2.4.1 Water Supply Services Sewerage Services Unregulated Services Context of Submission... 38

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2 1 Executive Summary Price Determination Process and Key Themes Transition to Price Equity Trade Waste Pricing Developer Charges Customer Hardship Policy Transitional Revenues Current Service Levels Operating Cost Target Capital Investment Program Expected Service Level Improvements Price and Service Plan About Southern Water Corporate Vision, Mission and Values Corporate Governance Key Business Activities Water Supply Services Sewerage Services Unregulated Services Context of Submission Regulatory Framework Overview Key Assumptions Shareholder Expectations Key Themes/Intentions of the PSP Customer Consultation Consultation on draft submission Targeted Consultation Key Issues from Customer Surveys Trade Waste and Developer Charges Feedback Service Obligations Introduction and Overview Industry Regulatory Obligations Page 2 of 184

3 4.2.1 Public Health Environmental Protection Authority (EPA) Dam Safety Customer Service Standards transitional standards Minimum Flow Rate Service Introduction Consultation with Regulators Public Health Environmental Protection Authority (EPA) Economic Regulator Customer Hardship Policy Support for Kidney Dialysis Patients Interest on Overdue Accounts Revenue Requirements Introduction and Overview Operating Expenditure Summary Justification of split of Operating Expenditure by Key Drivers Productivity initiatives Opex compliance improvement measures Forecasts of Operating Expenditure Capital Expenditure Summary Capital planning process and prioritisation Drinking water quality and wastewater compliance prioritisation Dam Safety Prioritisation Asset management Key drivers of capital expenditure (growth/renewal/improvements/compliance) Water capital expenditure by key driver Sewerage capital expenditure by key driver Water capital expenditure by asset class Sewerage Capital Expenditure by Asset Class Business support investment Sewerage pipelines transitional service standard setting Page 3 of 184

4 Water pipelines transitional service standard setting Proposed investment in water supply service standards compliance Regulated asset base Summary Opening value of RAB Projected average asset values Depreciation Assumptions Return on Capital (WACC) Corporation Proposal Asset annuity (for lower limit calculation) split between water and sewerage Lower limit revenue requirement (minimum sustainability) Statutory limit Upper limit revenue requirement Demand management Summary Key characteristics of customer base Demographics and land use Income and concession Customer Analysis Residential and non-residential Connection sizes and equivalent tenements Trade Waste Customer growth assumptions Water supply planning framework Water volume forecasts Water zone demand analysis Sewerage volume forecasts Sewer catchment demand analysis Trade waste volume forecasts Lot growth forecasts Demand management initiatives Water Metering Project Trade Waste Page 4 of 184

5 7 Pricing and customer impact analysis Summary Fixed Water Target Tariffs by Water Meter Connection Size Variable Water Charge Fixed Sewerage Target Tariffs by Equivalent Tenement (ET) Vacant Land Service Charges Fire Service Charge Target tariff at statutory limit and upper limit Regulatory pricing framework Rationale behind structure of regulated services and tariffs Regulated services Tariff principles for standard water and sewerage service Tariff principles for other fees and charges Unregulated services Pricing Zones Pricing transition objectives and side constraints Residential versus non-residential transition Water and sewerage tariffs Water tariffs Fixed water charges Limited Supply Variable water charge full quality Variable water charge limited quality Converting one part water pricing to two part pricing Removing free water allowances Fire Service charges Water pricing for strata titled residential properties Unbundling of two part pricing/removal of allowances for strata titled residential properties Service charge - water Water carriers and public filling stations Waysiders Sewerage tariffs Fixed sewerage charges Sewerage pricing for strata titled residential properties Page 5 of 184

6 Service charge - sewerage Motor home dump point (sanitary dump station) Septic tank effluent disposal (S.T.E.D.) schemes (limited sewerage services) Customer transition impacts Comparing Southern Water s pricing Customer impact analysis Transition examples Circumstances Requiring Immediate Application of Target Tariffs and Circumstances in which Transition by Side Constraints Will Apply Trade waste pricing Category 1 and 2 Trade Waste Customers Pricing Transition for Category 1 and 2 Trade Waste Customers Category 3 and 4 Trade Waste Customers Commitments to customers in respect of trade waste services Developer charges Service introduction charges Miscellaneous fees and charges Calculation of transition revenue paths Attachments Page 6 of 184

7 1 Executive Summary 1.1 Price Determination Process and Key Themes This is Southern Water s first Price and Service Plan. The Tasmanian Economic Regulator advised Southern Water that under the Water and Sewerage Industry Act 2008, it was required to submit a Price and Service Plan (PSP) by 31 October 2011 for a three-year period from 1 July 2012 to 30 June The Regulator has the jurisdiction to review, amend, request further information, approve or determine the prices that Southern Water is allowed to charge for regulated water and sewerage services and the way these prices are applied. This PSP aligns with the Regulator s first price determination for the water and sewerage services provided by Southern Water. It should be noted that the PSP is underpinned by a need to manage a number of competing interests, including: Regulatory expectations to improve service levels and reach compliance; Minimising price shocks for customers; Moving to equitable pricing arrangements; and Satisfying owner expectations outlined in our Shareholders Letter of Expectations. Ultimately, the PSP seeks to balance these competing priorities to deliver the best value for money outcome for Southern Water s customers. A key theme of the PSP is minimising price shocks for customers. Southern Water s revenues are below those considered to be sustainable in the long-term. While an immediate move to such levels would be desirable from a service improvement point of view, Southern Water will not make this adjustment at the expense of customers already under pressure from rising costs of living. It should also be noted that with limited metering in the southern region, this PSP has been developed in the absence of robust water usage data. This is reflected in the qualitative approach taken to demand forecasting in the PSP. It is an area where the second PSP will provide greater detail. 1.2 Transition to Price Equity The PSP outlines how Southern Water intends to begin moving our customers to consistent and equitable tariffs. Southern Water s pricing priorities for the regulatory period are: 1. Minimising price shocks for customers; 2. Introducing two part pricing; 3. Commencing the transition to equitable tariffs; and 4. Making progress towards unwinding cross subsidies. Page 7 of 184

8 The tariff design principles applied for water and sewerage services are: 1. A like fixed price for a like service (i.e. customers receiving the same service in Hobart and Rosny pay the same fixed charge); 2. Greater potential capacity usage, larger fixed price (i.e. larger water connection, larger fixed charge); and 3. User pays (i.e. paying for usage starts from the first kilolitre). The table below shows the target tariffs for a customer with a 20mm diameter water meter and a standard sewerage connection (one equivalent tenement). This table is indicative of the prices that should be paid if Southern Water were to have equitable pricing for the vast majority of residential customers. These are the charges new residential customers will pay if they connect during the regulatory period. Table 1.1: Target Tariffs ($, nominal) (base year) Annual % increase Fixed Water Service Charge per Connection (20mm DN) $ $ $ $ % Volumetric Charge (Water) $/kl (Potable Supply) $ $ $ $ (2.6%) CPI Fixed Sewerage Service Charge per Connection (1 Equivalent Tenement) $ $ $ $ % The target tariffs for customers with larger diameter water meters or who have a property assessed to be greater than one (1) equivalent tenement (typically larger non-residential customers) will increase proportionally. The proportional ratio for setting the target tariff for larger water meter connection sizes is outlined in the table below. Page 8 of 184

9 Table 1.2: Water Meter Connection Size Ratio Connection Size Ratio Diameter Nominal (DN) Meter Connection Size [DN] 20mm 25mm 32mm 40mm 50mm 65mm 75mm 80mm 100mm 150mm 200mm Ratio [R] From this table, therefore, a customer who has a property with a 40mm meter connection will have a target tariff four times the standard residential charge. In this example, the customer will have a target tariff of 4 x $ Given the diverse range of pricing levels Southern Water has inherited, it will take some years before all customers can move to their target tariffs. Southern Water considers it would be too great a price shock to immediately move those customers whose tariffs are significantly below the equitable level to their target tariff. Conversely, if Southern Water was to immediately move everyone whose tariffs are above the equitable level to the target tariff, it would reduce the revenue Southern Water could recover and compromise the funds available to upgrade ageing infrastructure and improve services, undermining the purpose of the industry reforms. With cost of living an understandable concern for the community, Southern Water proposes to implement a gradual move towards the target tariffs to balance the need to deliver service improvements while minimising price shocks and hardship for customers. The transition process, which will use what are termed side constraints, is outlined below. Table 1.3: Side Constraints SIDE CONSTRAINTS ($, nominal) Maximum $50 or 10% per service increase (whichever is the greater) on fixed charges for those customers below the target tariff. A maximum increase of 10 per cent on the current volumetric water rate for those customers below the target volumetric tariff. Charges for customers above target tariffs (fixed and volumetric) are to be frozen for two years before reducing by 5 per cent in The $50 per service side constraint also be increased proportionally for those customers with a water meter connection greater than 20mm and who are assessed to have a property greater than one equivalent tenement for sewerage (e.g. customers with a 40mm water connection will have a potential side constraint increase of $50 x 40mm connection size ratio (4) = $200). Strata title properties will share the increased side constraint associated with a larger diameter boundary water meter. Page 9 of 184

10 The chart below shows how an average residential customer in each municipality within the Southern Water region will move towards the target tariffs, but will do so under the side constraint increases expressed in Table 1.3. The chart assumes each customer at the target tariff consumes at a rate of 200kL p.a., which equates to a total bill of $ in (i.e. $ $ (200*$0.90)). Figure 1.1: Typical Residential Customer Bill Progression Typical bill for residential customer consuming 200kL p.a. on target tariffs $1, $1, $1, $ $ $ $ $ $ / / / /15 Brighton Central Highlands Clarence Derwent Valley Glamorgan Spring Bay Glenorchy Hobart Huon Valley Kingborough Sorell Southern Midlands Target Tariff As can be seen, some areas will move almost immediately to the year s target tariffs, while other areas may take many years. The proportional increase of the $50 side constraint aims to ensure that those customers who have larger diameter meter connections or multiple ET sewerage properties (typically larger non-residential customers), but who have current charges which are significantly below their appropriate target tariff, can be progressed towards the target tariff at the same proportional rate as domestic customers. For example, a customer who has a current $1,000 fixed water charge, but a 100mm connection, would transition to the $6,808 target ( ) at a maximum increase of $1,250 per year ($50 x 100mm connection ratio 25.00). In the absence of this proportioning, it may take this customer many decades to reach the target. While only a small number of customers are in this position, it is important that the cross subsidy they currently receive is corrected within a reasonable time frame. Page 10 of 184

11 Following are some examples of how a range of different customers will see their charges 1 transition from the charges they face in 2011/12: Legend At Target Tariff - movi ng with annual Target Tariff Above Target Tariff - frozen until 2013/14, then reducing by 5% Below Target Tariff, in creasing with side constraints ($50 or 10%) Table 1.4: Residential customer at target tariff (20mm water meter connection and Sewerage 1ET) Residential kl p.a. Annual Water & Sewerage Bill Quarterly Water & Sewer Bill Daily Water & Sewer Bill Charge Base Yr Yr01 Yr02 Yr03 Type* 2011/ / / /15 W $ $ $ $ S $ $ $ $ V ($/kl) $ $ $ $ V $ $ $ $ Total $ $ $ $1, W $64.23 $68.08 $72.16 $76.49 S $ $ $ $ V ($/kl) $ $ $ $ V $ $45.00 $46.17 $47.37 Total $ $ $ $ W $0.70 $0.75 $0.79 $0.84 S $1.26 $1.34 $1.42 $1.50 V ($/kl) $ $ $ $ V $0.48 $0.49 $0.51 $0.52 Total $2.45 $2.58 $2.72 $ Seasonality factors have been excluded from the examples Page 11 of 184

12 Table 1.5: Residential customer below target tariff (20mm water meter connection and sewerage 1ET) Residential kl p.a. Charge Type* Base Yr 2011/12 Yr /13 Yr /14 Yr /15 W S $ $ $ $ $ $ $ $ Annual Water & Sewerage Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $ $ $ $ W S $61.18 $80.00 $68.08 $92.50 $72.16 $ $76.49 $ Quarterly Water & Sewer Bill V ($/kl) $ $ $ $ V $ $45.00 $44.77 $47.37 Total $ $ $ $ W $0.67 $0.75 $0.79 $0.84 S $0.88 $1.01 $1.15 $1.29 Daily Water & Sewer Bill V ($/kl) $ $ $ $ V $0.41 $0.49 $0.49 $0.52 Total $1.95 $2.25 $2.43 $2.65 Table 1.6: Residential customer above target tariff (20mm water meter connection and sewerage 1ET) Residential kl p.a. Charge Type* Base Yr 2011/12 Yr /13 Yr /14 Yr /15 W S $ $ $ $ $ $ $ $ Annual Water & Sewerage Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $1, $1, $1, $1, W S $81.25 $ $81.25 $ $81.25 $ $77.19 $ Quarterly Water & Sewer Bill V ($/kl) $ $ $ $ V $ $45.00 $47.50 $47.37 Total $ $ $ $ W $0.89 $0.89 $0.89 $0.85 S $1.60 $1.60 $1.60 $1.52 Daily Water & Sewer Bill V ($/kl) $ $ $ $ V $0.52 $0.49 $0.52 $0.52 Total $3.01 $2.99 $3.01 $2.89 Customers with a water meter connection greater than 20mm and/ or have been assessed for sewerage as being greater than 1 equivalent tenement, will have target tariffs and side constraints that are increased proportionally. Below are the target tariffs and side constraints for a customer with a 40mm water connection and who is assessed as 5ETs for sewerage. Page 12 of 184

13 Table 1.7: Target Tariffs for a Non Residential Customer Variable Water Fixed Water Fixed Sewer $ $ $ $ Side constraint fixed water : $50 x 4.00 (ratio of 40mm connection) = $200, or 10% Side constraint fixed sewer: $50 x 5ET = $250, or 10% Side constraint variable: 10% The transition path for this customer is shown below. Table 1.8: Non Residential customer below target tariff (40mm water meter connection & sewerage 5 ET) Residential kl p.a. Charge Type* Base Yr 2011/12 Yr /13 Yr /14 Yr /15 W S $ $1, $1, $1, $1, $2, $1, $2, Annual Water & Sewerage Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $3, $3, $3, $4, W S $ $ $ $ $ $ $ $ Quarterly Water & Sewer Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $ $ $ $1, W S $2.33 $4.11 $2.88 $4.79 $3.16 $5.48 $3.35 $6.16 Daily Water & Sewer Bill V ($/kl) $ $ $ $ V $1.92 $1.97 $2.03 $2.08 Total $8.36 $9.64 $10.67 $11.59 With the introduction of metering across the region, those customers who currently receive fixed water charges only will move to two part pricing from 1 July For example, for customers converting to two part pricing and who have a 20mm water meter connection, the fixed water charge in 2012/13 will be reduced by 200kL of usage at $0.90/kL ($180).They will then be charged for each kilolitre of usage. This conversion recognises their current fixed charge implicitly includes usage component. The example below shows this conversion and the customer s subsequent transition towards the target tariff. As can be seen by following the fixed water charge component, the customer s fixed charge is still above the target tariff and will be frozen. Page 13 of 184

14 Table 1.9: Customer converting to two part pricing (20mm water connection and sewerage 1ET) Residential kl p.a. Annual Water & Sewerage Bill Quarterly Water & Sewer Bill Daily Water & Sewer Bill Charge Base Yr Yr01 Yr02 Yr03 Type* 2011/ / / /15 W $ $ $ $ S $ $ $ $ V ($/kl) $ - $ $ $ V $ - $ $ $ Total $ $ $1, $1, W $ $75.00 $75.00 $76.49 S $ $ $ $ V ($/kl) $ - $ $ $ V $ - $45.00 $46.24 $47.37 Total $ $ $ $ W $1.32 $0.82 $0.82 $0.84 S $1.26 $1.34 $1.42 $1.50 V ($/kl) $ - $ $ $ V $ - $0.49 $0.51 $0.52 Total $2.58 $2.65 $2.75 $2.86 This same conversion will occur for customers with larger meter connection sizes, with the amount the fixed charge is reduced increasing proportionally to the connection size. Page 14 of 184

