Issues Paper - Review of prices for Sydney Water Corporations … · 2011. 7. 18. · June 2011....

Independent Pricing and Regulatory Tribunal

Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other servicesFrom 1 July 2012

Water — Issues PaperJune 2011

Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services From 1 July 2012

Water — Issues Paper June 2011

ii IPART Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services

© Independent Pricing and Regulatory Tribunal of New South Wales 2011

This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-921628-99-3 DP133

The Tribunal members for this review are:

Mr Rod Sims, Chairman

Mr James Cox PSM, Chief Executive Officer and Full Time Member

Ms Sibylle Krieger, Part Time Member

Inquiries regarding this document should be directed to a staff member:

Richard Warner (02) 9290 8406

Alex Kelty (02) 9290 8499

Independent Pricing and Regulatory Tribunal of New South Wales PO Box Q290, QVB Post Office NSW 1230 Level 8, 1 Market Street, Sydney NSW 2000 T (02) 9290 8400 F (02) 9290 2061 www.ipart.nsw.gov.au

Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services IPART iii

Invitation for submissions

IPART invites written comment on this document and encourages all interested parties to provide submissions addressing the matters discussed.

The submission from Sydney Water is due by 16 September 2011.

Submissions from stakeholders are due by 14 October 2011.

We would prefer to receive them by email .

You can also send comments by fax to (02) 9290 2061, or by mail to:

Sydney Water Corporation Price Review 2012 Independent Pricing and Regulatory Tribunal PO Box Q290 QVB Post Office NSW 1230

Our normal practice is to make submissions publicly available on our website . If you wish to view copies of submissions but do not have access to the website, you can make alternative arrangements by telephoning one of the staff members listed on the previous page.

We may choose not to publish a submission—for example, if it contains confidential or commercially sensitive information. If your submission contains information that you do not wish to be publicly disclosed, please indicate this clearly at the time of making the submission. IPART will then make every effort to protect that information, but it could be subject to appeal under freedom of information legislation.

If you would like further information on making a submission, IPART’s submission policy is available on our website.

Contents

Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services IPART v

Contents

Invitation for submissions iii

1 Executive summary 1

2 Introduction 4 2.1 IPART’s role and core functions 4 2.2 Purpose of this Issues Paper 6 2.3 Scope of this review 6 2.4 The review process 10 2.5 The 2008 Determination 12 2.6 List of issues for stakeholder comment 14 2.7 Issues on which Sydney Water is requested to comment 20

3 Sydney Water’s role and regulatory framework 21 3.1 Sydney Water’s role 21 3.2 Regulatory framework 24 3.3 Incentive regulation 25 3.4 Service quality standards 25

4 IPART’s price determination process 28 4.1 Length of the determination period 28 4.2 Determining the notional revenue requirement 29 4.3 Forecasting metered water sales and customer numbers 29 4.4 Price structures and price levels 30

5 Outstanding issues from the previous review 34 5.1 Reporting annual progress against capital projects and operating

expenditure, and forecast expenditure 35 5.2 Review of sewerage charges, including the usage charge and the fixed

charge 37 5.3 Water and sewerage charging arrangements and price structures for multi-

dwelling properties 40 5.4 Rouse Hill recycled water scheme – costs and structure of recycled water

usage and fixed charges 41 5.5 Estimating the marginal cost of water 44 5.6 Reviewing the unfiltered water price and the costs of providing this service 46 5.7 Rouse Hill river management charge 46

Contents

vi IPART Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services

5.8 Developing a land area based charging system for stormwater services 48 5.9 Costs and charging arrangements for trade waste services 52 5.10 Miscellaneous and ancillary service charges – methodology for charging,

costs and service levels 54

6 New issues for this review 57 6.1 Determination of wholesale prices for the Sydney Desalination Plant (SDP) 57 6.2 Costs avoided by recycled water schemes 57 6.3 Treatment of expenditure on heritage assets 58 6.4 Environmental standards and efficient expenditure 59 6.5 Discretionary standards 60 6.6 Inclusion or exclusion of voluntary environmental expenditure in the RAB 61 6.7 Risk and Return Trade-off 62 6.8 Developer Charges 66 6.9 Forecasting water sales 67 6.10 Operating licence obligations 69 6.11 Scarcity pricing at the bulk water level 70 6.12 Increasing cost pressures 71 6.13 Potential increases in bulk water costs 71 6.14 Costs Arising from Section 16A Directions 73

Appendices 75 A Matters to be considered by IPART under Section 15 of the IPART Act 77 B Information required from Sydney Water 78 C IPART’s miscellaneous charging pricing principles 86

1 Executive summary

Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services IPART 1

1 Executive summary

The Independent Pricing and Regulatory Tribunal of NSW (IPART – hereafter referred to as “we,” “us,” or “our”) is responsible for setting the maximum prices that may be charged by metropolitan water agencies for water, sewerage, stormwater and recycled water services. We will undertake a review of the prices that Sydney Water Corporation (Sydney Water) can charge its customers commencing from 1 July 2012. The purpose of this issues paper is to seek comment and feedback from Sydney Water and stakeholders on the issues that are important for this review. Sydney Water and all other interested stakeholders are invited to provide responses to the issues raised in this paper, and to attend a public hearing on 22 November 2011 to express their views.

Sydney Water is the largest water agency in NSW, and provides services to a population of more than 4.4 million people in Sydney, Illawarra and the Blue Mountains. The Sydney Catchment Authority (SCA) manages Sydney’s drinking water storages and catchments, and Sydney Water purchases bulk water from the SCA. Sydney Water also receives some of its bulk water supply from its subsidiary, the Sydney Desalination Plant Pty Ltd.

Sydney Water treats and distributes over 1.4 billion litres of drinking water per day via a network of 265 service reservoirs, 171 water pumping stations, 10 water filtration plants and 21,015km of water mains. It collects and treats more than 1.3 billion litres of wastewater each day through its 24,022 km of sewer pipes in 24 separate sewerage systems with 29 wastewater treatment plants. Sydney Water recycles around 92 million litres of wastewater a day. It also provides stormwater drainage facilities through 440 km of stormwater channels.1

Additionally, in January 2010, the Sydney Desalination Plant was added to the water treatment network. It provides 4% of Sydney Water’s water supply needs. In future, the desalination plant is expected to supply up to 15% of Sydney’s water supply needs, together with 65% from the Prospect water filtration plant and around 20% from other water filtration plants.2

1 Source: Sydney Water. 2 Ibid.

1 Executive summary

2 IPART Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services

In conducting the 2012 review, one of our key roles is to ensure that only the efficient costs of providing Sydney Water’s regulated monopoly services are passed through into prices. We set prices with reference to Section 15 of our Act to recover only the efficient costs of funding the services that customers want to see provided. As part of our role of setting prices that recover efficient costs, we will form an overall view of whether the levels of Sydney Water’s operating expenditure and its capital program to be undertaken over the 2012 determination period are reasonable.

For the 2012 review of Sydney Water’s prices, there are a number of existing issues to be resolved that were identified at the time of the 2008 Determination. Some of the issues that arose in that review and are discussed in this paper include:

a review of sewerage charges, including the usage charge and fixed charge

the costs and structure of recycled water usage and fixed charges for the Rouse Hill recycled water scheme

the Rouse Hill river management charge

the costs and charging arrangements for trade waste services

the methodology for charging, costs and service levels applicable to miscellaneous and ancillary service charges

There are also a number of new issues that will be addressed throughout the course of the review. These include:

the treatment of expenditure on heritage assets

the inclusion or exclusion of voluntary environmental expenditure in the RAB

environmental standards and efficient expenditure

the trade-off between a water utilities’ risk that it bears and return that it receives

the Government’s decision to set developer charges to zero.

