to say that they felt at times the complexity of the regulatory system was actively used by some DNOs as a foil to prevent having to provide a full set of information, in particular in cost estimating. 4.24

Utilities companies responded that the cost estimating process was difficult for them,

as the level of detail available for a proposed scheme to enable them to assess necessary works to their networks and infrastructure was not always good, and would often change throughout the negotiation process as the development scheme detail itself evolved.

addition two utilities companies reported that they had experienced a significant increase in the number of applications for cost estimates, for which they had been allowed no addition resourcing under the terms of their price controls, and so had experienced internal resourcing constraints. 4.25

In addition there were consistent reports from end-consumer consultees of projects

not being delivered within the timescales agreed with the relevant DNO. The gas DNO were quoted as the most reliable in this respect, followed by telecomms, then by water, with both electricity DNOs but in particular SP Manweb some way further behind. This causes

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significant problems for both public and private sector - for the former in terms of procurement and capital spend programmes and the latter in terms of cashflows and investor interests & disposals - an inevitably incurs additional costs to due to abortive works, knock-on impacts on the remaining construction & lettings programmes, etc. 4.26

Whilst there was an acceptance that delays were occasionally unavoidable, many

consultees felt particularly aggrieved that in many instances there appeared to be no sense of accountability or concern that timescales had slipped, no sense of urgency to rectify such situations, and no acknowledgment of the punitive impacts of such delays. Many commented at the anomaly that the rest of the construction and service sector had to be accountable in terms of delivery, and felt such lack of accountability and transparency was evidence that the current regulatory framework was not fulfilling one of its key roles - namely protecting the interests of consumers - for this situation to have persisted for so long. It is interesting that at least one of the regulators reported their frustration at the lack of improvements in levels of customer service and accountability in the market they were responsible for, which seems to suggest that the current regulatory framework for whatever reason is not to compelling the DNOs in that particular utility market to improve in these areas. The fact that at least one of the regulators acknowledges this, and is keen to work more closely with key public sector stakeholders such as RDAs, is possibly a tacit acknowledgment of this.

Potential utilities constraints in the North West 4.27

As a part of this commission the Study Team endeavoured to gather information from

utilities companies about the current infrastructure provision for each utility in the region and any known capacity issues. The Study Team were reliant upon the cooperation of each of the relevant utility companies, as DNOs are not obliged under either statue or the terms of their regulated licences to either publish or provide this information. Unfortunately not all DNOs responded to requests for information in the manner that had been hoped for - notably preventing the Study Team from identifying more definitively potential areas of concern in terms of available capacity and planned development - and hence the analysis was relatively limited and caveated accordingly.

Electricity ENW network area 4.28

In summary there appear to be particularly high utilisation rates in the ENW network

for substations in the following areas at either Grid Supply (312 kV) or Primary (33kV) substation level:â&#x20AC;˘ parts of Central and Western Cumbria (132kV) and a small part of South-East Cumbria (33kV)

North West Utilities Infrastructure Study - Final Report • parts of the Fylde Coast (both 132kV and 33kV) • the Lancaster area (33kV only) • parts of Greater Manchester (both 132kV and 33kV) • the Warrington area (both 132kV and 33kV) • part of North Cheshire (132kV only) • South and Central Lancashire (33kV only)

4.29

Whilst the information provided by ENW did not allow the Study Team to identify the

precise locations where these high utilisation rates are occurring, it appears there are potential issues for the following areas of potential major development:• Greater Manchester - Growth Point and HMR areas, and Strategic Regional Sites at Barton, Carrington and Central Park • Fylde Coast and Lancaster area - Growth Point and HMR areas, and Strategic Regional Site at Bailrigg • Central Cumbria and parts of West and South Cumbria - Growth Point, and Strategic regional sites at Kingmoor and Westlakes (Whitehaven) • Warrington area - Growth Point area and Strategic Regional site at Omega South • South and Central Lancashire - Growth Point and Strategic Regional Sites at ROF Cuerden and Chorley SP Manweb network area 4.30

The information provided by SP Manweb seems to suggest there are no capacity

Electricity DNOs are able to model the impact that proposed regeneration and

development plans would have on their networks to identify potential constraints. As this is not a requirement under statute or their licence conditions they can however seek to recover the costs of this modelling work from the Third Party requesting it, however it can be useful to DNOs in helping to establish a business case for investment or substantiate their longer term pricing control period investment plans. It should be noted that DNOs can have difficulties in resourcing this type of work, as the responses to this element of the Study would seem to suggest. 4.32

DNOs are prevented under the terms of their licences from speculatively investing in

providing additional capacity in their networks (which it could be argued would be the 'true' market approach) unless Ofgem can be assured there is a robust business case, including

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certainty of demand and customer revenues. DNOs have therefore tended to rely upon using 'straight-line' load growth projections for their 5-year price control period investment planning, using all of their existing customers as the baseline. For DNOs to develop electricity networks to accommodate changes in demand over-and-above these 'straight-line load growth projections - for example to respond to growth in a particular town or sub-region - is therefore quite onerous, as it requires a significant amount of work in putting together a business case. Under the currently regulatory regime reinforcement of networks is either partly or fully paid for by the applicant seeking a connection, rather than the DNO - hence it could be argued that the driver to develop a business case for investment, when there is the potential for some or all of that investment to be made by other Third Parties, is not always strong.

Gas 4.33

In the absence of any information on capacity being provided by National Grid, the

Study Team were unable at this stage make any analysis of the North West network's ability to respond to future planned growth.

Potable Water 4.34

In general UU consider that the potable water trunk distribution network in the North

The key area of concern in the North West for UU is the West Cumbria and Carlisle

Resource Zones, both of which are quite sensitive to any major changes in supply and demand, with the later close to going into deficit.

