Government
of South Australia
SA Water
Regulatory Business
E-book
This page has intentionally been left blank.
e x e c uti v e s ummaRy
i
OuR PuRPOse
Delivering water and
wastewater services in
efÏcient, responsive,
sustainable and
accountable ways.
Government
of South Australia
SA Water
Regulatory Business
E-book
i i
sa Wate R R e g ul atORy Busi n e ss P ROP O s al
South Australia recently experienced the most
severe drought in recorded history, serving to
underline the critical importance of water to our
human needs, way of life, and future prosperity.
Delivery of major infrastructure such as the
Adelaide Desalination Plant means current and
future generations of South Australians can rely
on secure water supply, and represents another
important contribution by SA Water to the
community – the latest of many such contributions
during the Corporation’s proud 156-year history.
In this context, Water for Good – the South
Australian Government’s blueprint for securing
South Australia’s water supply – has initiated a
series of reforms of the water industry, including
new legislative and regulatory arrangements.
Although this is a time of significant change
within the industry, the expectations of our
customers and our owner – the South Australian
Government – mean that SA Water must continue
to deliver safe, reliable, responsive and cost-
effective services.
As we enter our first period of economic
regulation, this imperative remains paramount in
our minds, and guides our strategic direction.
Among other things, this Proposal outlines the
capital investment and operating expenditure
required to:
• Enable prudent and efficient delivery of water
and sewerage services, consistent with customer
expectations; and
• Ensure we can deliver an appropriate commercial
return to our owner, the South Australian
Government, representing the people of South
Australia.
In preparing this Proposal we have drawn on past
research and feedback from the community to
ensure we have a clear understanding of customer
expectations.
We have also undertaken benchmarking to
measure our performance against peers and,
where necessary, have enlisted external expertise
to provide independent scrutiny and enhance our
forecasting methodologies.
The degree of rigour applied to developing this
Proposal is evident throughout its chapters.
Thorough risk assessment and review of every
capital project has underpinned development
of our capital investment proposal – the nature
of which is changing. Whereas our capital
expenditure has been dominated by drought-
response initiatives in the recent past, necessary
capacity upgrades and asset renewal works
will act as the key drivers of capital expenditure
through to 2015–16.
At its peak, SA Water’s annual capital expenditure
for 2009–10 amounted to approximately
$1.1 billion, and during the three years leading into
the initial regulatory period averaged approximately
$590 million. In contrast, the annual capital
expenditure proposed for the initial regulatory
period averages approximately $368 million.
The operating expenditure proposed by
SA Water will enable efficient delivery of water
and sewerage services, consistent with the high
quality our customers expect and receive.
SA Water’s commitment to balancing service
quality, reliability and cost outcomes for
our customers means that, although we
Foreword by the chairman
and chief executive
FOR e WOR d By th e ch ai R man an d c h i eF e x e c uti v e i ii
face significant challenges in our operating
environment, we benchmark favourably among
our peers.
Despite significant cost pressures associated with
rising energy prices, carbon pricing, and the
operation and maintenance of new infrastructure,
we are proposing a relatively flat level of operating
expenditure for delivery of sewerage services
through to 2015–16.
The operating expenditure proposed in relation to
delivery of water services is forecast to decline from
a peak of approximately $484 million in 2013–14
to approximately $466 million in 2015–16, largely
reflecting the commissioning and proving plan
developed for the Adelaide Desalination Plant.
Through a decade of customer research and
discussions with the SA Water Customer Council
we understand our customers want safe and
healthy drinking water, assets that are reliable,
and a water utility that is quick to respond when
things go wrong.
However, customer expectations change.
While this Proposal marks an important milestone
for SA Water as it enters a new era of economic
regulation, it will also set in train a new dialogue
with our customers and key stakeholders,
including ESCOSA and two new customer councils
being established to represent the business and
broader communities.
SA Water considers this level of engagement will be
crucial if we are to meet customer expectations into
the future and, along with internal mechanisms to
manage customer feedback, we will work closely
with the Energy and Water Ombudsman as a means
of further understanding customer issues.
The issues we will face through to 2015–16 are
transparently set out in this Proposal, which clearly
describes how we will continue to operate in
line with the expectations of our customers and
owner.
We believe this Proposal provides the appropriate
information to support ESCOSA as it makes its
first revenue determination for SA Water.
On behalf of the Board of SA Water, we
recommend this Proposal as an efficient and
responsible approach for the initial regulatory
period.
Lewis Owens
Chairman
John Ringham
Chief Executive
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sa Wate R R e g ul atORy Busi n e ss P ROP O s al
contents
Table of acronyms and shortened forms
vi
Table of Attachments
ix
executive summary
xi
chapter 1: introduction
chapter 2: Business context
2.1.
About SA Water
2.2.
Key challenges in the operating environment
13
2.3.
SA Water Strategic Plan: 2012–16
26
chapter 3: customer service
31
3.1.
SA Water’s commitment to customer service
31
3.2.
Water Retail Code
32
3.3.
Customer Charter & performance
32
3.4.
Listening to customers
40
chapter 4: service classification
45
4.1.
Purpose
45
4.2.
Retail services
45
4.3.
Direct control services
46
4.4.
Excluded services
47
4.5.
Cost allocation methodology
49
chapter 5: demand Forecasts
51
5.1.
Demand for water services
51
5.2.
Demand for sewerage services
65
chapter 6: capital expenditure
73
6.1.
