Pricing Policy Statement - Excluded Retail Services. Introduction. Description of Excluded Services. Excluded Retail Services Offered in 2014/15

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1 Pricing Policy Statement - Excluded Retail Services Introduction SA Water s Water and Sewerage Retail Services: to Revenue Determination (ESCOSA, 2013, Section 2.2) requires SA Water to provide ESCOSA with annual pricing policy statements relating to excluded retail services (including developer contributions), recycled water/stormwater and revenue control compliance. This document sets out how SA Water s Excluded Retail Services Framework achieves the requirements of Chapter 5 of the Revenue Determination. Other separate pricing policy statements are available on developer contributions, recycled water/stormwater and revenue control compliance from SA Water s website (sawater.com.au). Description of Excluded Services Excluded retail services generally represent those services that are provided for the benefit of a single customer (or group of customers), rather than uniformly supplied to all network customers. As such, the cost of such services should therefore be recovered through specific charges to those customers (or potential customers), rather than paid for by all customers. Excluded retail services revenue and prices are set by SA Water and remain subject to a lighter form of regulation. That is, ESCOSA monitors prices for excluded services to ensure SA Water applies appropriate pricing principles in determining these prices. Excluded Retail Services Offered in 2014/15 SA Water offers over 100 different excluded services that have traditionally been classified as miscellaneous fees and charges. Excluded retail services include but are not limited to: Connections (water and sewerage); Annual audit of trade waste; Miscellaneous minor services; Recycled water audits; Easement extinguishment services; Fire plug flow testing service; and Network analysis. In general, where the activity is high volume, low cost and has low variations between individual jobs, SA Water will set a standard charge. The standard charge is based on the average cost of the jobs. Where the volumes are low, the cost is high and the variation between jobs can be high, then SA Water will charge based on individual estimates of the job. For a full list of SA Water s miscellaneous fees and charges, please refer to SA Water s website.

2 Development of Pricing Policy SA Water s long standing policy for all fees and charges has been for the Corporation to set prices that will recover the cost of providing the service and meet the Corporation s strategic priorities by taking into consideration: Customer impacts and affordability; Ongoing viability of SA Water; Compliance with service standards and regulatory requirements; and Pricing signals that encourage the most efficient use of resources. SA Water s guiding principle is that in the first instance, all fees and charges seek to set prices that will recover the full cost of providing the service. However, prices also need to take into account that: Fees and charges should be simple and transparent; In some cases, it may not be possible to remove all cross-subsidies between customers and services offered within a service classification; Prices may be set below cost in some circumstances or above cost to promote efficient use of resources; Overall profitability of fees and charges should be fair and reasonable. Incentives can be included within the pricing of fees in order to promote specific customer behaviours. A fee may be considered to include an incentive if it has the following attributes: It is set below the full cost of service; and Specific behaviour promoted by the fee will result in a net benefit to the Corporation such as avoidance of costs or compliance with environmental licence conditions. Further, SA Water sets its excluded retails services fees and charges consistent with ESCOSA s principles and the National Water Initiative (NWI) Pricing Principles. Further description on how SA Water s policy achieves the NWI Pricing Principles is set out below. Basis of Price Movements 2013/14 to 2014/15 Generally, the costs to provide these services do not fluctuate significantly year to year and due to the large number of fees and charges, SA Water reviews only a selection of fees and charges each year. For , SA Water has concentrated on reviewing developer contributions and associated connection charges and hauled waste charges. It has been assessed that non-domestic hauled waste charges should be aligned to the Long Run Marginal Cost (LRMC) recently calculated for volume and load based trade waste charges. Some of the charges are significantly below the relevant LRMC. Increases on these will be limited to CPI increases, consistent with other trade waste variations. Three charges have been identified that are over the LRMC and thus have been immediately reduced to the LRMC. The remaining charges, including connection charges, are increasing by inflation.