15 1.3 Trade Waste Pricing Liquid trade waste is the waste water from trade, industrial, commercial, institutional, dental, agricultural, veterinary, medical, scientific research, or experimental activities. It does not include domestic waste from sources such as toilets and hand washing basins. Southern Water will provide a service to convey and treat liquid trade waste, which must be of an appropriate volume and quality to be accepted for discharge into wastewater systems. Trade waste customers will be categorised using a risk ranking model based on the Water Services Association of Australia s National Wastewater Source Management Guideline, July 2008, and its categorisation will determine their charges. Southern Water s sewer network and treatment plants are designed for domestic waste and as a consequence there are additional costs associated with the management, treatment, and transportation of liquid trade waste through the sewer system. Existing category 1 and category 2 trade waste customers (whether they were previously charged for trade waste or not) will be deemed to have consent to dispose of their trade under the Customer Contract approved as part of this Price and Service Plan. As part of this approval, category 1 and 2 trade waste customers will also face the target tariffs approved as part of this Plan. Future category 1 and 2 trade waste customers will be required to apply for trade waste services so that Southern Water can ensure they are allocated to the appropriate category. Once this occurs, the customers will also be covered by the Customer Contract. However, category 3 and category 4 customers (larger scale industrial trade waste customer) will have their charging introduced following a case by case analysis of their current charges. These will be set out in separate contractual arrangements (known under the Water and Sewerage Industry Act 2008 as Section 61 contracts). Southern Water commits that category 3 and 4 customers will be given a reasonable period of time to transition to changed charging arrangements which at a minimum will align with the timelines agreed to have necessary pre-treatment infrastructure in place. The following target trade waste tariffs will apply for the financial year and will be increased by CPI (2.6%) in the last two years of the regulatory period. It is acknowledged that many trade waste customers, particularly those with previously high AAV based sewerage prices, could already be considered to be paying an implicit trade waste price. Similar to those customer moving from one part water pricing, those trade waste customers who have effectively been disposing of trade waste but not separately paying for it, will have their current sewerage charge reduced by the target tariff for their respective category of trade waste. They will then receive itemised bill components for both sewerage and trade waste at the target tariff. Page 15 of 184

16 Table 1.10 : Liquid Trade Waste Fees And Pricing ($, Nominal) Description Fee Category 1 Category 2 GENERAL Application Fee $/unit $117 $234 Management Fee $/annum $206 $299 Sampling $/unit At cost At cost Fixed Usage Charge compliant $/annum $387 $1,319 Fixed Usage Charge non-compliant $/annum $3,874 $13,193 NON-COMPLIANCE Exceedance Charge** non-compliance with acceptance criteria or deemed status criteria Non-compliance recovery of additional costs fixed 10 times Fixed Usage Charge $ At cost e.g. sampling, analysis, investigation, damaged infrastructure reinstatement or replacement and/or biosolids disposal. 1.4 Developer Charges Developer Charges for water and sewerage services were required by most councils in the southern region for some time prior to the handover to Southern Water on 1 July The councils based these charges on various methodologies of calculation and distribution. It is Southern Water s intention to replace all developer charges inherited from councils with new charges calculated by water zone and sewerage catchment using the Independent Pricing and Regulatory Tribunal (IPART NSW) approved methodology for local government water and sewerage providers in New South Wales. In brief, the IPART methodology: Starts with the value of existing headworks assets in the zone/catchment at replacement cost; Adds the value of the assets planned within the zone/catchment in the short to medium term (5 years); Calculates the total available capacity in the network, reflected as a number of equivalent tenements; Divides the capital value, including additions, by the number of equivalent tenements to get a capital charge per equivalent tenement; Assesses the time until full take up of capacity and adjusts the capital charge to reflect the present value of the capital charge; and Discounts this figure by 50 per cent in recognition of the retail return for the corporation from adding new customers. Page 16 of 184

17 The current headworks charges per equivalent tenement are detailed in Table 1.11 and 1.12 below. These have been split into charges inherited from councils and those that Southern Water calculated according to the IPART methodology. Southern Water is concentrating on first replacing the inherited council charges in areas where there is currently the most development activity and will submit these to the Regulator for approval as they are calculated. Page 17 of 184

18 Table 1.11: Southern Water Headworks Charges - Water WATER ($, nominal) Council Zone Sub-zone Brighton Clarence Glenorchy Hobart Kingborough Central Highlands Derwent Valley Glamorgan Spring Bay Huon Valley Sorell Southern Midlands Tasman All Water Zones Brighton Cambridge Acton Seven Mile Beach Calculated By 2012/ / /15 Council Council $1, $1, $1, $2, $2, $2, Actbridge Water Zones Westcamb Council $3, $4, $4, Cilwen Council $4, $5, $5, Tara Drive Council $5, $5, $5, Canopus Council $1, $2, $2, HiPasmorah Council $1, $1, $1, Lauderdale, Lauderdale Council Acton $1, $1, $1, Water Zones Richardsons Hill Council $3, $3, $3, Lindisfarne Hilindstaff Council Water Zone $2, $2, $2, Otago Council $2, $2, $2, Pasmere Council $1, $1, $1, Richmond Council $1, $1, $1, Risdon Vale Council $ $ $ East Risdon Council $5, $5, $5, Risdon Sugarloaf Council $3, $3, $4, Lindstony Council $ $ $ Warrah Council $ $ $ Wakehurst Council $2, $2, $2, Other Glenorchy Water Zones IPART (SW) $2, $2, $2, All Water Zones Hobart IPART (SW) $2, $2, $2, All Water Zones Council $2, $2, $2, All Water Zones IPART (SW) $2, $2, $2, All Water Zones IPART (SW) $2, $2, $2, All Water Zones Council $1, $1, $1, All Water Zones Council $1, $1, $1, Sorell, Midway Point Council $2, $2, $2, All Water Zones Council $2, $2, $2, All Water Zones IPART (SW) $2, $2, $2, Page 18 of 184

19 Table 1.12: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Council Catchment Sub-catchment Green Point Brighton Brighton Beauty Bay Bellerive Clarence College Corinth St Geilston Creek Howrah Clarence Rosny Howrah Beach Kangaroo Bay Koomela Bay Lindisfarne Rosny Montagu Bay Venice St Warrton Calculated By Council Council Council Council Council Council Council Council Council Council Council Council Council Council Council Council Council 2012/ / /15 $1, $1, $1, $1, $1, $1, $3, $3, $3, $2, $2, $2, $2, $2, $2, $2, $2, $2, $3, $3, $3, $5, $5, $5, $2, $2, $2, $3, $3, $3, $2, $2, $2, $3, $3, $3, $2, $2, $2, $2, $2, $2, $2, $2, $2, $4, $4, $4, $2, $2, $2, Page 19 of 184

20 Table 1.12: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Council Catchment Sub-catchment Calculated By 2012/ / /15 Duntroon Council $3, $3, $3, East Droughty Council $3, $3, $3, East Trywork Council $4, $4, $4, Gibsons Point Lauderdale (Gravity Only) Council IPART (SW) $3, $3, $3, $2, $2, $3, Tavern Council $3, $3, $3, Lowrok Council $3, $3, $3, Rokeby Oakdowns Oakshores Council Council $2, $2, $2, $3, $3, $3, Punches Reef Council $4, $4, $4, Rivulet Council $2, $2, $2, Clarence Skilrok Tranmere Council Council $2, $2, $2, $3, $3, $3, Tranmere Point Council $4, $4, $4, Trywork Point Council $4, $4, $5, West Droughty Council $3, $4, $4, Risdon Vale Council $3, $3, $4, Risdon East Risdon Council $4, $4, $5, Sugarloaf Council $4, $4, $4, Cambridge Kennedy Drive Prudentia Council Council $6, $6, $6, $6, $6, $6, Bilney Council $ $ $ Richmond Cosgrove Council $ $ $ Torrens Council $ $ $ Page 20 of 184

21 Table 1.12: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Calculated Council Catchment Sub-catchment By 2012/ / /15 Cameron Bay Council $4, $4, $4, Glenorchy Collinsvale IPART (SW) $2, $2, $2, IPART Glenorchy Prince of Wales Bay (GHD) $2, $2, $3, IPART Hobart Macquarie Point (GHD) $1, $1, $1, IPART Hobart New Town Selfs Point (GHD) $2, $2, $2, IPART Sandy Bay Blinking Billy (GHD) $2, $2, $2, Taroona Council $3, $3, $4, Kingborough Central Highlands Derwent Valley Blackmans Bay Council $3, $3, $4, Margate Council $3, $3, $4, Electrona Council $3, $3, $4, Woodbridge Council $3, $3, $4, Howden Council $3, $3, $4, IPART Hamilton (SW) $2, $2, $2, IPART Ouse (SW) $2, $2, $2, IPART Bronte (SW) $2, $2, $2, IPART Arthurs Lake (SW) $2, $2, $2, IPART Wayatinah (SW) $2, $2, $2, IPART Flintstone (SW) $2, $2, $2, IPART Bothwell (SW) $2, $2, $2, IPART New Norfolk (SW) $2, $2, $2, IPART Maydena (SW) $2, $2, $2, IPART Gretna (SW) $2, $2, $2, Page 21 of 184

22 Table 1.12: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Calculated 2012/ / /15 Council Catchment Sub-catchment By Orford Council $1, $1, $1, Glamorgan Spring Bay Huon Valley Sorell Southern Midlands Tasman 1.5 Customer Hardship Policy Triabunna Council $1, $1, $1, Swansea Council $1, $1, $1, Coles Bay Council $1, $1, $1, Bicheno Council $1, $1, $1, Ranelagh Council $1, $1, $1, Cygnet Council $1, $1, $1, Geeveston Council $1, $1, $1, Dover Council $1, $1, $1, Southport Council $1, $1, $1, Penna Council $3, $3, $3, Midway Point Council $3, $3, $3, Sorell Council $3, $3, $3, Dunalley Council $1, $1, $1, Kempton Council $1, $1, $1, Campania Council $1, $1, $1, Bagdad Council $1, $1, $1, IPART Port Arthur (SW) $2, $2, $2, IPART Nubeena (SW) $2, $2, $2, The Corporation has implemented a Residential Hardship Policy (see which provides assistance to customers experiencing financial hardship. It provides for an independent assessment of customer applications by external community welfare agencies (led by the Salvation Army) using agreed criteria, processes and policies to determine eligibility for assistance. It is aimed to assist those customers who are experiencing short term difficulties due to illness or unemployment. Southern Water introduced its Customer Assistance Program in with the allocation of $10,000 per annum to assist customers in hardship to pay their account. This allocation of funds for residential customers will be continued throughout the PSP period. Southern Water also offers customers a range of payment options and flexible payment plans. Page 22 of 184

23 116, , , , , , , , , , , ,858 In addition to these arrangements, Southern Water has a policy of offering a discount to customers using kidney dialysis machines in their homes. Each year the customer will be required to reapply for the discount, with the quantum of the discount to be equal to 200kl at the prevailing volumetric tariff (pro rata to apply). 1.6 Transitional Revenues Southern Water expects the following transitional revenues from the application of the target tariffs and side constraints, as well as through other forms of revenue such as trade waste and miscellaneous fees and charges. As can be seen, the transitional revenues are below the minimum measure of sustainability (the lower limit specified in OTTER s Final Price Determination). It will take Southern Water more than 10 years to reach the lower limit if the target tariff progression and side constraints are extrapolated. Table 1.17: Transitional Revenues ($000s, nominal) Fixed water 37,314 40,037 41,539 Variable water 22,467 23,134 23,762 Fixed sewer 50,477 53,553 55,732 Trade waste 1,345 1,359 1,374 Price cap compensation phase out 1, Other revenue 1,541 1,584 1,627 Unregulated Revenue Supplementary income 6,605 7,068 7,559 Expected transitional revenues 119, , ,764 Expected transitional revenues - real 116, , ,543 Upper limit - real 204, , ,620 Statutory limit - real 166, , ,476 Lower limit - real 135, , ,334 Figure 1.2: Revenue Limits Revenue Limits Transitional Revenue Lower Limit Revenue Recovery Statutory Limit Upper Limit $250,000 $200,000 $150,000 $100,000 $50,000 $ Page 23 of 184

24 1.7 Current Service Levels Throughout the PSP, customers will see the emergence of a number of key themes. Southern Water acknowledges that the service levels currently provided are poor when benchmarked against other service providers of similar size around the country. As summarised in the table below, Southern Water trails its peers in measures relating to breaks and bursts, wastewater treatment plant compliance and water quality, while water usage levels per connection also are significantly higher. Table 1.18: Current Service Levels Service level indicators Southern Water Barwon Water Hunter Water Unplanned water interruptions (per 100km of main) Sewer breaks and chokes (per 100km of water main) Water quality (no. of water zones where microbiological compliance achieved) Wastewater treatment compliance (no. of plants compliant at all times) /44 (73%) 32/32 (100%) 5/5 (100%) 2/31 (6%) 9/9 (100%) 14/18 (78%) The sector s regulators have been clear in providing their required standards of service and priorities for improvements. It is Southern Water s challenge to deliver these higher standards of service within specified timeframes. Over the past two years Southern Water has collated and analysed the available information relating to our assets so that we can best prioritise the three year improvement program included in this Plan. However, it is clear that there is still a lack of detailed knowledge about the performance of some of our assets and Southern Water will continue to collect this knowledge over the regulatory period. Southern Water is required to develop a set of transitionary service standards that will provide a path to compliance with the minimum standards set under the Customer Service Code. Developing this transitionary path depends on first establishing a baseline of performance and then allocating capital and operational spending to these areas. The table below sets out Southern Water s transitional service standards. As required by the Code, the transitional standards commence a path towards compliance with the target by the end of the second regulatory period ( ). As an example, Southern Water will improve its performance in the average duration of planned water supply interruption from an average of 300 minutes of outage, to an average of 260 minutes over the course of the regulatory period. Page 24 of 184

25 Table 1.19: Transitional Service Standards Service standard Target Current Water Unplanned water supply interruptions (per 100km of water main) Average time taken to attend bursts and leaks Priority 1 (minutes)1 Average time taken to attend bursts and leaks 120 N/A Priority 2 (minutes)2 Average time taken to attend bursts and leaks 1440 N/A Priority 3 (minutes)3 Average frequency of unplanned water supply 0.1 N/A interruptions (number) Average frequency of planned water supply 0.1 N/A interruptions (number) Average unplanned customer minutes off water 20 N/A supply (minutes) Average planned customer minutes off water 15 N/A supply (minutes) Average duration of unplanned water supply 100 N/A interruption (minutes) Average duration of planned water supply interruption (minutes) Unplanned water supply interruptions restored within five hours (per cent) Planned water supply interruptions restored within five hours (per cent) Number of customers receiving more than five 0 N/A unplanned water supply interruptions in a financial year (number) Unaccounted for water (per cent) 10 N/A Sewerage Sewer breaks and chokes (per 100km of sewer main) Average time to attend sewer spills, breaks and chokes (minutes) Average sewerage service interruption (minutes) 150 N/A Sewerage spills contained within five hours (per cent) Customers receiving more than three sewerage 0 N/A service interruptions per year Customers Total water and sewerage complaints (per 1, properties) Water and sewerage complaints to Ombudsman (per 1,000 customers) Percentage of calls answered by an operator within 30 seconds Page 25 of 184

26 1.8 Operating Cost Target In this PSP Southern Water has set a challenging target to deliver cost savings in our operating, maintenance and administrative expenditure by limiting the like for like increase in these costs to a rate of CPI minus 1 per cent (i.e. a real reduction in costs). Southern Water aims to deliver on the prereform expectation that the consolidation of water and sewerage services would provide greater efficiencies in operational planning and delivery, ultimately delivering faster progress towards improving levels of service. 1.9 Capital Investment Program The planned capital investment program takes into account wider regional considerations to provide future efficiencies. Most importantly, the capital program will lift service and compliance levels in some of the most poorly performing asset classes, such as wastewater treatment plants and dams, and will also provide for growth in the faster growing areas of our region. As can be seen in the pie chart below by far the greatest need for capital expenditure is in lifting service and compliance levels in sewer infrastructure (59 per cent), followed by water infrastructure at 34 per cent. Page 26 of 184

