Asset_Management_Council_1405_Asset_Management_Conference_2014_Paper_1833

AMPEAK Asset Management Conference 2014 AMBoK ID: 1833 Page 1
BUILD LEVEL OF SERVICES AND CUSTOMER VALUE INTO THE
DECISION MAKING SYDNEY WATER’S WATER MAIN ASSET
MANAGEMENT STRATEGY
David Zhang, Craig Crawley, Greg Kane
Sydney Water Corporation
Summary:
Sydney Water’s water network consists of about 21,000 km of water mains. Sydney Water is a statutory
state owned corporation, with the Independent Pricing and Regulatory Tribunal (IPART) as the economic
regulator. Sydney Water has developed a comprehensive set of decision frameworks and business
processes to manage the life cycle of water main assets to achieve a desired level of service and financial
return within an acceptable risk.
With the current constrained financial and economic environment, affordability is the most pressing issue in
the water industry as customers are seeking value for money. It is requiring the water industry to reduce
capital investment programs and deliver more with less while maintaining or improving customer satisfaction.
This paper presents the analysis of the asset performances and customer expectations against the level of
services and explains how Sydney Water explores the opportunities to build the level of services and
customer value into its asset management strategy and decision framework to optimise the capital
investment programs.
Key words: Water main, strategy, level of service, asset performance, customer value,
quantitative risk assessment, and capital forecast
1. INTRODUCTION
Sydney Water is a statutory state owned corporation, with the Independent Pricing and Regulatory Tribunal
(IPART) as the economic regulator. Sydney Water manages its water main assets in two classes - critical or
non-critical, depending on the consequence of a failure. Critical water mains (CWMs) are defined generally
as all water mains with a diameter 300mm and above. Some smaller diameter water mains are also
classified as CWMs due to factors such as single feeds to large numbers of customers, single feeds to
pressure reducing valve zones, and pump only systems. CWMs comprise around 4,700 km from a total of
about 21,000 km of water mains. The management approach for critical water mains is risk-based.
The non-critical water mains (reticulation) are generally of smaller diameter and have a lower impact when
they fail. As such, a response based maintenance strategy is employed to manage reticulation water mains
and renewal is based on their failure history through cost benefit analysis. The objective of the water main
management strategy is to achieve the least life cycle cost while meeting the level of service and customer
expectations. In contrast, CWMs pose a potentially high risk from the perspective of both loss of water supply
and other community or social impacts. CWMs require a more proactive management approach based on
risk assessment including condition monitoring and performance measurement.
2. ASSET MANAGEMENT PRINCIPLES
Sydney Water recognises that asset management is a business discipline to manage the life cycle of assets
to achieve a desired level of service and financial return within an acceptable risk framework. Sydney
Water’s asset management principle balances the customer needs and demands with overall asset and
system capability to determine the appropriate life cycle strategy.
The life cycle strategies and decision frameworks developed for water main assets support key decisions
across the asset’s life. There are two major decision frameworks applied to water mains and they are the
reticulation and critical water main decision frameworks. The aim of the reticulation decision framework is to
ensure all reticulation water mains continue to provide a reliable water supply and to minimise the impact on
the community and environment by identifying those water mains with an unacceptable level of failure and
prioritising them for renewal. The primary objective of the critical water main strategy is to prevent (or
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minimise) the failure of critical water mains with a high consequence of failure. A proactive maintenance
strategy is adopted for critical water mains. To prevent the potential failure of critical water mains, Sydney
Water has developed a quantified risk-based replacement model to assist in renewal decision-making. The
quantitative risk assessment model provides a powerful tool to rank critical water mains by their risk profiles
and to quantify risks in financial and economic terms.
