Community Consultation Paper:
Possible Price Outcomes
Regulated Water and Sewerage
Services 2013–18
Report 7 of 2012
September 2012
The Independent Competition and Regulatory Commission (the Commission) was
established by the Independent Competition and Regulatory Commission Act 1997
(ICRC Act) to determine prices for regulated industries, advise government about
industry matters, advise on access to infrastructure and determine access disputes. The
Commission has responsibilities under the ICRC Act for determining competitive
neutrality complaints and providing advice about other government-regulated
activities. Under the Utilities Act 2000, the Commission has responsibility for licensing
utility services and ensuring compliance with licence conditions.
Correspondence or other inquiries may be directed to the Commission at these
addresses:
Independent Competition and Regulatory Commission
PO Box 161
Civic Square ACT 2608
Level 8
221 London Circuit
Canberra ACT 2601
The secretariat may be contacted at the above addresses, by telephone on
(02) 6205 0799 or by fax on (02) 6207 5887. The Commission’s website is at
www.icrc.act.gov.au, and its email address is [email protected].
Foreword
This is the third paper released by the Commission as part of its current water price
review. The review will set the water and sewerage prices the ACT community will
pay in coming years.
This paper was not in our original schedule. Having completed an initial analysis of the
likely price increases flowing from some of the propositions now before us, we have
decided that it would be highly desirable to place these preliminary results, tentative
though they are, before the ACT community and seek their reaction to the issues
raised.
Our analysis of the propositions that have been put before us is only in its initial stages
and I am not able to give you much guidance about the likely content of our draft
report. I can, however, assure you that the Commission is seriously concerned about
the impact on the community of some of the prospective price increases coming out of
our initial analysis. Your input will assist us in dealing with the important issues that
are identified in this paper as giving rise to these prospective increases.
The principal purpose of this paper is to reach as wide an audience as possible. In order
to do this we have traded off technical precision and its associated complexity for clear
communication of the essential messages that we judge it vital for the community to
hear.
Malcolm Gray
Senior Commissioner
13 September 2012
iii – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Contents
Foreword
iii
Contents
iv
How to make a submission
v
Executive summary
vi
1
Introduction
1.1
Background
1.2
Purpose of the consultation paper
1.3
Submissions on the paper
1
1
1
2
2
How the Commission sets water prices
2.1
The regulatory approach
2.2
Building the accounting framework
2.3
Identifying the key factors
3
3
3
5
3
Impact of the significant factors
3.1
The starting point
Case 1: The starting point
3.2
Revenue shortfall
Case 2: Recovering the revenue shortfall in the next
regulatory period
Case 3: Recovering the revenue shortfall over the longer term
3.3
Rate of return
Case 4: Increasing the rate of return
3.4
Water price structure
Case 5: Adopting ACTEW Water’s price structure
3.5
The enlarged Cotter Dam
Case 6: Removing the Cotter Dam cost overrun from the
regulated asset base
7
7
7
8
9
9
11
11
13
13
14
14
4
Next steps in the price review
16
5
References
17
Abbreviations and acronyms
18
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – iv
How to make a submission
The Independent Competition and Regulatory Commission (the Commission)
welcomes submissions on the matters raised in this consultation paper as well as any
other relevant information that could assist the Commission’s price review.
Responses to the paper should be supported with evidence and data wherever
possible.
Submissions may be mailed to the Commission at:
Independent Competition and Regulatory Commission
PO Box 161
CIVIC SQUARE ACT 2608
Alternatively, submissions may be emailed to the Commission at [email protected].
The Commission encourages interested parties to make submissions in either
Microsoft Word format or PDF (OCR-readable text format – that is, they should be
direct conversions from the word-processing program, rather than scanned copies in
which the text cannot be searched).
Submit your submission documents along with a completed submission cover sheet,
which is available on the Commission’s website at
www.icrc.act.gov.au/waterandsewerage. For submissions received from individuals,
all personal details (for example, home and email addresses, and telephone and fax
numbers) will be removed for privacy reasons before the submissions are published
on the website.
The Commission is guided by and believes strongly in the principles of openness,
transparency, consistency and accountability. Public consultation is a crucial element
of the Commission’s processes. It is the Commission’s preference that all
submissions it receives be treated as public and be published on the Commission’s
website unless the author of the submission indicates clearly that all or part of the
submission is confidential and not to be made available publicly. Where confidential
material is claimed, the Commission prefers that this be under a separate cover and
clearly marked ‘In confidence’. The Commission will assess the author’s claim and
discuss appropriate steps to ensure that confidential material is protected while
maintaining the principles of openness, transparency, consistency and accountability.
The secretariat may be contacted at the above addresses, by telephone on (02) 6205
0799 or by fax on (02) 6207 5887. The Commission’s website is at
www.icrc.act.gov.au.
Submissions received by the Commission before 5 pm, Friday 19 October will be
considered in the Commission’s draft report. Submissions received after that date will
be considered in the Commission’s final report.
v – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Executive summary
The Commission has identified a number of significant factors that could have major
implications for water prices and customer bills in the next regulatory period.