Other issues for this review are discussed throughout this Issues Paper. We seek comment and feedback from Sydney Water and stakeholders on the issues that are discussed in this paper. In addition, we are conducting a number of other reviews at the same time as the 2012 Sydney Water Review that will have important consequences for Sydney Water’s costs, pricing, and financial position. These other reviews include:

the review of prices for the Sydney Catchment Authority (SCA)

the review of prices to be charged by the Sydney Desalination Plant (SDP) for its bulk water services

the review of price structures for the metropolitan water utilities.

Sydney Water and other interested stakeholders are invited to provide submissions to these other reviews that have an important bearing on the Sydney Water Review.

1 Executive summary


The remainder of this issues paper is structured as follows:

Chapter 2 provides an introduction and outlines our role and core functions, the purpose and structure of this issues paper, the review process and the scope of the review. It also provides a list of issues on which stakeholders are requested to comment.

Chapter 3 outlines Sydney Water’s role and regulatory framework, and explains incentive regulation and service quality standards.

Chapter 4 outlines our price determination process, and discusses the length of the determination period, the calculation of the notional revenue requirement, forecasting of metered water sales and customer numbers, and price structures and levels.

Chapter 5 discusses outstanding issues from the previous review.

Chapter 6 covers the new issues specific to this review.

2 Introduction


2 Introduction

IPART regulates the charges or prices for the provision of water, sewerage, stormwater, recycled water, trade waste and other ancillary and miscellaneous services, including the provision of residential and non-residential properties with water, and the transportation and disposal of sewage from those properties.

The current determination for Sydney Water was released in 2008.3 The period for that determination was 1 July 2008 to 30 June 2012 (current determination period). In this review, we will determine Sydney Water’s charges for water, recycled water, wastewater and stormwater services to apply from 1 July 2012 (upcoming determination period). Before setting these prices, we will examine Sydney Water’s water, sewerage, recycled water and stormwater functions, its regulatory requirements and the appropriate level of revenue needed to support these activities in an efficient and effective manner.

Sydney Desalination Plant Pty Ltd, a wholly owned subsidiary of Sydney Water, has been granted 2 Water Industry Competition Act 2006 (WICA) licences. Sydney Desalination Plant Pty Ltd has now been declared a monopoly supplier and we have received terms of reference to conduct a pricing determination for the desalination plant. A separate Issues Paper will be released addressing the upcoming determination for Sydney Desalination Plant Pty Ltd.4

2.1 IPART’s role and core functions

IPART is the economic regulator that is undertaking this review of prices for the Sydney Water Corporation. IPART is charged with setting prices for four major metropolitan water providers in NSW. These water service providers are Sydney Water Corporation, Hunter Water Corporation, Gosford Council and Wyong Shire Council.

3 IPART, Review of Sydney Water Corporation’s Water, Sewerage, Stormwater and Other Services - From

1 July 2008 – Determination and Final Report, June 2008. 4 IPART, Determination of Prices for Sydney Desalination Plant Pty Limited’s Supply of Water - Issues

Paper, June 2011.

2 Introduction


Our role as price regulator is to set prices that will allow the water utilities to recover an amount of revenue that is equal to the efficient costs of providing their regulated water services. In conducting this review, we will engage the services of consultants to assess Sydney Water’s past and forecast operating and capital expenditure. These consultants will provide recommendations to us on the efficient costs incurred by Sydney Water that should be recovered from customers through prices. We will then consider these recommendations in setting prices that recover Sydney Water’s efficient costs.

In setting prices, we also aim to ensure that the prices we set are cost-reflective. Setting cost reflective prices signals to consumers the costs of their consumption decisions and results in an efficient allocation of resources. If prices do not reflect the full costs of service provision, or are set higher than the cost of service provision, it will encourage overconsumption or underconsumption of the service respectively and result in an inefficient allocation of resources. We may deviate from setting cost-reflective prices or choose to phase-in changes to prices in order to mitigate impacts on customers or the utility.

We have a transparent process for determining prices that is open to the public and involves a considerable degree of consultation with stakeholders, where stakeholders are any parties with an interest in the issues that the review addresses. We take into account the views of all stakeholders in making our decisions on pricing. Stakeholders are offered three opportunities to provide input into the review process. Stakeholders can provide a submission in response to the issues paper that also addresses Sydney Water’s submission, they can attend a public hearing to express their views, and they can also provide a submission in response to our draft report.

This issues paper has been released with the aim of obtaining stakeholders views on the issues that are raised in it and posed throughout the paper. By expressing their views on these issues, stakeholders will provide valuable feedback to us on the issues they see are important and how they believe we should approach these issues. We are interested in hearing stakeholder’s views and responding to their concerns. We have raised these issues as they are important in guiding our review process.

In addition to ensuring that Sydney Water are only allowed to recover the efficient costs of their operations through prices, we are also charged with protecting consumers from abuses of monopoly power in terms of prices, pricing policies and standard of services as well as taking into account the social impact of the determinations and recommendations. We conduct customer impact analysis and take these impacts into account when making pricing decisions. For example, we may choose to transition prices to levels that recover the full costs of a utility’s operations if we consider that the initial price impacts on customers may be too great. Either the government or the utility may then have to bear the cost of the shortfall.

2 Introduction


Our role also includes considering the need to promote competition in the supply of the services we regulate, and the appropriate rate of return on public sector assets, taking into account the appropriate payment of dividends to the Government. Much of our role is derived from the matters that we are required to take into account in making our price determinations. These matters are outlined in Appendix A of this Issues Paper and section 2.3 below.

2.2 Purpose of this Issues Paper

To assist stakeholders in making submissions, this Paper explains how the review is to be undertaken, provides background information, and outlines issues on which we particularly seek comments. We are interested in hearing the views of Sydney Water and stakeholders on the issues that are raised throughout this Issues Paper. These views are an important input to our review process. All submissions from stakeholders will be considered in making our draft and final determinations.

2.3 Scope of this review

This review will be conducted under Section 11 of the Independent Pricing and Regulatory Tribunal Act 1992 (IPART Act). Under Section 15 of the IPART Act, IPART is to have regard to the following matters (in addition to any other matters IPART considers relevant) when making a determination:

the cost of providing the services

the protection of consumers from abuses of monopoly power in terms of prices, pricing policies and standard of services

the appropriate rate of return on public sector assets, including appropriate payment of dividends5

the effect on general price inflation over the medium term

the need for greater efficiency in the supply of the services so as to reduce costs for the benefit of consumers and taxpayers

the need to maintain ecologically sustainable development by appropriate pricing policies that take account of all the feasible options available to protect the environment

the impact on pricing policies of borrowing, capital and dividend requirements of the government agency concerned and, in particular, the impact of any need to renew or increase relevant assets

5 IPART has released a paper on financeability tests and their role in price regulation that outlines

how regulatory adjustments could be made to a utility’s revenue requirement where there are concerns over the financeability of the utility’s operations. IPART, Financeability Tests and their Role in Price Regulation, January 2011.

2 Introduction


the impact on pricing policies of any arrangements into which the government agency concerned has entered involving the exercise of its functions by some other person or body

the need to promote competition in the supply of the services

considerations of demand management (including levels of demand) and least cost planning

the social impact of IPART’s determinations and recommendations

the quality, reliability and safety of the services provided. 6

In considering these matters, we must balance the diverse needs and interests of stakeholders — such as customer affordability, environmental impact and maintenance of overall customer service quality — and ensure that Sydney Water receives an allowance only for the efficient costs of the services it provides and does not undertake unnecessary expenditure. We also take into account principles issued by the Council of Australian Governments (COAG) and contained in the National Water Initiative.7

For this review, we will engage consultants to undertake an investigation of Sydney Water’s capital and operating expenditure program to determine whether it is optimal in terms of meeting the community’s demands for water, sewerage, stormwater and recycled water services. The outcomes of the consultant’s investigations will be published on our website.