3. CUSTOMER VALUE
Sydney Water’s vision is to provide valued water solutions. Sydney Water puts customer front of mind and
contributes to liveable cities. To ensure that customers get solutions that they value, Sydney Water is
developing a customer value strategy to better understand customer expectations and build these into
decision making. Customer value is generally defined as ‘worth what paid for’, a function of perceived quality
of service over cost. The better the perceived quality, efficiency and design of the service, the more likely the
customer will be prepared to pay for it. Customer value is an emerging area of interest and focus for the
water industry and there is also a growing desire by utilities to become more customer-focused and
responsive to customer needs. Regulators are also seeking more evidence of customer value, and aligned
with that, innovative customer engagement.
Sydney Water has a number of initiatives and forums that provide insight into customer value. In 2006
Sydney Water developed a customer insights framework and the key elements of the framework comprised
two broad streams of research:
 research to gather customer feedback on service interactions
 research to identify broader needs and expectations of a water utility
Since 2007, Sydney Water has conducted an annual customer value survey to measure Sydney Water’s
perceived performance across key services, price and brand image elements. In a recent survey shown in
Figure 1, service elements make up 38% of value, brand image elements 34% and price 29%. It is
highlighted that pricing is only one of the drivers to define value for money, level of service and brand image
are more important in customers’ perceptions. A recent survey also reveals that there is a significant
decrease in the rating of the price of water as high/very high, comparing with the previous three years.
Sydney Water conducted an extensive service faults tracking survey and asked customers about the impact
of repeat problems on satisfaction with Sydney Water. Figure 2 shows that customers’ satisfaction rates are
significantly decreased after three or more repeat problems.
Figure 1 – How Value for Money is perceived
To better understand residential and business customers’ acceptance about water interruptions, Sydney
Water conducted a survey to measure their tolerance of planned or unplanned water interruptions for various
durations. Figure 3 shows that business customers have similar acceptance of planned and unplanned water
interruptions. In contrast, more residential customers can tolerate planned interruptions than unplanned
interruptions. In dealing with planned water interruptions, residential customers have much higher
acceptance than business customers. Figure 4 shows that residential customers have higher relative
acceptance of unplanned water interruptions than business customers. Based on the customers’ tolerance of
water interruptions, we should pay more attention to the longer duration interruptions as they have higher
impacts on customers’ value and acceptances.
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Figure 2 Repeat Failure impacting on satisfaction
Figure 3 Business customers’ tolerance of planned or unplanned water interruptions
Figure 4 Business and Residential customers’ acceptance of unplanned interruption
4. BUILD CUSTOMER VALUE INTO DECISION MAKING
Based on the customer value for money survey, it highlights that customers measure value for money not
only from taking into account pricing and service levels but also Sydney Water’s brand image. To meet
customer expectations, it requires Sydney Water to not only reduce the capital and operational expenditures,
but also improve the level of service and improve its corporate image through attending a water main failure
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in a timely manner and taking into account social impacts such as prolonged duration of the unplanned water
interruption and traffic disruptions due to failure of critical water mains.
4.1. Reticulation water mains
Reticulation water mains are generally of smaller diameter and have a lower impact when they fail. Renewal
is based on their failure history through cost benefit analysis. Figure 2 shows that repeat failure impacts on
customer satisfaction. Sydney Water proactively analyses poor performing assets, especially repeat failures
and their impacts to customers and then prioritises them for renewal fortnightly. The aim of reticulation water
main renewal is to ensure all reticulation water mains continue to provide a reliable water supply and to
minimise the impact on the community and environment by identifying those water mains with an
unacceptable level of repeat failure and prioritising them for renewal.
To meet the defined level of service and customer expectation, a 24 hour, seven day a week response
capability is in place throughout the year to identify, respond and repair and re-establish service to customers
to minimise impact of a failure. The following aspects are taken into consideration:
 set up key performance indicators to measure response times for water main breaks which is
measured from the time Sydney Water receives notification of a failure to the time the loss of water
is stopped.
 Unplanned interruption: in identifying renewal candidates, rebate costs were taken into account to
reflect the customers’ acceptance of unplanned interruption.
 Service and image: the social cost of traffic disruptions is taken into consideration to reflect customer
value to enhance Sydney Water’s service levels and corporate reputation.