This paper provides preliminary estimates of the possible impact of these factors. The
paper was developed to inform the ACT community and to elicit the community’s
views to assist in the development of the Commission’s draft report scheduled for
release in late November 2012.
The three significant factors that could affect water prices are:
•
the incorporation of a revenue shortfall from the current regulatory period
•
adopting a revised approach to calculating the rate of return
•
changes in the water price structure.
This paper analyses these factors to estimate their impact on water prices and annual
customer bills in the next regulatory period. The paper also analyses the impact of the
cost overrun on the enlarged Cotter Dam project in response to the high level of public
interest.
The paper examines the factors through the following cases:
•
Case 1 – the starting point, which incorporates ACTEW Water’s proposed
operating and capital expenditure
•
Case 2 – recovering a revenue shortfall of $238 million over the next five years
•
Case 3 – recovering a revenue shortfall of $238 million over a longer period
•
Case 4 – increasing the rate of return as proposed by ACTEW Water
•
Case 5 – adopting the alternative water price structure as proposed by ACTEW
Water
•
Case 6 – removing the enlarged Cotter Dam cost overrun.
Table 1 shows the results of the analysis of these cases.
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – vi
Table 1 Comparison of cases
2012–13
Current
($)
Water prices
Fixed charge ($/pa)
Tier 1 price (0–200 kL/a)
Tier 2 price (over 200 kL/a)
Annual water bills
50 kL/a
100 kL/a
150 kL/a
200 kL/a
300 kL/a
400 kL/a
500 kL/a
750 kL/a
1,000 kL/a
10,000 kL/a
2013–14 (% change between current and relevant case)
Case 1
Case 2
Case 3
Case 4
Case 5
Case 6
Starting
point
Revenue
shortfall
5 years
Revenue
shortfall
longer term
Increased
rate of
return
Alternative
price
structure
No Cotter
Dam cost
overrun
99.83
2.43
4.86
–
3
3
–
37
37
–
10
10
–
20
20
30
–9a
–9a
–
–6
–6
221
343
464
620
1,072
1,558
2,044
3,259
4,474
48,214
2
2
2
3
3
3
3
3
3
3
20
26
29
31
33
34
35
36
36
37
6
7
8
9
9
9
10
10
10
10
11
15
16
17
19
19
19
20
20
20
9
3
15
21
11
5
1
–2
–4
–9
–3
–4
–4
–5
–5
–5
–5
–5
–6
–6
a These percentages are based on ACTEW Water’s proposed pricing structure.
Table 1 shows that:
•
The most significant factor that could affect prices and bills in the next regulatory
period would be recovering the revenue shortfall over a five-year period, which
would increase prices in 2013–14 by 37 per cent and the bulk of customer bills by
26 to 33 per cent.
•
The second most significant factor would be using ACTEW Water’s proposed rate
of return, which would increase prices in 2013–14 by 20 per cent and the bulk of
customer bills by 15 to 19 per cent.
•
Recovering the revenue shortfall over the longer term would increase prices in
2013–14 by 10 per cent and the bulk of customer bills by 7 to 9 per cent.
•
The alternative price structure proposed by ACTEW Water would result in higher
overall water bills for low- and average-volume customers and a reduction in bills
for high-volume customers.
The Commission is keen to hear the ACT community’s views on these important
issues. The Commission will hold a public forum on the community consultation paper
on Thursday 27 September 2012. Members of the ACT community are encouraged to
attend.
vii – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
THIS PAGE IS INTENTIONALLY BLANK
1
Introduction
1.1
Background
On 13 October 2011, the Treasurer sent a reference to the Independent Competition
and Regulatory Commission (the Commission), asking it to undertake a review of the
provision of water and sewerage services in the ACT. The review will determine the
prices that ACTEW Water will be able to charge its customers for water and sewerage
services for the next regulatory period, starting on 1 July 2013.
In November 2011, the Commission released a context paper that explored issues
relating to the broader water cycle and the provision of water and sewerage services in
an urban environment such as the ACT (ICRC, 2011).The Commission then released
an issues paper in February 2012 seeking submissions from interested parties on key
aspects of the price review (ICRC, 2012).
The issues paper discussed a number of matters that the Commission will take into
consideration during the price review process. The issues paper also noted that the
Commission will undertake significant analysis as part of the review process, including
of the issues identified as important in the issues paper. It also foreshadowed the
potential release of further papers in the lead-up to the draft price direction (ICRC,
2012: 3). The Commission received seven submissions in response to the issues paper,
which are available on the Commission’s website at www.icrc.act.gov.au.