27 Figure 1.3: Capital Expenditure by Asset Class Capex by Asset Class Water 34% Buildings Asset Information and S ystems facilities 2% 1% Recycled Water 1% Vehicles Plant & Equipment 3% Wastewater 59% Below are the highlights of the capital program, featuring projects with a value greater than $1 million. Table 1.20: Capital Projects > $1M Project Blackmans Bay WWTP - $26m over three years Detail The project will involve upgrades to the Blackmans Bay WWTP and pumping of sewage flows from Margate and Electrona to the upgraded Blackmans Bay plant. Sewer Renewal Program - $23m over three years. The sewer renewals program will reduce the number of pipe breaks and blockages, minimising the risk of sewer spills and ensuring levels of services to customers are improved. Page 27 of 184

28 Project Wastewater treatment plant upgrade program - $21.4M Detail Southern Water has scheduled upgrades to a number of wastewater treatment plants to ensure compliance. These include: Turiff Lodge WWTP - $5M over first two years. Brighton WWTP - $10M over first two years. Dover WWTP - $1.5M over the first two years. Geeveston WWTP with $2M expended in year 2 Ongoing minor upgrades, investigations, design and approvals for WWTP upgrade projects - $7.5M Tolosa Dam Project - $16M over three years. Decommission the existing Tolosa Dam, rehabilitate the site and provide network storage in nearby location. Water Renewal Program - $11M over the three year regulatory period. The Water Renewal Program will increase the level of customer service by reducing the number of breaks per 100km of network. Margate/Electrona redirection - $11M over three years. The Margate and Electrona WWTPs will be decommissioned. Flows will be redirected to an upgraded Blackmans Bay WWTP Small Towns Project - $8M over the regulatory period. This project seeks to address poor water quality in many regional towns including Ouse, Hamilton, Gretna, Wayatinah, Judbury, Mountain River, Tunbridge and Colebrook. Greater Hobart Wastewater Strategy - Expected spend of $5.4M over three years. Investigation of options for rationalising the number of wastewater treatment plants along the Derwent. Margate Augmentation - $5.0M in second year of regulatory period. The works will provide capacity for growth for the next 30 + years in the Margate area. Snug Reservoir - $1.8M over the first two years of the regulatory period. To cater for growth in the area a new reservoir is required in Snug. Lauderdale Sewerage Scheme - $2M in year one of the regulatory period. Implementation of a pressure sewerage scheme in the residential areas of Lauderdale. Taroona Wastewater Redirection - $5M in the first year (majority of expenditure in years previous to regulatory period). Rather than upgrade the Taroona WWTP in its current location the plant is to be decommissioned and the sewage diverted to Self s Point WWTP. Page 28 of 184

29 Project Lodge Hill Reservoir - $1.9M in the third year of the regulatory period Detail To cater for growth in Brighton an existing reservoir at Lodge Hill will be duplicated Expected Service Level Improvements In summary, the capital expenditure and process improvement programs are expected to deliver the following outcomes for the region: - Improved licence compliance at seven priority wastewater treatment plants; - Removal of boil water notices in five towns and achievement of compliance with Australian Drinking Water Guidelines in a further seven towns; - A safer and healthier working environment for Southern Water employees; - Increased capacity to cater for growth across the region; and - Reductions in sewer blockages and water main breaks. Page 29 of 184

30 2 Price and Service Plan About Southern Water Southern Water operates under the Water and Sewerage Industry Act 2008 and is subject to economic, environmental, public health and water rights regulation by the State Government. Southern Water s purpose and vision is to create lasting value for our communities by providing sustainable water and wastewater solutions. Our purpose is underpinned by our principles: no harm, it s up to us, better communities and lasting value. Southern Water currently services the southern region of Tasmania covering an area of 25,000 square kilometres. The region includes Hobart and its urban fringes, as well as many small towns and hamlets. It spans the twelve urban and rural municipalities of Brighton, Central Highlands, Clarence, Derwent Valley, Glamorgan Spring Bay, Glenorchy, Hobart, Huon Valley, Kingborough, Sorell, Southern Midlands and Tasman. Around eighty-five per cent of the region s population lives within the Greater Hobart area. However, Southern Water has an operating licence that allows it to provide water and sewerage services anywhere within Tasmania. Attachments A1 and A2 show the operating areas including key water and sewerage assets. The region serviced by Southern Water has a population of approximately 250,000 2, with the majority of the customer base living within Greater Hobart with an estimated population of 212, Southern Water also services non urban municipal areas including: Central Highlands, Southern Midlands, Huon Valley, Glamorgan Spring Bay and Tasman. Overall Southern Water provides water services to about 198,000 people with 180,000 of the population receiving a sewerage services. 2 ABS Regional Population Growth 3 Hobart Capital City is defined as Greater Hobart in line with the ABS Local Statistical Area definition, which comprises; Brighton, Clarence, Derwent Valley part A, Glenorchy, Hobart, Kingborough part A and Sorell part A. Page 30 of 184

31 Southern Water manages a total of 48 active water catchments, which feed into 25 drinking water treatment plants or dosing stations, which in turn feed numerous drinking water systems. The key water catchments are the River Derwent, Lake Fenton and Mt Wellington, which supply the majority of Greater Hobart. Table 2.1: Southern Water Key Facts Key Facts Southern Water (as at 30 June 2011) Current Area Serviced (sq km) 25,483 Population Receiving Water Supply 203,600 Population Receiving Sewerage service 185,400 Service Connections, Water 96,406 Service Connections, Sewer 86,970 Drinking water catchments 48 Total Sourced Water (ML) 41,517 Reservoirs, tanks and dams 231 Drinking water treatment plants/dosing stations 25 Water supply mains (km) 3,008 Total Volume of Sewerage Collected (ML) 24,162 Sewer mains (km) 2,060 Level 2 Waste Water Treatment Plants (WWTP) 31 Level 1 WWTP 17 Equivalent full time employees 350 Page 31 of 184

32 2.2 Corporate Vision, Mission and Values Southern Water aims to provide leading practice water and wastewater services in the most efficient and cost effective manner. Southern Water seeks to be recognised as being professional, passionate, forthright, trustworthy and approachable. Our vision is to create lasting value for our communities by providing sustainable water and wastewater solutions, where: To create means to mobilise the energy and capability of our people and service providers to generate continuous improvement; Lasting value means long-term benefits and returns to our communities and owners; Sustainable means identifying and incorporating social, environmental and economic benefits into our decisions and actions; and Water and wastewater solutions means implementing infrastructure improvements that meet agreed levels of service. This vision is underpinned by our core values: Leadership: We will set the agenda for future water management by taking a professional approach and encouraging innovative thinking. Courage: We are prepared to make the difficult decisions for the long-term benefit of our customers, owners and the environment and to stand by those decisions and face up to criticism. Openness: We will set expectations and communicate with clearness and respect. Collaboration: We will consult and discuss, work as a team and listen. Quality: We will build our assets to last, take pride in our workmanship and deliver on our promises. Efficiency: We will get it right the first time, look for smarter solutions and continual improvement while keeping control of our budget. Safety: We will ensure the safety of all staff, the quality of our water supply and management of wastewater and protect the environment. 2.3 Corporate Governance Southern Water is incorporated as a proprietary company limited by shares. The twelve councils within the southern region are our owners. Southern Water is controlled by a Board consisting of a chairman and five directors. The chairman and three of the directors also sit on the boards of Tasmania s two other regional water and sewerage corporations, while the two remaining directors are specific to Southern Water. The board reports to our owners representatives who in turn report to the twelve owners of Southern Water. Page 32 of 184

33 Southern Water employs approximately 350 full time equivalent employees (FTEs) who are engaged in a broad range of activities to support the licensed activities. The corporation has a strong focus on safety, customer service and environmental outcomes. Figure 2.1: Southern Water Structure Southern Water is a shareholder of Onstream, also a proprietary company limited by shares. The shareholders of Onstream are the three regional water and sewerage corporations. Onstream provides common services to the regional water and sewerage corporations, which include billing, information technology, payroll, procurement and network communication services. 2.4 Key Business Activities Water Supply Services Southern Water has 25 water treatment plants throughout the region that supply 37 drinking water systems. The treatment plants are a mix of full and chlorination only treatment, with fluoridation also provided at 14 of the plants. Four of the 37 systems receive water that goes through no treatment and is classes as non-potable supply. The customers in the Greater Hobart region are supplied potable water via a water network that has three key catchments: Lake Fenton, Mount Wellington and the River Derwent. These catchments feed treatment plants at National Park, Bryn Estyn, Fern Tree and Merton, which in turn serve systems as far north as Kempton, as far south as Snug and as far east as Sorell. The integrated nature of this system allows Southern Water to minimize the cost of production (i.e. supply through gravity rather than pumping) where storages and rainfall allow. Page 33 of 184

34 Southern Water also provides 21 regional drinking water systems. A variety of catchments feed these systems, from native forests to highly utilised catchments supporting agricultural and recreational activities. Of these systems, 11 are full treatment plants, while a further 10 are chlorination only water treatment plants. Systems at South Franklin, Judbury, Mountain River and Gretna receive no water treatment. Southern Water also provides a number of sundry water services that are regulated. These include water provided for fire fighting purposes and water accessed in bulk by water carters and other individuals. Southern Water sources around 41,500 ML of water from its catchments and delivered this to more than 96,000 properties. Table 2.2: Southern Water s Water Treatment Plants Water Treatment Plants National Park Bryn Estyn Fern Tree Merton Cygnet Agnes Creek Dover Geeveston Donnelys Huonville Geeveston Kermandie Cygnet Nicholls Rivulet Ranelagh Colebrook Oatlands Tunbridge Bothwell Hamilton Ouse Wayatinah Ellendale Maydena Bicheno Coles Bay Orford Swansea Triabunna Systems without treatment South Franklin Judbury Mountain River Gretna Type of Treatment/Fluoridation Chlorination only/fluoridation Full treatment/fluoridation Chlorination only/fluoridation Chlorination only/fluoridation Full treatment Full treatment /Fluoridation Full treatment / Fluoridation Full treatment / Fluoridation Chlorination only/fluoridation Chlorination only/fluoridation Chlorination only/fluoridation Chlorination only/fluoridation Full treatment /Fluoridation Chlorination only Full treatment Chlorination only Chlorination only Chlorination only Full treatment Chlorination only Full treatment Full treatment Full treatment / Fluoridation Full treatment Chlorination/Fluoridation No treatment No treatment No treatment No treatment Page 34 of 184

35 2.4.2 Sewerage Services Southern Water operates 48 sewerage systems covering the majority of population centres serviced by reticulated water supplies. Of these, 31 are level 2 treatment plants (greater than 100 kilolitres per day of average dry weather flow) and are regulated by the Environmental Protection Authority (EPA), while the remaining 17 are level 1 plants and are regulated by local councils. Only 3 of the treatment plants (Cambridge, Rokeby and Selfs Point) treat waste to a tertiary level. In the Greater Hobart area there is reasonably close alignment of suburbs that have access to water and sewerage services, while in the regional areas this is a lot less uniform. Southern Water operates sewerage services in the regional areas of Woodbridge, Dunalley, Bronte Lagoon, Nubeena, Karanja and Flintstone, which are areas that don t have a reticulated water supply, while the fingers of the sewerage systems often do not reach to the same extent as the water system. Consequently, sewerage services are provided to approximately 10,000 less connections (86,000 connections). In 2009/10, 24,000Ml of sewage was treated by Southern Water s sewage treatment plants and around 3,000ML (or 13 per cent) of the treated sewage was re-used. Table 2.3: Southern Water s Sewerage Treatment Plants Sewerage Treatment Plant Level 2 Plants Blackmans Bay Bicheno Bothwell Brighton Cambridge Cameron Bay (Berriedale) Campania Cygnet Dover Electrona Geeveston Green Point (Bridgewater) Kempton Macquarie Point Margate Midway Point Oatlands Orford Penna Prince of Wales Bay Ranelagh Richmond Risdon Vale (East Risdon) Rokeby Level of Treatment Secondary Secondary Secondary Secondary Tertiary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Tertiary Page 35 of 184

36 Sewerage Treatment Plant Rosny Selfs Point Sorell Swansea Taroona Triabunna Turriff Lodge (New Norfolk) Level 1 Plants Bagdad Barwick Lagoons Blessington St, Clarence Bryn Estyn Colebrook Collinsvale Dunalley Flintstone Gretna Hamilton Howden Karanja Maydena Nubeena Ouse Wayatinah Woodbridge Level of Treatment Secondary Tertiary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Secondary Unregulated Services Southern Water provides a small number of unregulated services. These services are considered unregulated by the Economic Regulator as they are sold into markets that have alternative forms of supply. As these services are unregulated the costs of these services should not be borne by regulated water and sewerage customers. For some of these products, like re-use and bio-solids, the delineation between regulated and unregulated services is not always clear. In some cases the provision of re-use is a lower cost option for regulated sewerage customers than the alternative of further treatment to allow disposal to the environment Irrigation Irrigation water is available to some customers under limited circumstances. The irrigation water supply comes from the same treatment and distribution infrastructure that provides water to our urban customers. It is allocated to irrigation customers once urban demand has been satisfied. This surplus capacity generally occurs during the cooler, wetter months. As such, the provision of irrigation supply Page 36 of 184

37 services actually leads to cost optimisation of pipe capacity in off-peak periods through the recovery of additional unregulated revenue. Southern Water currently provides bulk irrigation water directly to 75 customers, including Daisy Banks Dam operated by Tasmanian Irrigation Schemes, which supplies irrigation water into the Coal River Valley. Approximately 3,000 ML per annum is sold to these customers Re-use Southern Water operates 16 recycled water schemes, supplying a total of 60 customers who irrigate land using approximately 13 per cent of the wastewater treated by Southern Water. Recycled water schemes vary between unregulated services and least cost wastewater disposal solutions. An example of a non-regulated service is the Clarence recycled water scheme, Tasmania s largest recycled water network supplying 28 customers. An example of a regulated scheme is a small regional scheme supplying one customer for free in what is the most cost effective method of managing wastewater discharge. Expansion of recycled water provision is only likely to be undertaken where it is the least cost option for wastewater discharge. This may occur where the alternate receiving environment is highly sensitive or valuable and the cost of advanced wastewater treatment is less sustainable than the development and operation of recycled water infrastructure. At this time, the commercial re-use schemes have operational costs which substantially exceed revenue received. It is not envisaged that re-use water services will result in a positive financial return during the life of this plan Bio-solids Bio-solids are the solid by-product of wastewater treatment. Bio-solids management is an extension of wastewater management, as opposed to a stand-alone non-regulated service. Southern Water bio-solids are currently either utilised for agricultural spreading, composted by licensed processors or (where contaminated) buried at licensed landfill. Southern Water pays a number of operators to undertake each of these management activities. Cost optimisation and compliance are the focus areas for bio-solids management in the short to medium term. This is not an area of the business that is expected to achieve a positive financial return during the life of this plan Tankered Waste Liquid trade waste and domestic septic waste is currently tankered from businesses and homes by cartage contractors to a select number of Southern Water s wastewater treatment plants. Most WWTPs are not designed to accept this waste, which is often unidentified and uncharacterised when it arrives at the WWTP. Page 37 of 184

38 However, this service is unregulated as there are competitive alternatives for waste producers in regards to disposal. These include landfills and some commercial providers who have waste separation facilities. 2.5 Context of Submission Regulatory Framework Overview The following chart captures the main regulatory obligations that Southern Water faces. Central to the regulatory framework is the Operating Licence issued to Southern Water. The Operating Licence sets out the terms and conditions under which Southern Water may own and operate water and sewerage infrastructure and under which we may provide our services. This instrument requires compliance with the various regulatory portfolios, which are considered in more detail in Chapter Key Assumptions The Price and Service Plan has been formed based on the following key regulatory assumptions: Table 2.4: Key PSP Assumptions CPI 2.6% WACC Existing Assets (equity funded) 2.74% WACC Existing Assets (debt funded) and WACC New Assets 5.32% Expected average water usage post two-part pricing (20mm connection) (kl) 200kL Equivalent number of 20mm water connections 107,216 Equivalent number of sewerage tenements 95,404 Water and Sewerage Connection Growth (%) 0.7% Capex per annum $60m Opex indexation 1.75% Shareholder Expectations The Water and Sewerage Corporations Act 2008 prescribes governance issues including ownership structure, roles and powers of owner Councils, composition, roles and powers of Owners Representatives and the requirement for the Shareholders to provide to the Water and Sewerage Corporations a Letter of Expectation. The inaugural Shareholders Letter of Expectation commenced on 1 July 2009 and is still in operation. A copy is included as Attachment B. The Shareholders Letter of Expectation identifies the strategic priorities they have of the Corporation and the high level expectations of the performance of the Corporation. These matters are designed to influence the development of the Corporation s Strategic Plans. Page 38 of 184