As Carlisle has been identified as a

Similar to electricity DNOs, water DNOs can model the impact that proposed

regeneration and development plans would have on their networks to identify potential constraints.

However again, as this is not a requirement under statute or their licence

conditions they can seek to recover the costs of this modelling work from the Third Party and appear to have difficulties in resourcing this type of work. 4.37

At this level it is not the responsibility of the water company to provide network

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Wastewater 4.38

UU have limitations on wastewater treatment capacity in several areas. In addition

much of the sewerage system is of Victorian vintage with severe capacity limitations, which are further exacerbated by liabilities on environmental improvements and restrictions on the network. 4.39

The areas of key concern area appear to be parts of the Fylde Coast in terms of

wastewater treatment to cope with current and future demand, and south & west Manchester to cope with any further growth in demand. In addition there are issues in Manchester with the Victorian-era combined wastewater/stormwater system. Some localised issues also arise in parts of Lancashire, namely the Ribble Valley and the Preston area. The potential impact upon major development proposals is hence:â&#x20AC;˘ Greater Manchester - Growth Point and HMR areas, and Strategic Regional Sites at Barton, Carrington and Davenport Green â&#x20AC;˘ Fylde Coast - Growth Point and HMR areas â&#x20AC;˘ Central Lancashire - Growth Point area and Strategic Regional Sites at ROF Chorley and Cuerden Identifying & resolving potential issues 4.40

UU's investment focus is in continuing to bring these older systems up to modern

standards.

As with potable water, under the current statutory and regulatory framework

wastewater capacity for new development must be funded by developers and not funded via increased customer changes.

Modelling can be undertaken to asses the impact of new

development on existing wastewater networks, but again this is a rechargeable item and as it is not a licence or statutory requirement is not prioritised as a work item within DNOs. Telecomms 4.41

There are no particular pressing geographic issues, although there is a need to

ensure that NGN roll-out does not disadvantage any of the North West sub-regions as compared to the others and enables regional centres to compete with European knowledge destinations.

Factors specific to the North West region 4.42

The baseline report identified that there are some features of the structure of the

utilities markets in the North West which are unique, and could well be impacting upon the development and operation of a more competitive utilities market which, in theory, should in turn deliver better service and better value-for-money to key stakeholders and consumers in the region.

North West Utilities Infrastructure Study - Final Report

CONSTRAINTS Age of utilities infrastructure 4.43

The North West was one of the first regions in the UK to invest heavily in utilities

infrastructure.

For example the Manchester & Salford Waterworks Corporation was

established in 1809 to provide fresh water supplies to the city, public gas supplies having been introduced the year before; Manchester Corporation was the first municipally-owned gas company (in 1843); and large parts of the water and wastewater network in conurbations such as Manchester and Preston were built in early-Victorian times. Some of this infrastructure is still in use, notably some of the wastewater network. As a result of being amongst the first wave of 'adopters' of public utilities, some of this infrastructure is now approaching or at the end of its usable life, and requires considerable investment for it to cope with anticipated levels of demand and, in some cases, to cope better with existing levels of demand. 4.44

All of the respective utilities companies have invested heavily in upgrading their

network assets - for example United Utilities investment programme in the North West's potable water network for the 2005-2010 investment programme totals ÂŁ3.5bn - but it is likely that a considerable amount of further investment will be needed to meet the demands of planned major investments in the region, and to ensure that the region remains competitive with other UK and European regions. Unique network architecture in the SP Manweb area 4.45

As set out earlier in this report, the former MANWEB area has a network architecture

which is unique to that area and quite unlike the 'standard' network architecture found in the rest of the North West region and other regions across the UK. This is a historic feature, inherited from the days when the network was first built in the 1940s. The intention was that MANWEB would be able to achieve a much higher utilisation of transformer capacity (and hence lower cost per unit of load supplied) and a higher degree of security of supply than the traditional approach adopted by other UK networks.

However this type of network

architecture has less positive attributes, the key one being that the costs of developing, managing and maintaining it are substantially greater (approximately 5 times). This means that the costs of delivering development projects in the SP Manweb area could be proportionally higher, in particular the costs of any network reinforcements that may be required. 4.46

In addition it is known that because of the unique network architecture, the SP

Manweb network uses non-industry standard technical components, and requires specialised technical skills and knowledge.

Whilst these factors will not necessarily translate into

increased cost for the end-consumer, they could lead to increased lead-in and delivery times on infrastructure works - especially in the light of known world market supply issues for network components and staffing recruitment and retention issues. Costs could also increase

North West Utilities Infrastructure Study - Final Report

if manufacturers apply premiums to technical components that are in greatest demand. Reports from the consultation phase of lead-in terms in the SP Manweb area of up to 2 years and cost premiums being applied would seem to substantiate these two factors. Asset sweating 4.47

For some utilities in the UK the practice of 'asset sweating' has become

commonplace.