4.2. Critical water mains
The primary objective of the critical water main strategy is to prevent (or minimise) the failure of critical water
mains with the high consequence of failure including traffic disruption, flooding and extended period of water
disruption. Without a sound management and proactive maintenance strategy to manage these high
consequence critical water mains, the level of service and Sydney Water’s reputation could be impacted. To
effectively prevent the potential failure of critical water mains, Sydney Water has developed a quantified risk-
based replacement model to assist in renewal decision-making. The principle of the model is to determine
the risk associated with each section of the critical water main by estimating the probability and
consequences of failure for each asset, shown in Figure 5. The consequence of failure is calculated in
dollars by considering the financial and economic impacts to Sydney Water including costs of repairs, water
loss, restoration, property damage and customer rebates, as well as the social impacts to the community
including water discontinuity and community disruption.
Figure 5 Sydney Water’s critical water main quantified risk model
4.3. Calculation of water discontinuity as social cost
The social cost of water discontinuity is calculated using an estimate of the number of customers affected
due to unplanned water interruption and the possible customers’ behaviours. Given the complexity of the
water network system configuration, hydraulic modelling is required to better estimate the number of
customers affected due to water main break. The calculation of social cost aims to value, in dollar terms, the
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inconvenience caused by a lack of water service and the inconvenience suffered will be a function of a
number of factors:
 Length of service interruption
 Time of day and day of week
 Availability of suitable substitutes
 Demographics of customers
In general, a short period of unplanned water interruption is unlikely to cause significant disruption as bottled
water can easily be obtained at a relatively minor cost. The social cost can effectively be estimated by
looking at the direct cost of purchasing bottled water.
The current calculation is based on the time and dollar cost of purchasing drinking water, with less emphasis
on the inconvenience associated with the lack of potable water for other than drinking purposes.
Inconvenience is likely to be the most important driver of social cost for a longer period of unplanned water
interruption. The longer the outage, the higher the inconvenience is likely to be.
As we know from Figure 4, the tolerance of unplanned water interruption differs depending on the durations.
When there is an unplanned water interruption event with a shorter duration, it can be assumed that
customers will go to the corner shop or supermarket to purchase bottled water for the initial three hours.
Where Sydney Water cannot restore water supply within three hours, a water tanker is usually organised to
distribute water to the customers. It is assumed that an average of the tanker cost and the purchase cost is
used for the period from three hours to six hours. For prolonged events of six to 24 hours, it is assumed that
customers will travel to friends or relatives. When the water discontinuity is longer than 24 hours, it is
assumed that the customers are required to have an alternative accommodation. These costs are in addition
to the water purchase and travel costs. These costs are then only applied to those customers who ‘could not
cope’ according to a Sydney Water survey.
4.3.1. Calculation of traffic disruption as social cost
When a critical water main breaks close to a major road, it has the potential to cause a significant interruption
to the traffic and the local community. This occurs as the failure of the main and its repair causes the closure
of part of or the entire road. To calculate the costs of traffic disruptions, an estimate of delay time, volume of
traffic and the value of time lost for various road users are required.
The economic cost of traffic disruption can be estimated by traffic volume and the delay per impacted
passenger multiplied by the value of time. The delay time can be estimated with a good understanding of the
following factors:
 Time of day when the failure occurs;
 Availability of alternative routes;
 Provision of warnings (eg radio announcements) of delays;
 Type of road and traffic volumes; and
 Flow-on impacts to other roads in the vicinity especially as cars divert around a closure.
For each road type, an estimate of the number of vehicles per day can be obtained from Roads and Maritime
Services NSW (RMS). If a water main breaks in the vicinity of a road, it will impact the local traffic. In many
instances, delay time will be close to zero if traffic conditions are low and there are available alternative
routes. However, delays are more likely to be higher during peak hour on main commuter routes where
similar substitutes are not available. Duration of impact is the period in which road users are impacted as
distinct from the period of repair and restoration. While road closures may occur, traffic will not continue to be
impacted as drivers find alternative routes around the disruption. The duration of impact varies according to
the road type. Based on traffic management statistical information, it is assumed that the maximum delay for
a minor road, single major road, dual major road and freeway is between 10 minutes to one hour. The value
of time per vehicle is estimated at $23 per hour, which is calculated using the RMS Economic Assessment
Manual. The calculation of the average hourly impact is based on the assumption that there is equal
probability that a main will fail in every hour of the day. The cost for each hour of the day is based on
assumed traffic level and weighted such that the maximum delay time coincides with the peak traffic periods.
