Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process

C652 – Provision of specialist services in economic regulation to support the PC15 business planning process

Procurement process Open

Stage This stage of the procurement exercise is being conducted with the intention of selecting a supplier or suppliers to supply the goods and /or services as outlined in the specification.

Deadline for As indicated on E-sourcingni submission

Criteria and See Annex 1 of this document for details of the weightings (selection and) award criteria and scoring methodology

Procurement Utilities Contracts Regulations 2006 Regulations (as amended)

Finance and Regulation Directorate Operational Procurement Team Northern Ireland Water Westland House 40 Old Westland Road BELFAST BT14 6TE Tel: 08457 440088

1 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process

Tender C652

Title: Provision of specialist services in economic regulation to support the PC15 business planning process

Specification

Table of contents

2 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process

1. Introduction

Northern Ireland Water

Background to Northern Ireland Water

Northern Ireland Water, created in April 2007, is owned entirely by the Department for Regional Development.

It is responsible for the supply and distribution of drinking water and the provision of sewerage services for approximately 780,000 domestic, agricultural and business customers throughout Northern Ireland. Northern Ireland Water (NI Water) supplies these services to a population of 1.7 million.

An overview of the size, scale and nature of the assets operated by NI Water is detailed here.

 26,500km of Water Main.  1,265 Sewerage Pumping Stations.  20 Major Water Treatment Works.  15,300 km of Sewers.  450,000 Manholes.  1100 Waste Water Treatment Works. Further information is available on the NI Water web site http://www.niwater.com/

Directorate /Business unit This tender is being run by the NI Water Finance & Regulation Directorate, on behalf of the Finance & Regulation / Regulation & Business Performance Unit.

2. Background to the requirement

About NI Water NI Water is responsible for providing water and sewerage services in Northern Ireland. It is both a government owned company (GoCo) and a Non Departmental Public Body (NDPB). The Northern Ireland Minister for Regional Development acts as both the sole shareholder and policy maker.

NI Water is the only statutory water company in Northern Ireland; as a GoCo, it operates in accordance with company legislation and is subject to economic and quality regulation.

Before April 2007 water and sewerage services were provided by the ‘Water Service’, an agency that came under the remit of the Department for Regional Development. When NI Water was established it was intended that domestic water charges would be introduced and that by 2010 the company would be fully funded by direct income. However, as domestic water charging has been deferred, NI Water continues to rely on government subsidy.

Because it relies on government funding for the majority of its revenues, it is also classified for public expenditure purposes as a NDPB and it is subject to

3 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process the rules that govern public expenditure. This hybrid arrangement adds complexity, and funding is uncertain from year to year.

Economic Regulation The Northern Ireland Authority for Utility Regulation (the Utility Regulator) is the body responsible for the economic regulation of the electricity, gas and water industries in Northern Ireland.

PC15 – a longer term strategic view NI Water’s first price control was PC10 (2010-2013). This will be followed by a two year interim PC13 (2013-2015) to enable preparation for a longer term, more strategic approach to be taken to the six year PC15 (2015-2021). It is envisaged that there will be a mid-term review of PC15 in 2018.

The duration of PC15 and the opportunity for a mid-term review are determined partly by the likely milestones for the government’s Spending Reviews, which will determine the level of government funding that is available to NI Water.

In addition, the Department for Regional Development is leading the development of a long- term water strategy for Northern Ireland with a 24 year horizon. The strategy will address issues of climate change and the delivery of sustainable improvements in water management which depend on contributions from a wide range of stakeholders.

Changes in the regulatory approach In PC10 and PC13 the Utility Regulator’s approach mirrored that of Ofwat. However, NI Water is conscious of significant changes to the regulatory approach being considered by Ofwat and notes that the Utility Regulator has also indicated that it will review its approach to a number of regulatory matters. For example, the Utility Regulator’s Overall Approach to PC15 indicates that the Utility Regulator will:  Consider the extent to which we can refresh our existing operational efficiency modelling approach taking account of the development of efficiency modelling by other regulators;  Be minded to continue examining the likely extent of frontier shift across the water industry;  Continue to benchmark NI Water against water and sewerage service providers in Great Britain;  Consider our approach to capital efficiency modelling and will publish our approach in May 2013;  Review the alternative of moving to a revenue cap,

It is important that NI Water is able to assess the potential impact of changes in the regulatory approach as we prepare our PC15 Business Plan.