Issues that we will investigate in this review include:

the efficiency of Sydney Water’s operating costs and the scope for further efficiency gains over the upcoming determination period

Sydney Water’s efficient capital expenditure requirements and the outcomes that will be achieved by its proposed capital expenditure program

Sydney Water’s regulatory requirements and any other government-imposed requirements

the impacts of price increases on customer bills

the appropriate rate of return for Sydney Water

forecast demand for Sydney Water’s water and sewerage services and the methodology for forecasting water demand

estimates of the marginal cost of water

increasing cost pressures

sewerage revenues and prices and comparisons of pricing across utilities

6 The section 15 requirements are listed in full in Appendix A. 7 The National Water Initiative has built on the principles established in the 1994 COAG Water

Reform Framework.

2 Introduction


stormwater area-based charging

charges for trade waste and miscellaneous services and making these charges cost reflective

Rouse Hill recycled water charges

recycled water revenues and avoided costs

Rouse Hill river management charges

the structure of Sydney Water’s prices, taking into account potential impacts on Sydney Water and economic efficiency.

Our general approach to determining monopoly prices for water agencies is outlined in the following diagram.

2 Introduction


Figure 2.1 IPART’s determination process

Obligations for service provision

Regulatory framework

What is the most appropriate approach to regulating the revenue and prices of agencies in this industry?

Given accuracy of forecasts and current industry dynamics, over what period should prices be set?

Revenue requirements

What are the efficient costs of providing these services?

How much will costs differ with variations in the levels of service provided?

What is an appropriate rate of return on the investment in the agency?

Will the agency have adequate access to capital to fund works that meet required standards and maintain services in the long term?

Price structure

How should the costs of delivering services be spread among customer groups?

How should prices be structured to encourage consumer and agency responses that best achieve sustainability objectives?

What are the likely impacts of prices on the affordability of services for different groups of consumers?

What are the potential environmental impacts?

What does the proposed outcome imply for the ongoing viability of the agency and its credit ratings?

What are the likely impacts on competition?

Determining a regulatory balance

What are the services the water agencies are required to deliver to customers and to what standard?

What are consumers' expectations about the level of service to be provided?

What are the broader environmental and operational constraints within which water agencies must operate and what impacts do these have on their capacity to deliver services?

2 Introduction


2.4 The review process

In undertaking this review, we will conduct our own research and analysis, using selected consultant investigations and public consultation. We invite submissions to the review as part of our consultation process. This issues paper was prepared to assist in identifying and understanding the key issues for the review and to elicit stakeholder comment. A range of issues are raised – throughout the paper and in consolidated lists in Section 2.6 and Appendix B – for which we seek particular comment. However, stakeholders may raise and discuss any other issues they believe are of relevance to the review. Details on how stakeholders can make submissions are given at the front of this Paper (on the page preceding the Table of Contents).

Additionally, this paper identifies information that Sydney Water is requested to provide in its submission.

Stakeholders will have a further opportunity to present their views at a public hearing.

We will release a draft report and determination following this consultation, and comments from stakeholders will be invited. We will consider the comments received from stakeholders before making our final determination and publishing our final report.

An indicative review timetable is set out below.

Table 2.1 Indicative review timetable

Task Timeframe

Release issues paper Friday 24 June 2011

Receive submission from Sydney Water Friday 16 September 11

Receive public submissions Friday 14 October 2011

Public hearing Tuesday 22 November 2011

Release draft report March 2012

Receive submissions to the draft report April 2012

Release final report June 2012

Note: These dates are indicative and are subject to change.

We have encountered difficulties completing our price reviews on time in the past because of delays in the provision of necessary information by regulated entities. Delays and the late provision of supplementary information can result in work being suspended or revised to take into account new information received. Delays and new information not only add to our workload and that of our consultants, but also limits stakeholders’ ability to participate and provide input into our processes and decisions.

2 Introduction


To allow us to better manage delays in the provision of information and supplementary information to this review, we will establish mechanisms that allow us to ‘stop the clock’ if we do not receive necessary information from Sydney Water on time. Under ‘stop the clock’ arrangements, a delay in receiving information would mean that the timetable will automatically be extended by the length of the delay. If it was necessary for us to ‘stop the clock’ we would announce that this is taking place and would publish a revised timetable on our website. If Sydney Water provides new information, we may need to ‘reset the clock’, reflecting the need to rework and reconsider matters to take this new information into account.

To ensure Sydney Water can provide all the information we require, we have undertaken a number of measures and have been in close communication with Sydney Water. In September 2010, we wrote to Sydney Water informing them of the upcoming review and our information requirements.8 The letter outlined in detail the information we require in Sydney Water’s submission, and ensures that Sydney Water has ample time to prepare its submission well in advance of this issues paper being released. The provision of advance notice to Sydney Water was in response to feedback from water agencies in the past that early notice of our requirements for an upcoming review would enable agencies to better prepare for the review.

This paper reiterates our information requirements (both throughout the paper and listed in Section 2.6 and Appendix B.) We will attempt, as far as possible, to agree with Sydney Water on what information it should provide for this review and when it should be provided. This should ensure that Sydney Water is able to provide the appropriate information within the relevant timeframe, and will minimise the possibility that we will have to stop or reset the review ‘clock’.

In addition to the timely provision of information, Sydney Water will be required to justify its costs and forecast sales through the provision of sufficiently comprehensive information. In particular, any proposal to change the price level or structure of any of its regulated services must be accompanied by sufficient cost information and justification to support the proposed change, must allow us to analyse the proposal and must enable stakeholders to make an informed response. Sydney Water’s submission should also identify the potential customer impacts of the proposal, how these impacts are distributed, and options to mitigate or minimise these impacts.

We are also interested in receiving Sydney Water’s response to the broader range of issues raised throughout this paper (and listed in Appendix B), in addition to its comments on other issues that are important to this review.

8 IPART, Letter to Sydney Water – IPART’s 2010 Price Review, 10 September 2010.

2 Introduction


2.5 The 2008 Determination

The 2008 Determination, which applies for the period from 1 July 2008 to 30 June 2012, set Sydney Water’s prices to generate total revenue of $8,671 million (in $2010/11 dollars.)9 This reflected our assessment of Sydney Water’s efficient costs of supplying water, sewerage and stormwater services to its customers. The effect of the 2008 Determination was that the bill of a household with average water consumption increased by a total of $259 (real $2010/11) or 31% in real terms by the end of the determination period (6.9% per annum on average). The largest increases in bills were in 2008/09 and 2009/10, which was a result of the construction of the desalination plant.

The 2008 Determination indicated that the decisions made on prices would allow Sydney Water to:

renew and expand water mains to service new growth and maintain existing service standards

undertake work on pressure management and leakages to reduce main breaks and water losses

invest in recycled water schemes to further support efforts to balance long-term demand and supply, including the replacement flows program on the Hawkesbury-Nepean River

invest in wastewater infrastructure to reduce both wet and dry-weather overflows

service new urban development

upgrade sewage treatment plants, including plants in the Hawkesbury/Nepean river catchment

construct the desalination plant

continue and extend existing demand management initiatives, including the retrofit, rainwater tank rebate and educational programs for residential customers, and the Every Drop Counts program for business customers, to address the demand/supply imbalance.

Sydney Water’s actual costs since the 2008 Determination

The figures below compare Sydney Water’s actual (or forecast) capital and operating expenditure against costs used to determine Sydney Water’s prices for the 2008 Determination. They show considerable variation between the costs that we allowed and actual costs.