1.2
Purpose of the consultation paper
ACTEW Water provided its main submission to the price review on 30 July 2012. 1
While deficient in some respects, as noted below, the material in the submission
allowed the Commission to make preliminary estimates of the impact of various factors
on the water prices that may confront ACT water customers in coming years. It is
apparent from these preliminary estimates that the effect of some of these factors is
substantial. The water price increases emerging from this preliminary analysis are well
beyond those experienced in recent years. While there has been some speculation in the
media and elsewhere that significant water price increases may be in the offing, the
ACT community has not been given any clear idea of the principal choices that need to
be made in determining water prices for the next regulatory period. The purpose of this
community consultation paper is to fill that gap and invite the community to comment
on the issues the paper raises.
The Commission believes that these issues are of such importance that the community
should be given the opportunity to comment before it produces its draft report,
scheduled for late November 2012. In reading this paper, please keep in mind that
these are preliminary estimates. We have not yet completed our review of ACTEW
Water’s proposed operating cost and capital expenditure budgets. These and other
elements that enter into the determination of prices may undergo significant refinement
between now and May 2013, when we issue our final price direction. We believe,
1 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
nevertheless, that the factors contributing to these preliminary estimates are of
sufficient importance that public consideration is essential.
Although many factors will influence the prices ultimately determined by the
Commission in May next year, three have emerged as particularly important in our
preliminary analysis. Those factors are:
•
the impact of incorporating a revenue shortfall from the current regulatory period
in prices for the next regulatory period
•
the impact of adopting a revised approach to calculating the rate of return, as
proposed by ACTEW Water
•
the impact of changes in the water price structure, as proposed by ACTEW Water.
A fourth, the impact of the cost overruns on the project to enlarge the Cotter Dam, has
been the subject of much public comment. This paper also considers those overruns.
In order to provide clear and readily understandable information, the analysis below
isolates the separate impact of each of these factors. In our draft report due in
November, the Commission will consider a range of variations to the basic cases
presented here, but at this stage it is very valuable for us to hear community views on
the issues presented here.
The discussion in this paper focuses on the impact of the factors identified above on
water prices and bills. The reference sent to the Commission also requires it to
determine prices for sewerage services for the next regulatory period. These will be
discussed in our draft report, and community comment will be sought in response.
1.3
Submissions on the paper
For your submission to be considered in the preparation of the draft report and price
direction, it should be received by the Commission before
5 pm, Friday 19 October 2012. Submissions received after that date will be
considered in the Commission’s final report.
The Commission will hold a public forum on the community consultation paper on
Thursday 27 September 2012. The forum details are provided in Table 1.1. Members
of the ACT community are encouraged to attend.
Table 1.1:
Public forum details
Date
Thursday 27 September 2012
Time
12.30–2.30 p.m.
Location
Chatham House Room
Waldorf on London
2 Akuna Street
Canberra ACT 2601
Refreshments
Tea and coffee will be provided
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 2
2
How the Commission sets water
prices
This chapter outlines the Commission’s regulatory approach and describes the
accounting framework used to develop price determinations. It also discusses the role
of the significant factors identified in the Commission’s preliminary analysis.
2.1
The regulatory approach
The early stages of the Commission’s approach to the review were described in the
introduction. The Commission highlights the issues it believes need to be considered in
the review and invites input from all stakeholders. After it receives submissions, the
Commission begins the analysis on which its price determination will ultimately be
based. Through this process and the refinements to it that occur as the Commission
collects more information, including community input, the issues that have been raised
with the Commission are addressed. The Commission provides its initial views in the
draft report and seeks further community input before providing a final view and price
determination about six months later.2
The preliminary results reported in the next chapter derive from the accounting
framework developed below. The Commission starts by analysing the implications of
the propositions put in ACTEW Water’s submission. This is a key document for the
review because it lays out how the responsible entity, ACTEW Water, plans to deliver
its services over the next regulatory period.
The role of the Commission is to analyse the assumptions and propositions in the plan
to ensure that ACTEW Water is providing services and meeting its other objectives at
efficient cost. After it completes the analysis, the Commission sets a price path
consistent with its conclusions about ACTEW Water’s plans and having regard to the
criteria set out in the Independent Competition and Regulatory Commission Act 1997
(ICRC Act). 3
2.2
Building the accounting framework
The accounting framework that lies at the heart of the Commission’s analysis of
ACTEW Water’s plans and provides the basis for setting water prices is based on what
is known as the building-block approach. This is a method widely employed by other
regulators for similar purposes. ACTEW Water adopts the same framework in its
submission to the Commission. It contains information that ACTEW Water would
ordinarily develop in its corporate planning processes.
There are three steps in the building-block accounting framework for the determination
of water prices:
1. Identify ACTEW Water’s operating and capital costs for the next regulatory
period. This gives the total revenue requirement.
3 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
2. Determine the net revenue requirement. This is done by making adjustments to the
total revenue requirement. Unregulated revenue (from bulk water sales to
Queanbeyan City Council, for example) is subtracted. Under-recovery of revenue
from the current regulatory period may be added.
3. Calculate the prices required to allow ACTEW Water to recover revenue from
water sales to ACT customers equal to the net revenue requirement.
ACTEW Water’s operating costs are made up of such items as the salaries it pays its
employees, the electricity and fuel it uses, and services such as legal, engineering and
catering purchased from other companies.
