Using cost-benefit analysis to appraise investments
An United Utilities case study

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Page 4: Investment for the Millom project

United Utilities 17 Image 10The original budget for the Millom project was set at £14.5 million. However, this was before a full evaluation of the social costs was carried out. Having consulted with the Environment Agency, United Utilities aimed to identify the best possible solution for its shareholders, the environment, local communities and other stakeholders. The key considerations were:

  1. the initial capital outlay of the project (capex)
  2. the ongoing operating expenditure from running the project (opex)
  3. the wider costs and benefits to the environment and other stakeholders.

All possible solutions when costed out were over the original budget. Therefore the partners in the plan engaged in a cost-benefit analysis to identify which of the three options put forward gave the best return against all factors.

Whole-life assessments

The whole-life cost assessment of the solutions involved examining capital costs of construction (e.g. concrete structures, pumps and pipe work) as well as operating costs – e.g. power and chemicals for treatment. Although option 1 had a significantly lower initial capital outlay, originally United Utilities had discounted options 1 and 3 as the application of the technology was new to the company and the regulator, so more data was needed to accept the solution. This only left option 2, despite it being the most costly and potentially having a negative impact on the environment.

However, United Utilities found positive evidence from colleagues at Welsh Water to demonstrate how the ultraviolet treatment processes could be used effectively. It then worked closely with the Environment Agency to ensure the project minimised the negative external costs and maximised the external benefits.

This resulted in United Utilities adopting option 1 as the most innovative, cost-effective and environmentally beneficial option that in some way satisfied all stakeholders. The key reasons were:

  • It had the lowest capex and whole-life cost - the infrastructure for option 1 can be contained within the existing waterworks/treatment works site.
  • Its carbon footprint and environmental impact was lowest - it minimises the use of concrete and construction waste.
  • When storms and heavy rain occur the excess water is treated with ultraviolet disinfection and is discharged into the estuary. This eliminates strong odours that would have affected the local community and delivers benefits to the shellfish and bathing waters.

United Utilities 17 Diagram 5

United Utilities | Using cost-benefit analysis to appraise investments