9 IPART, Review of Prices for Sydney Water Corporation’s Water, Sewerage, Stormwater and Other

Services, June 2008, p 33.

2 Introduction


Figure 2.2 shows that in relation to the amounts that we allowed for capital expenditure in the 2008 Determination, Sydney Water overspent in the 2008/09 and 2009/10 financial years. It has also forecast a minor overspend in 2010/11 and 2011/12.

Figure 2.2 Sydney Water Corporation capital expenditure

Sydney Water Corporation Capital Expenditure

0.00

500.00

1000.00

1500.00

2000.00

2500.00

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Year

$201

0/11

mill

ion

DeterminationActual

Note: Actual figures for 2010/11 and 2011/12 are projections. Data source: Sydney Water 2008 Determination and Sydney Water AIR 2009/10.

Figure 2.3 shows that in relation to the amounts we factored into prices for operating expenditure in the 2008 Determination, Sydney Water had an overspend in 2008/09 followed by an underspend in 2009/10. It has forecast that its operating expenditures in 2010/11 and 2011/12 will approximately match the amounts we determined in the 2008 Determination.

2 Introduction


Figure 2.3 Sydney Water Corporation operating expenditure

Sydney Water Corporation Operating Expenditure

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Year

$201

0/11

mill

ion

DeterminationActual

Note: Actual figures for 2010/11 and 2011/12 are projections. Data source: Sydney Water 2008 Determination and Sydney Water AIR 2009/10.

For this review, we will be seeking from Sydney Water a reconciliation of its actual costs over the 2008 Determination period against the costs we allowed when we set prices in the 2008 Determination, and an explanation of the variances.

2.6 List of issues for stakeholder comment

To assist in identifying and understanding the key issues for this review, we seek comment on the following issues, which are explained and discussed throughout this paper (the page numbers are listed below). Stakeholders (including Sydney Water) may address some or all of the issues in their submissions, and can also raise and discuss any issues that they feel are of relevance to this review. A full list of the issues for stakeholder comment with the corresponding page number is listed below. These issues are grouped according to the relevant section of the Issues Paper.

IPART’s Price Determination Process

1 The appropriate length of the price path for the 2012 determination period. 33

2 The prudence of Sydney Water’s capital expenditure over the current determination period 33

3 Sydney Water’s projected capital expenditure program, including expenditure drivers, proposed service outcomes and scope for efficiency gains, to be outlined in its submission. 33

2 Introduction


4 The efficiency of Sydney Water’s operating costs over the current determination period and the efficiency of its projected operating costs (outlined in its submission). 33

5 The scope for Sydney Water to achieve further efficiency gains over the upcoming determination period. 33

6 The methodology and major assumptions used to develop Sydney Water’s forecast operating expenditures. 33

7 The evidence of customers’ willingness to pay for Sydney Water’s service levels and proposed expenditures. 33

8 Sydney Water’s proposed price structures and levels for residential and non-residential charges for the 2012 Determination in terms of fixed and usage charges. 33

Reporting of Annual Progress against Capital Projects and Operating Expenditure, and Forecast Expenditure

9 Sydney Water’s annual expenditures by year on each of its capital projects. 37

10 Sydney Water’s actual operating expenditure by year over the 2008 Determination compared to our determined expenditure, and justifications for any variances. 37

11 Sydney Water’s actual capital expenditure by year over the 2008 Determination compared to our determined expenditure, and justifications for any variances. 37

12 Sydney Water’s forecast operating expenditure by year over the 2012 determination period, and the drivers for these levels of expenditure. 37

13 Sydney Water’s forecast capital expenditure over the 2012 determination period, and the drivers for these levels of expenditure. 37

14 The cost of Sydney Water’s individual capital expenditure projects over the 2012 Determination. 37

15 The appropriateness of introducing any future reporting requirements for Sydney Water, and the nature of these requirements. 37

Review of Sewerage Charges Including the Fixed Charge and the Usage Charge

16 Sydney Water’s proposed price structure for residential and non-residential sewerage charges for the 2012 determination, in terms of fixed and usage charges. 40

17 The appropriate price structure for sewerage prices. 40

2 Introduction


18 The mherits and disadvantages of standardising sewerage charging structures across agencies. 40

19 Stakeholder’s views of the proposed option outlined for changing the sewerage charging structure, where usage and fixed charges are transitioned to more cost-reflective levels. 40

20 Sydney Water’s proposal in relation to charging arrangements and price structures for water and sewerage for multi-dwelling properties. 41

Rouse Hill Recycled Water Scheme - Costs and Structure of Recycled Water Usage and Fixed Charges

21 Sydney Water’s proposed approach to setting the price structure and level for Rouse Hill recycled water for the 2012 Determination. 44

22 The level of cost recovery of the Rouse Hill recycled water scheme. 44

23 The incentive for customers to disconnect from the Rouse Hill recycled water scheme if the fixed charge remains in place and the likelihood of customers disconnecting from the scheme. 44

24 Whether full cost recovery from Rouse Hill customers of the Rouse Hill recycled water scheme remains appropriate or whether some form of cost spreading should be implemented. 44

Estimates of the Marginal Cost of Water

25 The approach stakeholders believe should be used to set usage charges for Sydney Water. If marginal cost is to be used, the relative merits of using short-run or long-run marginal cost for the 2012 Determination should be adressed. 45

26 Sydney Water’s proposed usage charge for water and the method that was used to determine it. 45

Review of the Unfiltered Water Price and the Costs of Providing this Service

27 Sydney Water’s proposed costs and charges for unfiltered water. 46

Rouse Hill River Management Charge

28 Whether it is desirable to spread some of the costs of the Rouse Hill river management scheme across Sydney Water’s general customer base in order to mitigate price impacts on customers and to recognise benefits to the general Sydney Community. 48

2 Introduction


Developing a Land Area Based Charging System for Stormwater Services

29 Sydney Water’s proposed stormwater charging structure and levels for the 2012 Determination. The justification, advantages and disadvantages of Sydney Water’s proposed stormwater charging structure. 52

30 The implementation of a stormwater charging system similar to that of Hunter Water, or the appropriateness of some other form of stormwater charging. 52

31 The possible justification, advantages and disadvantages of Sydney Water adopting a simplified land area based stormwater charge such as the one developed by IPART. 52

Costs and Charging Arrangements for Trade Waste Services

32 Sydney Water’s proposed trade waste charges for the 2012 Determination, including the approach used by Sydney Water to formulate its trade waste charges. 54

33 The degree to which Sydney Water’s trade waste charges are cost reflective. 54

34 The impact of Sydney Water’s proposed changes to its trade waste charges on customers. 54

35 The Trade Waste Pricing Principles and the possibility of including additional principles. 54

Miscellaneous and Ancillary Service Charges - Methodology for Charging, Costs and Service Levels

36 Sydney Water’s proposed miscellaneous and ancillary charges for the 2012 Determination. 55

37 Sydney Water’s methodology and assumptions for estimating the level of miscellaneous charges. 55

38 The degree to which Sydney Water’s proposed miscellaneous charges are cost reflective. 55

39 The impact of miscellaneous charges on customers (and the broader customer base) as a result of any proposed changes to the existing miscellaneous charges. 56

40 Any other factors affecting miscellaneous charges. 56

Costs Avoided by Recycled Water Schemes

41 The avoided costs of recycled water schemes Sydney Water is seeking to recover from customers in the 2012 Determination. 58

2 Introduction


42 The evidence Sydney Water has provided for its recycled water avoided cost proposals. 58

43 The impact on customers resulting from the recovery of Sydney Water’s recycled water avoided costs. 58

Treatment of Expenditure on Heritage Assets

44 The treatment of heritage assets for pricing purposes. 59

Environmental Standards and Efficient Expenditure

45 Sydney Water’s approach to meeting environmental standards placed on it, and the means of achieving these standards at least cost. 60