This is where ways are devised to make more efficient use of existing

infrastructure capacity by findings ways of squeezing more demand on the networks - namely getting more from existing configurations rather than the active or even ad hoc transformation of existing infrastructure provision. It should be noted however that asset sweating is not by any means unique to the utilities industry, and is a management technique that has been increasingly adopted by other sectors, for example manufacturing, in order to reduce costs and remain competitive. 4.48

Critics of the regulatory system say that the instance of asset sweating has been

particularly profound in the utilities industry due to the recent history. The decision to privatise formerly public sector monopolies in utilities was taken as it was recognised that the consequences of decades of public ownership had led to poor returns and poor terms of business for the end-consumer. The situation was exacerbated by the constraints that public finances had put on investment in some industries, including infrastructure. The need to move to a more efficient system inevitably led to an imperative to sweat the assets. In addition critics of the regulatory system6 say that the instance of asset sweating has been particularly encouraged recently with the robust stance adopted on investment and pricing by the regulator, which critics say is deterring long-term commitment to infrastructure investment. 4.49

Asset sweating has already been identified in previous studies as a particular issue

for both water and electricity infrastructure in parts of the North West and there are concerns that - whilst accepting as a short-term strategy - this cannot continue as a long-term solution. It could be that some of the issues reported by end-consumers with outages or supply interruptions in parts of the region are a direct result of asset sweating; high non-contestable reinforcement costs may also be an indirect consequence, as the DNOs seek to squeeze more capacity out of the existing network and push it to its limits. 4.50

As stated above the use of utilities' networks at or above capacity is not unique to the

North West region: this is a common situation elsewhere in the UK. But when added to other factors that seem to be specific to the North West region, notably relating to the timescales for delivering increased capacity, it could putting the North West at a competitive disadvantage -

for example Prof Dieter Helm, Oxford University, in " Ownership, Utility Regulation And

Financial Structures: An Emerging Model", January 2006

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in particular if other region's have the ability to respond more quickly to additional capacity requirements than the North West is able to (see 'Timescales' section below). 4.51

In addition asset sweating brings associated implications for network reliability.

Assets that are towards the end of their lifespan may well not be as reliable when forced to work at or above capacity than newer and more technically-advanced assets would be. Whilst again the Study Team have not been able to demonstrate a direct correlation, it is interesting to note that some of the DNOs have recently seen their performance levels either drop against previous performance or fail to meet UK benchmark targets on indicators that could be related to the degree of asset sweating - for example unplanned interruptions to service and leakages. Two electricity networks and two DNOs 4.52

As set out above the North West region is unique amongst English regions in having

electricity distribution networks operated by two different companies.

This provides an

additional layer of confusions for key stakeholders who already have limited knowledge and understanding of the utilities market and how it operates.

Whilst the Study cannot

categorically substantiate this, it may also be acting as a limiting factor on the introduction of further competition in the electricity market, as the difficulties this brings, and the reduced economies of scale, may be deterring other potential entrants to the market.

These factors

could be magnified on the SP Manweb network, where potential entrants to the market may feel that the costs of upgrading or standardising the network, plus the cost of acquiring the specific skilled staff to operate the network, cannot be recovered through the potential for revenue-generation. Competition in the utilities marketplace 4.53

Evidence provided by Ofgem, BERR and the DNOs themselves suggests that

competition in those sections of the utilities markets that open to competition is relatively good in the North West region compared to other English regions - for example published Ofgem/BERR data shows that competition in electricity connections is the 3rd-highest of all UK regions. Having said that, competitively-provided connections still represent an equally relatively low proportion of all connections provided in both the region and across the UK7, and the regulator has expressed disappointment and surprise that the level of competition in the electricity market has not grown quite as much as had been anticipated over the past 10 years. 4.54

There was a strong view from end-consumer consultees that the North West does not

have genuine competitive choice when it comes to delivering certain forms of major utilities 7

approx. 10% of a total of approx. 40,000 connections in the North West, and 3.7% of a total of 492,309

connections in the UK

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infrastructure. This seems to be particularly the case with the electricity market in the North West, notably in the former MANWEB area: feedback from end-user consultees conveyed a strong view that there are very few other potential providers and hence there was no other realistic alternative but to work with the incumbent DNO or their wholly-owned subsidiary CORE Utilities, who were viewed as being very much one-and-the same as SP Manweb. 4.55

As set out previously in this chapter, it is probable that this perceived lack of

competition is at least partly due to a lack of understanding about the marketplace and in particular what options there are to deliver utilities infrastructure choices. As set out in the baseline report, competition in the gas market is relatively healthy - suggesting there may be a better level of understanding of that market; the key area of frustration therefore largely revolved around the electricity and water markets. There were anecdotal reports by endconsumers that where they had tried to work with companies other than the incumbent DNOs to deliver electricity and water infrastructure works, the incumbent DNOs had not been especially helpful or responsive - for example to requests to provide information or data that the alternative utilities company needed to assess the works required. 4.56

Whatever the reality of the situation, the fact remains that there is a perception in the

North West that the level of competition in utilities provision is limited. It is likely that if this perception is held within the region, it may also be held outside of the region, and hence potentially act as a negative factor for investment decisions that are mobile within the UK (and beyond). In addition the energies and resources being spent by all parties in trying to achieve the desired result - without a shared common objective - could be more fruitfully put towards building synergies and getting the best-possible solution for 'North West plc'.

OPPORTUNITIES 4.57

There are some features of the North West's current utilities situation which could act

as a benefit to the region's economic development:Opportunities for the development of renewable energy technologies and production 4.58

The UKâ&#x20AC;&#x2122;s energy, economic and environmental policy now involves a unified

approach to the twin challenges of energy security and climate change. Maintaining a sustainable national economy requires integrated answers to both, and will provide major business opportunities for UK firms. The North West region has a long-established concentration of the UK's specialist companies, facilities and staff in the nuclear sector, and it is recognised that these existing strengths and assets, combined with significant potential natural assets in renewable energy generation are of national and international importance. West Cumbria - "Britain's Energy Coast" - can provide a unique contribution to both Europe and the UKâ&#x20AC;&#x2122;s short and long term policy goals, transforming its own economy in the process.

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4.59

In order to do this the region needs to develop technologies which can harness the

region's plentiful natural assets (wind, wave and water).