39 Explicit in the Shareholders Letter of Expectation is for Southern Water to promote the efficient delivery of water supply and provision of sewerage services in the southern region, to encourage water conservation, demand management of water and the re-use of water on an economic and commercial basis. The shareholders also expect the corporation to be successful in business, operating its activities in accordance with good commercial practice and to maximise sustainable returns. In addition to these principal objectives, the shareholders expect Southern Water to uphold the original principles of structural reform in order by maintaining a capability and governance structure to manage the water resource, water supply and sewerage services in a sustainable manner, taking account of economic, environmental and social benefits including the improvement of drinking water quality across the southern region. As a high priority the shareholders require all water reticulation and sewerage schemes to be upgraded to comply with the respective regulators standards. The shareholders require the corporation to review and report to the owners representatives annually on the performance of the board of the corporation, its committees and individual directors and distribute dividends of at least 50 per cent of the net profit after tax Key Themes/Intentions of the PSP Southern Water is committed to the Tasmanian water and sewerage reform process and recognises the importance of significantly raising public health and environmental standards and the quality of service to all parts of the southern community. Throughout this plan customers will see a number of key themes emerging. Firstly, service levels are poor relative to other service providers of like size around the country. Southern Water trails its peers in measures of breaks and bursts, wastewater treatment plant compliance and water quality, while we also have significantly higher water usage per capita due to the lack of consequences for water wastage. Table 2.5: Current Southern Water Performance Southern Water Barwon Water Hunter Water Unplanned water interruptions (per 100km of main) Sewer breaks and chokes (per 100km of water main) Water quality (number of water zones where microbiological compliance achieved) Wastewater treatment compliance (number of plants compliant at all times) /44 (73%) 32/32 (100%) 5/5 (100%) 2/31 (6%) 9/9 (100%) 14/18 (78%) Page 39 of 184

40 Throughout this Price and Service Plan period we will continue to reshape Southern Water to provide efficient regionally-based services, by the continuous improvement of business as usual processes, the delivery of excellent customer service through a customer focused workforce and the ongoing investment in the capability of our employees. The introduction of metering and measurement of water consumption, and the transformation into a unified regional organisation with one culture and one set of management systems are accorded a high priority. All of our initiatives have a strong focus on safety, customer service and environmental outcomes. We aim to provide leading practice for the provision of water and sewerage services in the most efficient and cost effective manner. In order to achieve our vision we have set the following strategic objectives for the period: Customers To provide water and wastewater services that meet community needs, regulatory requirements and agreed customer service standards. Financial To invest in sustainable programs and projects that achieve the lowest life cycle cost to customers while delivering sustainable distributions to our owners. Environment To be recognised as an environmentally sustainable business with improving levels of performance in our stewardship of catchments, receiving waters and the use of natural resources. People and Systems To promote high levels of satisfaction among our people while improving OH&S and focusing business system performance and automation to minimise costs. To achieve these objectives, we will implement the following strategies: Page 40 of 184

41 Each strategic objective is aimed to ensure that Southern Water creates a distinct brand in terms of strong local presence, with emphasis on customers and the community, sustainability, the environment, sound financial management and innovation. These priorities are reflected in the intended capital works expenditure over the regulatory period, with the majority of work to focus on improving sewerage services. While Southern Water can control internal optimisation, probably the biggest opportunity available to gain greater efficiencies is by reforming the way the sector interacts with land use planning in the State. Southern Water supports infill development to lower the average cost of service delivery for our customers. In this context, the Tasmanian Planning Commission is coordinating a forum looking at how to optimise urban planning in the State. Southern Water is represented on the southern regional working group. Southern Water s chairman has also been appointed an inaugural member of the recently formed Infrastructure Advisory Council whose purpose is to provide advice to the Government about current and future infrastructure policy, planning and delivery. The council will provide a vital link between government, industry and the community and help ensure government decisions are guided by expert advice. Finally, against a backdrop of rising utility costs nationally and locally, it is clear to Southern Water that the future pricing of water and sewerage services is an issue of growing concern for many customers. In its recent inquiry into the urban water and sewerage sector, the Productivity Commission found that water and sewerage bills, on average, make up 2.11 per cent of household disposable income and are relatively less expensive compared to other essential services such as electricity and housing. This is not to suggest that water and sewerage costs aren t material to consumers and Southern Water has taken this into consideration when setting fixed target tariffs to increase by 6 per cent per annum (a lot lower rate than electricity). However, the reality is revenues must increase for Southern Water to improve levels of services and in comparison to other jurisdictions, water and sewerage is underfunded. Southern Water will continue to work with its customers and the sector s regulators to ensure that price increases are fair and reasonable. Page 41 of 184

42 3 Customer Consultation In line with our strategic commitment to ensure greater transparency about our policies, decisionmaking and activities, we implemented a comprehensive community communication strategy on future pricing and service issues. 3.1 Consultation on draft submission The community consultation process began in early February 2011 with a public commitment from our Chairman and CEO to release a first draft of the PSP for customer feedback in July The Price and Service Plan Summary was publicly released on 18 July 2011 and closed for comment on 16 August The summary document focused on the impact of the Plan on those customers receiving standard water and sewerage services but did not cover services and prices for developers, trade waste customers and for miscellaneous fees and charges. A set of questions and answers were also released with the summary document on the Southern Water website. 3.2 Targeted Consultation Due to the complexity of the pricing reform issues faced by Southern Water, we identified a clear need to test the impact of pricing proposals on a representative customer group. A pricing specific Customer Consultative Group (CCG) was established in July Membership was drawn from a range of professional bodies, business, environmental and community organisations across southern Tasmania. Participants in the process were invited to be involved based on their personal expertise and experience in representing the views of their organisations. Representatives from the following organisations were involved in the consultation process: Sustainable Living Tasmania Tasmanian Council of Social Service Inc. Tasmanian Pensioners Association Tasmanian Small Business Council Wilson Homes An unaffiliated customer representative. The group met on two occasions to review and provide feedback on the Price and Service Plan Summary and on a specifically prepared pricing discussion paper. Page 42 of 184

43 Southern Water also sought input from a separate trade waste consultative group. The Trade Waste Customer Consultative Group (CCG) consists of industrial trade waste customers who have been assessed as high risk dischargers (Category 4), commercial customers with high volume - medium risk discharges (Category 3) and commercial customers that have cumulative impacts or multi-site operations. Approximately 30 Customers are on the CCG invitation list. Meetings are held every 3 months to provide information to customers and receive feedback on Southern Water trade waste related processes. It has proved to be an informative and valuable forum for both Southern Water and our trade waste customers. The August 2011 forum focused on pricing of trade waste, with Southern Water presenting the proposed trade waste tariffs and transition philosophy. In addition, Southern Water has presented information to the development sector on the transition to the IPART methodology of developer charges calculation and on the need for developer charges more generally. The business also met separately with the welfare sector to discuss and gain feedback on the impact of the Price and Service Plan for their constituents. 3.3 Key Issues from Customer Surveys Through the release of our Price and Service Plan Summary and consultative group meetings, the following key feedback was received: Confirmation of the need to move away from the inequities of AAV pricing. Strong support for postage stamp pricing from the Consultative Group and a request that it be acknowledged that this is another form of cross subsidy, but one that customers are willing to accept. Disagreement with the quantum of the proposed side constraints was voiced by welfare organisations, particularly their impact on very low income customers. Disagreement with the proposal to freeze the charges of all those customers above their target tariff, though agreement that the inequities of current pricing arrangement cannot be fixed immediately. Acceptance that service levels need to be improved, but strong disagreement that price increases are required if dividends are being paid to council owners and health and environmental non-compliance continues. Generally strong support for a heavier weighting of pricing on the volumetric component, such that a material difference can be made to a bill if usage is reduced. A general feeling that the proposed one part sewerage pricing does not reward customers who contribute less flow to sewer and there is a preference for a form of two part sewerage pricing. Page 43 of 184

44 However, it was also acknowledged that given the infancy of the business, achieving a consistent approach for sewerage pricing is a good first step. Agreement that billing to individual lot owners in strata title arrangements is preferred. However, it was also felt that unit entitlement may not be the most appropriate default for bill allocation where sub metering does not occur and allowing bodies corporate to suggest an alternative split may be appropriate. The bill conversion process for those moving to two part pricing was supported, however it was acknowledged that some customers will find it hard to break the habits of their historical usage and may be penalised. Disagreement with the levying of service charges. The need for greater clarity on how the target tariffs were derived, with reference to the costs of running the business. Further explanation regarding the adoption of the 200kL usage assumption is desired. The feedback suggests that customers perceive this as a tariff itself rather than an assumption to illustrate the usage component of a total bill. No disagreement with the charging methodology for customers with larger connection sizes and greater than one equivalent tenement for sewerage (largely non-residential customers), but a number of customers could not easily understand what this meant for them as they did not know connection size(s). A request that communication of the pricing transition needs to be simplified, particularly for pensioners and specifically in the area of sub metering. A customer feedback register has been compiled from issues raised by the CCG and through the public consultation process (Attachment C) Trade Waste and Developer Charges Feedback There has been no opposition to the charges or the methodology presented to the customer group following the trade waste pricing session. The issue of developer charges has been raised at forums with the Housing Industry Association and the Master Builders Association. At both sessions information on the need for developer charges and the methodology for calculation was presented, as was Southern Water s proposed approach to replace the inherited charges with charges calculated according to the IPART methodology. There was general acceptance of this approach and an understanding of the reasons for levying developer charges. The feedback received through consultation was presented to the Southern Water Board for its consideration. Southern Water is of the view that the feedback it received did not provide sufficient need for the business to change the approach taken to pricing in the PSP. However, greater justification for Southern Water s positions has been included in the relevant sections of the PSP. Page 44 of 184

45 4 Service Obligations 4.1 Introduction and Overview Southern Water operates in a highly regulated environment. As a monopoly service provider the prices charged are overseen by an Economic Regulator. Due to the inherent public health, environmental and safety risks involved in providing water and sewerage services we also face regulation of the technical provision of services. The key regulatory bodies that Southern Water must respond to are: Water and Sewerage Economic Regulator prices, customer service and asset management. Director of Public Health drinking water quality and fluoridation. Director, Environment Protection Authority level 2 wastewater treatment plant compliance and major sewage spills. Department of Primary Industries, Parks, Water and Environment water licence allocations and dam safety. Water and Sewerage Ombudsman customer complaints. In addition, Southern Water is also required to comply with relevant occupational health and safety requirements, which has been a significant driver of spending by the Corporation immediately following our set up. 4.2 Industry Regulatory Obligations Public Health Southern Water is responsible for the operation and management of 38 drinking water systems in accordance with the Tasmanian Public Health Act 1997 and Tasmanian Drinking Water Guidelines, Management of all systems is undertaken using the risk management principles of the Australian Drinking Water Guidelines (ADWG). The risk management approach is based on the completion of a comprehensive risk assessment which assesses the entire system from catchment to tap. In addition to the assessment process, Southern Water verifies performance through the completion of a comprehensive testing program. As part of the new regulatory environment under which Southern Water is operating, a Compliance Implementation Plan (CIP) for drinking water supplies was developed and submitted to the Department of Health and Human Services (DHHS). This contains a Drinking Water Quality Management plan which outlines areas of high risk and proposes projects and mitigation measures to address these risks. In addition DHHS provided a list of priority systems in need of improvement which were considered in developing the Drinking Water Management Plan and identifying priority projects and programs. Based on requirements from DHHS, high risk systems identified through Southern Water s risk assessments and existing boil water alert status, a complete list of high priority sites has been compiled. Page 45 of 184

46 4.2.2 Environmental Protection Authority (EPA) Southern Water manages 31 Level 2 and 18 Level 1 wastewater management facilities in accordance with the Environmental Management and Pollution Control Act (EMPCA). In addition, Southern Water manages many thousands of kilometres of sewer pipe work and over 300 pump stations. Level 2 treatment facilities (>100kL/day) are regulated by the EPA while Level 1 treatment facilities (<100kL/day) are managed by local government with the Environmental Health Office being the key contact. In addition to meeting licence requirements for activities such as wastewater treatment, Southern Water has a general environmental duty under EMPCA and can be prosecuted for causing material environmental harm. Several investigations have been carried out by the EPA into potential breaches of the Act. The EPA is in the process of issuing new Environmental Protection Notices (EPNs) for many Level 2 systems in order to update the operating permit to meet with modern environmental management requirements. These new EPNs are likely to result in significant operational and capital expenditure in order to meet the new requirements. As part of the new regulatory environment under which we operate, a Compliance Implementation Plan (CIP) was developed and submitted to the EPA. This contains a Waste Water Quality Management plan which outlines areas of high risk and proposes projects and mitigation measures to address these risks. This was submitted as an interim plan in July 2010, with a final version submitted in July In addition, the EPA provided a list of priority systems which was considered when developing the Waste Water Management Plan and identifying priority projects and programs Dam Safety Dam safety in Tasmania is currently controlled by the following statutory requirements: Water Management Act 1999 (Tasmania) Dam Safety Regulations 2003 (Tasmania) The statutory requirements are administered by the Water Management Branch of the Department of Primary Industries, Parks, Water & Environment (DPIPWE). The Dam Safety Regulations also incorporate the Australian National Committee on Large Dams (ANCOLD) suite of guidelines and refer to publications of the New South Wales Dam Safety Regulator. As such, Southern Water has a legal requirement to ensure that the following requirements are met for their dam portfolio: They are operated and maintained in a safe manner. Dam Hazard Categories are known and regularly reviewed. Appropriate surveillance programs are implemented. Page 46 of 184

47 Dam safety emergency plans are prepared and where relevant, warning information and inundation maps are provided to appropriate emergency agencies to assist downstream emergency planning by these agencies. Suitably qualified and experienced personnel are engaged on dam works and during inspections. Suitable corporate governance structures and internal reporting processes are in place. Dam safety reviews are undertaken at the appropriate time. Dam risk profiles are available and risks are being addressed on a priority basis Customer Service Standards transitional standards The Tasmanian Water and Sewerage Economic Regulator oversee Southern Water s compliance with customer service standards. These standards are captured in the Tasmanian Water and Sewerage Industry Customer Service Code, which requires Southern Water to transition to compliance with measures including the number of water leakages, sewer blockages, time taken to attend to leaks and blockages, numbers of complaints and the time taken to answer calls to our Customer Service Centre. Southern Water is required to develop a set of transitionary service standards that will provide a path to compliance with the minimum standards set under the Customer Service Code by the end of the second regulatory period ( ). Developing this transitionary path depends on first establishing a baseline of performance and then allocating capital and operational spend to these areas. The table below sets out Southern Water s transitional service standards. Page 47 of 184

48 Table 4.1: Transitional Service Standards Service standard Target Current Water Unplanned water supply interruptions (per 100km of water main) Average time taken to attend bursts and leaks Priority 1 (minutes)1 Average time taken to attend bursts and leaks 120 N/A Priority 2 (minutes)2 Average time taken to attend bursts and leaks 1440 N/A Priority 3 (minutes)3 Average frequency of unplanned water supply 0.1 N/A interruptions (number) Average frequency of planned water supply 0.1 N/A interruptions (number) Average unplanned customer minutes off water 20 N/A supply (minutes) Average planned customer minutes off water 15 N/A supply (minutes) Average duration of unplanned water supply 100 N/A interruption (minutes) Average duration of planned water supply interruption (minutes) Unplanned water supply interruptions restored within five hours (per cent) Planned water supply interruptions restored within five hours (per cent) Number of customers receiving more than five 0 N/A unplanned water supply interruptions in a financial year (number) Unaccounted for water (per cent) 10 N/A Sewerage Sewer breaks and chokes (per 100km of sewer main) Average time to attend sewer spills, breaks and chokes (minutes) Average sewerage service interruption (minutes) 150 N/A Sewerage spills contained within five hours (per cent) Customers receiving more than three sewerage 0 N/A service interruptions per year Customers Total water and sewerage complaints (per 1, properties) Water and sewerage complaints to Ombudsman (per 1,000 customers) Percentage of calls answered by an operator within 30 seconds Page 48 of 184