Discretionary Standards

46 Sydney Water’s proposal in relation to areas where there are currently no standards for discretionary expenditure, and how levels of expenditure in these areas should be determined. 61

47 The introduction of standards or the development of a policy to clarify what expenditure needs to be undertaken in areas that are currently discretionary, or if they should remain at the discretion of the water utility. 61

Inclusion or Exclusion of Voluntary Environmental Expenditure in the RAB

48 The evidence of customer support to justify Sydney Water incurring discretionary expenditure, and the appropriate level of evidence of customer support Sydney Water would need to provide to justify funding discretionary expenditure. 62

Risk and Return Trade-Off

49 The range for the WACC for Sydney Water and underlying assumptions. 65

50 The non-systematic risks for Sydney Water and, to the extent necessary, how these should be reflected in the determination. 65

51 The rate of return that Sydney Water is seeking, and the justification for this rate of return. 65

Developer Charges

52 Sydney Water’s proposed approach to recovering future costs that were formerly recovered through developer charges. 67

2 Introduction


53 The appropriate approach to recovering costs incurred by Sydney Water when servicing developers. 67

Forecasting Water Sales

54 Sydney Water’s proposed approach to forecasting consumption for the 2012 Determination, and the levels of forecast consumption. 69

55 The impact on customers of any changes in the approach to forecasting consumption levels. 69

56 The use of an alternative approach to forecasting consumption, with the aim of increasing the accuracy of consumption forecasts (such as using a moving average of past actual consumption levels). 69

Operating Licence Obligations

57 The costs Sydney Water is seeking to pass through to customers arising from its operating licence obligations. 70

58 Whether the Government should pay for non-commercial activities it directs Sydney Water to undertake. 70

Scarcity Pricing at the Bulk Water Level

59 The introduction of some form of scarcity pricing at the bulk water supplier level for the 2012 Determination, and the possible impacts of this scarcity pricing on Sydney Water and other stakeholders. 71

Increasing Cost Pressures

60 The impact that Sydney Water’s costs are having on prices, and the appropriate treatment of increased costs in terms of pass through into prices. 71

Potential Increases in Bulk Water Costs

61 The potential increases in bulk water costs Sydney Water expects to encounter as a result of increases in capital expenditure by SCA. 72

62 The impact increased bulk water costs will have on water charges for Sydney Water customers. 72

63 Ways to mitigate the impact of potential bulk water cost increases on final Sydney Water customer bills. 72

2 Introduction


2.7 Issues on which Sydney Water is requested to comment

Throughout the following chapters of this paper we have sought information from Sydney Water. This information is numbered under headings and is listed in Appendix B. We expect that Sydney Water will address all of our information requirements in its submission.

3 Sydney Water’s role and regulatory framework



Sydney Water provides water, wastewater, stormwater and recycled water services to customers. Sydney Water is the monopoly supplier of these services to its customers. In the absence of competitive markets, Sydney Water is regulated to ensure that appropriate economic, social and environmental objectives are achieved.

This chapter outlines Sydney Water’s role and functions, its broader regulatory framework and our regulatory approach.

3.1 Sydney Water’s role

Sydney Water is the largest water agency in NSW, and provides services to a population of more than 4.4 million people in Sydney, Illawarra and the Blue Mountains. The Sydney Catchment Authority (SCA) manages Sydney’s drinking water storages and catchments, and Sydney Water purchases bulk water from the SCA. Sydney Water also receives some of its bulk water supply from its subsidiary, the Sydney Desalination Plant Pty Ltd.

Sydney Water treats and distributes over 1.4 billion litres of drinking water per day via a network of 265 service reservoirs, 171 water pumping stations, 10 water filtration plants and 21,015km of water mains. It collects and treats more than 1.3 billion litres of wastewater each day through its 24,022 km of sewer pipes in 24 separate sewerage systems with 29 wastewater treatment plants. Sydney Water recycles around 92 million litres of wastewater a day. It also provides stormwater drainage facilities through 440 km of stormwater channels.10

Additionally, in January 2010, the Sydney Desalination Plant was added to the water treatment network. It provides 4% of Sydney Water’s water supply needs. In future, the desalination plant is expected to supply up to 15% of Sydney’s water supply needs, together with 65% from the Prospect water filtration plant and around 20% from other water filtration plants.11

10 Source: Sydney Water. 11 Ibid.



Sydney Water was formed in 1995 as a state-owned corporation (SOC) under the State Owned Corporations Act 1989. Under Section 21 of the Sydney Water Act 1994, it is required to fulfil 3 principal objectives:

to be a successful business

to protect the environment

to protect public health.

To promote these objectives and to prevent abuses of Sydney Water’s monopoly position, the Government granted Sydney Water an operating licence which sets minimum performance standards it must meet as well as obligations in relation to customer service, system performance and environmental performance. The licence also requires Sydney Water to have a Customer Contract setting out the rights and obligations of customers and of Sydney Water, including customer complaint handling procedures and rights of redress if there is a failure to provide the agreed level of service.

We conduct an annual audit of Sydney Water’s compliance with its operating licence, and can impose financial and other penalties for breaches of this licence.

Sydney Water operates third-pipe dual reticulation systems in the Rouse Hill development area. For this review, a key issue will be our examination of the charging arrangements for recycled water services in the Rouse Hill area. We will review the level of cost recovery of this scheme and whether the charging arrangements are cost reflective. In addition, Sydney Water has a number of other recycled water initiatives.

Sydney Water’s area of operations is illustrated in Figure 3.1.



Figure 3.1 Sydney Water’s area of operations

Data source: Sydney Water.



3.2 Regulatory framework

There are a number of other regulators, in addition to IPART, that oversee Sydney Water’s water industry functions. Several government regulators have responsibility for all metropolitan water agencies. Sydney Water’s primary regulators are:

IPART, which is responsible for setting the maximum prices Sydney Water can charge for its monopoly services. We are responsible for monitoring and reporting compliance with Sydney Water’s operating licence, which imposes obligations relating to customer service, water quality, system performance, water conservation and demand management; an environmental management plan and indicators; catchment management; and complaint and dispute handling. IPART also grants licences to water infrastructure operators, and has granted the Sydney Desalination Plant a Water Industry Competition Act 2006 (WICA) licence.

Office of Environment and Heritage (OEH), which is responsible for monitoring and regulating wastewater discharges from Sydney Water’s sewerage system to the receiving waters. OEH issues environment protection licences under the Protection of the Environment Operations Act 1997 for Sydney Water’s sewage transportation and treatment systems. These licences stipulate quantity and quality conditions for discharge from each wastewater treatment works and specify reporting requirements and operational controls for the pipe network and pumping station.

NSW Health, which is responsible for regulating the quality and safety of Sydney Water’s drinking water. Under its operating licence, Sydney Water is required to provide NSW Health with a comprehensive water quality management plan outlining its strategies for ensuring that the quality of water supplied to customers complies with the appropriate guidelines (including those specified by NSW Health). Sydney Water is also required to provide an Annual Water Quality Report, monthly monitoring results and event-based results. The operating licence requires Sydney Water to maintain a Memorandum of Understanding with NSW Health recognising NSW Health as the drinking water quality regulator and facilitating effective interaction between the two organisations.

NSW Office of Water, which regulates Sydney Water’s extractions from the Hawkesbury-Nepean River. These extractions are used by the North Richmond water filtration plant to provide a drinking water supply for the Hawkesbury area.

In addition to these regulators, Sydney Water is also subject to requirements and planning approvals relating to its proposed developments. For example, the Sydney Desalination Plant was subject to a number of requirements during construction and operation to minimise environmental impacts.