In preparing the PC15 Business Plan, NI Water would seek advice from specialists in economic regulation in all of these matters. In addition we are also seeking support with the design and implementation of a suitable cost allocation basis which will underpin our tariff setting processes thus ensuring compliance with both best practice charging principles and licence requirements.

4 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process 3. Scope

Period of contract The period of the contract will be as outlined in e-sourcingNI. The contract shall remain valid for all orders placed on or before the last day of the initial contract period or, if applicable, the last day of the extended contract period should the contract be extended by a further period.

The initial contract period will end on 31 March 2016.

Geographical coverage The contractor will ordinarily work with NI Water staff based at NI Water headquarters, Westland House, 40 Westland Road, Belfast BT14 6TE. On occasions, may also be necessary for the contractor to travel to other NI Water sites.

Quantities of goods and/or services

Note : Where possible, estimates of the volume of goods or services required by NI Water have been included in the Tender documents. These estimates are intended as indicative only and must not to be regarded as a guarantee as to the quantity that will be required during the period of the Contract. NI Water reserves the right to add additional goods/services to the contract from time to time and equally to delete goods/services from the contract in accordance with contract requirements.

4. Specification

Functional requirements

NI Water wishes to engage subject matter experts to advise on economic regulatory matters throughout the PC15 price control process.

In particular, advice is sought on:

(i) Suitable methods for assessing NI Water’s comparative efficiency and setting appropriate efficiency catch-up targets; (ii) Implementation of a suitable cost allocation basis to be used to further develop tariffs which comply with best practice charging principles and licence requirements; and (iii) NI Water’s cost of capital, which will involve separate assessments of the cost of debt and cost of equity components and which reflect NI Water’s unique funding basis and governance structure.

While not an exhaustive list, opinion and advice may also be sought on:

(iv) changes in economic regulatory approach to PC15; (v) approaches to capital efficiency;

5 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process (vi) frontier shift assumptions including appropriate total factor productivity (TFP) and real price effects (RPE) assumptions; (vii) assisting NI Water in the preparation of a PC15 Special Factor claim; and (viii) the approach taken by the Utility Regulator on the above matters in their draft and final determinations.

Monitoring Schedule

The services will be provided through a call-off contract. The deliverables for each assignment of the call-off will be agreed prior to the call-off assignment being activated.

Invoices are to be submitted at the completion of each assignment.

The NI Water Contract Owner and Contract Manager will continually monitor performance and provide feedback to the contractor.

Other requirements The tender Bid should include: (i) clear responses to the questions posed in Annex 1; and (ii) the total ‘landed on shore’ daily cost (ex VAT) of each grade of staff offered for the delivery of the contract. The selected Bidder will, prior to the commencement of each assignment, identify which of its staff will have responsibility for the delivery of the assignment and an estimate of the associated cost.

5. Constraints

This is a call-off contract which will provide NI Water access to specialist economic regulatory advice and support throughout the PC15 business planning process. Each assignment within the contract will be agreed between NI Water and the contractor prior to work commencing on the assignment.