Capital cost has two components. First, ACTEW Water owns a large number of assets,
including the four dams around Canberra and the pipe network that brings water to our
homes. Previous determinations by the Commission placed an aggregate value on these
assets, known as the regulated asset base or RAB. The owners of ACTEW Water, like
those of any other company, expect a return on those assets. The first element of
capital cost is the return earned on the RAB. By earning a return on the RAB, ACTEW
Water is able to meet its interest expenses and pay a dividend to its owners. The second
element of capital costs recognises that assets wear out in the course of use. This
second element is called depreciation.
Adding operating and capital costs gives the total revenue requirement, which is the
amount of revenue that ACTEW Water needs to raise from selling water to cover its
costs.
In addition to its sales to ACT customers, ACTEW Water also sells bulk water to
Queanbeyan City Council. This revenue earned is subtracted from the total revenue
requirement. Finally, in certain circumstances, ACTEW Water may propose to recover
revenue in the next regulatory period that it expected to but did not actually earn in the
current regulatory period. Any such revenue shortfall amount is added to the total
revenue requirement. The result of these adjustments is the net revenue requirement,
which is the amount that must be earned from water sales to ACT customers.
In order to work out the revenue generated by water sales, we need to know two things:
the number of customers and the volume of water consumed by each customer. Each
customer pays the same fixed charge, but the price per kilolitre varies depending on
water use. 4 These two elements are the final elements in the accounting framework.
With all these elements in place, the revenue from sales of water to ACT customers can
be calculated for any given prices and a set of prices selected that meet the net revenue
requirement over the regulatory period.5
Figure 2.1 shows the percentage breakdown for ACTEW Water’s total revenue
requirement for water based on forecast costs for 2012–13.
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 4
Figure 2.1
Forecast water total revenue requirement, 2012–13
Depreciation,
12%
Return on
capital, 39%
2.3
Operational
and
maintenance
costs, 49%
Identifying the key factors
The Commission has populated the accounting framework described above with
operating and capital expenditure data drawn from the submission from ACTEW
Water. Unfortunately, the submission does not contain a complete set of accounting
information. The Commission has filled the gaps by inferring values for the missing
information that seem to be consistent with the approach adopted by ACTEW Water in
its submission. 6
In order to demonstrate the impact of each of the significant factors identified earlier,
the Commission has developed a starting point, Case 1 and a number of subsequent
cases, each of which varies a single element from Case 1.
Case 1, the starting point, uses ACTEW Water’s proposed operating and capital
expenditure for the next regulatory period. It also uses a nominal rate of return based
on the Commission’s 2008 methodology, which results in a value of 7.72 per cent. 7
Customer numbers for Case 1 are drawn from the ACTEW Water submission, and,
while ACTEW Water has refused to supply a forecast of water sales as an element of
the accounting framework, the Commission has used an estimate from Attachment 12
of ACTEW Water’s submission. Case 1 adopts the existing water price structure.
Cases 2 and 3 explore the impact of recovering the revenue shortfall from the current
regulatory period, 1 July 2008 to 30 June 2013. Restrictions on water use followed by
cool and wet summers resulted in much lower water sales revenue than what was
estimated at the time the current price direction was put in place in early 2008. The
revenue shortfall has been estimated by ACTEW Water at about $238 million.
In Case 2, the Commission included the estimated $238 million in the net revenue
requirement, which means that it is recovered in full over the next regulatory period. In
Case 3 we added the revenue shortfall to the RAB, treating it as a capital asset and
recovering it over the longer term.
5 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Case 4 varies from Case 1 by calculating the rate of return using the methodology
proposed by ACTEW Water. 8 This increases the rate of return from 7.72 per cent to
9.63 per cent. 9
Case 5 varies from Case 1 by adopting the new price structure proposed by ACTEW
Water in place of the current one. The ACTEW Water proposal involves increasing the
fixed charge for water supply from $100 to $130 per annum and reducing the level of
consumption at which the higher, second-tier per kilolitre price cuts in from 200 kL/a
to 120 kL/a.
Case 6 varies from Case 1 by removing the cost overrun on the enlarged Cotter Dam
project from the RAB. During the 2008 review, the project cost estimate provided to
the Commission was $145 million. The Commission determined that this amount
should be included in the RAB. The most recent cost estimate included in the ACTEW
Water submission to the current review is about $405 million. Previous work by the
Commission suggests that there is a case for including the bulk of the additional cost in
the RAB. 10 Nevertheless, this case was included to show the impact of the cost overrun
because of the high level of public interest in this issue.
Chapter 3 describes each case in detail and reports the water prices and customer bills
that are generated by the accounting framework in each case.
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 6
3
Impact of the significant factors
This chapter provides more detail on the six cases described in Chapter 2. It also
presents the price and customer bill outcomes for each case, and without seeking to
restrict your comments on any issue of interest, poses specific questions on which the
Commission seeks community input. We are pleased to acknowledge that we have
already had submissions covering some of the issues raised here. We will respond to
those in our draft report.