Consultation revealed that

experience in developing renewable sources of energy was currently mixed across the region - macro-level generation appears very localised and constrained by planning issues and public concerns; micro-generation appears to be becoming increasingly popular with the private sector in particular, driven by a combination of cost benefits, CSR and regulatory requirements disillusionment with 'traditional' routes of power supply. 4.60

The region therefore has a significant opportunity to benefit from the synergy of these

two factors, and develop a leading sustainable approach to future energy planning and consumption. Opportunities for the roll-out of newer technologies 4.61

The region has seen some excellent progress in the past decade in terms of the roll-

out of newer telecommunications technologies. NWDA have been key in championing and facilitating the delivery of some of these, for example Project Access in sub-regions such as Cumbria, and this investment has left the region for now in a good relative competitive position. Concerns were expressed that the region may suffer competitively if the roll-out of the next generation of telecommunications (NGNs) was not progressed more quickly, in particular in light of the faster rate at which these were being progressed in other parts of the UK (notably in the South East) and across Europe - but the experience and expertise garnered with the development and delivery of the likes of ADSL broadband will leave the region in a good position for the roll-out of NGNs. Building on existing skills strengths 4.62

The region has a number of potential strategic opportunities it could exploit with

respect to utilities and the skills agenda. The region has a concentration of utilities-related skills, with particular expertise in the nuclear sector and an emerging concentration in renewable technologies - the latter being driven partly by the region's abundance of potential natural assets in renewable technology (eg. wind and open water). Existing DNOs have reported issues with recruitment and retention of staff with the appropriate skills and experience, and have stated their willingness to work with key public sector stakeholders to try to address these issues. There is clearly therefore a potentially mutually beneficial set of actions and arrangements that could be put in place which would augment the region's existing strengths and increase existing competitive advantages. Utilities capacities 4.63

Whilst there are some key concerns for specific utilities in specific locations, these are

relatively few and are confined to certain parts of the region rather than abundant and widespread, especially when compared to some other English regions - for example water

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issues in the South and East.

This should be seen as a positive for the region, and a

potential strength to build upon.

Lack of progress in resolving utilities issues 4.64

Many of the issues identified throughout this commission resonate with the findings of

Whilst the Study Team has not been able to develop substantive proof of a causal

relationship, there were reports from some key stakeholders - including end-consumer consultees and public sector facilitators - that in some parts of the region the issues relating to available capacity and the ability to develop additional required capacity within reasonable timescales and within reasonable costs limitations may be affecting the region's ability to retain business & investment and to attract new and/or additional business investment .

North West Utilities Infrastructure Study - Final Report

KEY CONCLUSIONS

5.1

This chapter of the report sets out the key conclusions emerging from the key findings

of this commission.

Conclusion 1 - the level of mutual understanding and trust between the utilities industry and key stakeholders in the economic development arena needs to improve 5.2

Utilities infrastructure is key to delivering economic growth, and requires a

considerable amount of both public and private investment. There is a considerable lack of understanding amongst key stakeholders in both the public and the private sector, but in particular the public sector, of how the utilities' industries operate. This is fuelling a lack of trust by end-consumers in the region in all aspects of the utilities industries currently operating in the UK, including utilities DNOs themselves, the regulatory system and the regulators themselves. In the long term this is not a constructive or sustainable situation for the region, in particular given the growing importance of the sustainability and climate change agenda and the key role the utilities play in this. It is therefore vitally important that all key stakeholders, and in particular public sector agencies, develop a better understanding of the bespoke statutory and regulatory frameworks that govern each of the utilities. This will ensure that:• there is a better alignment of utilities and development policy • public sector resources in utilities infrastructure are being properly and efficiently procured, in line with 'best-value' principles • those areas of the current regulatory framework which either are in transition, or are subject of debate as to their potential unintended consequences for the consumer, can be better scrutinised by key stakeholders to again ensure that investment is the minimum required to deliver the desired outcomes; and • the appropriate level of utilities infrastructure is delivered in a timescale and quantum cost that facilitates planned economic growth 5.3

At the same time utilities companies need to better understand how the

development planning and investment system works, and be enabled through the regulatory framework to become more closely involved in these strategic planning processes. This will enable them to demonstrate to the regulators and their customers that they are better aligning their forward plans with their customers requirements, and to actively demonstrate to key stakeholders that they are a key and influential player. 5.4

In addition there is a clear need for utilities companies to deliver better and more

focused customer service, and to build greater levels of trust amongst their customer

North West Utilities Infrastructure Study - Final Report

base by significantly improving the transparency of cost estimating, procurement and delivery, especially on major economic development projects. It is clear from the consultation undertaken as a part of this commission that this is an area of considerable frustration and distrust for many stakeholders who are commissioning works from DNOs. At the same time public and private sector stakeholders need to understand utilities companies' concerns around being transparent on the provision of information, but ensuring that they can continue to be competitive and not reveal commercially-sensitive information to competitors and suppliers. 5.5

The respective regulators also have a role to play in 'policing' utility company

performance to ensure that substandard or non-compliant behaviour is identified, steps taken to rectify this, and accountability as a whole is greatly improved. The fact that at least one of the regulators acknowledges this, and is keen to work more closely with key public sector stakeholders is a positive opportunity for the region. The changes to the regulatory framework around complaints handling in the electricity and gas markets are a positive step forward which key stakeholders should cascade down through the region to ensure that best use is made of this. There is similarly the opportunity for key stakeholders to work with utilities companies to improve their customer relations, and potentially to act as a facilitator where a regionally-significant project or initiative is involved. 5.6

A more constructive longer-term mutual relationship between key stakeholders

in economic development and the region's DNOs could have many positives for the region In particular the electricity and water DNOs consulted - ie. those in the sectors which seem to have the greatest potential issues - acknowledged their own shortcomings in terms of understanding the development planning framework that governs economic development and regeneration, and were keen to work more closely with key public sector agencies to more closely align respective planning and investment activities.