The estimated cost of traffic disruption per hour is about $10,000 for major single roads, $25,000 for major
dual roads and $80,000 for freeways. As the size of the water main break will have different impacts on the
traffic and the community, a diameter factor should be applied to take into account the consequence cost for
transport delay due to various sizes of water main.
4.3.2. Property damage due to flooding
When a critical water main breaks, it often causes significant impact to the local community, such as flooding
of residential properties, and impacting on commercial activities. This is calculated using the multiplication of
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geographic location factor, size factor and average third party liability. Broadly the third party liability cost is
predominantly related to third party damages that are associated with flooding (or flooding induced
commercial losses).
4.3.3. The importance of customer value in decision making
For any larger diameter water main, it is unlikely to justify its renewal without taking into account the social
costs as the renewal cost is normally high compared to the direct maintenance costs to the water agency. If
the water agency does not take into account the social impacts into the cost benefit analysis, poor
performing critical water mains will continue to fail as they cannot be justified for renewal. Eventually the
water agency’s service level drops, the community and customers are not happy and corporate reputation
may be affected as customers complain about traffic disruption, flooding or the extended water disruption.
The quantified risk model assists Sydney Water to make an informed decision about critical water main
management by comparing the risk with the net present value of relevant risk mitigation activities such as
prioritisation of condition assessment programs, scheduled maintenance, and replacement of critical water
mains (Kane, 2013). The overall critical water main strategy is shown in Figure 6. It includes a list of
initiatives from renewal, condition assessment, inspection, operational procedure development and spare
inventory management. The strategy centres on the quantitative risk assessment and is supported by a long
term capital investment forecast, information management, minimising third party damage through
reinforcing asset protection, developing approval procedures and research & development in condition
assessment of buried pressurised pipelines.
Figure 6 Overview of Sydney Water Critical Water Main Strategy
5. LIVING IN A CONSTRAINTED CAPITAL ENVIRONMENT
Utilities throughout the world are faced with the challenge of managing their assets to meet stakeholder and
customer levels of service with limited funds. In the United States, the US Environmental Protection Agency
released a study in 2002 that highlighted the funding gap between actual and needed investment in water
infrastructure, estimated at $102 billion for drinking water under current revenue scenarios. The projected
funding gap is a result of aging infrastructure and increasing population and demands on water systems.
Closing the gap will likely require both increases in funding and more efficient management of water assets,
for example through application of the improved asset management practices (Marlow, 2009).
In 2013, the American Water Association conducted the annual state of water industry survey and listed the
top 15 issues facing the water industry. The top three issues are: state of infrastructure, lack of public
understanding of value of water, and capital cost. In 2012, the Water Services Association of Australia
(WSAA) worked with the International Water Association (IWA) conducted the third asset management
performance improvement project with a total of 37 water utilities from Australia, Canada, New Zealand,
Philippines and the United States. This project highlighted that a constrained economic environment (global
financial crisis impacts to US and others) and regional influences (such as major water security investment in
Australia increasing debt and water prices) are driving changes in water industry asset management
practices to deliver affordable prices, improved value for money and reduced capital expenditure.
This is not a coincidence. These issues are the most immediate issues facing the water industry around the
globe and Sydney Water is no exception. To respond to these challenges, Sydney Water developed its
corporate strategic plan 2012-16 with the vision of valued water solutions. To help us to achieve the vision,
Sydney Water has set up a goal to increase customer satisfaction while keeping price increases below
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inflation.