3.1
The starting point
In order to compare the impact of the factors, a starting point for the comparison is
required.
Case 1: The starting point
Case 1 treats the significant factors in the following ways:
•
The revenue shortfall is not included.
•
The rate of return is set using the Commission’s approach at 7.72 per cent.
•
The current water pricing structure, incorporating a fixed water supply charge of
$100 and a price per kilolitre that doubles for annual consumption above 200
kilolitres, is retained.
•
The full cost of the enlarged Cotter Dam, estimated at about $405 million in the
ACTEW submission, is included in the RAB.
Table 3.1
Case 1 indicative water price and bills
2012–13
2013–14
Current ($)
Case 1 ($)
Change 2012–13 to
2013–14 (%)
Water prices
Fixed charge ($/pa)
Tier 1 price (0–200 kL/a)
Tier 2 price (over 200 kL/a)
99.83
2.43
4.86
100.00
2.50
5.01
0.2
3
3
Annual water bills
50 kL/a
100 kL/a
150 kL/a
200 kL/a
300 kL/a
400 kL/a
500 kL/a
750 kL/a
1,000 kL/a
221
343
464
620
1,072
1,558
2,044
3,259
4,474
225
350
475
635
1,101
1,602
2,102
3,353
4,605
2
2
2
3
3
3
3
3
3
48,214
49,652
3
10,000 kL/a
7 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Table 3.1 shows the prices that are necessary to raise the net revenue requirement for
Case 1 and the impact on the water bills of customers at various levels of annual water
consumption.
The first column of figures in Table 3.1 shows the situation now, in 2012–13, the last
year of the current regulatory period. The upper block of the next column shows the
prices that would apply in 2013–14, the first year of the next regulatory period. Prices
in subsequent years would increase at the rate of 1 per cent per annum in real terms.
The lower block shows the water bills that would result from imposing these prices at
various levels of water consumption. The last column shows the percentage increase in
prices and water bills between 2012–13 and 2013–14.
Table 3.1 shows that in Case 1 the prices per kilolitre rise by 3 per cent compared to
current prices. Water bills for the bulk of customers with annual consumption between
100 and 300 kilolitres rise by 2 to 3 per cent compared to current bills.
3.2
Revenue shortfall
Cases 2 and 3 present alternative approaches to dealing with the revenue shortfall that
has occurred in the current regulatory period. In its 2008 report, the Commission
contemplated the possibility that such a revenue shortfall might be carried forward for
recovery in a later period. The 2008 price direction stated that:
Where the net present value of actual water revenue earned by ACTEW over the
period 2008–09 to 2012–13 from the services set out in clause 3.1 of this price
direction differs by more than 3% from the forecast net present value of revenue set
out in the Commission’s price determination, then ACTEW must, when submitting
proposed tariffs to the Commission as part of the Commission’s price determination
for the period commencing on 1 July 2013, incorporate in tariffs a revenue passthrough amount (ICRC, 2008).
The revenue shortfall can be attributed mainly to the restrictions on water use in force
over much of the regulatory period. The restrictions caused a reduction in water sales
far beyond that normally associated with fluctuations in climatic conditions. It also
appears that the experience of prolonged water restrictions, combined with a public
campaign to conserve water and significant increases in water prices, has caused a
permanent downward shift in the level of demand for water. Finally, the drought ended
in spectacular fashion with record rainfall further depressing water sales in the last
years of the regulatory period. How a revenue shortfall that has occurred in such
circumstances should be treated is a matter for judgment.
As discussed earlier, the revenue shortfall is not recovered in Case 1. In this section
two options for recovering it are considered.
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 8
Case 2: Recovering the revenue shortfall in the next regulatory period
Case 2 differs from Case 1 in its treatment of the revenue shortfall.
Specifically, the shortfall, estimated at $238 million in the ACTEW Water submission,
is included in the net revenue requirement so that its recovery is spread over the five
years of the next regulatory period.
Table 3.2 shows the water prices and customer bills that occur in Case 2.
Table 3.2
Case 2 indicative water price and bills
Water prices
Fixed charge ($/pa)
Tier 1 price (0–200 kL/a)
Tier 2 price (over 200 kL/a)
Annual water bills
50 kL/a
100 kL/a
150 kL/a
200kL/a
300 kL/a
400 kL/a
500 kL/a
750 kL/a
1,000 kL/a
10,000 kL/a
2012–13
2013–14
Current ($)
Case 2 ($)
Change 2012–13
to 2013–14 (%)
99.83
2.43
4.86
100.00
3.32
6.64
0.2
37
37
221
343
464
620
1,072
1,558
2,044
3,259
4,474
48,214
266
432
598
811
1,429
2,093
2,757
4,418
6,078
65,863
20
26
29
31
33
34
35
36
36
37
In Case 2 the prices per kilolitre rise by 37 per cent, and water bills for the bulk of
customers rise by 26 to 33 per cent compared to current prices and bills.