Conclusion 2 - investment planning in utilities needs to be better aligned with planned economic growth 5.7

Since the creation of the utility companies as private sector entities, the investment

planning process for utilities and the statutory investment and development processes within the private and public sector have acted in relative isolation from one another. 5.8

The current disconnect is not serving either party well at present, and ultimately is not

supporting economic growth & regeneration. The potential amount of planned economic growth over the next 5 to 10 years is significant. There is a need for a longer-term joined-up approach to utilities planning and investment in the region, involving all potential key

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stakeholders including the utilities companies, the respective regulators and local planning authorities. . 5.9

In order for this to happen there needs to be a review of the current utilities

regulatory framework to ensure that utility DNOs are not prevented from more closely aligning their investment plans to meet planned economic growth and in a manner which is more responsive to the timescales operating in economic development and regeneration. Through establishing closer relationships with the incumbent DNOs and the conditions laid down under PPS12 in developing LDFs, key local planning authorities could persuade DNOs to model the impact proposed regeneration and development plans would have on their networks to identify constraints. This could also benefit the utility companies in providing evidence to their appropriate regulator to strengthen their investment and use of system revenue predications as part of price control negotiations. 5.10

However, as the responses to this element of the Study suggest, there appears to be

a difficulty within utility distribution companies in resourcing this type of work. Therefore In addition utilities DNOs must be allowed to adequately resource these activities by being enabled through the regulatory framework to invest in recruiting and employing sufficient appropriately qualified and experienced staff to lead this close liaison 5.11

Similarly key public sector stakeholders, especially local planning authorities,

need to have the ability and expertise to engage with utilities DNOs. A potential solution would be to engage specialist utilities staff - either in-house or independent consultants - to provide the expertise and due diligence services at the planning stage to determine the impact developments would have on utility networks, and the likely consequential issues and associated costs and timescales. This could be at a regional, sub-regional or local level, although the sub-regional and local level may provide better results due to the localised nature of utilities issues.

Conclusion 3 - significant investment is needed in the region's utilities infrastructure to meet the requirements of planned economic growth 5.12

As set out above, the amount of planned economic growth over the next 5 to 10 years

is significant, and some of this development is planned for parts of the region that from the evidence gathered appear to either already be experiencing utility capacity issues, or are likely to in the near future. Geographical areas within the region which are potentially facing particular infrastructure and capacity issues include:â&#x20AC;˘ parts of Greater Manchester, including the west and south-west of the core of the conurbation â&#x20AC;˘ Lancaster â&#x20AC;˘ Carlisle

North West Utilities Infrastructure Study - Final Report • West Cumbria • parts of central and south Lancashire • the Fylde Coast As set out above and in the previous baseline report, many of these areas are also anticipated to be key economic drivers for their respective sub-regions. 5.13

Added to this are the further factors that:• the region has an ageing infrastructure, parts of which are at or beyond their expected usable lifespan. Utilities companies have invested in the past 5 years in upgrading and renewing parts of this network, but it is possible that the scale of investment required, and the timescales it is required in, to facilitate planned economic growth will be greater than they can bear alone • the former MANWEB area of the region has inherited an electricity network with an architecture which is unique in terms of its design and component usage;

relatively costly to manage, maintain and operate (5 times more

costly compared to a more 'standard 'network design); and is also now relatively aged in terms of its useful lifespan. There are some end-consumers who feel that the consequences of this could be translating into increased rechargeable reinforcement costs which are likely to continue given the quantum of planned growth there is in this part of the region • the current widespread practice of asset sweating may be starting to cause reliability problems. This is not immediately apparent from the evidence provided to date by the utilities companies on capacities, but what is not known is the ability of the aged infrastructure to work for long periods of time near or at designed capacity 5.14

The regulatory framework as it stands is very clear across all utilities that

investment in additional capacity is not to be funded by DNOs, but by those third parties promoting the development requiring the additional capacity.

In addition

All other things remaining equal, it is likely that there will need to be significant

investment in the region's utilities infrastructure funded by either the private sector or public sector.

It is therefore vitally important that these investing stakeholders understand the

respective utilities markets and regimes in detail, to ensure that this investment is procured, defrayed and delivered in the most cost-effective manner possible.

In addition key

stakeholders should look to work with the utilities DNOs on investment plans to assess

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whether there are any economies of scale or additional value can be added to existing planned price control investments; and in developing robust business cases for additional investment where possible.

Conclusion 4 - current and potential utilities constraints needs to be identified in more detail 5.16

As set out elsewhere in this report the Study Team hoped to identify areas of the

region where there may be utilities capacities constraints at present and in the immediate future. The Study Team were reliant upon each of the utility companies operating in the region to provide the base data to facilitate this assessment, but unfortunately the information provided did not enable the analysis to be as detailed as had been hoped. 5.17

There is therefore a need for this capacity analysis to be pursued in more detail

by each of the utilities companies, and to drill-down below the sub-regional level. Utilities companies are able to model the impacts of proposed new development on their existing networks (at a cost to the party requesting this modelling, as this is not a service they are required to provide under licence or statute); they can also build into these models details of any network enhancements or improvements that they already have within their planned investment programmes to provide a more accurate forward picture of their respective networks, capacities and potential issues. This will enable all key stakeholders to identify at a more detailed sub-regional and local level:• the precise location served by each respective utility network where there may be capacity constraints, either at present or in the foreseeable future • the nature of any potential capacity constraints, and the nature of the works required to resolve them • an outline quantum of the works involved and the likely scale of costs involved • any other potential constraints - for example the timescales likely to be needed to deliver required works • the reason for the differences in reported infrastructure issues by end-consumers and reported network capacities by DNOs - for example, in the SP Manweb area, where there was a significant level of reported issues in the Merseyside subregion that appear to be anomalous with the data provided by SP Manweb indicating there are no capacity issues in Merseyside