In addition, there is an increasing expectation on utilities by regulators to demonstrate customer value and
deliver an optimised level of service. Regulators are requiring the water industry to reduce capital investment
programs and deliver more with less while maintaining or improving customer satisfaction.
6. Asset and system performances
The asset and system performance standards set in the Operating Licence are effectively Sydney Water’s
minimum service standards and the system performance standards represent a form of “customer service
guarantee”. In recent years, asset and system performances have been improved over these years and we
are now operating well below licence limits for most of the standards, shown in Figure 7 to 9. In this context,
the targets for these standards should strike a balance between providing Sydney Water with sufficient
latitude to cope with unexpected system failures and providing an incentive to maintain the organisation’s
focus on improved performance. To pursue an optimal investment program with consideration of the
regulator’s view and customer expectation, a further review of asset and system performance was conducted
to optimise the capital and operational programs against the level of services and risk.
Figure 7: Unplanned water interruption licence limit - Operating Licence
As shown in Figures 7 to 9, Sydney Water has performed better than the licence limits for the past. As asset
manager, we need to understand in each case the logic behind asset performance in relation to asset base,
capital or operational expenditure and system or design standards, etc. We also need to understand if we
can relax some of the levels of service as a trade-off to reduce the capital or operational costs. In this way,
we can pursue the optimal balance point to meet the licence standards and customer expectations at the
lowest life cycle cost with the inputs from stakeholders such as regulators and customers.
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Figure 8: Low pressure licence limit - Operating Licence
Figure 9: Repeat water interruption licence limit – Operating Licence
6.1. Build level of service into decision making
To build level of service into decision making, Sydney Water sought opportunities to trade reduced capital or
operational costs with the risk of reducing service level, potentially seen as reduced performance standards
against the licence limits. Based on the analysis, there is potential for Sydney Water to reduce some capital
investment in water main renewals and growth to narrow the gap between performance standards and
licence limits in unplanned water interruption and low pressure respectively. Even though there is large head
room between the repeat water interruption performance and the licence limit, it cannot be used as it neither
provides financial benefit nor improves customer satisfaction.
6.1.1. Optimal balance between performance and licence limit to reduce capital program
Figure 10 shows the number of customers experiencing unplanned interruption exceeding five hours caused
by water main failures. It shows that critical water mains contribute about 15% to the licence limit and
reticulation water mains contribute to about 85% on average. It is interesting to know that the contribution
from critical water mains has reduced since 2009/10 to a stable level of 10%, which potentially was a result
of the implementation of the critical water main strategy in 2007/08.
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Figure 10: number of customers experiencing unplanned interruption exceeding 5 hours
The red curve in Figure 11 represents the water system performance by showing the total number of
customers (or percentage) who are affected by unplanned water interruptions at various duration time in a
year (e.g, 8% of customers experiences longer than 1 hours unplanned interruption and 4% of customers
experiences longer than 4 hours unplanned interruptions). Regulators set different key performance
indicators (KPI) to measure utilities’ reliability and availability along this curve. NSW Office of Water requires
water agencies to report on number of customers experiencing any duration unplanned water interruption;
Water industry regulator in UK (Ofwat) requires water agencies to report the total number of properties
affected by unplanned interruptions of more than 12 hours duration; and NSW IPART sets up a licence limit
for Sydney Water that no more than 40,000 properties experience an unplanned water interruption lasting
longer than 5 hours annually. Young described this curve as “discontinuity frontier” and the future for
customer service standards in unplanned water interruption may involve a regulator choosing two points,
three points or an entire discontinuity curve (Young, 1999). If we apply electricity industry’s reliability
measures, the system average interruption frequency index (SAIFI) can be represented by the maximum
reading of y axis of the “discontinuity frontier” curve; the customer average interruption duration index
(CAIDI) is close to the x axis reading of the area’s centroid under discontinuity frontier, x and y axis
(unavailable area); the system average interruption duration index (SAIDI or average unplanned customer
minutes off water supply) can be obtained by the product of SAIFI and CAIDI.
