SA Water E-book

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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

i v

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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sa Wate R R e g ul atORy Busi n e ss P ROP O s al

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)

v i i i

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

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