49 4.2.5 Minimum Flow Rate The minimum flow rate for serviced land within the Southern Region of Tasmania at 1 July 2012, is the flow rate that the property received or would have received if that property was connected to Southern Water s water infrastructure at 1 July The minimum flow rate for land that becomes serviced land within the Southern Region of Tasmania after 1 July 2012 is 15 litres a minute. See Section for the pricing treatment of customers deemed to be receiving a limited service at 1 July Service Introduction The Water and Sewerage Industry Act 2008 requires Southern Water to include an Extension with its Price and Service Plan for approval by the Economic Regulator. The Service Extension, Expansion and Introduction Policy (Attachment C) covers the circumstances in which Southern Water will extend or expand its infrastructure to accommodate new development and the sharing of costs. The policy specifically covers the circumstances in which Southern Water will introduce services to existing areas that presently only have on-site water or sewerage service. As can be seen in Section 5, Southern Water will complete one extension during the regulatory period, the roll out of sewerage services to Lauderdale, while Section 7 addresses the associated service introduction charge for the project. 4.3 Consultation with Regulators In forming the Price and Service Plan, Southern Water has consulted extensively with the sector s regulators, both on a bilateral and multilateral basis. In particular, Southern Water has brought together representatives from the key regulatory offices to present its prioritised capital expenditure program. These sessions have aimed to brief the regulators on the scale of the regulatory compliance task, the available information for decision making and how Southern Water has balanced the various priorities in light of its financial and operational constraints. In drawing up the draft Plan tradeoffs have been made across the asset spectrum. Southern Water has drawn on a range of internal and external industry expertises to ensure our customers receive the best outcome from our capital and operational spend through the first regulatory period. As part of the development of the Wastewater Management Plan, the various Drinking Water Quality Plans, our dam safety compliance program and the asset management plan, input has been gathered from the individual regulators to identify the priority areas to be addressed within specific asset portfolios Public Health Meetings and discussions with the Department of Health and Human Services have focused mainly on development of the Drinking Water Management plans and projects to address DHHS s high priority list of systems. Discussions have also included the emerging problem of disinfection by products in some systems and the lifting of boil water notices in towns such as Swansea and Ellendale where solutions have been implemented to improve water quality. Fluoridation management and improvement of Page 49 of 184

50 fluoride levels has also been a key concern of DHHS and Southern Water has responded by improving fluoride operations and completing required projects Environmental Protection Authority (EPA) Significant consultation with the EPA has occurred on issues including the wastewater management plan, data transfer and management, rollout of new Environmental Protection notices and incident investigations. The EPA raised some concerns around the interim wastewater management plan relating to environmental risk rankings and a lack of project detail to address key risks. Significant changes and improvements have been made to the final plan to address these concerns. More recently, Southern Water has initiated meetings and improved consultation with southern councils Environmental Health Officers (EHOs) to improve incident response protocols, risk management and foster a strong working relationship between Southern Water and EHOs. These meetings have proved productive and have resulted in improved incident management practices Economic Regulator Throughout the development of the asset management plan, Southern Water officers have held meetings with OTTER to present initial findings and discuss acceptable presentation and interpretation of investigation results. Typically these discussions have centred on the highly variable levels of service currently provided to customers in different locations in southern Tasmania and Southern Water s desire to improve our understanding of the true variability of service levels that our customers receive. The service standards performance across all southern Tasmanian suburbs and towns was then presented to the Economic Regulator, providing greater level of detail compared to the single service standard figures published as mandatory KPI s for the whole of the region. When the length of the buried pipeline assets is considered (>5,300Km) and the time that is needed to materially change asset condition is considered, these discussions led to a greater understanding of the possibility of differential and transitional service standards in the future. 4.4 Customer Hardship Policy Southern Water is required to develop a Customer Contract as part of its PSP (Attachment D). This Contract details the services, and standards of those services, that Southern Water will provide to its Customers. It does not apply to customers of Southern Water who receive a water service for irrigation purposes, or who receive a water service that does not meet the standards of service in the Customer Contract. These customers will be subject to a contract under Section 61 of the Water and Sewerage Industry Act Page 50 of 184

51 The Corporation also has a Residential Hardship Policy, which is detailed in Southern Water s Customer Charter, and provides assistance to customers experiencing financial hardship in paying their water and sewerage accounts. Southern Water introduced its Hardship Policy in with the allocation of $10,000 per annum to assist those in hardship to pay their account. This funding allocation will be continued at least at this quantum through the Price and Service Plan period. To date the program has not been extensively utilised by customers, l which may be due to the fact that Southern Water has not actively pursued outstanding debts owing to the corporation. The Salvation Army, which administers the program on our behalf, also advises that this may be due to the fact that customers have been accessing Federal Government financial relief funding to pay their Southern Water account and other bills. Access to these funds has been promoted to customers by the customer Service Centre, the Salvation Army and other community welfare agencies Support for Kidney Dialysis Patients In addition to the above arrangements, Southern Water has a policy of offering a discount to customers using kidney dialysis machines in their homes. Each year the customer will be required to reapply for the discount, with the quantum of the discount to be equal to 200kl at the prevailing volumetric tariff for that year (pro rata to apply) and will appear as a reduction off the fixed charge for the customer Interest on Overdue Accounts Southern Water charges interest or fees on overdue accounts in accordance with the provisions of the Tasmanian Water and Sewerage Industry Customer Service Code. Where interest is to be charged, or calculated, for a refund on overcharged amounts, as interest earned on a security deposit paid or for failure to pay a debt due, it will be calculated at the bank bill rate. Interest will accrue daily and will be capitalised (if not paid or refunded) every 90 days. Where a fee is to be applied for failure to pay a debt due, the amount of the fee will be a reasonable charge. In addition to interest, Southern Water will charge an administration fee for failure to pay a debt due. The fee will be $5. The fee will not be charged if: a. the account balance is less than $50; or b. the customer is eligible for a concession; or c. the customer pays the overdue amount within five days of the due date; or d. the customer contacts Southern Water prior to the fifth day after the due date and is offered a flexible payment plan. Page 51 of 184

52 5 Revenue Requirements 5.1 Introduction and Overview The calculation of the revenue requirement for Southern Water has been the subject of much discussion within the community. Previous analysis by the Economic Regulator suggested that moving to Southern Water s required revenue (also referred to as full cost recovery) may require as much as an 81 per cent increase in revenue from the southern region. The benchmark revenue calculation is based on what is known as the building block methodology of determining revenues and shows customers where Southern Water s revenue recovery should move over time. The building block methodology takes account of the revenue necessary to cover: Efficient operating costs; Depreciation on regulated assets; A commercial return on regulated assets; and Externalities (e.g. the cost of problems caused in catchments through provision of water, or to receiving waters that receive wastewater outfalls) The chart below provides an overview of the components that Southern Water has included in its calculation. Figure 5.1: Building Block Framework Building Block Framework Depreciation - Return on Capital- Depreciation New Return on Capital OPEX Revenue Existing (Existing Assets) Assets -New Assets Requirement However, the reality is that we will not and cannot move to this full cost recovery level overnight. We are conscious that cost of living pressures are rising within the community and, in combination with the Page 52 of 184

53 State Government; we have explored ways in which this revenue requirement may be reduced to ensure that Southern Water can still be a sustainable service provider. The key parameter that affects the level of revenue required through the building block is the targeted return on regulated assets. In other jurisdictions, a line in the sand approach to returns has been instigated on the commencement of service provision by corporatized providers like Southern Water. This approach suggests that the assets that were transferred to the corporations should earn a lower level of return, reflecting that they were previously operated under a different economic model and were likely to have been funded through the use of less debt. New assets added by the corporation should then earn a commercial return. The State Government recently legislated to set a lower return on existing assets as a requirement in the Water and Sewerage Industry Act This legislative change requires that when calculating the weighted average cost of capital (WACC the percentage return allowed on regulated assets) to be applied to assets transferred to Southern Water by previous owners, a 3 per cent equity premium should be used. The following WACCs will be applied to old and new assets. Table 5.1: Key Regulator Parameters Parameter Rate WACC (Existing Assets, Equity Funded) 2.74% WACC (New Assets, Debt & Equity Funded) 5.32% Starting RAB (1/7/2012) $1.444 billion The line in the sand approach results in a statutory revenue limit of $166.3 million (real) in revenue in , $168.8M in and $171.8M in Clearly this is a huge leap from the $111.7M (real) expected to be received from customers in However, it is significantly lower than the $204.4 million in revenue in , $205.8M in and $207.6M in that would have been required if a full commercial return was to be earned on existing assets (the upper limit). Table 5.2: Statutory Limit - $000s, real Return on Assets 43,696 45,303 46,867 Regulatory Depreciation 43,092 44,386 45,702 Efficient Operating Costs 68,672 68,004 67,785 Statutory Revenue Requirement 155, , ,354 Statutory Revenue Requirement (nominal) 159, , ,950 Page 53 of 184

54 116, , , , , , , , , , , ,858 The chart below displays the revenue requirement as calculated using: The upper limit (Section 5.10); The statutory limit (5.9); The lower limit (5.8); and The transitional revenues expected under proposed side constraints (Section 8). As can be seen, Southern Water is approximately $23M below the minimum measure of sustainability. Figure 5.2: Comparison of Revenue Limits Revenue Limits $250,000 Transitional Revenue Lower Limit Revenue Recovery Statutory Limit Upper Limit $200,000 $150,000 $100,000 $50,000 $ The following chapter explains the elements of spending that result in this revenue requirement. 5.2 Operating Expenditure Summary Operational expenditure refers to expenditure that does not create or lengthen the life of an existing asset, but which is necessary for the running of the business. This includes spending on items such as maintenance of assets, administrative costs many wages and salaries. Since its creation, Southern Water has been working to understand the efficient cost of operating water and sewerage in the region. Historically these operations have been underfunded, particularly with respect to the maintenance of assets, and we are yet to determine the efficient operating expenditure required on a year-to-year basis that optimises preventative and reactive maintenance on our assets. However, we are extremely conscious that one of the primary reasons for consolidating water and sewerage services within one southern corporation was to deliver economies of scale and realise productivity improvements in operational delivery. Consequently, Southern Water has targeted a yearly Page 54 of 184

55 increase in operating expenditure that is limited to one percentage point lower than the forecast inflation rate (2.75 per cent). That is, we are targeting a real decrease in operating expenditure. Table 5.3: Efficient Operating Costs ($000s, real) Efficient Operating Costs 69,632 68,955 68,284 Minus unregulated expenses (283) (280) (279) Efficient regulated opex 68,672 68,004 67, Justification of split of Operating Expenditure by Key Drivers It is acknowledged that the PSP Guideline requires labour related operational expenditure to be indexed at the expected real increase in Average Weekly Earnings (minus a productivity factor), while non-labour costs are to be indexed at CPI. However, for consistency with its current Corporate Plan, Southern Water s total efficient operational costs for the PSP have been indexed at CPI minus 1 per cent. It should be noted that the approach taken by Southern Water results in a lower figure for operational costs than by pursuing indexation as per the PSP Guideline Salary and On-costs In line with the existing enterprise agreement covering the majority of the organisation, Southern Water has indexed this component of operational expenditure at 1.25 per cent per annum for the regulatory period (4 per cent nominal minus CPI). An analysis of available forecasts for Average Weekly Ordinary Time Earnings and Wage Cost Index suggest growth of around 4 per cent (nominal) for the year 4. A productivity factor of 1.75 per cent would be necessary to lead to the same outcome as modelled by Southern Water Materials and services water and sewerage This component includes the electricity costs that will be incurred by the corporation and which look likely to be influenced by the introduction of the carbon tax. With a number of key electricity contracts up for renewal soon and indications of price increases of at least 10 per cent per annum expected, this will necessitate the realisation of other significant efficiencies to meet the 1.75 per cent per annum cost indexation target. The expected efficiencies are explained below under productivity initiatives. 4 Commbank AWOTE 3.9%, WCI 3.9% (Economic and Financial Forecasts - week commencing 19 September), Australian Treasury WCI 4.25% ( Budget Papers) Page 55 of 184

56 Administration and services costs Administration costs have been indexed at 1.75 per cent, consistent with the aim of achieving a CPI-1 per cent productivity initiative. The recent collocation of Onstream functions within Southern Water is expected to provide some savings in this area Regulatory and compliance costs The regulatory and compliance costs are based on forecasts of operating licence costs and costs incurred as a result of the Economic Regulator conducting price determinations and completing performance monitoring Unregulated costs We have analysed the costs attributable to providing irrigation services and re-use water (for revenue generating re-use schemes) and found that approximately 0.41 per cent of total operating costs are associated with unregulated activities. As such, this percentage has been netted off to arrive at the efficient operating cost figure Productivity initiatives Southern Water is targeting greater efficiencies in the cost of materials, many of which are largely driven by reviewing existing procurement procedures. These include: the supply of pipes for renewal works; centralisation of chemicals purchasing; centralised electricity contracts; road reinstatement works; bulk material purchase and storage (i.e. gravel); and reviewing stock levels held in stores and associated procurement processes. Another efficiency measure that will provide greater economies of scale will be the consolidation of operations at 169 Main Road Moonah. Coinciding with the start of the regulatory period, urban field crews will move to Moonah from their current location at Goodwood to be co-located with the asset planning and administrative functions of the business. This will result in greater efficiencies in works scheduling and improve the timeliness of feedback from the field. There are also a number of start-up business costs that are now being finalised and will not appear as part of future operational costs. These include initial costs associated with bringing staff training to appropriate levels (e.g. confined space and manual handling), issuing of protective clothing and upgrading of tools and minor equipment for staff. In addition, the business is moving from leasing motor vehicles to purchasing vehicles. Page 56 of 184

57 5.2.4 Opex compliance improvement measures In addition to the capital program and its implications for compliance levels, Southern Water is focusing on the operational expenditure that can also result in improved outcomes. The Catchment to Customer to Coast management plans prepared to satisfy the Public Health and Environmental regulatory requirements. They include many non capital projects, programs and initiatives over the regulatory period to address key risks or regulatory requirements. These projects are funded through operational expenditure. Some key initiatives are outlined in the table below and have been broadly categorised into topic areas. Many of these programs have already improved performance and compliance. A dedicated focus on fluoridation operations has seen a steady improvement across the board in compliance with DHHS s fluoride regulations. Likewise the improved monitoring programs are yielding valuable data that allows for targeted investment and improved operational response to incidents relating to non compliance. Table 5.4: Non-capital Compliance Improvements Project and Topic area Description Catchment Management Bushfire risk and emergency protocols This project will identify means to reduce risk of bushfires occurring, protection of Southern Water s assets and water supply during fires and management of catchments and supply while recovering from fires. Drinking Water Treatment and Quality Water Monitoring Program This program verifies the quality of drinking water supplied to over 250,000 customers. The program also supplies valuable data to a range of data clients including customers. Fluoridation management Chemical Supply Management This project will address security of supply and quality of many key chemicals including fluoride and will seek to reduce supply costs through more competitive tendering. Page 57 of 184

58 Project and Topic area Description Wastewater Source Management Trade Waste Agreements and consents project Infiltration and Ingress Project This project is designed to roll out and upgrade trade waste agreements and consents for industrial and commercial customers. This will result in significant improvements in risk management and reduce loads into wastewater treatment plants. This project is intended to identify illegal and inadvertent stormwater connections to the sewer system and to reduce the peak wet weather loads on sewers and sewage treatment plants. Sewer pump stations Wastewater demand forecasting This project is gathering engineering and network information about sewers and applying sewage flow models to improve the operation of pump station networks and identify areas where investment is required. Level 1 Wastewater Treatment De-sludging Program This project seeks to improve the operation and maintenance of sewage lagoon systems by removing excess sludge and using the material for agricultural purposes. Level 2 Wastewater Treatment Wastewater HACCP This project seeks to apply the Hazard Analysis and Critical Control Point philosophy to wastewater management by identifying critical control targets to improve operational process control and compliance. Page 58 of 184