3.3 Incentive regulation

Sydney Water is regulated through our determination of the maximum prices it can charge for its monopoly services during a determination period. We then specify how these prices can rise or fall over that period to allow for movements in general price inflation, efficiency gains, and significant changes in the operating environment (such as new customer service or environmental standards).

The determination of Sydney Water’s revenue requirement is a vital element of our price-setting process. We consider all the factors outlined in Section 15 of the IPART Act when we set prices with the aim of generating a required level of revenue. The calculation of the revenue requirement is based on an analysis of the efficient operating and capital costs Sydney Water would incur in providing appropriate levels of service over the determination period.

We use the ‘building block’ methodology to calculate Sydney Water’s revenue requirement. The ‘building block’ costs of service provision comprise operations costs, maintenance and administration costs, depreciation (return of capital) and rate of return (return on capital). Chapter 4 provides a detailed overview of our approach to setting prices.

One of the key aims of incentive regulation is to encourage Sydney Water to achieve the efficiency targets outlined in the building block approach. Sydney Water has an incentive to achieve efficiencies because it is allowed to retain in full the benefits of any efficiency gains over the determination period (through higher profits). Actual profits will be higher than the rate of return allowed in the revenue build-up if Sydney Water outperforms the efficiency target. The opposite will apply if Sydney Water does not achieve the expected efficiency improvements.

Our chief responsibility is to meet the requirements of our Act. We use the building block approach to set prices and meet the requirements of our Act.

Chapter 4 provides a detailed overview of our approach to setting prices.

3.4 Service quality standards

We expect that Sydney Water’s required existing standards of service will, at a minimum, be maintained as a result of our price determination process. Sydney Water’s operating licence contains a number of service-related standards and requirements that are reviewed as part of the annual audit process. For example, Sydney Water’s performance against its water supply continuity, water supply pressure and sewer overflow standards is listed in Table 3.1 below.



Table 3.1 Sydney Water’s performance against sewer overflow, water supply continuity and water pressure standards

Indicator Licence standard (pa)

2005/06 2006/07 2007/08 2008/09 2009/10

No of uncontrolled sewage overflows - dry weather private property

25000 12746 13340 9253 7627 8249

No of properties which experience unplanned water interruptions exceeding 5 hours

35000 27805 29592 31982 25656 21050

No of properties that experience a pressure failure

15000 2540 1094 345 1093 36

Source: IPART, Operating Licence Compliance Report, Annual Report 2009-10, pp 9-21.

Sydney Water’s operating licence requires that it ensure that no more than 15,000 properties experience a water pressure failure in a financial year. A property in Sydney Water’s area of operations is deemed to have experienced a water pressure failure if it experiences pressure of less than 15 metres head (measured at the point of connection or “main tap”) for a continuous period of 15 minutes or more.

Sydney Water has consistently outperformed its operating licence standards in relation to the number of properties that experience a water pressure failure. Over the period 2005/06 to 2009/10 it has achieved standards that are well below the licence limit of 15,000 properties. This level of compliance with the operating licence in relation to water pressure standards considerably exceeds that required by the operating licence. We consider that there are likely to be costs arising from achieving a level of compliance that significantly exceeds regulatory standards and suggest that these need to be compared to the benefits for customers. We are interested in obtaining feedback from Sydney Water on these costs and benefits.

There are a number of other regulatory instruments that provide guidance on maintaining service standards. These include Sydney Water’s discharge licences (issued by OEH). Sydney Water is also subject to the requirements of NSW Health.

In determining Sydney Water’s prices we will need to consider relating actual and proposed expenditure to service quality outcomes, and ensuring an appropriate matching of service quality levels with customers’ willingness to pay.

Sydney Water will need to provide information on the drivers of its proposed expenditure program and what its proposed expenditures will imply for service quality and performance.



We seek comment and explanation from Sydney Water on:

1 The monopoly services Sydney Water delivered over the 2008 Determination period, including service levels; that is the quantity, quality and scope of the services provided by Sydney Water.

2 The variations between the service levels forecast in the 2008 Determination and the actual service levels delivered, and a detailed explanation of the reasons for variations.

3 The monopoly services and service levels that Sydney Water forecasts will be delivered over the 2012 price determination period.

4 The uncertainties/risks in Sydney Water’s operating environment over the upcoming determination period and beyond, including the nature of these uncertainties/risks and the likelihood of them affecting specific costs (for example, electricity charges).

5 How Sydney Water has ascertained the appropriate service levels it plans to provide over the upcoming determination period and how these service levels relate to forecast costs. Where service levels are determined by Government policy, specific references for that policy or decision should be provided.

6 The costs and benefits arising from significantly exceeding regulatory targets and service levels, such as in the case of Sydney Water’s level of compliance with water pressure standards. Additionally, any evidence of willingness to pay for increased service levels or standards.

4 IPART’s price determination process



This chapter outlines our proposed approach to setting prices and poses a number of questions related to the price-setting approach for the 2012 review of Sydney Water’s prices. The scope of this review and the matters we are required to take into consideration in setting prices are outlined in Section 2.3.

4.1 Length of the determination period

The first step in the price determination process is to determine the length of the price path. In recent metropolitan water determinations, we have generally opted for a 4-year price path, as in the case of the 2008 Sydney Water review12, the 2009 review of Gosford and Wyong’s water charges13 and the 2009 Hunter Water review.14 We have generally considered that a 4-year price path strikes an appropriate balance between providing certainty to the regulated businesses and limiting delays in customers benefitting from efficiency gains.

We will consider a number of factors when deciding on the length of the determination period, including:

The confidence we can place in Sydney Water’s forecasts. If, for example, the expenditure profile can only be reliably predicted for 2 years, a short determination period may be more appropriate.

The alignment of the determination period with the 2012 Sydney Catchment Authority (SCA) determination, given the significance of the SCA’s bulk water charges for Sydney Water’s operating costs. The next SCA determination is scheduled to commence from 1 July 2012.

The alignment of the determination period with the 2012 Sydney Desalination Plant (SDP) Determination, given that the cost of water supplied from the Sydney Desalination Plant is an important input into Sydney Water’s costs of providing water to retail customers.

The alignment with Sydney Water’s operating licence review.

12 IPART, Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services

- Determination and Final Report, June 2008. 13 IPART, Gosford City Council and Wyong Shire Council, Prices for water, sewerage and stormwater

drainage services from 1 July 2009 to 30 June 2013 - Determinations and Final Report, May 2009. 14 IPART, Review of prices for water, sewerage, stormwater and other services for Hunter Water

Corporation - Determinations and Final Report, July 2009.



The advantages of a longer determination period include stronger incentives for Sydney Water to increase efficiency; greater stability and predictability (which may lower Sydney Water’s business risk and assist investment decision making); and reduced regulatory costs. Disadvantages include increased risk associated with inaccuracies in the data used to make the determination; possible delays in customers benefitting from efficiency gains (because prices are not set to account for these gains until the next determination); and the risk that changes in the industry will affect the appropriateness of the determination.

We are interested in obtaining Sydney Water’s views and those of stakeholders in deciding on the appropriate length of the determination period.

4.2 Determining the notional revenue requirement

The next step in the price-setting process is to determine Sydney Water’s notional revenue requirement. This is calculated by analysing the efficient operating and capital costs of providing appropriate levels of service over the determination period. We will enlist the services of consultants to assist us in determining these efficient costs. In calculating the notional revenue requirement, we will also form a view on the efficiency gains Sydney Water can reasonably achieve over the determination period.