Implementation programme / Plan

It is envisaged that the contract will run from 1 April 2013 to 31 March 2016. The Utility Regulator’s Overall Approach to PC15 provides the key milestones of the PC15 programme:

15 Mar 2013 Utility Regulator publishes draft PC15 Information Requirements 15 May 2013 Utility Regulator publishes final PC15 Information Requirements 15 May 2013 Utility Regulator publishes approach to opex & capex efficiency 31 Oct 2013 NI Water submits draft efficiency and cost data to Utility Regulator 20 Dec 2013 NI Water submits draft Special Factors claim to Utility Regulator 24 Mar 2014 NI Water submits PC15 Business Plan to Utility Regulator 10 July 2014 Utility Regulator publishes Draft Determination for consultation 15 Oct 2014 NI Water submits a response to the Draft Determination

6 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process 10 Dec 2014 Utility Regulator publishes Final Determination 10 Feb 2015 NI Water accepts or rejects the Final Determination

As PC15 is an integral part of NI Water’s business planning process, involvement from the subject matter experts may be required at each stage of the project to provide robust research to inform NI Water’s submissions to the Utility Regulator and then objective, independent scrutiny of the Utility Regulator’s proposals.

6. Procurement and contractual requirements

NI Water Standard Terms and Conditions

Any contract awarded as a result of this exercise will be awarded under Northern Ireland Water Terms and Conditions of Service, as amended, which can be downloaded from the NI Water Web site. http://www.niwater.com/gms2.asp

7. Procurement procedures

Evaluation

NI Water reserves the right to interview suppliers or carry out site visits for all suppliers or only those suppliers that meet a required quality and/or cost threshold. NI Water also reserves the right to inspect the type of equipment proposed to be supplied and /or may require a demonstration or clarification before acceptance of any tender. Additionally, if a tender is deemed, following an evaluation on quality, not to have met the minimum requirements of the specification and as such has not reached a minimum score threshold on quality of 30% of the 70% available, the tender may be excluded from the remainder of the competition, on the basis that it is deemed unable to provide the required supplies/services. NI Water is not bound to accept the lowest or any tender. NI Water also reserves the right to accept any tender in whole or part thereof.

A breakdown of the selection and award criteria and scoring methodology is attached at Annex 1

8. Format and content of responses

If you have not used the e-tendering portal before you should make yourself familiar with it as soon as possible and read all the instructions. Important information regarding the completion of responses is contained in the Qualification Questionnaire / Envelope.

7 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process Submissions All submissions including attachments must be made via the e-tendering portal (www.e-sourcingni.bravosolution.co.uk) by the designated closing time and date. Tenders that are incomplete or in the wrong format may be deemed to be non-compliant with instructions and may not be considered.

 Only attach documents that have been specifically requested and attach them in the correct area.

 Company name must be shown in the header and or footer on attachments

 Number the pages of attachments showing total number of pages e.g. page 1 of 3

 Attach files where specified. When asked for an attachment at Question level, upload the file to the correct Question in order to complete your response.

 Tenderers are required to keep tenders valid for acceptance for a period of ninety days from the event closing date.

 Pricing information should only be uploaded in the Commercial Response questionnaire / envelope.

 NI Water will not reimburse any costs incurred by applicants in connection with preparation of their responses to any stage of this project

Variant bids are not permitted for this procurement. (A variant bid for example could provide NI Water with an alternative solution or alternative pricing).

Buyer Attachments

The following documents are attached in the project file and should be used in responding to this project

. Tender documents (this document) . F11 - Supplier response form (to be completed and attached where instructed) . Annex 2 - Scorecard . Annex 3 - Pricing Schedule . F16 – Financial Analysis Form

8 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process 9. Annex 1 – Selection and Award Criteria

FINANCIAL CHECKS

NI Water will seek independent financial and market advice by way of a Dun and Bradstreet assessment to ensure that the preferred supplier identified for each of the lots is of a sound financial standing. If the Dun & Bradstreet assessment rates the supplier as ‘above average risk’ or ‘high risk’, NI Water reserves the right to exclude the tenderer from the remainder of the tendering exercise. In addition, NI Water will apply the following Financial Appraisal Model to all tenderers as part of the Stage 1, mandatory compliance check. Applicants who are assessed in the Financial Analysis assessment of any lot as High Risk, will be excluded from the process. The Financial Analysis assessment will be conducted on the basis of the information provided to NI Water by the supplier on form F16 attached to the questionnaire. A composite score will then determine the overall financial risk of the applicant (including all consortium members identified as named organisations). The following tables set out the basis on which the financial standing of applicants to deliver the services and/or supplies required, will be assessed.