5.18

This information could also benefit the utility companies in providing evidence to their

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5.19

In addition one utility company were not forthcoming with any data on their existing

network, meaning that the Study Team were unable to draw any conclusions as to whether there may be any capacity on the gas network which may affect planned development in the region. It is important for key stakeholders to encourage this DNO to work with them to establish the baseline position, and understand better the potential issues, opportunities and constraints. 5.20

In addition at least one DNO has accepted that their forward planning capabilities at a

more localised level are not as precise as they could be due to the constraints they have on absorbing available information. A more proactive two-way relationship between key public sector stakeholders and utilities DNOs could facilitate a better exchange of information and allow the DNOs to model potential impacts upon their networks.

Conclusion 5 - questions over the effective competition in utilities 5.21

As is set out in the Key Issues, there is a clear division between the regulators and

utilities DNOs, and end-consumers, as to whether there is sufficient competition in utilities the region - with the former strongly of the view that there is an acceptable level of competition, and the latter strongly feeling that there isn't an effective open market place. It is thought that this is in part due to a lack of understanding by some public sector stakeholders and endconsumers about the marketplace, and in particular what options there are to deliver utilities infrastructure choices (although poor on-the-ground experiences with incumbent DNOs may have added to this). In addition it is clear that public sector stakeholders do not appreciate that the level and nature of competition within each utility is different for each. 5.22

Whatever the reality of the situation, the fact remains that amongst the key procurers

of utilities infrastructure works the prevailing perception is that there is not a truly open market in utilities in terms of competition. In addition it is likely that if this perception is held within the region, it may also be held outside of the region, and hence potentially act as a negative factor for investment decisions that are mobile within the UK (and beyond). 5.23

End-consumers felt strongly that it was the role of the utilities regulators to ensure

that competition was real and transparent: this accords with the stated role and remit of the utilities regulators. In addition, whilst confirming there was an acceptable level of competition in force, at least one regulator has expressed disappointment that the level of competition in their particular market (electricity market) has not grown quite as much as had been anticipated over the past 10 years.

It is therefore appropriate to establish a

communication channel with the regulators - and in particular this regulator - to work with them to ensure that a fully competitive market is operating within the North West region.

North West Utilities Infrastructure Study - Final Report

Conclusion 6 - existing and potential strengths in utilities in the region 5.24

On a more positive note the region has a number of potential strategic opportunities it

could exploit with respect to utilities. The region has a long-established concentration of the UK's specialist companies, facilities and staff in the nuclear industry, and it is recognised that these existing strengths and assets, combined with significant potential natural assets in renewable energy generation, are of national and international importance. Incumbent DNOs in the region have reported issues with recruitment and retention of staff with the appropriate skills and experience, and have stated their willingness to work with key public sector stakeholders to try to address these issues.

In addition there are some

concerns that the region may fall behind other UK and European regions and be at a competitive disadvantage in the roll-out of new technologies in renewable energy and telecommunications unless there is a further significant region-wide 'push'.

It is

important to encourage the region's existing DNOs to work collaboratively on environmental technologies with other key institutions such as the region's plethora of Higher Education Institutions, and to take up the opportunity of initiatives such as Registered Power Zones (RPZs). 5.25

The region therefore has a significant opportunity to develop a leading

The willingness of some of the

region's incumbent DNOs to work with key stakeholders as far as they can within the current regulatory framework constraints - as demonstrated by UU's active response to its consultation on the region's Growth Point proposals prior to Expressions Of Interest (EoIs) being submitted - should be encouraged.

Conclusion 7 - the current system of dealing with utilities issues may not be working 5.26

Many of the issues identified throughout this Study resonate with the findings of other

studies into utilities issues over the past 6 years; with those raised in the Case Studies; and with those reported by consultees from elsewhere in the UK. The concern is that many of these issues are long-standing, with some going back to the years following privatisation, yet clearly have not been resolved fully as they are still causing real 'on-the-ground' issues for many public and private sector stakeholders in the region. 5.27

Whilst this Study has not been able to categorically develop proof of a causal

relationship, there is anecdotal evidence from some sub-regions that issues with

North West Utilities Infrastructure Study - Final Report

existing utilities' supply and developing the necessary capacity in reasonable timescales and costs may be affecting business and investment retention and attraction. 5.28

In addition end-consumer consultees held a wide number of views and theories on

Whilst establishing the truth behind all of the above is important, the most striking

point is that all of the above factors seem to suggest that the processes by which utilities are meant to be delivered, and the inbuilt system for dealing with issues that arise during this process, are either not functioning to their maximum effect, or not functioning effectively at all - because if they were, these issues would not still be occurring. The conclusion is that there is a need for key stakeholders - including government - to establish in the short-tomedium term how they can work together to ensure that better progress is made.

North West Utilities Infrastructure Study - Final Report

APPENDIX 1 - EDITED GLOSSARY A ADSL - "Asymmetric Digital Subscriber Line" - a digital communications technology that allows the use of a standard telephone line to provide high speed data communications. Is it asymmetric in that it allows higher speeds in one direction (towards the customer) than the other. A splitter - or microfilter - allows a single telephone connection to be used for both ADSL service and voice calls at the same time. A later and superior version of ADSL, known as 'ADSL 2+' exists, which doubles the downstream data movement rates compared to ADSL.