The purpose of incorporating efficiency gains into the notional revenue requirement is to provide Sydney Water with guidance on its potential to improve the efficiency of its operating and capital expenditure without reducing the quality of the services it delivers. The incentive to pursue efficiency gains arises from the fact that prices are set for the determination period and are not linked to costs actually incurred. If Sydney Water can achieve better than expected cost savings during the determination period, it can expect to earn a higher return than was forecast by us. Efficiency gains are also incorporated to provide a basis for our decision on the revenue requirement.

In deciding on an appropriate allowance for capital expenditure and applying the ‘building block’ approach, we will incorporate all renewals and maintenance capital expenditure where that expenditure is based on sound asset management practices and is appropriately justified by Sydney Water. Our price-setting process allows for all essential renewals and maintenance expenditure; if Sydney Water seeks cost savings by delaying this expenditure, it does so at its own risk and not as a result of our price-setting process.

4.3 Forecasting metered water sales and customer numbers

Once we have established the notional revenue requirement, we will set prices for individual services to recover these costs. Prices are set based on forecast water sales and customer numbers. Customer numbers are used to calculate fixed charges and water sales are used to calculate usage charges. If forecasts differ markedly from



actual figures, the prices set will cause Sydney Water to significantly over- or under-recover its required revenue.

4.4 Price structures and price levels

The next step in our price review process is to identify the broad pricing approaches Sydney Water can feasibly apply to translate the revenue requirement into prices, and to assess the overall average impact of each of these approaches on customers and Sydney Water.

We then identify feasible pricing structures and calculate actual prices for all or a selection of the identified pricing approaches. We also evaluate the proposals advanced by Sydney Water in its submission.

Our general approach to pricing for metropolitan water utilities is to set a combination of periodic fixed and usage charges. The current price structure for Sydney Water has the following key features:

Uniform or ‘postage stamp’ pricing for water and sewerage services across Sydney Water’s area of operations.

Most of the costs associated with sewerage and stormwater services are recovered through fixed charges.

Water usage charges are designed to encourage efficient water consumption and are set with reference to the long-run marginal cost (LRMC) of water supply.15

Fixed charges for water services are calculated as the residual of the revenue requirement not recovered through usage charges or developer charges.

Section 15 of the IPART Act sets out the matters we are required to take into account in deciding price levels, including Sydney Water’s financial viability and the impact of its prices on customers. Balancing these competing interests may mean the target revenue to be recovered through prices is less than our determined notional revenue requirement.

We will evaluate the impact on customers in deciding on price structures and levels. This involves considering the magnitude of price increases in each year of the determination period and the effect of these increases on customer bills for varying consumption levels. For this review, we will be undertaking an increased level of customer impact analysis using our customer impact assessment model that has been developed for us by NATSEM. Additionally, we will be undertaking a review of price structures for metropolitan water utilities concurrently with this review. The review of price structures is aimed at implementing prices that are cost-reflective, encourage efficient consumption levels and are consistent across the regulated water utilities. We will release a separate issues paper for this review.

15 The LRMC represents the incremental cost of measures to bring supply and demand into

balance over the longer term.



In considering financial viability and sustainability, we will examine Sydney Water’s forecast credit rating, taking into account its existing cash and debt levels and its ability to pay dividends.

We will consider economic efficiency, and will examine the signals sent to customers, cost reflectivity and consistency with long run marginal cost. The prices each customer class or group pays should reflect the marginal cost their consumption imposes (ie, prices should reflect cost causality).

We expect that Sydney Water will provide us with their proposed price structures and price levels for the 2012 Determination period for water, wastewater, and stormwater. Where Sydney Water proposes changes to price levels and structures, it will need to provide appropriate data to justify the changes. Sound and verifiable data on the costs of providing each of its services (including water, sewerage, recycled water, trade waste, stormwater and miscellaneous and ancillary services) to each customer class or group is necessary for ensuring price structures and levels are as cost reflective and efficient as practically possible.

We seek comment and explanation from Sydney Water on the following issues:

Length of the Determination Period

7 The appropriate length of the price path for the 2012 Determination period and the reasons for this view.

Capital Expenditure over the 2008 and 2012 Determination Periods

8 Sydney Water’s capital expenditure over the current determination period, drivers of this expenditure and service outcomes achieved.

9 Sydney Water’s capital expenditure over the current determination period compared to expenditure we allowed in the 2008 Determination, and an explanation of variances.

10 Sydney Water’s projected capital expenditure over the upcoming determination period; drivers of this expenditure; expected service outcomes; the robustness of the business case for these expenditures; the practicality of the projects being delivered within the proposed timeframe; the reasonableness of cost estimates; and stakeholder willingness to pay for service levels.

Operating Expenditure over the 2008 and 2012 Determination Periods

11 Sydney Water’s operating expenditure over the current determination period, drivers of this operating expenditure and service outcomes achieved.

12 Sydney Water’s operating expenditure over the current determination period compared to expenditure we allowed in the 2008 Determination, and an explanation of any variances.

13 Sydney Water’s projected operating expenditure over the upcoming determination period, drivers of this expenditure, service outcomes to be achieved, specific



efficiency programs, the potential for efficiency gains, and stakeholders’ willingness to pay for service levels.

14 The methodology and major assumptions used to develop Sydney Water’s forecast operating expenditures.

15 The proposed trend in forecast operating expenditure over the 2012 price determination period and the relationship between this trend and Sydney Water’s obligations and service standards, having regard to expected productivity improvements, historical expenditures, trends in input prices, relevant benchmarks and any other relevant factors.

Determining the Notional Revenue Requirement

16 The value, timing and description of any contributions (including contributed assets) to Sydney Water from government and/or other sources by year.

17 The extent to which Sydney Water has carried out options analysis for proposed service delivery expenditures (eg, testing contestability of tasks and services provided, conducting cost benefit analysis and business case analysis).

18 Sydney Water’s approach to the allocation of shared or common costs to activities and customers and the rationale for this allocation.

19 Sydney Water’s proposed approach to the treatment of depreciation of assets for the 2012 Determination.

Performance against the 2008 Determination

20 Sydney Water’s assessment of its performance against the requirements of the 2008 determination, including the output measures listed in appendix F.1 of the 2008 Determination.

Customer Numbers for the 2008 and 2012 Determinations

21 The number of Sydney Water’s actual customers over the 2008 determination period; and the forecast numbers of customers for the proposed 2012 determination period (a minimum of 4 years data should be provided).

Price Structures and Price Levels

22 Sydney Water’s proposed price levels and structures for the 2012 Determination for each tariff included in the 2008 Determination. If Sydney Water proposes that a tariff is no longer required, Sydney Water should give reasons.

23 The reasoning or justification for each of Sydney Water’s proposed tariffs that addresses the following factors:

– The relationship between the proposed tariff and the forecast costs of service provision.

– The relationship between the proposed tariff structure and the tariff structure included in the 2008 determination. If Sydney Water proposes a new or revised tariff structure, the submission should clearly describe the rationale for the



proposed variation, the proposed price levels, the cost of the services involved and sufficient detail to allow IPART to replicate the analysis.

– The impact of the proposal on customers (eg, actual and annual percentage change to bills).

– Analysis of any customer ‘willingness to pay’ information available to Sydney Water, and/or a discussion of any customer consultation engaged in its pricing proposals.

– The methodology for calculating the tariff, including major assumptions.

24 Sydney Water’s methodology used to determine water and sewerage service charges.

25 Sydney Water’s views on price structures and how price structures should be determined.

We seek comments from stakeholders on:

1 The appropriate length of the price path for the 2012 determination period.

2 The prudence of Sydney Water’s capital expenditure over the current determination period.

3 Sydney Water’s projected capital expenditure program, including expenditure drivers, proposed service outcomes and scope for efficiency gains, to be outlined in its submission.