Medium Max Criteria High Risk Low Risk Risk Score

Average Net Profit before Net profit < Net profit Net profit Tax – over past three 5% of 5-20% of >20% of years as a % of the contract contract contract 3 potential annualised value value value contract value to the applicant. Score 0 2 3

Potential annualised contract value to the >70% 20% - 70% <20% applicant as % of Average 2 Annual Turnover (over past three years) Score 0 1 2

Average Net Assets (over past three years) as a proportion of potential -ve - +ve 2 annualised contract value to the applicant.

Score 0 - 2

9 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process

Current Working Capital (current assets minus -ve - +ve 3 current liabilities)

Score 0 3 Total Score 10

Financial Risk Assessment Score

Low Risk – assessed as ‘financially sound’ for the purposes 8 - 10 of the PQQ

Medium Risk – assessed as a ‘potential risk’ for purposes 5 - 7 of the PQQ

High Risk – assessed as ‘major risk’ and excluded from the 0 - 4 PQQ

CONFLICTS OF INTEREST

Bidders are required to declare in the questionnaire via eSourcing NI any potential conflicts of interest i.e. detail any current agency agreements with manufacturers. Northern Ireland Water will consider any potential conflicts of interest identified by lead consortium members and prime contractors and their identified named organisations. Bidders who Northern Ireland Water considers to have an unacceptable conflict of interest will be excluded from the process.

ESSENTIAL CRITERIA

Bidder company profile Pass / Fail The bidder is asked to demonstrate relevant experience of advising on approaches to, and assessment of, comparative cost efficiency. Experience must have been gained within the regulated utility sector within the previous 5 years. (Maximum 2 sides of A4)

The bidder is asked to demonstrate relevant experience of advising on approaches to cost allocation and tariff design. Experience must have been gained within the

10 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process regulated utility sector within the previous 5 years. (Maximum 2 sides of A4)

The bidder is asked to demonstrate relevant experience of suitable methods for assessing cost of capital. Experience must have been gained within the regulated utility sector within the previous 5 years. (Maximum 2 sides of A4)

Each question in this section must receive a Pass in order for the bid to be assessed at the next stage.

AWARD CRITERIA

Evaluation Sub Criteria Weighting Quality 70% Cost 30%

Guidance for completion and scoring

Bidders must provide a response to each question.

Bidders must ensure that their responses to each question are numbered / labeled.

Questions will be scored exclusively against the response provided against each question.

Bidders are required to upload a completed response to each of the questions, in Annex 1, to the relevant section within the technical envelope on eSourcing NI. Please note, full responses must be provided for each question. Responses must be self-contained i.e. must not reference any other section of the questionnaire.

Bidders must ensure they do not exceed the response page limit per question. Each question has a scoring mechanism where scores are allocated on a basis of 0 to 4. The score assigned is then factored by the relevant weightings.

Important: - Where a Bidder receives a score of 0, 1 or 2 in any question, NI Water reserves the right to exclude the Bidder from further participation in the competition.

Please ensure that responses are clear and concise and, where indicated, page limits and font styles are adhered to. Please note the panel will only review the pages that fall into the required page limits. Any pages outside the required limit will not be assessed.

11 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process

9.1 Evaluation Scorecard

QUALITY - Question 1 (4 marks*) (25% weighting)

Who do you propose for this engagement? Bidders are asked to note that: 1. It is envisaged that the contract will begin on or soon after 1st April 2013. 2. Work carried out throughout the term of this contract must be undertaken by those staff for which CV’s have been submitted during this tender process. Where it becomes necessary to replace someone on the contract, e,g, where they leave the company, their replacement on the contract must be in agreement with NI Water.

Demonstrate by individual CV the in-depth knowledge and experience that will be utilised to fulfil the requirements of Section 4 of the Tender Document.