Case 3: Recovering the revenue shortfall over the longer term
Case 3, like Case 2, differs from Case 1 in its treatment of the revenue shortfall, but in
another way.
Specifically, the revenue shortfall is added to the RAB so that its recovery is spread
over the longer term, as is the case for longer lived assets that ACTEW Water owns,
such as the dams.
Table 3.3 shows the water prices and customer bills that result in Case 3.
9 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Table 3.3
Case 3 indicative water price and bills
Water prices
Fixed charge ($/pa)
Tier 1 price (0–200 kL/a)
Tier 2 price (over 200 kL/a)
Annual water bills
50 kL/a
100 kL/a
150 kL/a
200 kL/a
300 kL/a
400 kL/a
500 kL/a
750 kL/a
1,000 kL/a
10,000 kL/a
2012–13
2013–14
Current ($)
Case 3 ($)
Change 2012–13 to
2013–14 (%)
99.83
2.43
4.86
100.00
2.68
5.35
0.2
10
10
221
343
464
620
1,072
1,558
2,044
3,259
4,474
48,214
234
368
501
672
1,170
1,705
2,240
3,578
4,916
53,074
6
7
8
9
9
9
10
10
10
10
In Case 3 the prices per kilolitre rise by 10 per cent, and water bills for the bulk of
customers rise by 7 to 9 per cent compared to current prices and bills.
We now compare and contrast the first three cases.
Recovering the revenue shortfall within the regulatory period (Case 2) would increase
the per kilolitre price by 37 per cent rather than the 3 per cent that results from not
recovering it at all (Case 1). Recovering it over the longer term (Case 3), rather than
not at all, would increase the per kilolitre price by 10 per cent rather 3 per cent.
Water bills for a 200 kL/a customer under Case 2 would increase by 31 per cent
compared to 3 per cent under Case 1. Under Case 3, the water bill of a 200 kL/a
customer would rise by 9 per cent compared to 3 per cent in Case 1.
Discussion
Recovering the revenue shortfall within the regulatory period increases water prices by
a much larger amount than would occur by spreading the recovery over a number of
decades. In Case 2, recovery of the revenue shortfall is completed within the regulatory
period and therefore has no effect on prices in future periods. In Case 3, recovery of the
revenue shortfall is spread over multiple regulatory periods and causes prices to be
higher than they otherwise would have been in each of them. The consequence of
taking the longer-term approach is to incur a substantial interest burden because of the
lengthy period over which the revenue shortfall is recovered.
The Commission is particularly interested in community views on how to treat the
revenue shortfall.
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 10
Should the revenue shortfall in the current regulatory period be recovered? If so,
how?
In considering this question, the impact of the various alternatives on ACTEW Water
should be taken into account. Surprisingly, the ACTEW Water submission to the
Commission provides no guidance on this matter, but is limited to encouraging ‘the
Commission to explore options that would minimise the social impact and price
pressure of any revenue pass through’ (ACTEW Water, 2012: 214).
ACTEW Water is the business name under which ACTEW Corporation owns and
operates the water and sewerage assets and business in the ACT. ACTEW Corporation
is ultimately owned by the community of the ACT. Accounting profits made by
ACTEW Corporation, including through ACTEW Water, are paid as dividends to the
ACT Government. Insofar as delaying recovery of the shortfall or not collecting it at
all impacts the profits of ACTEW Corporation, it may be expected that the dividend
flows to the ACT Government will be reduced. This decrease in turn may result in a
reduction in services provided by government and/or an increase in other charges.
3.3
Rate of return
This section examines the impact of calculating the rate of return proposed by ACTEW
Water.
Case 4: Increasing the rate of return
Case 4 differs from Case 1 in that the new method for calculating the rate of return on
capital proposed by ACTEW Water replaces the method used by the Commission in its
last price determination, increasing the allowed return on capital from 7.72 per cent to
9.63 per cent. 11
Table 3.4 shows the water prices and customer bills that occur in Case 4.
11 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Table 3.4
Case 4 indicative water price and bills
Water prices
Fixed charge ($/pa)
Tier 1 price (0–200 kL/a)
Tier 2 price (over 200 kL/a)
Annual water bills
50 kL/a
100 kL/a
150 kL/a
200 kL/a
300 kL/a
400 kL/a
500 kL/a
750 kL/a
1,000 kL/a
10,000 kL/a
2012–13
2013–14
Current ($)
Case 4 ($)
Change 2012–13 to
2013–14 (%)
99.83
2.43
4.86
100.00
2.93
5.85
0.2
20
20
221
343
464
620
1,072
1,558
2,044
3,259
4,474
48,214
246
393
539
726
1,271
1,856
2,441
3,905
5,368
58,050
11
15
16
17
19
19
19
20
20
20
In Case 4 the prices per kilolitre rise by 20 per cent compared to 3 per cent in Case 1.
Water bills for the bulk of customers rise by 15 to 19 per cent compared to 2 to 3 per
cent in Case 1.