59 Project and Topic area Description Recycled Water Management Recycled Water business integration project Improved management of recycled water systems including increased storage, updated customer agreements and progressing pricing and contractual arrangements. The project is designed to place recycled water management on a more cost sustainable footing. Biosolids Management Biosolids Cost Optimisation Project Ongoing efforts to reduce biosolids management costs by competitive tendering, encouraging new re-users into the market, potential value adding of biosolids products and efficient audit and governance systems to ensure compliance. Receiving Environment Management Environmental Assessment Projects Environmental assessment and monitoring of key receiving environments in conjunction with upcoming EPN requirements from the environmental regulator. Includes water quality, biological and sediment monitoring and investigations to evaluate and minimise environmental impacts Forecasts of Operating Expenditure Table 5.5: Operating Expenditure by Component ($000s, real) Materials and services - water 9,724 9,629 9,536 Materials and services - sewerage 8,274 8,193 8,113 Salary and on-costs 32,450 32,845 33,245 Administration and services 13,229 13,101 13,417 Regulatory and compliance 1,849 1,831 1,813 Other 3,429 2,685 1,940 Total Operating Costs 68,955 68,284 68,064 Minus unregulated costs (0.41%) (283) (280) (279) Efficient Operating Costs 68,672 68,004 67,785 Page 59 of 184

60 To determine a direct split of operating costs between water and sewerage, Southern Water s chart of accounts was analysed and costs allocated. The table below summarises that allocation process and show, by percentage, the attribution to each category. Those costs that were directly attributable to water or sewer have been allocated. Some costs were for areas that had water and sewer functions, but where it was not possible to split with any further level of granularity. The other category captures business overheads that are not water or sewerage specific in nature. As can be seen, of the cost base that can be accurately attributed, 21.7 per cent of costs in Southern Water s budget was sewer related, while 22.0 per cent were water related. Given these findings, and in allocating the other and water and sewer categories on a basis, it suggests that Southern Water s current cost base is split equally between water and sewerage. Table 5.6: Split of Operating Costs (%) Other Sewer Water Water and Sewer Total Administration costs Employee costs Materials and Services Other expenses Regulatory Costs Grand Total Capital Expenditure Summary Increased capital expenditure is critical to address existing shortfalls in infrastructure performance and service delivery, as well as preparing the business for future growth. The drivers for capital expenditure can be categorised as: Growth investment required to ensure system capacity is maintained to cater for projected demand and growth. Renewals refurbishment, replacement and maintenance of assets to ensure optimal asset life cycle and performance is maintained. Level of service upgrades to infrastructure to improve levels of service for customers Compliance where there are clear regulatory requirements to be met that relate to compliance with relevant legislation (OHS, health and/or environmental). Extension Extension of new services into already developed areas. Page 60 of 184

61 Southern Water s level of capital expenditure is largely dependent on the corporation s revenue flows, operating expenditure and available borrowings. Additionally, we need to maintain a BBB credit rating and the debt to equity level is a key determinant in achieving this rating. Within these current financial constraints we are planning to spend $60 million per annum on capital works for the period of this plan. This equates to $180 million over the three years. The table below provides an overview of capital expenditure ($m, real) by asset class for the three years of this plan. The chart displayed on the next page provides a graphical representation of all total expenditure during the regulatory period. Table 5.7: Capex Spend by Asset Class Asset Class Total Water - Treatment Water - Pipes/Pump stations Water - Reservoirs Water - Dams Wastewater - Pipes/Pump stations Wastewater Treatment Information Systems Building, facilities, vehicle, equipment Grand Total Page 61 of 184

62 Figure 5.3: Capex Spend by Asset Class Capex by Asset Class Building, facilities, Water - Treatment, vehicl Information e, equipment, $12.6M $8.6M Systems, $3.M Water - Pipes & pumpstati o ns, $26.8M Wastewater - Treatment, $56.3M Wastewater - Pipes & Pumpstations, $50.5M Water - Dam Safety, $17.4M Water - Reservoirs, $3.7M Key features of the capex propgram over the period of this plan include: - Signficant invesment (over 50 % of the capital program) in improving performance and capacity issues in wastewater treatment and conveyance (pipes and pumpstations); - Upgrading priority water treatment systems; - Renewing and upgrading water pipes and pumpstations; - Addressing priority dam safety risks, predominantly decommissioning of the Tolosa Dam; and - Ongoing investment in corporate services infrastructure such as information systems, equipment and vehicles. While this expenditure represents a significant increase in capital expenditure relative to expenditure levels prior to the water and sewerage reforms, it is not adequate to address priority compliance and levels of service issues across the region. Southern Water will be required to prioritise projects to ensure expenditure is optimised. Expenditure on level of service and compliance issues is expected to be an ongoing focus of the capital expenditure plan and it is estimated that bringing infrastructure up to current standards will take at least another 10 years. The split of the program by core driver is also included below. Page 62 of 184

63 Figure 5.4: Capex Spend by Core Driver Capex by Core Driver Extensions, $3.M Growth, $25.6M Compliance, $97.M Renewals/Level of Service, $53.2M In summary, the capital expenditure program is expected to deliver the following outcomes for the region: - A reduction in the discharge of nutrients into fresh and marine waters; - Increased levels of wastewater reuse; - Compliance at 7 priority wastewater treatment plants; - Safer and healthier working environments for Southern Water employees; - Reductions in sewer blockages and water main breaks; - Removal of boil water notices in 5 towns and the achievement of compliance with Australian Drinking Water Guidelines in 7 towns; and - Increased capacity to cater for growth across the region Capital planning process and prioritisation Southern Water s capital planning processes are directed towards: - Providing for sustainable asset management and optimal life cycles; - Ensuring the corporation is improving compliance with regulatory requirements and levels of service to existing customers; and - Identifying, assessing and acting on opportunities for growth and efficiency. Page 63 of 184

64 The greatest opportunity to influence project costs is through the planning and design phases. For this reason, we are investing in planning and design to ensure that capital expenditure is optimised and is as strategically proactive as possible. Capital planning occurs within 5 nominal planning horizons. See Table 5.8 below. Table 5.8: Capex Planning by Time Horizon Capital planning horizon Strategic Asset Management (the Asset Management Plan) out to 25 years 10 year capital expenditure plan 3 year capital expenditure plan Annual capex plan development Annual capex plan implementation Description - Provides high level and long term context regarding the corporations strategic approach to asset management - Planning process for achieving agreed service levels at minimum life cycle cost - Identifies core long term issues and drivers impacting on capital expenditure, including Level of service requirements and standards Asset condition and criticality Demand ang growth Environmental conditions, including climate change - Notional plan constructed on known capital expenditure requirements. - Informs creation and ongoing refinement of 3 and 1 year capital expenditure plans. - Mechanism for programming, delaying and bringing forward capital expenditure according to priorities - Majority of projects have variable scopes and budgets, as little detailed investigation undertaken at this stage - Provides tool for planning expenditure transitions between various strategic priorities and associated drivers (e.g as investment in WWTP upgrades tapers off, investment in renewals increases) - Aligns with the Corporate Plan and Price & Service Plan. - Identifies distinct projects and programs. - Scope and costs of identified projects and programs are less variable - Informs resourcing (internal capacity and capability) and project delivery strategies - Focus on capital planning and prioritisation - Process aligns with annual budget planning cycles - New and immediate bids for capital expenditure are considered (usually minor works and corporate expenditure with short design, planning and invesigation timeframes) - Locks in expenditure for the financial year - Process is primarily used for monitoring and reporting capex plan implementation to ensure expenditure targets and cash flow requirements are met - New high priority expenditure (eg unforseen breakdowns or events) can be considered - Projects accelerated or slowed depending on cash flow and targets requirements Page 64 of 184

65 There are a series of inputs and process that inform the capital planning process, these include: Financial, health and environmental constraints and opportunities; Asset condition and performance data; Operational expenditure actual and forecasts; System constraints and opportunities; Local knowledge, reality check, functional requirements; Strategic direction and focus; Levels of service and performance expectations; and Strategic and statutory land use planning. Within the capital planning process a number of processes are undertaken to identify and develop projects and programs that feed into the capital expenditure plan, these include Infrastructure planning (by asset class or spatially) Demand forecasting Network modeling Financial modeling Capital prioritisation Options identification and analysis Designs from concept through to detail Investigations Prioritisation of capital expenditure occurs at a number of levels and at different times in the capital planning process. As the level of detail and robustness varies throughout the planning horizon the degree of sophistication of the prioritisation process varies accordingly. Capital prioritisation is underpinned by the following approach: Outcome focused capital program to meet corporate objectives within constraints and tolerable risk levels Sound governance arrangements Communication with all stakeholders Robust and consistent inputs from project justifications and business cases Established processes and tools Documented outcomes Analytical and judgement based components Page 65 of 184

66 5.3.3 Drinking water quality and wastewater compliance prioritisation Southern Water developed the Catchment to Customer to Coast framework to address the environmental and public health regulatory requirements under the water and sewerage reforms. This framework contains ten management plans and risk reviews covering the following key areas of business. Catchments Drinking water quality Fluoridation Wastewater source management Pump station management Level 1 wastewater treatment Level 2 wastewater treatment Recycled water Biosolids Receiving environments Each plan contains multi criteria analysis leading to risk ranking of the various systems managed by Southern Water. Risk mitigation projects are identified and prioritised and progress on these projects is tracked and reported on a regular basis to regulators and internally. Due to the level of analysis, the projects arising from the plans are well targeted to address key risks, ensuring that the project actually fixes the problems. These projects usually are described as having level of service/compliance as the core driver. The projects identified in the management plans feed into the Capex plan, generally as level of service/compliance based projects, and are well represented and of a reasonably high priority in the project capex spend. Generally the projects arising from the plans relate to compliance rather than hydraulic capacity or response to development pressures. In general, a significant amount of analysis of linear assets is still required to understand condition and system constraints. In the water and wastewater treatment asset class, the shortcomings of the plants are now quite well understood and upgrade projects are being, or have been, specified. Environmental investigation is also required to understand the capacity of receiving environments to accept treated wastewater flows without significant impact. These studies will ultimately define the level of treatment, and the cost, of wastewater treatment upgrades. Page 66 of 184

67 5.3.4 Dam Safety Prioritisation Under the ANCOLD Guidelines for Dam Safety Management 2003, dams are assigned a hazard rating based on the severity of damage and loss and the population at risk downstream of the dam - the rating table is shown below: Table 5.9: ANCOLD Hazard Ratings Population at Risk Negligible Severity of Damage and Loss Minor Medium Major 0 Very Low Very Low Low Significant 1 to 10 Low Low Significant High C 11 to 100 Significant High C High B 101 to 1000 High A High A 1000 Extreme Southern Water has 148 water and wastewater storages which meet the definition of dams under the regulations and of those 67 are associated with potable water. Prior to the formation of Southern Water the largest dams were owned and operated by Hobart Water. Over a 10-year period, Hobart Water put significant effort into building an understanding of their dams. Southern Water has been systematically working on understanding the hazard category of all of the water dams and will then follow with the wastewater dams. A preliminary desktop assessment indicates that the hazard category of the wastewater dams are likely to be low to very low for population at risk, with the hazard rating being driven by environmental issues. Page 67 of 184

68 The hazard ratings for Southern Water s water dams are shown below: Figure 5.5: Southern Water Dam Portfolio by Hazard Rating Southern Water Dam Portfolio - Water Storages EXTREME HIGH - A HIGH - B HIGH - C SIGNIFICANT LOW VERY LOW UNKNOWN Southern Water has produced a dam safety management plan based on the ANCOLD Guidelines for Dam Safety Management 2003 to ensure that it is managing dam safety risk in a prioritised and systematic way. The plan builds upon the previous dam safety work, monitoring and surveillance and planned upgrades for Hobart Water and focuses on: Increasing the level of dam safety awareness and training across the organisation; Understanding the hazard rating of the entire dam portfolio; and Developing and implementing appropriate surveillance and monitoring programs. The ANCOLD Guidelines on Risk Assessment are directed to the application of risk assessment, as an aid to better dam safety management. Figure 5.6 below is a risk plot of 9 of Southern Water s key dams. A Portfolio Risk Assessment (PRA) is to be carried out on all Southern Water dams with a hazard category of significant and higher in 2011/2012. The PRA is used to prioritise the capital plan. Page 68 of 184

69 F, probability of failure per year with expected loss of life Figure 5.6: Risk Plot of Southern Water s Key Dams 1.0E-03 Flagstaff Lake Fenton Tolosa Ridgeway 1.0E E-05 Risdon Brook Upper Res Lower Res Limekiln Knights Creek ) ANCOLD Existing Dams Limit of Tolerability 1.0E-06 ANCOLD New Dams NSW DSC Negligible Risk 1.0E N, Number of fatalities due to dam failure Page 69 of 184

70 5.3.5 Asset management Southern Water s asset management objective is to deliver sustainable service levels at life cycle minimum cost while meeting or exceeding customer, owner and regulatory requirements. Southern Water uses a variety of water industry benchmarking tools assess its asset management capability. In the initial stages of operation, the Service Delivery group focused on continuity of service while its Asset Strategy group examined the scope of regulatory non compliance, principally in its waste water treatment plants. As data capture and analysis improves, problem definitions have become clearer and a series of priority high value projects is being initiated. Asset Management Plan Southern Water s first asset management plan primarily aims to: collect asset data; understand existing service levels & levels of non compliance; understand asset condition using existing records, inference from performance or direct examination & measurement; review plant and material type, asset lives and valuation and renewal timings; carry out assessments of criticality and risk across all assets; build renewal programs based on the best available evidence of asset and service performance; and package 20 year capex, operations and maintenance programs into price and service plans Key drivers of capital expenditure (growth/renewal/improvements/compliance) Investment is prioritised across the principal drivers: growth, renewals, compliance, level of service and extensions and the associated asset classes water, wastewater, recycled water, building and facilities. These drivers are described as: Growth investment required to ensure system capacity is maintained to cater for projected demand and growth. It also includes scenarios where Southern Water may be extending services into existing areas. Renewals refurbishment, replacement and maintenance of assets to ensure optimal asset life cycle and performance is maintained. Page 70 of 184

71 Level of service/compliance (improvements) where there are clear regulatory requirements to be met that relate to levels of customer service and compliance with relevant legislation (OHS, health and/or environmental). Extension Extension of new services into already developed areas. Improving efficiency and the potential to reduce operational expenditure through capital investments is a cost-cutting driver that informs all investment decisions. The table below provides examples of typical projects undertaken in response to each driver and the relevant funding mechanism. Table 5.10: Capex Drivers Key Driver Typical examples Funding sources Growth Compliance Renewals Level of Service Extension Increasing capacity in bulk water or trunk sewers to service expanded residential areas. Upgrades or replacement of water or wastewater treatment plants to meet legislative standards. Replacement or refurbishment of underground pipes that are not performing adequately (i.e. failing regularly). Improvements to infrastructure to improve customer service levels. Renewals and level of service drivers are difficult to split, as a renewal spend may result in a level of service improvement. Implementation of wastewater services to existing areas and townships. Revenue from annual charges and headworks charges Revenue from annual charges Depreciation Revenue from annual charges Cost recovery from customers benefiting from extension In general, projects driven by the need to improve levels of service/compliance have clear regulatory goals that should be met. These projects are designed to improve services to customers or to ensure compliance with licence and regulations. Growth and extension projects are designed to cater for areas of new developments or where there is increased industrial or residential demand. Southern Water works closely with local government to understand areas of growth potential. These projects may be partly or completely funded by developer or resident contributions under a user pays principle. Page 71 of 184

72 Renewal projects are designed to repair, update or replace infrastructure that is failing or at the end of its economic life. Given the service levels provided by Southern Water s assets, the renewals program is likely to exceed depreciation levels in the 30 year Capex Plan. Renewal type projects are generally funded from depreciation. Reflecting the need to upgrade many of the assets to meet levels of service and compliance requirements, around 44 per cent of the capital program is dedicated to achieving this aim. The table below summarises capital expenditure across drivers for all asset classes. Although the capex plan has been presented in terms of investment against drivers, in reality projects are more often undertaken in response to multiple drivers. A number of the projects in the capex plan for the regulatory period will be in the design and costing phase at the commencement of the plan. The final cost split across the drivers is not fully known. The detail of the plan for the regulatory period can be found at Attachment E. Table 5.11: Capital Program by Driver All Asset Classes ($M, real) Extensions $2.5M $0.5M - Growth $10.4M $8.9M $6.2M Renewals $15.0M $13.9M $20.2M Level of service $1.0M $16.5M $1.3M Compliance $29.9M $34.9M $32.1M Grand total 58.8M 60.0M 60.0M Water capital expenditure by key driver Southern Water has identified and initiated a range of projects to deal with water supply and quality issues and to cater for growth and improve level of service. The table below gives a breakdown of the value of investment by core driver. Table 5.12: Water Capex by Driver Core Driver Compliance dams Compliance other Projected spend ($M, real) $16.0M $14.4M Extensions 1.0M Growth Renewals/level of service $10.7M $18.3M Page 72 of 184