*Please note, each CV will be scored individually out of 4 marks. Each individual score will then be added together and an average score out of 4 will be used for bidder’s overall score for question 1. Your response should be limited to 2 sides of A4 in Arial Font 10 for each CV. Assessment Score Indicators CV’s of proposed Partners / Directors, Principal Consultants, Senior Consultants and Consultants clearly show evidence of direct contributions to contracts with UK water companies in the last 5 years in all of the following three areas: 1. Relevant experience of advising on approaches Excellent 4 to, and assessment of, comparative cost efficiency; 2. Relevant experience of advising on approaches to cost allocation and tariff design; and 3. Relevant experience of suitable methods for assessing cost of capital. CV’s of proposed Partners / Directors, Principal Consultants, Senior Consultants and Consultants clearly show evidence of direct contributions to contracts with UK water companies in the last 5 years in two of the three following areas: 1. Relevant experience of advising on approaches Good 3 to, and assessment of, comparative cost efficiency; 2. Relevant experience of advising on approaches to cost allocation and tariff design; and 3. Relevant experience of suitable methods for assessing cost of capital.

12 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process CV’s of proposed Partners / Directors only, clearly show evidence of direct contributions to contracts with UK water companies in the last 5 years in two of the three following areas: 1. Relevant experience of advising on approaches Satisfactory 2 to, and assessment of, comparative cost efficiency; 2. Relevant experience of advising on approaches to cost allocation and tariff design; and 3. Relevant experience of suitable methods for assessing cost of capital. CV’s of proposed Principal Consultants, Senior Consultants and Consultants only clearly show evidence of direct contributions to contracts with UK water companies in the last 5 years in two of the three following areas: Fair 1 1. Relevant experience of advising on approaches to, and assessment of, comparative cost efficiency; 2. Relevant experience of advising on approaches to cost allocation and tariff design; and 3. Relevant experience of suitable methods for assessing cost of capital. CV’s do not contain evidence of direct contributions to contracts with UK water companies in the last 5 years Unsatisfacto 0 in any of the three identified areas. ry

QUALITY - Question 2 (4 marks) (15% weighting) Identify several options which could be used in PC15 to assess NI Water’s comparative cost efficiency. Which of these options do you believe is most suitable and explain why?

Your response should be limited to 2 sides of A4 in Arial Font 10

Assessment Score Indicators Bidder demonstrates a clear understanding of the issue. Relevant options clearly identified, properly explained Excellent 4 and suitable option evaluation criteria identified and applied. Partial understanding of the issue demonstrated. Potential options identified and explained. Option Good 3 evaluation criteria not identified. Preferred option identified.

Bidder demonstrates minimal understanding. Relevant and non-relevant options identified and explained. Option Satisfactory 2 evaluation criteria not identified. No preferred option identified

13 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process No understanding demonstrated. Majority of options Fair 1 identified are not relevant, with little or no explanation offered. No evaluation of options carried out. Unsatisfactor No understanding of comparative efficiency. No relevant 0 y options identified. No evaluation of options carried out.

QUALITY – Question 3 (4 marks) (5% weighting) Explain how you would ensure that the comparative efficiency analysis takes account of company specific characteristics and the approach you might take to identify any such characteristics.

Your response should be limited to 1 side of A4 in Arial Font 10

Assessment Score Indicators Bidder demonstrates a clear understanding of the issue. Their proposed approach is clearly laid out and Excellent 4 will ensure deadlines for special factor submissions are met. Partial understanding of the issue demonstrated. Good 3 Proposed approach defined at high level. Bidder demonstrates minimal understanding of the Satisfactory 2 issue. Proposed approach lacks detail and definition.

Bidder demonstrates no understanding of the issue. Fair 1 Proposed approach is unclear or impractical

Unsatisfacto Bidder demonstrates a no understanding of the issue. 0 ry No approach outlined.

QUALITY - Question 4 (4 marks) (5% weighting)

What steps will be taken to ensure the appropriateness and quality of the assessments and advice being offered to NI Water?