Discussion
Case 4 indicates the impact of increases in the rate of return on prices in the next
regulatory period. The Commission’s issues paper raised the question of the
appropriate rate of return to allow a publicly owned company whose liabilities are
underwritten by government and which borrows at little more than the government
borrowing rate (ICRC, 2012). Some of the submissions received by the Commission in
response to the issues paper supported re-examination of this issue.
In light of the findings from Case 4 and ACTEW Water’s proposal to change the
manner of calculating the allowed rate of return, we would welcome community views
on this issue.
On what basis should the return ACTEW Water is allowed to earn on the RAB be set?
Again, it should be remembered that any reduction in the allowed rate of return may
reduce the profitability of ACTEW Corporation and the level of dividends paid to
government.
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 12
3.4
Water price structure
Changing the water price structure has no impact on ACTEW Water’s net revenue
requirement. However, it alters the distribution of changes in bills across customers
according to their annual water consumption.
Case 5: Adopting ACTEW Water’s price structure
In Case 5 we look at the new price structure proposed by ACTEW Water.
Case 5 differs from Case 1 in that the fixed water charge is increased from $100 to
$130 per annum, and the level of consumption at which the second, higher tier of
prices cuts in is reduced from 200 to 120 kL/a.
Table 3.5 shows the water prices and customer bills that occur in Case 5 compared to
current prices and bills.
Table 3.5
Case 5 indicative water price and bills
Water prices
Fixed charge ($/pa)
Tier 1 price (0–200 kL/a)
(0–120 kL/a)
Tier 2 price (over 200 kL/a)
(over 120 kL/a)
2012–13
Current
($)
2013–14
Case 5
($)
99.83
2.43
130.00
30
2.21
–9a
4.42
–9a
4.86
%
difference
Annual water bills
50 kL/a
100 kL/a
150 kL/a
200 kL/a
300 kL/a
400 kL/a
500 kL/a
221
343
464
620
1,072
1,558
2,044
240
355
533
748
1,190
1,632
2,074
9
3
15
21
11
5
1
750 kL/a
3,259
3,178
4,474
48,214
4,282
44,036
–2
–4
–9
1,000 kL/a
10,000 kL/a
a Increases in first- and second-tier volumetric prices respectively, ignoring the change in the cut-over
point.
In Case 5 the fixed charge for water supply increases by 30 per cent compared to no
change in Case 1. The prices per kilolitre decrease by 9 per cent rather than the 3 per cent
increase in Case 1. Note that the latter is not a strict like-for-like comparison because the
consumption level at which the second-tier price cuts over is now lower.
13 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Adopting ACTEW Water’s proposed price structure radically alters the distribution of
water bill increases across customers compared to the existing structure. In Case 1, the
increase in bills from 2012–13 to 2013–14 was 2 to 3 per cent across all customer
classes. In Case 5, however, smaller customers face a substantially larger increase in
bills, whereas larger customers would see a reduction in bills from 2012–13 to
2013–14. Under ACTEW Water’s proposed new pricing structure, the increase in the
bill for a customer with an annual consumption of 200 kilolitres is 21 per cent, but a
customer consuming 10,000 kL/a would see a reduction in their bill of 9 per cent.
Annual consumption of ACTEW Water’s ACT customers clusters around the
200 kilolitre level. Therefore, this redistribution of water charges across customers
would have a major impact.
Discussion
The results above clearly highlight the broader question of the preferred distribution of
any necessary price increases and whether a change to the current price structure is
desired by the ACT community. We would welcome the expression of community
views on this topic.
Should the current price structure be changed? If so, how?
Is it desirable to move towards a price structure like that proposed by ACTEW Water?
3.5
The enlarged Cotter Dam
This section looks at the cost of constructing the enlarged Cotter Dam. As explained
earlier, the primary purpose of this case is to respond to public concern about the
impact on water prices of the cost overrun by providing an estimate of its effect.
Case 6: Removing the Cotter Dam cost overrun from the regulated asset
base
Case 6 differs from Case 1 in that the increase in the estimated cost of the enlarged
Cotter Dam project that has occurred since the last price direction in 2008 has been
excluded from the RAB, reducing the RAB by about $260 million.
Table 3.6 shows the water prices and customer bills that result in Case 6.
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 14
Table 3.6
Case 6 indicative water price and bills
Water prices
Fixed charge ($/pa)
Tier 1 price (0–200 kL/a)
Tier 2 price (over 200 kL/a)
Annual water bills
50 kL/a
100 kL/a
150 kL/a
200 kL/a
300 kL/a
400 kL/a
500 kL/a
750 kL/a
1,000 kL/a
10,000 kL/a
2012–13
2013–14
Current ($)
Case 6 ($)
Change 2012–13
to 2013–14 (%)
99.83
2.43
4.86
100.00
2.29
4.59
0.2
–6
–6
221
343
464
620
1,072
1,558
2,044
3,259
4,474
48,214
215
329
444
591
1,017
1,476
1,934
3,081
4,227
45,502
–3
–4
–4
–5
–5
–5
–5
–5
–6
–6
In Case 6, the prices per kilolitre fall by 6 per cent compared to a 3 per cent increase in
Case 1. Water bills for the bulk of customers fall by 4 to 5 per cent compared to a rise
of 2 to 3 per cent in Case 1.