3 ESCOSA s determination sets out that inflation for is to be based on the 12 month Consumer Price Index (CPI), all groups index (weighted average of eight capital cities) published by the ABS for the March quarter. This value was 2.9% for March Achievement of Principles as set out in Determination SA Water is required to demonstrate that our proposed 2014/15 excluded retail service prices are compliant with pricing principles as specified in Chapter 5 of the Revenue Determination. These principles include (as listed below) five NWI Pricing Principles, plus four additional pricing principles as determined by ESCOSA. The principles are set out in the following table: Pricing Principle NWI Principle 8: Setting Developer Charges (Urban Water Tariffs) NWI Principle 9: Capping Developer Charges (Urban Water Tariffs) NWI Principle 10: Revenue from Developer Charges (Urban Water Tariffs) NWI Principle 1: Capital Expenditure Recovery 2014/15 Statement of Compliance NWI Principle 7: Differential water charges (Urban Water Tariffs) ESCOSA Principle 1: Where a service is provided for the sole benefit of the recipient, the beneficiary should pay the full efficient cost of the service, and other consumers should not be required to contribute to the cost of the service ESCOSA Principle 2: Where a service is provided to a distinct group of customers (eg trade waste audits are provided to trade waste customers only), prices to a customer should reflect the cost of supplying the service to the customer and a reasonable allocation of the fixed costs of providing the service, where relevant ESCOSA Principle 3: Prices should reflect the efficient cost of the particular service provided, although in circumstances where the cost of implementing differentiated prices to different customers is likely to outweigh the benefits, non-differentiated prices can be implemented ESCOSA Principle 4: SA Water must be able to provide transparent information to customers on how the cost for these services have been calculated, or are to be applied and must be able to support its position in the event of a dispute The following provides an explanation to how charges relating to Excluded Retail Services comply with the relevant pricing principles outlined above.

4 NWI Principle 1: Capital Expenditure Recovery For new or replacement assets, charges will be set to achieve full cost recovery of capital expenditures (net of transparent deductions/offsets for contributed assets and developer charges and transparent community service obligations) through either: a) Return of capital (depreciation of the RAB) and return on capital (generally calculated as rate of return on the depreciated RAB); or b) Renewals annuity and a return on capital (calculated as a rate of return on an undepreciated asset base (ORC)). In contrast to regulated retail services which require significant levels of capital expenditure and assets to deliver services and thus earn a rate of return and a return on capital, excluded retail services are generally activities where SA Water is required to use limited assets to deliver the service. Thus, the Corporation charges customers the direct and indirect cost of providing the service, including materials such as meters and pipes, but does not charge for depreciation or rate of return on the limited assets associated with the delivery of the service. NWI Principle 7: Differential water charges (Urban Water Tariffs) Water charges should be differentiated by the cost of servicing different customers (for example, on the basis of location and service standards) where there are benefits in doing so and where it can be shown that these benefits outweigh the costs of identifying differences and the equity advantages of alternatives. Note: Differential pricing may be achieved by upfront contributions, including developer charges. ESCOSA Additional Principle # 1 Where a service is provided for the sole benefit of the recipient, the beneficiary should pay the full efficient cost of the service, and other consumers should not be required to contribute to the cost of the service. Consistent with both these principles (NWI Principle 7 and ESCOSA Principle # 1), SA Water is sensitive to the economic basis of applying differential charges to customers where there are benefits in doing so. SA Water seeks to ensure costs of excluded retail services are met by the beneficiaries of that service, who are required to pay the full efficient costs of the services provided. When determining the service cost for a service it is often necessary to utilise average costs. This approach recognises the need for simplicity and the cost/benefit of further price differentiation for these types of services. In general, where the activity is high volume, low cost and has low variations between individual jobs, SA Water will set a standard charge. The standard charge is based on the average cost of the jobs. This provides certainty and consistency across customers. Where the volumes are low, the cost is high and the variation between jobs can be high then SA Water will charge based on individual estimates of the job. In setting excluded retail services fees, prices are aligned to a cost-plus approach. This approach is defined and applied as follows:

5 COST-PLUS APPROACH Cost of Service (fee) = Direct cost + Indirect cost + Profit Margin Where: Direct cost = costs that can be directly associated with providing a services eg labour (including on costs), transport, materials and contractor costs Indirect cost = corporate overhead + local overhead Profit Margin = Overall target of 10% The fee calculation and cost recovery principles are used to ensure a consistent methodology is applied in determining the cost of providing services and to inform the pricing decision for each service. A cost of service approach is a bottom-up methodology that calculates prices by adding the various components of costs, including direct costs and indirect costs. Where the service will benefit individual customers, is likely to be infrequent and/or is administrative in nature, the charge should be raised at the time the service is delivered based on the cost of the service as incurred at the time of delivery. An example is a water connection where an individual customer benefits from a one-off service (ie connection). Therefore this customer should fund the capital investment and should be charged at the time of connection. Any significant work associated with direct costs in the metropolitan area is outsourced to third party contractors (ie meter installation) and is subject to a competitive tendering process. SA Water s purchase of materials is also subject to competitive tender. The cost-plus approach also includes an allowance for overheads in the cost of the fee. Corporate overheads are per the corporate overhead allocated to excluded retail services during the determination process. As discussed above, there are limited assets involved in providing services to customers and thus SA Water does not include an allowance for depreciation or rate of return. Rather, SA Water seeks to earn a fair and reasonable profit margin, having regard to the particular market circumstances faced by SA Water in providing the services and its pricing objectives. To ensure efficient use of resources SA Water does not seek to undertake detailed reviews of every individual fee every year. Rather, SA Water undertakes a rolling review of individual fees. Additionally, to ensure stability, consistency and simplicity for customers SA Water may choose to apply standard price increases across a range of fees, rather than seek to adjust individual fees by individual values every year. As such, while SA Water attempts to align individual fees to the cost plus approach, it generally takes an overall view of this objective. Additionally, there are a few fees which provide broader benefits to SA Water and thus SA Water does not seek to fully recover its costs. For example, charges to remove meters are below cost to encourage customers to remove unused meters. Unused meters create unnecessary opportunities for breakage and stealing and add additional metering costs.

6 ESCOSA Additional Principle # 2 Where a service is provided to a distinct group of customers (eg trade waste audits are provided to trade waste customers only), prices to a customer should reflect the incremental cost of supplying the service to the customer, and a reasonable allocation of the fixed costs of providing the service, where relevant. As discussed under ESCOSA Additional Principle # 1, excluded retail service charges are based on a cost based approach which ensures that the incremental cost (direct cost) is charged to customers and fixed costs (eg overhead type costs) are also recovered. ESCOSA Additional Principle # 3 Prices should reflect the efficient cost of the particular service provided, although in circumstances where the cost of implementing differentiated prices to different customers is likely to outweigh the benefits, non-differentiated prices can be implemented. We note that the issues raised in this principle are materially the same as: NWI Principle 7: Differential water charges (Urban Water Tariffs) with regard to the need for charges to be differentiated; and ESCOSA Additional Principle # 1 with regard to the need for prices to reflect efficient costs. To demonstrate how charges for excluded retail services meet this principle, we refer you to the above discussions under these respective principles. ESCOSA Additional Principle # 4 SA Water must be able to provide transparent information to customers on how the costs for these services have been calculated, or are to be applied, and must be able to support its position in the event of a dispute. SA Water clearly sets out prices via its public communication as standard practice, which includes information/fact sheets, publishing prices on the Corporation s website and in the Government Gazette. Customers are also provided with relevant price information on request and at no charge. The fact sheets provide information on the overarching policies and more specific information on individual charges as appropriate. Where SA Water charges based on the estimated cost of the work the customer will be provided with information outlining the basis of the estimate. As stated above, SA Water has a clear and reproducible methodology for ascertaining costs and charges. SA Water is able to produce the workings to demonstrate how these have been derived.