4 The efficiency of Sydney Water’s operating costs over the current determination period and the efficiency of its projected operating costs (outlined in its submission).

5 The scope for Sydney Water to achieve further efficiency gains over the upcoming determination period.

6 The methodology and major assumptions used to develop Sydney Water’s forecast operating expenditures.

7 The evidence of customers’ willingness to pay for Sydney Water’s service levels and proposed expenditures.

8 Sydney Water’s proposed price structures and levels for residential and non-residential charges for the 2012 Determination in terms of fixed and usage charges.

5 Outstanding issues from the previous review



There are a number of outstanding issues from the 2008 Price Determination for Sydney Water that we will examine in the course of the 2012 review, as well as a number of new issues that have arisen since the 2008 Determination that will require investigation and analysis. This chapter outlines the nature of the outstanding issues from the 2008 review and invites comment from Sydney Water and stakeholders in response to them. This will inform our analysis of these issues and help us reach decisions on these matters. The outstanding issues from the 2008 Determination include:

reviewing sewerage charging arrangements including the usage charge and fixed charge

Sydney Water reporting annual progress against capital projects, including reconciling capital and operating expenditure and outcomes against our allowances

reviewing charging arrangements and price structures for water and sewerage for residential and non-residential multi-dwelling properties

estimating the costs of the Rouse Hill recycled water scheme. These costs will be used to review the structure of recycled water usage and fixed charges in the Rouse Hill area

estimating the long-run marginal cost of water

reviewing the unfiltered water price to determine whether it reflects the costs of providing the service

reviewing the river management charge for Rouse Hill, including a review of the costs and level of cost recovery attained using the original charging methodology

investigating a land area based charging system for stormwater services, to be proposed in advance of the next price determination

reviewing the costs and charging arrangements for trade waste services

reviewing miscellaneous and ancillary services, including the methodology for charging, costs and service levels.



Additional issues that have arisen since the 2008 Determination that we will address for this review include:

investigating the costs avoided by recycled water schemes

the treatment of expenditure on heritage assets

inclusion or exclusion of voluntary environmental expenditure in the RAB

the relationship between environmental standards and efficient expenditure

our approach to the risk and return trade-off

the decision by the NSW Government to set developer charges to zero

forecasting water sales

our approach to discretionary standards, which occur when there are no explicit limits or standards set by Government that have to be met by water utilities (the utilities then determine expenditure in these areas.)

operating licence obligations placed on Sydney Water

the use of scarcity pricing at the bulk water level

increasing cost pressures

potential increases in bulk water costs.

Each of these issues will be examined in turn and comments are sought from Sydney Water and stakeholders on each of these issues. The information we seek will be outlined in the questions after each section. Sydney Water and stakeholders are also free to draw attention to any other issues they feel will be of relevance in this review.

5.1 Reporting annual progress against capital projects and operating expenditure, and forecast expenditure

For stakeholders and IPART to understand how Sydney Water has performed over the 2008 Determination, Sydney Water needs to report on its annual progress against capital projects, and reconcile capital and operating expenditure and outcomes against our allowances.

In the appendices to the 2008 Determination, we included a list of Sydney Water’s forward capital expenditure projects to be undertaken by Sydney Water over the 2008 determination period along with forecast expenditures by year for each of these projects.16 We asked Sydney Water to provide information on its expenditures on each of these projects by year, to indicate how it is tracking against these forecasts. This was designed to provide stakeholders and IPART with information on how Sydney Water is performing in relation to its forecasts in the 2008 Determination.

16 IPART, Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other services

- Determination and Final Report, June 2008, Appendix F.



Sydney Water also needs to provide a comprehensive overview of its capital and operating expenditure outcomes over the 2008 Determination. Sydney Water’s submission should include sections on past operating and capital expenditure. These sections should contain tables comparing determined operating and capital expenditure for the 2008 Determination with actual operating and capital expenditure over the 2008 determination period. The figures for the 2011/12 year will need to be an estimate as this year will not be completed at the time Sydney Water makes its submission. The tables should be accompanied by a comprehensive explanation of the reasons for any variation between determined and actual expenditure.

In its submission, Sydney Water also needs to provide forecasts of operating and capital expenditure by year for the 2012 Determination period. It needs to include justifications for its proposed levels of expenditure with reference to levels of expenditure over the 2008 Determination period. Where operating and capital expenditures are forecast to differ considerably from recent or allowed levels in the 2008 Determination, reasons for these differences should be provided.

There should also be an explanation of the drivers of operating and capital expenditure over the 2012 Determination, and an outline of major upcoming capital projects.

We have also released a performance report on metropolitan water utilities for 2009/10 (available on our website). This report can be used by stakeholders to compare the performance of Sydney Water to other metropolitan water utilities across a number of indicators.

We seek comment and explanation from Sydney Water on:

26 Sydney Water’s annual expenditures by year for each of the capital projects listed in Appendix F of the 2008 determination report.

27 Sydney Water’s actual operating expenditure by year over the 2008 determination period compared to our determined expenditure, and justifications for any differences.

28 Sydney Water’s actual capital expenditure by year over the 2008 determination period compared to our allowed expenditure, and justifications for any differences.

29 Sydney Water’s forecast operating expenditure by year over the 2012 Determination period, and the drivers for these levels of expenditure.

30 Sydney Water’s forecast capital expenditure over the 2012 determination period, and the major capital projects driving these levels of expenditure.

31 The cost of individual capital expenditure projects over the 2012 Determination.



We seek comment from stakeholders on:

9 Sydney Water’s annual expenditures by year on each of its capital projects.

10 Sydney Water’s actual operating expenditure by year over the 2008 Determination compared to our determined expenditure, and justifications for any variances.

11 Sydney Water’s actual capital expenditure by year over the 2008 Determination compared to our determined expenditure, and justifications for any variances.

12 Sydney Water’s forecast operating expenditure by year over the 2012 determination period, and the drivers for these levels of expenditure.

13 Sydney Water’s forecast capital expenditure over the 2012 determination period, and the drivers for these levels of expenditure.

14 The cost of Sydney Water’s individual capital expenditure projects over the 2012 Determination.

15 The appropriateness of introducing any future reporting requirements for Sydney Water, and the nature of these requirements.

5.2 Review of sewerage charges, including the usage charge and the fixed charge

During the 2008 review, Sydney Water agreed to participate in a comprehensive investigation of sewerage charges in preparation for the 2012 price determination. IPART has engaged with Sydney Water and other agencies over the last 12 months in conducting this investigation.

5.2.1 Sewerage price structure

The price structure for sewerage services differs for residential and non-residential customers. At present residential customers only pay a fixed service charge for sewerage. Non-residential customers pay a fixed service charge, and a usage charge for discharges over 500kL per year. The current sewerage charges for different customer classes are shown in Table 5.1 below.

Table 5.1 Current residential and non-residential sewerage charges for 20mm meter ($2010/11)

Residential service charge (per year)

Non-residential service charge (per year)

Non-residential Usage charge (per kL)

$517 $517 x df a 500kL/pa =$1.45 x df

a minimum total non-residential charge equal to the residential charge applies. Note: df= discharge factor which is the determined percentage of metered water consumption that is discharged to the sewerage system.

Source: Sydney Water website.



Residential customers are charged only a service (fixed) charge for sewerage services which reflects that discharges from households are difficult to measure. A fixed sewerage charge for residential customers is also used because there is limited opportunity to respond to usage prices, and the costs of providing sewerage services are predominately fixed in nature.17

Non-residential customers are charged a service charge (based on the size and number of water meters adjusted by a sewerage discharge factor) and a usage or volumetric charge. The volumetric charge is based on metered water usage and a discharge factor. Sydney Water applies a minimum charge to non-resi

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