AMP = 'Asset Management Plan' - 5-year plan which all water DNOs must produce which sets out the asset management and investment plans over the plan period. This is what the regulator, OFWAT, uses to determine prices and hence needs to be agreed in advance by OFWAT C "CAPEX" - expenditure on investment in long-lived distribution assets, such as underground cables, overhead electricity lines and substations.

The "CAPEX rolling incentive" is the

mechanism by which DNOs are incentivised to deliver CAPEX efficiencies.

"Charging Statements" - in accordance with standard condition 4 of their licence, DNOs are obliged to produce and publish this document, which contains i) a system charging methodology; ii) a system charging statement; and iii) a connection charging statement.

"Connections" - this is the term applied to the point at which any new or revised end-user systems connect into the DNOs existing distribution network. Connections can be carried out by the licenced DNO for the area or by a suitably-accredited contractor (an 'ICP').

"Connection Charging Methodology" - each DNO is obliged by their licence to have a clear and transparent methodology through which charges are levied against customers.

"Connection Charging Point" - this is the closest economically feasible point, taking into account any customer request for gas to be made available at a particular pressure, on the gas transporterâ&#x20AC;&#x2122;s system, which is deemed to have enough capacity to supply the new load disregarding existing loads.

"Contestable works" - these are works to utilities infrastructure which can be competitively procured from a suitably-accredited contractor. DNOs are obliged to provide fully detailed and transparent cost estimates for these works. In April 2006 Ofgem extended the scope of

North West Utilities Infrastructure Study - Final Report

contestable works associated with the provision of new and modified electricity connections to include certain reinforcement and diversionary works, namely diversions and connection reinforcement works which: • are physically and electrically separate from existing DNO infrastructure • do not require access to existing DNO operational areas • are fully funded by the customer; and • are restricted to works on overhead and underground cables not exceeding 33kV and on HV/LV distribution substations

Design of diversionary works for overhead and underground cables not exceeding 33kV and on HV/LV distribution substations are contestable, but design of connection reinforcements will remain non-contestable; as will dismantling and disposal of existing DNO assets associated with contestable diversionary works, and final connection of assets installed as part of diversionary and reinforcement works. D DCPR5 = "Distribution Price Control Review 5" - the review currently being undertaken by Ofgem to help establish the new pricing control period from 2010-2015 in electricity markets

DNO = "distribution network operator" - a company that manages the installation and upkeep of their cabling and the distribution of electricity from the point where it leaves the transmission system (133kV) to the supply point (132kV and below). Each DNO is an effective monopoly, as there is only one DNO licence holder for each network area. E "Energywatch" - the independent gas and electricity watchdog for domestic and non-domestic consumers.

Under Section 30 of the Consumers, Estate Agents and Redress Act 2007

Energywatch will be abolished in October 2008.

ESCO = "electricity supply company - these are joint venture companies that undertake to funds, manages and operates new electricity infrastructure and derives transmission revenue from it. Depending on the funding model, this may reduce the end-client's initial costs but will lock them into a long-term management arrangement with the scheme and the electricity supplier, potentially with further exposure to revenue risk associated with the operation of the system.

"Exit Point" - a point of connection at which a supply of electricity may flow between the REC’s system and the client’s installation, suppliers installation or the distribution system of another person.

North West Utilities Infrastructure Study - Final Report

G GDN = "gas distribution network" - this is the network through which gas which is piped under high-pressure to 12 local distribution zones across the UK (by National Grid) is then distributed across the country (usually at lower pressures). There are 8 GDNs in the UK, each covering a separate geographical region, along with some smaller networks owned & operated by IGTs

GSP = "Grid supply point" - the point between transmission and distribution systems where responsibility for electricity supply transfers from National Grid Transco to the local DNO licence holder. Line losses occur during the transmission from the national to the local network as the voltage is stepped down to a usable current. H "HV" = High Voltage - supply voltage over 1,000 volts (1kV). I ICP = "independent connection provider" - contractors who can install extensions from existing DNO owned networks to provide individual connections to end users.

IDNO = "independent distribution network operators" - independent operators who, under licence, own and run smaller distribution networks embedded in the electricity DNO networks.

IGT = "independent gas transporter" - independent operators who, under licence, own and run smaller distribution networks embedded in the gas DNO networks

"Infrastructure charge" - a standard charge payable to the water company for a connection to the water main, due as a contribution to the water DNO's infrastructure costs.

"Inset Agreement" - agreement for an out of area water company, or private company, to own and operate a water distribution network

"Interruptible gas supply" - a supply that may be interrupted by Transco or the supplier to maintain the transmission/distribution system to allow supplies to firm gas consumers when there is a constraint on the system. Customers with an interruptible gas supply must have an alternative power supply should an interruption to the gas supply occur. L "Load" - the amount of electric power delivered or required at any specific point or points on an electrical system. The requirement originates at the energy-consuming equipment of the customer.

North West Utilities Infrastructure Study - Final Report

"LV" = Low Voltage - electricity supplies at below 1,000 volts. M "Metered supply" - this is a supply of a utility which pass through a readable meter

MUSCO = "multi-utility supply company" - these are joint venture companies that undertake to funds, manages and operates all new utilities infrastructure within a new development and derives revenues from it. Depending on the funding model, this may reduce the end-client's initial costs but will lock them into a long-term management arrangement. N NGN = "next-generation network" - a telecommunications network that handles multiple types of traffic such as voice, data and multimedia.

"Non-contestable works" - these are works to utilities infrastructure which can only be a carried out by the licenced DNO and are therefore cannot be procured via any other route (eg. market competition within ICPs). DNOs are however still obliged to provide fully detailed and transparent cost estimates for these works.