Capital expenditure leading into the initial regulatory control period
74
6.2.
Benchmarking of SA Water’s capital expenditure
75
6.3.
Capital expenditure development process
79
6.4.
Overview of proposed capital expenditure
88
cOn te n ts v
6.5.
Proposed infrastructure capital expenditure – direct control water services
89
6.6.
Proposed infrastructure capital expenditure – direct control sewerage services
98
6.7.
Capital expenditure driven by corporate support requirements
109
6.8.
Delivery of the proposed capital expenditure program
112
chapter 7: Operating expenditure
119
7.1.
Operating expenditure leading into the initial regulatory control period
119
7.2.
Benchmarking of SA Water’s operating efÏciency
121
7.3.
Overview of proposed operating expenditure
127
7.4.
Operating expenditure forecast development process
128
7.5.
Proposed operating expenditure – direct control water services
134
7.6.
Proposed operating expenditure – direct control sewerage services
139
7.7.
Operating expenditure associated with the ADP
143
7.8.
Interaction of the capital and operating expenditure forecasts
146
chapter 8: Pass through events
149
8.1.
Uncertainty in a regulatory context
149
8.2.
Overview of proposed pass through events
150
8.3.
Nature and purpose of pass through events
150
8.4.
Proposed pass through events
151
chapter 9: Regulatory Finance
161
9.1
Regulatory Asset Base (RAB)
161
9.2.
Depreciation
164
9.3.
Weighted Average Cost of Capital (WACC)
166
9.4.
Estimated regulatory income tax
180
chapter 10: Required Revenue and Pricing
187
10.1. Proposed forms of revenue and price control
187
10.2. Calculation of allowable revenue
192
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table of acronyms and shortened forms
Acronym / shortened form
Full form
Proposal
Regulatory Business Proposal 2013–2016 (this document)
AAB
Accounting Asset Base
AAS
Australian Accounting Standards
ABS
Australian Bureau of Statistics
ADP
Adelaide Desalination Plant
ADWG
Australian Drinking Water Guidelines
AER
Australian Energy Regulator
ANCOLD
Australian National Committee on Large Dams
APF
Accounting Policy Framework
ATA
Australian Teleservices Association
BOD
Biochemical Oxygen Demand
CAM
Cost Allocation Methodology
CAPM
Capital Asset Pricing Model
CCTV
Closed Circuit Television
CDD
Cooling Degree Days
CGB
Commonwealth Government Bond
Charter
SA Water’s Customer Charter
CLD
A composite measure of number of customers, length of network and
demand
Code
ESCOSA’s Water Retail Code (draft)
CPMM
SA Water’s Corporate Project Management Methodology
CSIRO
Commonwealth Scientific and Industrial Research Organisation
Customer Assist Program
SA Water’s Customer Assist Program
Customer Council
SA Water Customer Council
Customer Service Centre
SA Water’s Customer Service Centre
CWMS
Community Wastewater Management System
DORC
Depreciated Optimised Replacement Cost
DPTI
Department of Planning, Transport and Infrastructure
DRC
Depreciated Replacement Cost
EIP
Environment Improvement Program
EP
Equivalent population
EPA
Environment Protection Authority
ERA
Economic Regulation Authority of Western Australia
ESCOSA
Essential Services Commission of South Australia
ESCV
Essential Services Commission (Victoria)
Final Advice
Advice on a Regulatory Rate of Return for SA Water – Final Advice,
February 2012
taBl e OF ac RO n yms an d s hORte n e d FOR ms v i i
Acronym / shortened form
Full form
FVC
Fair Value Curve
GAP
Glenelg to Adelaide Parklands
GIP
Government Inspection Points
GL
Gigalitre
GPCC
Government Planning and Coordination Committee
GSP
Gross State Product
Guidance Paper
ESCOSA’s Guidance Paper with respect to Review of SA Water’s Prices
for 2013/14–2015/16
Initial Pricing Order/IPO
Pricing Order for the Regulatory Period 1 July 2013–30 June 2016
IPART
Independent Pricing and Regulatory Tribunal
IRP
Iron Removal Plant
ML
Megalitre
MRP
Market Risk Premium
MVA
Megavolt Ampere
NSIS
North South Interconnection System
NTER
National Tax Equivalent Regime
NWC
National Water Commission
NWI
National Water Initiative
Ombudsman
Energy and Water Ombudsman SA
PAC
Powdered Activated Carbon
PL
Pipe Line
PMF
Probable Maximum Flood
PMP
Project Management and Procurement
PVC
Polyvinyl Chloride
PWC
Public Works Committee
RAB
Regulatory Asset Base
RBA
Reserve Bank of Australia
REC
Renewable Energy Certificate
RET
Renewable Energy Targets
RTAB
Regulatory Tax Asset Base
RTU
Remote Telemetry Unit
SCADA
Supervisory Control and Data Acquisition
SMT
SA Water’s Senior Management Team
TCorp
NSW government borrowing authority
TFP
Total Factor Productivity
The Act
Water Industry Act 2012 (SA)
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sa Wate R R e g ul atORy Busi n e ss P ROP O s al
Acronym / shortened form
Full form
The Board
SA Water’s Board of Directors
The Treasurer
The Treasurer of South Australia
VAA
Value Advisor Associates
WA
Water Association
WACC
Weighted Average Cost of Capital
WSAA
Water Services Association of Australia
WTP
Water Treatment Plant
WWTP
Wastewater Treatment Plant