Here’s what Utility Week Live taught us about the shift to totex.
The burning question was asked and answered first. Is it pronounced toe-tex or tot-ex? The overwhelming response was tot-ex.
With that vital issue clarified, the delegates at the conference could then get into the meat of the issue: the impact of totex on the utility companies.
Better decisions have to, and will, be made
Under totex, the old ways of having separate allowance for capital expenditure and operational expenditure has gone. Totex combines the two.
As Northumbrian water network manager Dennis Dellow told the Water Theatre, having that one pot of money allows the companies to think more holistically about issues, such as leakage, enabling them to find the best solutions.
This may be putting a sticking plaster on the problem for now, keeping the asset running for as long as possible, or it may be building that new asset. The thought processes, especially as the budgets begin to dwindle as the price control period enters its final few years, will have to improve to ensure that projects that need to be completed, have the funds available to be done.
Having to make these decisions is not something new. Totex may mark a significant shift for the water industry, but delegates stated it should not be hailed as revolutionary because it has been happening in other industries for a long time.
Totex will drive efficiencies
“The best way not to save money is to not spend it at all and find another solution.” This sums up the attitude of the totex regime.
With energy networks and now the water companies under totex rules, the need to make money go further is pressing.
“It’s about sweating the assets,” one delegate told Utility Week, adding that spending a lot of money on a capital project when a repair or refurbishment would do a similar job is where the industry is now at.
The water companies in particular are now being encouraged to “use the assets that were needed and built under previous price controls”.
Technology is a key part of this equation, with new and innovative ideas springing up to help improve the life of a number of assets, pushing back the need to replace them. This is the totex ideal.
Other issues make the totex shift more complicated
While totex may drive smarter decisions and push costs down as the infrastructure in the ground is maintained and its lifetime prolonged, not everything is perfect with the new, single money-pot regime.
“There is a lot of complexity,” one keynote delegate said during a roundtable session, adding that the totex shift just adds to the already lengthy list of things for them to do. “The water companies are trying to do everything at once”.
One of the principle concerns links to running out of money during the price control period. Come the last couple of years of the price control period, a company may look to build a necessary new asset, only to find is funding limited, so t will have to compromise and make do with a “sub-optimal solution until the start of the next price control period”
This could, in the water sector, hit the outcome delivery incentives (ODIs), which have financial rewards and penalties associated with them. One water sector veteran said this could lead to tactical ODI-related planning and spending. With totex reserves potentially running low, and some ODIs “out of reach, some water companies, at risk of reputational and financial penalties, may focus on reaching those ODIs “that will make a difference”.
So totex, A potential game change, creating an efficient and smart utilities sector, provided lessons can be learned, and tactical decisions for short term financial gains can be avoided. But on the whole, a good move.