73 The level of spending on dams and storages reflects the poor safety rating of some of Southern Water s dams, while the renewal program s addresses the poor levels of service provided by the infrastructure inherited from councils. The compliance spend reflects the need to improve water quality in many small towns around the southern region. Extension and growth spending is relatively modest by comparison. This is indicative of the size of Southern Water s customer base and growth predictions over the next decade, as well as the fact that in the past drinking water projects have generally kept pace with growth. While some areas are experiencing rapid growth, overall growth is still modest Sewerage capital expenditure by key driver Southern Water has scoped a range of wastewater treatment and conveyance projects to cater for growth, to reduce the incidence of spills and to improve environmental outcomes. The capital projects dealing with wastewater are outlined in detail in Attachment F but the table below gives a breakdown of value of investment by core driver. Table 5.13: Sewerage Capex by Driver Driver Compliance Extension Growth Renewals/Level of Service Projected Spend ($M, real) $64.1M $2.0 M $14.4M $26.3M The key expenditure in this asset class relates to compliance. Most of Southern Water s wastewater treatment plants do not comply with regulatory requirements and require significant investment to bring them up to the appropriate standard. We also have over 300 pump stations, many of which require investment to prevent failures and spills of raw effluent. The planned expenditure on these pump stations is reflected in the sewerage renewals budget. Growth driven projects are also significant, especially in areas such as Brighton and Kingborough where wastewater infrastructure development has not kept pace with residential growth. In the past, spending on water infrastructure to meet growth has generally been higher than wastewater spending, necessitating the need for a catch up over the next decade. Renewals spending is also significant and approximately in line with requirements in water renewals. Again, this is reflective of the age of the sewer network and some poor infrastructure installations in regional areas that are now failing earlier than expected. Page 73 of 184

74 5.3.9 Water capital expenditure by asset class Pipes and pump stations Investment in water pipelines and pump stations will ensure customer service levels are improved as well as providing adequate capacity in networks to cater for expected growth. Additional investment in renewals will ensure that improvements in the level of service to customers are achieved through a reduction in water main breaks and the increased reliability of pump stations. A number of key projects and programs will be rolled out over the regulatory period. Table 5.14: Highlights of Pipes and Pumps Capital Spend Project/Program Description Drivers and problems Water Renewal Program The Water Renewal Program is a program of work which will increase the level of service to customers by reducing the number of breaks per 100km of network. Program expenditure will increase in upcoming years as a consolidated regional view of infrastructure condition and performance is developed. $11M over the three year regulatory period. Southern Water has many thousands of kilometres of bulk water and local reticulation pipework, much of which is old and degraded. In order to maintain a high level of service and prevent pipe breaks and subsequent pressure loss and erosion, we need to continually invest in upgrading aged drinking water transfer and reticulation infrastructure. Margate Augmentation Huon Valley Extension Projects Bulk Water Pump Stations Renewal Program This project arises from previous investigation work undertaken by Hobart Water and Kingborough Council that identified the need to augment the supply to Margate by 2015 to cater for projected growth. The work will provide capacity for growth for the next 30 + years. $5.0M in second year of regulatory period. With the finalisation of the Huon Valley Regional Water Scheme Southern Water has the potential to extend water services to previously unserviced areas of the Huon Valley. Bulk water pump stations are critical pieces of infrastructure in the Hobart Water Supply area and must operate reliably and efficiently. This program will invest around a total of $5M in renewal switchboards and mechanical components across the regulatory period. Margate is a rapidly growing area south of Hobart where supply of adequate volumes of water at agreed pressures can be a challenge with current infrastructure. In addition, many of the older water mains are constructed of asbestos cement pipe which is now reaching the end of its useful life. Pipe breaks are common. Poor or no reticulated water supply. Switchboards and mechanical components in a number of pump stations are beyond their nominated asset lives and require renewal. Page 74 of 184

75 Reservoirs Investment in water supply reservoirs will occur in two of the fastest growing areas of the southern region, namely Brighton and Kingborough. Table 5.15: Highlights of Reservoirs Capital Spend Project Description Drivers and problems Snug Reservoir Lodge Hill To cater for growth in the area a new reservoir is required in Snug. Total project cost of $3.8M, with $1.9M in the third year of the regulatory period. To cater for growth in Brighton an existing reservoir at Lodge Hill will be duplicated. $1.9M in the third year of the regulatory period. Like Margate, Snug is an area of high local growth. With current infrastructure, development would be limited by water supply and pressure. To enable further development, a new reservoir is required to cater for the local area supply. With current infrastructure, development would be limited by water supply and pressure. To enable further development a new reservoir to cater for the local area supply is required Water Treatment The water treatment plants at Orford and Dover are scheduled for upgrades during the regulatory period. The exact timing and extent of these upgrades will be informed by growth projections and process audits presently underway. Southern Water will also invest in improvements to chlorination and fluoridation infrastructure to ensure compliance with relevant standards. Expenditure will be around $1.3 million. Additional investment of up to $550,000 will be made to manage alkalinity in water supply systems. There will ongoing investigations and consultation on potential solutions for the removal of boil water notices in a number of small towns in the region. The most likely solution will be significant upgrades to water treatment infrastructure. Page 75 of 184

76 Table 5.16: Highlights of Water Treatment Capital Spend Title Scope Drivers or Problems Small Towns Project This project seeks to address poor water quality in many regional towns including Ouse, Hamilton, Gretna, Wayatinah, Judbury, Mountain River, Tunbridge and Colebrook. Too address poor water quality a range of solutions may be employed including full treatment, improved disinfection or special supply agreements. These measures are designed to improve compliance and protect public health. $8M over the regulatory period. Many towns currently receive water directly from rivers or streams which may or may not be disinfected. These water sources may be contaminated by agricultural or forestry activities or upstream human habitation. Some of these water sources also contain high levels of tannins which may react with chlorine to form disinfection byproducts such as trihalomethanes. Many of these towns are currently subject to boil water notices. Orford Water Treatment Plant Upgrade Dover Water Treatment Plant Upgrade The existing WTP at Orford requires replacement and has inadequate capacity to service growth projects in the area. Additionally, the plant also provides some water to Triabunna during high demand times. The existing site (on the side of a cliff) makes operation of the plant difficult and inefficient. The total cost of upgrading the plant is expected to be in the order of $4M. Southern Water will invest approximately $500K during the regulatory period to undertake detailed design and preliminary site works for a major treatment plant upgrade, with the majority of project implementation to occur in the following regulatory period. Inline measurement of fluoride residuals. All of these towns have been identified as areas of concern by the Department of Health and Human Services. Inadequate water treatment processes to meet expected demand. The existing plant is located on the side of the cliff making upgrades in situ problematic. Improved control of fluoridation dosing. Chlorination & Fluoride Stations Identification of zones and network nodes requiring improved chlorination by the installation of chlorine booster stations. Reduction in Public Health risk by improving reliability of chlorine residuals. HACCP analysis of non-hobart water supplies. Page 76 of 184

77 Title Scope Drivers or Problems Alkalinity management (Northern Lines) Investigation of levels of risk and exposure. Design and installation of dosing systems for: Ferntree National Park (optional) Northern Lines (optional) Reduce Public Health risk due to heavy metals by optimising water chemistry. Improved ph management of Northern Lines system will also improve chlorine residuals Dam Safety Southern Water s Dam Safety program monitors the risk profile of all dams and implements work to ensure that all dams conform to contemporary standards and legislative requirements. Dam works are generally very costly and have long planning horizons due to their 100 year life cycles and the complex nature of the works. The medium term liability for dam safety work is likely to exceed $50 million. In order to extend the life of very expensive storage assets and to prevent catastrophic failure, with potential loss of life, investment in the upgrade, strengthening and improvement of dam assets will be required over the medium term. Table 5.17: Highlights of Dam Safety Capital Spend Title Scope Drivers or Problems Tolosa Dam Project Decommission the existing Tolosa Dam and rehabilitate the site to a satisfactory standard. Network storage in the form of reservoirs (tanks) will be constructed nearby. Due to dam safety and water quality risks the Tolosa Dam cannot remain in its current form. Expected total project cost of $19.8M, with $16M over the three years of the regulatory period. Knights Creek Spillway Lining Line the spillway to prevent scouring. $100K The current unlined spillway is at risk of significant scouring, leading to potential dam failure. Ridgeway Dam Anchor Replacements Investigations and design will be undertaken to replace the anchors on the dam wall. $550K in first year (capital expenditure associated with implementation of designs expected to be above $5M, but not scheduled for this regulatory period). Dam anchors have reached the end of their useful life. Page 77 of 184

78 Sewerage Capital Expenditure by Asset Class Sewerage treatment Southern Water is aiming to upgrade several WWTPs to meet regulatory requirements, increase the reliability of wastewater services and cater for future growth in the respective areas. The upgrade program also includes rationalisation of treatment plants in areas such Taroona, where sewage will be pumped to the Self s Point WWTP, and also Margate/Electrona, with sewage to be pumped to an upgraded Blackmans Bay WWTP Expenditure on WWTP upgrades in this area has been informed by a detailed analysis of the risks associated with these treatment plants as well as the priorities communicated by the Environmental Protection Authority (EPA). This expenditure is part of an ongoing program of work on WWTP upgrades that is likely to extend beyond a decade. By increasing the performance of these plants we will reduce the impact of these plants on receiving waters, with subsequent improvements in environmental quality and general recreational amenity. Significantly, the program will see the commencement of major upgrades to the WWTPs in the Brighton and Kingborough municipalities, which have experienced significant residential growth in recent years. These upgrades will provide future capacity for growth and expansion. Throughout the regulatory period we will continue ongoing investigations into the most sustainable solutions for the central Hobart WWTP, where a range of options are being considered. Page 78 of 184

79 Table 5.18: Highlights of Sewerage Treatment Capital Spend Project or program Blackmans Bay WWTP Scope This project continues investigations and design work commenced by Kingborough Council as part of the Kingborough Wastewater Strategy. The project will involve upgrades to the Blackmans Bay WWTP and pumping of sewage flows from Margate and Electrona to the upgraded Blackmans Bay plant. Blackmans Bay - $26M over three years Drivers and problems Kingborough municipality has grown rapidly in the past 10 years with wastewater treatment plants now at, or over, their rated capacity. Margate and Electrona WWTPs are located near residential and recreational areas and significant odour issues have been reported. The discharge locations for these two plants are also less than ideal with poor mixing occurring in the environment. Taroona WWTP traditionally has shown poor performance and discharges near beaches and recreational areas. Odour issues have also been reported. In order to cater for future growth and remove environmental problems, it is proposed to decommission Electrona and Margate plants and pump the sewage to an expanded Blackmans Bay plant. This project is likely to result in long-term operational savings. Page 79 of 184

80 Project or program Wastewater treatment plant upgrade program Scope Based on risk reviews undertaken by Southern Water and consideration of priorities provided by the Tasmanian Environmental Protection Authority (EPA) Southern Water has scheduled upgrades to a number of wastewater treatment plants. Turiff Lodge upgrade - $5M over first two years of period. Stage 1 upgrade to include outfall extension, screening, dewatering and phosphorus removal. Brighton Treatment Plant - $10M over first two years of regulatory period. Dover WWTP - $1.5M over the first two years to improve compliance. Geeveston WWTP upgrade total cost of $5.5M, with $2M expended in year 2 (stage works) Ongoing minor upgrades, investigations, design and approvals for WWTP upgrade projects - $7.5N Drivers and problems Turriff Lodge WWTP discharges to an ineffective set of wetlands which also functions as a public recreational area. The plant was built in the 1980s and does not meet modern licence requirements. An upgrade is required that discharges into deeper water in the river to avoid risk of public contact. Brighton Municipality has grown rapidly in recent years and wastewater treatment infrastructure has not kept pace with development. The current system is overcapacity and requires expansion to meet current and future demands. Page 80 of 184

81 Project or program Greater Hobart Wastewater Strategy Scope Southern Water has initiated a major project to investigate options for rationalising the number of wastewater treatment plants over the medium to long term. The project will provide a long-term plan for wastewater management to ensure an increase in plant performance and compliance and provide capacity for growth into the future. The project will consider upgrade and rationalisation options and also consider environmental impacts and opportunities Expected spend of $5.4M over three years, with significant additional expenditure in following years. Drivers and problems There are four sewage treatment plants currently serving the western shore of the Derwent including Cameron Bay, Prince of Wales Bay, Selfs Point and Macquarie Point. Significant work is required on most of these plants to improve performance to meet modern licence requirements and cater for growth. Alternatively, an opportunity exists to amalgamate or rationalise some facilities potentially generating long-term savings Sewerage pipes and pump stations During this regulatory period, investment in renewals of pipes and pump stations will be significant - year 1: $4 million, Year 2: $7 million, Year 3: $12 million. Investment will be targeted at the highest priority renewals, with the period of the Plan being used to gather a more detailed view of pipe and pump station condition and performance to enable future investment to be optimised. Southern Water will invest in upgrades to the switchboards at a number of urban and regional areas. This will improve the reliability of these stations, reducing the risk of spills as well as delivering operational efficiency through increased remote monitoring and control. The most significant complete upgrade of a pump station will be the Andrew Street ($1.12 million) pump station in Brighton, where the pump station is in poor condition and unable to cope with increased flows in the catchment. Page 81 of 184

82 Table 5.19: Highlights of Sewerage Pipes and Pumps Capital Spend Title Scope Drivers or Problems Lauderdale Sewerage Scheme Taroona Wastewater Redirection Implementation of a pressure sewerage scheme in the residential areas of Lauderdale. $2M in year one of the regulatory period. Rather than upgrade the Taroona WWTP in its current location the plant is to be decommissioned and the sewage diverted to Self s Point WWTP. The Lauderdale township is presently unsewered, relying on on-site disposal systems. Current wastewater management methods present health and environmental risks and are potentially constraining development in the township. Existing Taroona WWTP requires significant upgrades to meet current standards. $2M in the first year (majority of expenditure in years previous to regulatory period). Andrew Street Pump Station (Brighton) Complete upgrade to existing pump station $1.12M in the first year Existing pump station at Andrew Street is in poor condition and regularly overflows in rainfall events. Furthermore, growth in the Brighton area is placing demand on the pump station beyond its design capacity. Page 82 of 184

83 Title Scope Drivers or Problems Sewer Renewal Program Margate/ Electrona redirection The sewer renewals program will reduce the number of pipe breaks and blockages, minimising the risk of sewer spills and ensuring levels of services to customers are improved. Program expenditure will increase in coming years as a consolidated regional view of infrastructure condition and performance is developed. This program will also cater for pump station replacements and upgrades as required and identified by modelling, investigation and risk assessment. This is an ongoing annual project. - $23M over three years. The Margate and Electrona WWTPs will be decommissioned as part of the implementation of the Kingborough Regionalisation Strategy. Flows will be redirected to an upgraded Blackmans Bay WWTP Southern Water has many thousands of kilometres of sewer pipes, much of which is old and degraded. We also have many pump stations which are currently under stress during rain events or that may require upgrade due to age or growth in the near future. In order to maintain a high level of service and prevent environmental releases of raw sewage, we need to continue to invest in upgrading aged sewage infrastructure. Existing Margate and Electrona plants do not comply with existing licence limits and do not have sufficient capacity for growth in the area. Margate/Electrona redirection - $11M over three years Business support investment Southern Water invests in a range of other assets to ensure our infrastructure can be designed, constructed, operated and maintained efficiently and effectively. This investment covers: - Plant, vehicles and equipment - Information systems - Buildings and facilities. Expenditure in this area over the regulatory period is summarised below. Page 83 of 184

84 Table 5.20: Highlights of Business Support Capital Spend Asset class Year 1 Year 2 Year 3 Plant, vehicles and equipment $ 2.0M $ 2.0M $ 2.0M Information systems $ 1.0M $ 1.0M $ 1.0M Buildings and facilities $ 1.0M $ 1.0M $ 1.0M Sewerage pipelines transitional service standard setting During , Southern Water averaged 65 blockages per 100km a year compared to the Customer Service Code minimum service standard of 28 and a water industry peer benchmarked standard of 48 unplanned water supply interruptions per 100km of main. For comparison, this is equivalent to a 100 metre sewer main experiencing a choke or blockage every 15, 36 and 21 years respectively. Some of the poorer performing suburbs in southern Tasmania had a performance level almost 4.6 times the minimum service level. Again, for comparison, this is equivalent to a blockage or chokes on a single 100 metre long main every 7 years. Only 15 per cent of Southern Water s customers received the minimum sewerage service level of 28 blockages per 100 kilometres of sewer main per year or better. Page 84 of 184