While the contribution of the cost overrun is significant, its impact on prices and bills
is much smaller than that due to either the recovery of the revenue shortfall within the
regulatory period (Case 2) or the increase in the rate of return (Case 4).
15 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
4
Next steps in the price review
The Commission is developing its draft report and price direction scheduled for release
in late November 2012.
The draft report and price direction will set out the Commission’s preliminary
determination of the prices ACTEW Water can charge for the next regulatory period.
The draft report will set out, in some detail, the regulatory approach and calculations
the Commission has adopted in arriving at the preliminary prices.
Importantly, the draft report will be informed by ACTEW Water’s main submission to
the price review and stakeholder responses to the Commission’s February 2012 issues
paper and this consultation paper.
Before the release of the draft report, the Commission proposes to hold a public forum
on the consultation paper on 27 September 2012 (see Chapter 1 for details).
Stakeholders will have an opportunity to comment on the Commission’s draft report,
and submissions are due by February 2013. The Commission plans to hold a public
hearing on the draft report in February 2013.
Table 4.1 details the Commission’s timetable for the price review.
Table 4.1:
Inquiry into water and sewerage services, 2013–18 timeline
Task
Date/expected date
Release of context paper
23 November 2011
Release of issues paper
21 February 2012
Receipt of ACTEW Water’s main submission
30 July 2012
Release of consultation paper
13 September 2012
Public forum on the consultation paper
27 September 2012
Release of draft report
late November 2012
Submissions on draft report close
February 2013
Public hearing
February 2013
Final report
May 2013
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 16
5
References
ACTEW Water. (2012) Submission to the Issues Paper:Regulated Water and
Sewerage Services 2013–18, ACTEW, Canberra.
Dwyer, T. (2012) Submission to the Issues Paper:Regulated Water and Sewerage
Services 2013–18, Canberra.
ICRC. (2006) Water and Wastewater Discussion Paper 1: Technical Regulatory
Issues. Report 14 of 2006, Independent Competition and Regulatory Commission,
Canberra.
ICRC. (2008) Water and Wastewater Price Review – Final Report and Price
Determination. Report 1 of 2008, Independent Competition and Regulatory
Commission, Canberra.
ICRC. (2010) Final Report:Enlarged Cotter Dam Water Security Project. Report 9 of
2010, Independent Competition and Regulatory Commission, Canberra.
ICRC. (2011) Context Paper: Water in the ACT. Report 8 of 2011, Independent
Competition and Regulatory Commission, Canberra.
ICRC. (2012) Issues Paper:Regulated Water and Sewerage Services 2013–18. Report
1 of 2012, Independent Competition and Regulatory Commission, Canberra.
17 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18
Abbreviations and acronyms
ACT
Australian Capital Territory
Commission
Independent Competition and Regulatory Commission (ACT)
ICRC
Independent Competition and Regulatory Commission
ICRC Act
Independent Competition and Regulatory Commission Act 1997
(ACT)
RAB
regulated asset base
Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18 – 18
Endnotes
1 ACTEW Water’s main submission is available on the Commission’s website.
2 The formal statement of the pricing structure the Commission puts in place at the end of the review
process is called a price direction. The ICRC Act gives the Commission the power to order compliance
with such a direction.
3 The ICRC Act requires the Commission to take into account a range of economic, environmental and
social factors in undertaking a price review.
4 Because the ACT has a two-step price per kilolitre, we need to know both total water sales and the
proportions attracting each of the two charges.
5 To maintain consistency with the 2008 price determination, the analysis has required the price impact of
the regulatory proposal to occur mostly in the first year of the regulatory period and for prices to increase
by 1 per cent real in each of the remaining years of the period. The reasons for this approach are explained
in earlier Commission reports and discussion papers. For example, see ICRC (2006).
6 The Commission is concerned that ACTEW Water has, at the time of writing, refused to supply the
missing information and is pursuing it in regard to this matter.
7 This is equivalent to a real rate of return of 5.22 per cent, assuming an inflation rate of 2.5 per cent.
8 ACTEW Water also proposed a change from a pre-tax to a post-tax rate of return. For technical reasons,
that change is not incorporated here. While its effects are not insignificant, they do not seem to be of the
magnitude of the issues considered in this paper.
9 This is equivalent to a real rate of return of 7.13 per cent assuming an inflation rate of 2.5 per cent.
10 See the Commission’s 2010 report on the enlarged Cotter Dam project (ICRC, 2010).
11 The ACTEW Water submission actually proposes a post-tax rate of return of 9.14 per cent. Using data
supplied in the ACTEW Water submission, the Commission estimates that this is equivalent to a pre-tax
rate of return of 9.63 per cent.
19 – Community Consultation Paper: Possible Price Outcomes – Regulated Water and Sewerage Services 2013–18