"Non-load related expenditure" - The replacement or refurbishment of assets which are either at the end of their useful life due to their age or condition, or need to be replaced on safety or environmental grounds. P POC = "Point of Connection" - the point at which a development is connected to the DNOâ&#x20AC;&#x2122;s distribution system

"Pricing Control" - Ofgem administers a price control regime that ensures that efficient distributors can earn a fair return after capital and operating costs whilst limiting the amounts that customers can be charged. These controls are 5-year periods (referred to as "Pricing Control Periods") in which the prices which DNOs can charge to their customers (both domestic and non-domestic) are fixed within a range. DNO investment plans are also tied to the agreed pricing controls. The next pricing control period will be operational from 1 April 2010 to 31 March 2015, although consultation is already underway for this. Ofgem monitor compliance with the price control conditions which, together with other legal requirements, are set out in the license which each DNO must hold. Ofgem can take enforcement action if price control/licence requirements are breached.

"PR09" - this is pricing review that OFWAT are currently progressing towards the new pricing control period for water and sewerage companies in England that will run from 1 April 2010 to 31 March 2015.

North West Utilities Infrastructure Study - Final Report

R REB = "regional electricity board" - the term prior to privatisation for the various state-owned companies responsible for provision (separately) of water (potable & waste), electricity and gas supplies to English regions. In the NW the REBs were NORWEB and MANWEB.

REC - "regional electricity connection"

"Reinforcement" - this is the term used to encompass any alterations to an existing utilities system to enable the system to distribute an increased amount of electricity - for example uprating or provision of a new sub-station, or replacement of existing feeders. S SDS = "Strategic Direction Statement" - this is the first element in the process of agreeing an AMP.

"Section 16 request" - this is a request made to a DNO for a quotation for the costs of making a new connection. Under Section 16 of the Electricity Act DNOs are bound by licence to provide such quotation within 90 days.

The cost of providing extensions from a DNO's

existing distribution system - including new connections - is fully chargeable and payable in advance of the works being carried out. Under legislation DNOs are able to recover the 'reasonable' costs of providing a connection, including any necessary enhancement or reinforcements to its distribution system.

Costs are also only estimates, with the end-

customer being liable for the actual incurred cost of works.

"Section 41 Agreement" - a requirement under the Water Industry Act 1991 for a water DNO to provide a water main to be used for supplying water to premises in a particular area, for domestic purposes.

SLO = "Self Lay operator" - a private company approved for laying water mains

SSDL - "Symmetric Digital Subscriber Line" - a next-generation communications connections technology allowing faster connection rates and greater bandwidths than ADSL.

It is

symmetric ie. it allows equivalent connection rates and bandwidths from both directions (unlike ADSL).

STA = "statutory authority" is a term frequently used when referring to a DNO, in particular by the public sector, but more correctly refers to the rights of DNOs (the statutory authority) to put cables and pylons over other people's land and to lay cables in streets, which is regulated under Acts of Parliament.

North West Utilities Infrastructure Study - Final Report

"Standard Licence Condition (SLC 4F)" - this new condition was introduced by Ofgem in 2007 in order to support competition. The conditions relate to provision of non-contestable services and measures required to improve the unmetered service level agreement (SLA). It also set out a number of good practice principles that were designed to improve the way that DNOs manage customer interfaces. Ofgem will be monitoring performance against the new licence condition and voluntary standards, and have stated they will be particularly interested in what progress DNOs make in: • making more information available • to customers about how their connections request will be managed • informing customers about their choices and options over connections' provider • being more transparent over their costs by providing breakdowns of connections' costs; and • taking more responsibility by introducing visible and robust dispute processes when customer raise disputes

"Substation" - facility equipment that switches, changes, or regulates electric voltage. An electric power station which serves as a control and transfer of power flow, transform voltage levels, and serve as delivery points to industrial customers. T "Tariff Support" - these were allowances through which the cost of installing new (load) connections from DNO distribution systems could be offset. These were removed by Ofgem in April 2005.

Utilities companies say that because there has been no compensating

amendment to DUoS that they are now directly bearing a greater proportion of asset investment costs than previously; however some evidence would seem to suggest that the end customer may actually be funding a greater proportion of new assets through upfront connection charges.

"Transmission" - the transfer of electricity at high voltage from the power stations across the UK through wires on pylons to points where it can be distributed to users. This is known as the Grid System and is owned and operated by the National Grid Company (NGC).

21CN = "Twenty-First Century Network" - the name given by BT to their largest investment in the UK telecommunications network, which will represent an almost complete overhaul and simplification of the network, which currently has 16 discrete but related network platforms. U "Use of System" - this is phrase used in statute and utilities licences to describe the end customers ability to use the existing and future distribution system as managed and operated

North West Utilities Infrastructure Study - Final Report

by a DNO. Use of System Charges include DUoS ("distribution of use system" - charges incurred for distributing electricity across the local area system to the supplied premises); GDUoS ("generator distribution use of system tariffs" - charges applied to generators of electricity levied when they wish to connect into the regulated network infrastructure); and TUoS ("transmission use of systems" - charges incurred for transmitting electricity across the National Grid network from the source of generation to the network of the local distribution company). Ofgem have proposed major changes to the DUoS system which currently operates which - if accepted - would come into force in the new Pricing Control Period 20102015 and would have implications upon cost for Third Parties requisitioning works from electricity DNOs. W WIRS = "Water Industry Regulation Scheme" - Lloyds Register scheme for approving private companies approval for self lay schemes.

WRMP = "Statutory Water Resources Management Plan" - a statutory document that all licenced water companies must produce which sets out a long term view beyond the limit of the 5-year pricing and asset management plan how the company will restore and maintain the balance between supply and demand over a 25-year period.