The DWMP blog – Episode 5. Targets; cost or value?

If you haven’t already seen the earlier episodes in this series, I suggest that you start from Episode 1 (https://tinyurl.com/DWMP-blog).

Setting a long-term plan requires knowing the targets that you are trying to achieve.?Those targets are themselves uncertain as they will be subject to economic, political and social pressure.?So how do we set the targets and how do we ensure that they balance what society wants with what society can afford?

Key targets for the service provided by drainage and wastewater systems are the number of properties and other areas suffering flooding and the protection of the water environment.?Other targets will include avoiding nuisance or disruption, minimising carbon footprint and increasing biodiversity.

The published DWMP guidance recommends setting service targets at company level and then cascading these to each river basin and catchment area.?This approach results in a postcode lottery where service failures can be ignored if the area targets are met.?If you are the only flooded house in the village, you are probably stuck, because the catchment as a whole is meeting its target, so no action is needed.?Fortunately, most companies ignored this part of the guidance and took alternative approaches.?

There are alternative approaches to a postcode lottery.?

• A target level of service to be achieved in all locations irrespective of cost.?This gives the best customer outcomes but can lead to expensive schemes being promoted.
• A target level of service to be achieved in all locations unless the cost of the scheme exceeds an affordability threshold based on willingness to pay.?This can leave some customers stuck with a poor level of service because achieving the target would be too costly.
• A cost benefit approach where the value of a service failure is defined, and service is improved to the extent that it is cost beneficial to do so but without any firm target level of service.
• A combination, where a cost-effective approach is used to achieve a low, minimum level of service in all locations and then a cost benefit approach is used to consider delivering additional benefit.

The level of service for environmental projection is generally driven by legal and regulatory requirements and so is not subject to a cost benefit assessment.?The Water Framework Directive (WFD) and associated UK regulations do allow a get-out for when costs are excessive compared to benefits; but this is rarely invoked.?However, for non-regulatory environmental targets in excess of WFD requirements, a cost benefit assessment may be appropriate.?This could include conditions for wild swimming or the YISMIDs ambition to have absolutely no sewage discharges to the environment.

The option of a cost benefit approach most strongly affects setting the level of service for flooding as there are no absolute regulatory requirements for this.

To calculate the ratio of costs and benefits we need to be able to put a financial value of the benefits of environmental improvement or reduced flood risk.?How is this done?

The values that customers put on improved service are gauged through willingness to pay surveys and focus groups, but these surveys have difficulties in gauging true customer wishes. ?We in effect ask customers who have not had any failure of service, how much extra they would pay for someone else to have no failure of service.?It is a challenging concept to respond to.

The customer wishes are normally gauged uniformly across the water company region, although at least one water company analysed the willingness to pay results separately by operating area.?They found significant differences, but they decided that it was politically unacceptable to actually respond to those perceived customer wishes with different levels of service and charges.

So, what was done in practice in the first cycle of DWMPs?

There is a distinction to be drawn between the long-term plans developed for DWMPs and the five-year regulatory business plans.?DWMPs are perceived as being aspirational plans to be delivered in an ideal world, whereas regulatory business plans are constrained by concerns about affordability for customers.?

The DWMPs generally set a target level of service to be achieved in all locations irrespective of cost.?For property flooding the target was generally set as an annual probability of flooding; typically 1:30.

Once the DWMP is collated there will be a pruning exercise to produce the business plan by bring costs down to what customers and the government are prepared to see paid for.?This could involve implementing an affordability threshold to exclude expensive schemes and could also involve a glidepath from the current probability of flooding to the desired probability over a number of years.

How should we set targets in the future??I am a strong supporter of a cost benefit approach as it forces a real discussion of why we are trying to achieve improvement and who considers it important.?However, there are some problems with a pure cost benefit approach as it is currently applied.?

First, a new approach is needed to willingness to pay to make it easier for customers to understand.?Perhaps a move to willingness to accept surveys that pose the question as “how much compensation would you like if you suffered a service failure”.?This is much easier for customers to relate to.?

Second, long term plans have to consider the uncertainty in the benefit value of service failures at future planning horizons.?In twenty years, will people be more prepared to pay for reduced flood risk for other communities??Will they be more prepared for increased bills to provide safe conditions for wild swimming??Will they pay more for sewage discharges to just disappear??This uncertainty is at least as large as that for climate change, but will need to be incorporated into future planning.

Third, there has to be minimum levels of service for both property flooding and environmental discharges that is provided even when the costs are excessive.?Setting these minimum standards is itself a challenge as it would stretch the limits of the willingness to pay / willingness to accept methodologies.?

Summary

The method of setting targets in the DWMP guidance was misappropriated from the WRMP methodology and was not found useful in delivering DWMPS.?There are some significant challenges to put target setting on a firmer base including setting minimum standards, a better approach to customer value and consideration of future uncertainty of customer value.