Figure 11: Different KPIs employed by Regulators
The following diagram demonstrates that the effectiveness of various intervention methods to improve the
system performance, reliability and availability. The curve of short duration events is more elastic than the
curve of longer duration events. Operational change (opex programs) such as response time management
and change of crews can relatively easily improve the performance of shorter duration events, however the
longer duration event is difficult to improve as it is more rigid and it is largely contributed by either system
configurations such as less redundancy and single supply or characteristic of assets such as under roads or
railways. The middle section of the curve can be improved through combination of capital investment (capex)
such as water main renewal as well as operational change and system improvements.
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Figure 12: Water discontinuity frontier, system availability and effectiveness of intervention methods
Figure 13 shows the “discontinuity frontier” curve of Sydney Water’s water network performance. It shows
that the percentage of properties experience unplanned interruptions at various durations over the past few
years. As we can see from Figure 13, it shows that the overall system performance and availability have
been improving as the number of properties experiencing unplanned interruptions at various durations is
decreasing.
Figure 13: Percentage of properties experiencing various duration of unplanned water interruptions
Even though water main failure is largely driven by its asset condition, system pressure and soil
environment, it is understood that there are significant seasonal variations with water main breaks and leaks.
Based on the observation of past water main failure performance, severe weather conditions can increase
water main failure rates by up to 50%. Consideration should also be given for the likelihood of extremely
large unexpected failure events. It is then possible to allocate a reasonable buffer to provide contingency
covering the extreme weather event and the large water main break events. We can then utilise the
remaining gap to optimise the capex programs in reticulation and critical water main renewals.
With a clear view of performance, level of service and risk as well as regulators and customers’ view,
analysis reveals that there is potential for Sydney Water to reduce some capital investment in water main
renewals and growth to narrow the gap between asset performance and licence limits in unplanned water
interruptions and low pressure respectively. Based on the analysis, we could propose around a 20%
reduction in the water main renewal programs without breaching licence limits. The utilisation of available
head room between unplanned water interruption performance and licence limit by various drivers is shown
in Figure 14.
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Figure 14: Unplanned water interruption longer than 5 hours – Operating Licence
We are going to continue to closely monitor water main performance. Further analysis of asset performance,
customer willingness to pay and improving customer satisfaction will be undertaken to optimise the balance
in asset performance, risk, lowest life cycle cost and customer satisfaction.
7. CONCLUSIONS
Sydney Water’s asset planning process considers both asset capability and service outcomes to determine
its servicing strategies and its investment in new assets, maintenance programs and renewal projects. The
process effectively sets up a balance between what the various stakeholders are looking for and our
capability to deliver it. We then put in place decision frameworks and planning processes to guide decision
making and actions to implement that servicing strategy with consideration to the level of service and
customer value.
The asset and system performance standards in the Operating Licence are effectively Sydney Water’s
minimum service standards. Sydney Water continually explores the available opportunities to strive towards
an efficient balance between service, cost and risk through better understanding customer value and
expectations. Further customer engagement and research is planned to assess tolerance for a potential
impact on service where altering our performance against a current licence standard, or maybe exceeding
the limit, could bring a cost benefit.
8. REFERENCES
[1] D. Marlow, P. Davis, D. Trans, D. Beale, S. Burn and A. Urquhart, Remaining Asset Life: A
State of The Art Review, WERF, 2009
[2] G. Kane, D, Zhang, D, Lynch, M. Bendeli Sydney Water’s critical water main strategy and
implementation – a quantitative, triple-bottom line approach to risk based asset management,
Sydney, 2013
[3] K. Young, P. Belz, A whole of life approach to management of water mains, 1999
[4] Sydney Water customer value strategy, 2013
[5] IWA-WSAA 2012 asset management performance improvement project, Nov. 2012
[6] 2013 AWWA state of water industry report, 2013
[7] Sydney Water Water Main Asset Class Plan 2010/11, July 2011
[8] International Infrastructure Management Manual, 2006
[9] AS/NZS 4360 Risk Management, 2004
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