Your response should be limited to 1 side of A4 in Arial Font 10

Assessment Score Indicators The steps include sign off by Partners/Directors for all advice / deliverables provided to NI Water. Where Excellent 4 deliverables have been compiled by a Partner/Director, they are reviewed and counter-signed by another Partner/Director.

14 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process All assessments and advice is provided to NI Water via Good 3 Partner/Director. Prior internal scrutiny is provided at Manager level. Satisfactory 2

Assessments and advice are provided without prior Fair 1 internal scrutiny.

Unsatisfacto No evidence is provided of quality assurance of 0 ry assessments and advice.

QUALITY - Question 5 (4 marks) (15% weighting)

The bidder is asked to outline the key principles which should be adopted when developing regulated water and sewerage tariffs. Outline the approach you would take when designing a suitable cost allocation methodology which adheres to these principles.

Your response should be limited to 2 sides of A4 in Arial Font 10 Scoring Mechanism

Assessment Score Indicators Bidder demonstrates a clear understanding of issues associated with tariff design. Their proposed cost Excellent 4 allocation solution is clearly laid out and is consistent with industry best practice. Partial understanding of the issue demonstrated. Key Good 3 success criteria identified and high level cost allocation solution identified. Bidder demonstrates minimal understanding of the Satisfactory 2 issues. Proposed approach lacks detail and definition.

Bidder demonstrates no understanding of the issue. Fair 1 Proposed approach is unclear or impractical

Unsatisfacto Bidder demonstrates a no understanding of the issue. 0 ry No approach outlined.

QUALITY - Question 6 (4 marks) (5% weighting)

The bidder is asked to explain how NI Water’s unique governance status and financial framework would impact NI Water’s cost of capital. The bidder is asked to outline its approach to assessing NI Water’s cost of debt and cost of equity. Your response should be limited to 2 sides of A4 in Arial Font 10 Scoring Mechanism

15 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process

Assessment Score Indicators Bidder demonstrates a clear understanding of issues associated with NI Water’s financial framework. Excellent 4 Proposed approach is well explained and fully reflects these issues Partial understanding of the issue demonstrated. High Good 3 level approach outline. Bidder demonstrates minimal understanding of the Satisfactory 2 issues. Proposed approach lacks detail and definition.

Bidder demonstrates no understanding of the issue. Fair 1 Proposed approach is unclear or impractical

Unsatisfacto Bidder demonstrates a no understanding of the issue. 0 ry No approach outlined.

COST - (30% weighting)

Important: Only bidders who pass the minimum Quality threshold criteria will continue to the pricing evaluation stage

Bidders are required to upload a complete response to the Pricing Schedule in the commercial envelope on eSourcing NI.

Addition information relating to the qualification or technical envelope must not be attached within the commercial envelope. Please note the panel will not review such information. Only the completed pricing schedule should be uploaded here.

Price will be evaluated on the basis of daily rates. The lowest overall price will be awarded the maximum marks.

State the daily rates (landed on shore at NI Water Head Office, Westland House, Belfast) (ex VAT) for each grade of staff to be utilised in this contract.

 Partner / Director  Manager  Associate

Your response should be limited to 1 side of A4 in Arial Font 10

Grade Weighting Partner / Director 80% of the 30% available.

16 Tender C652 - Provision of specialist services in economic regulation to support the PC15 business planning process Principal Consultant Assessed Senior Consultant collectively as 20% Consultant of the 30% available.

The following formula will be applied to all bids to calculate the relevant commercial score for each bid submission.

1. Lowest Tender Bid Price (Partner)/Bid Price (Partner) X Weighting of 80

2. Lowest Tender Bid Price (Collective)/Bid Price (Collective) X Weighting of 20

3. Lowest Overall Tender Bid Price Score (Partner Score + Collective Score)/100 X Weighting of 30

For the purposes of this ITT NIW requires all Bidders to complete the Pricing Schedule. We will therefore not accept any variant bids in terms of alternative pricing models.

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