85 Figure 5.7: Southern Water Sewer Network Performance Assessment by Suburb Page 85 of 184

86 The average performance of Southern Water s sewer network assets is far above the minimum service standards as well as the weighted average performance of a peer group of major Australian water authorities (data from WSAA Facts ). The implications for asset condition are obvious. While some of the oldest suburbs in Tasmania are well represented on the poor performing end of this scale, this is not always the case. It is evident that many factors apart from age, including the type and standard of construction, can influence service performance in the long term. Significant renewals are required to address this service standard non compliance. For the purposes of the asset management plan, the level of investment required has been quantified in terms of the target service standard as an input to the Price and Service Plan. The renewals program targets expenditure of $23M for sewerage renewals in the 3 year period. Of the $23M, it is proposed to carry out sewer relining in the worst affected areas of Montagu Bay, Goodwood, Moonah, Mt Nelson, West Hobart, Hobart, North Hobart, Lenah Valley and Sandy Bay. The expectation is that this level of investment will reduce the system-wide performance from 65 to 52 blockages per 100 km sewer main / year. Figure 5.8: Sewerage Renewals Curve Page 86 of 184

87 Based on preliminary modelling, an estimated minimum of $27M of sewer relining in poor performing suburbs is required to meet the minimum service standard of 28 blockages per 100km of sewer main per year. This estimate brings forward the renewal / replacement of unfit for purpose sewers with a significant maintenance history Water pipelines transitional service standard setting The performance of our water networks is much closer to compliance with minimum service levels than that of the sewer network. During 2009/1010, Southern Water averaged 38.2 unplanned service interruptions per 100km of main compared to the minimum service standard of 32 and a Water Industry peer benchmarked value of 34 water main breaks per 100km of main (WSAA Facts). For comparison, this is equivalent to a 100 meter water main experiencing a burst every 26, 30 and 31 years respectively. While some of the poorest performing suburbs in southern Tasmania had a performance level more than 2.5 times the minimum service level, this was equivalent to a burst on each individual 100 metre length main every 12 years. On a more detailed customer scale, 28 per cent of Southern Water s customers received the minimum service level of 32 unplanned water supply interruptions per 100 kilometres of water main per year or better. The following graphs show (1) Southern Water s water network performance benchmarked against industry peers (WSAA Facts Data from ) using the indicator of unplanned water supply interruptions per 100km of main and (2) the proportion of customers who receive a level of service equal to, or better than, the minimum service standard. Page 87 of 184

88 Figure 5.9: Water network performance assessment 2009-/2010 by suburb Page 88 of 184

89 On average, the unplanned water supply interruption performance of our water infrastructure was only 19 per cent outside the Customer Service Code minimum service standard. There is, however, clearly significant variability in the level of service received by customers in different parts of southern Tasmania and the data provides a clear focus for targeted renewals in priority suburbs such as Taroona, Mount Stewart, Mount Nelson, Claremont, Moonah, Lenah Valley and Hobart. It is also apparent from the data that older suburbs are not necessarily the poorest performing areas, e.g. Battery Point s burst water main performance is better than the minimum service standard and yet it contains some of the oldest mains in southern Tasmania Proposed investment in water supply service standards compliance This plan estimates the expenditure of $19.5M over 3 years for water renewals. It is estimated that $ 8.3M of this sum will be allocated to the replacement of the generally small diameter water mains and service connections that make up the bulk of customer interruptions to service.. A provisional performance target of 36 unplanned water supply interruptions per 100km of main per year has been set for achievement by 2014/2015 after considering a number of issues including: a) the reasonable performance of the water network during when compared with the minimum service standard; b) the impacts of the roll out of water metering on renewals expenditure; and c) the unquantified impacts of seasonality on burst mains performance across southern Tasmania. Page 89 of 184

90 5.4 Regulated asset base Summary Southern Water s regulated asset base is valued at $1.444 billion. This has been calculated using the total opening asset base transferred to Southern Water valued at the depreciated optimised replacement cost (as at 1 July 2009) and after removal of unregulated assets. The asset base for capital expenditure on regulated assets has been rolled forward, adjusting for regulatory depreciation, asset contributions (cash and physical assets) and disposals. Exclusion of unregulated activities According to the methodology for exclusion of unregulated assets outlined in the PSP Guideline, revenue generating re-use assets have been excluded from the asset base. However, assets used for the provision of irrigation services have not been removed from the asset base as these services are provided by using excess winter capacity in the potable water system. That is, assets used to deliver potable water would be no different in size even if we were not providing water for irrigation purposes Opening value of RAB Table 5.21: Opening value of RAB ($000s, real) Water Sewerage Total 1/07/2009 Opening RAB 771, ,718 1,430,280 Additions 17,171 11,122 28,293 Sales (746) (746) (1,491) Depn Old (20,304) (17,335) (37,639) Depn New (198) (181) (379) Contributed (2,370) (2,370) (4,740) 30/06/2010 Closing 765, ,209 1,414,324 Additions 40,472 16,134 56,607 Sales (100) (100) (200) Depn Old (20,283) (17,317) (37,600) Depn New (866) (688) (1,554) Contributed (1,278) (1,278) (2,556) 30/06/2011 Closing 783, ,961 1,429,021 Additions 50,923 9,076 59,999 Sales (100) (100) (200) Depn Old (20,280) (17,314) (37,594) Depn New (2,449) (1,150) (3,600) Contributed (1,718) (1,718) (3,436) 30/06/2012 Closing 809, ,754 1,444,191 Page 90 of 184

91 5.4.3 Projected average asset values Table 5.22: Projected average asset values ($000s, real) Water Sewerage Total 30/06/2012 RAB 809, ,754 1,444,191 Additions 17,505 41,295 58,800 Sales (100) (100) (200) Depn Old (20,277) (17,312) (37,589) Depn New (3,743) (1,760) (5,503) Contributed (1,765) (1,765) (3,530) 30/06/2013 Closing 801, ,113 1,456, Average RAB 805, ,933 1,450,179 Additions ,000 Sales (200) Depn Old (37,584) Depn New (6,802) Contributed (3,627) 30/06/2014 Closing 795, ,261 1,467, Average RAB 798, ,687 1,462,061 Additions ,000 Sales (200) Depn Old (37,579) Depn New (8,124) Contributed (3,727) 30/06/2015 Closing 796, ,685 1,478, Average RAB 796, ,973 1,473, Depreciation Assumptions The following assets lives have been assumed for the following classes of assets. Table 5.23: Average Asset Lives by Asset Class Asset Class Average Life Opening Asset Base - Rem. life Water - Treatment Water - Network Sewerage - Network Sewerage - Treatment Metering Non Network - IT/Scada 8.40 Non Network - General Page 91 of 184

92 These asset classes result in the following straight-line regulatory depreciation figures for the regulatory period. Table 5.24: Regulatory Depreciation ($000s, real) Opening Asset Base 37,589 37,584 37,579 Water - Treatment Water - Network 861 1,062 1,266 Sewerage - Network Sewerage - Treatment 506 1,030 1,481 Metering 1,784 1,784 1,784 Non Network - IT/Scada Non Network - General 1,567 1,772 2,017 Total Regulatory Depreciation 43,092 44,386 45, Return on Capital (WACC) Corporation Proposal The Weighted Average Cost of Capital is used to determine the return that should be earned by Southern Water on our asset base. The WACC reflects the cost of servicing the asset base, which occurs through either the use of borrowings to invest in new assets (debt), or paying returns to owners for their asset contribution (equity). The rate of the WACC is effectively the weighted average of the proportion of the asset base funded through debt (e.g. interest rate applied to borrowings) and the part funded by equity (e.g. the alternative return that could be earned if the equity was invested elsewhere e.g. the ten year bond rate). As part of the Price and Service Plan, Southern Water has calculated the WACC (Real Pre Tax) to provide an estimate of the rate of return. The formula for the Regulatory WACC is as follows: WACCnominal Rd * D Re* 1 (1 t(1 )) * 1 D WACCreal 1 WACCnominal 1 i 1 Page 92 of 184

93 Where: Re = Cost of equity (post-tax) = Rf e * (Rm Rf ) Rd = Pre tax cost of debt Rm = Market return Rf = Risk free rate t = Corporate tax rate βe = Equity beta D = Gearing Ratio i = forecast inflation = Gamma represents the proportion of imputation credits, which can be used by shareholders and varies between 0 and 1. Background WACC (Weighted Average Cost of Capital) is basically the cost of debt times the proportion of debt used to finance the enterprise plus the cost of equity times the proportion of equity used to finance the enterprise, i.e.: Re x proportion equity funding + Rd x proportion debt funding. However, Re (the cost of equity) is conventionally quoted as a post-tax value while Rd (the cost of debt) is conventionally quoted as a pre-tax value. This led to the basic, textbook WACC formula: Equity Funding * Re Debt Funding * Rd(1 T) Debt Equity Debt Equity Where the debt is converted to a post-tax value (1-T) to make it comparable to the post-tax equity value. The traditional WACC formula provides a post-tax WACC value. The Regulator will use a pre-tax WACC, which includes an adjustment for imputation credits. This is then converted to a real WACC value using the Fisher Equation. The recent amendments to the Water and Sewerage Act 2008 will see the cost of equity component of the formula hard wired at 3 per cent for existing assets transferred to Southern Water. It is the role of the Regulator to set the WACC values as part of the Price and Service Guidelines. In the interim, the proposed Weighted Average Cost of Capital has been set in alignment with the statutory limit provided for under the Act. That is, existing assets that were equity contributed to Southern Water prior to price regulation by the Economic Regulator (i.e. those up to 30 June 2012), are to earn a lower Page 93 of 184

94 rate of return, while assets that are debt funded prior to Southern Water and those new assets added from the commencement of the first regulatory period are to be allowed to provide a commercial return. This statutory limit approach has the impact of reducing the benchmark level of revenue required by the corporation (therefore also reducing the required revenue from customers in the medium term). This is appropriate and reflects the fact that many of the assets inherited by Southern Water were already paid for under a different funding mechanism i.e. they were created through government grant funding or through developer contributions. It is not appropriate that a commercial return is earned on these assets. As existing assets are replaced by new assets, the return on assets building block will get progressively higher, such that the full asset base will be able to earn a commercial return once all existing assets have reached the end of their economic lives (in perhaps 80 years time). The Regulator has calculated the WACC on new assets to be 5.32 per cent, with a return on existing (old) assets of 2.74 per cent. Proposed Weighted Average Cost of Capital (WACC) WACC (new CAPEX, Debt Funded) = 5.32 per cent WACC (old CAPEX, Equity Funded) = 2.74 per cent 5.7 Asset annuity (for lower limit calculation) split between water and sewerage The renewals annuity is another measure (akin to depreciation) of the yearly spend required to renew or refurbish assets. While depreciation is an averaged view of what the renewal of the asset base should be, the asset annuity is heavily dependent on the age of assets in the current asset base and the expected timing of their replacement. For example, the annuity may be higher than the depreciation expense if a large hump of renewal is required in the short to medium term, while it may be lower if the large bulk of replacement works are many years out. The annuity does not take into consideration the compliance improvements that may be required when asset replacement or refurbishment occurs. Southern Water has calculated a 30 year asset renewals annuity at $ million for each year of the regulatory period. This annuity includes a discount rate aligned with the weighted average cost of capital on existing assets (2.74 per cent). However, this annuity calculation only allows for renewal and replacement assuming assets are already achieving compliance. The compliance spend for Southern Water has been estimated at around $500m. Over the 3 years of the PSP, spending on compliance in Section 5 is expected to average $32.3m. Page 94 of 184

95 Table 5.25: Asset Annuity Provision ($000s, real) Annuity provision 22,458 22,458 22,458 Compliance Premium 32,330 32,330 32,300 Total Annuity Provision 54,758 54,758 54,758 For comparison, Southern Water s regulatory depreciation in the first year of the regulatory period is calculated at approximately $43.1 million. 5.8 Lower limit revenue requirement (minimum sustainability) Under pricing principles set by the National Water Initiative, water businesses should recover revenue that is at least equal to the lower bound limit. The lower limit is the minimum level for business viability at which all operating costs are met, including a provision for asset refurbishment or replacement, but without allowing a return on capital other than interest costs incurred and dividends paid. As such, the lower limit calculation includes the following cost build: efficient operating costs; an annuity provision for the replacement/refurbishment of assets; interest cost on debt; and externalities (e.g. costs of problems caused in catchments through provision of water, or to receiving waters taking wastewater outfalls these are not costed into the calculation below). Table 5.26: Lower limit revenue requirement ($000s, real) Efficient operating costs 68,672 68,004 67,785 Annuity provision 54,758 54,758 54,758 Debt servicing costs 11,798 14,212 15,791 Lower limit revenue recovery 135, , ,334 As can be seen in Section 8, Southern Water projects that its transitional revenues across the regulatory period will be below the minimum level of sustainability. The debt servicing component is extracted directly from Southern Water s borrowing cost and guarantee fee costs forecast in its current Corporate Plan. Page 95 of 184

96 5.9 Statutory limit In this section, Southern Water has calculated the level of revenue required to run its business if it were operating at the statutory limit. The statutory limit requires a differentiated return on the existing assets transferred to Southern Water up until 1 July 2011 (2.74 per cent) and new assets added post 1 July 2009 (5.32 per cent). This revenue build is carried out according to what is known as the building block methodology. The building block methodology provides for the revenue necessary to cover: Efficient operating costs; Depreciation on regulated assets; A commercial return on regulated assets (or the statutory returns in this case); and Externalities (e.g. costs of problems caused in catchments through provision of water, or to receiving waters taking wastewater outfalls these are not factored into the calculation below). The revenue calculated under this methodology is also known as the statutory limit. Table 5.27: Statutory Limit Revenue Requirement ($m, real) Return on assets (statutory limit) 43,696 45,303 46,867 Regulatory depreciation 43,092 44,386 45,702 Efficient operating costs 68,672 68,004 67,785 Statutory limit 155, , , Upper limit revenue requirement In this section, Southern Water calculates the level of revenue that it would require to run its business if it were operating at full cost recovery and using the commercial rate of return (5.32 per cent) on all assets. This revenue build is carried out according to the same building block methodology. Table 5.28: Upper limit revenue requirement ($m, real) Return on assets (upper limit) 77,150 77,782 78,371 Regulatory depreciation 43,092 44,386 45,702 Efficient operating costs 68,672 68,004 67,785 Upper limit 188, , ,858 Page 96 of 184

97 116, , , , , , , , , , , ,858 Figure 5.10 below outlines the revenue requirement as calculated at the statutory limit (using a WACC of 2.74 per cent for existing and 5.32 per cent for new assets), at the upper limit, the lower limit and the actual transitional revenues proposed. Figure 5.10: Comparison of Revenue Limits $250,000 Revenue Limits Transitional Revenue Lower Limit Revenue Recovery Statutory Limit Upper Limit $200,000 $150,000 $100,000 $50,000 $ As can be seen in Section 8, Southern Water s projected transitional revenues are significantly less than all measures of sustainability. Section 7 sets out how the transition towards sustainability will commence. Page 97 of 184

98 6 Demand management 6.1 Summary Due to the absence of two-part pricing in the southern region, there is a lack of historical data at the customer level to analyse and project future demand, particularly by customer classes. For this reason, the demand analysis in this section will be largely qualitative, with some quantitative data, where available. In examining the demand picture, we have split the analysis by water zone and sewer catchment, noting whether there is sufficient treatment capacity to service current demand and whether there is expected demand growth in the zone/catchment. The links to capital program also have been highlighted. 6.2 Key characteristics of customer base Demographics and land use In the past few decades, commercial and residential development in the southern region has increased along coastal ribbons, which has resulted in a relatively decentralised population. Within the urban area of greater Hobart, average densities of new areas is now around 7 to 10 dwellings per hectare, whereas established suburbs were developed at much higher densities of upwards of 15 dwellings per hectare. Some older inner city suburbs within the Hobart municipal area were established at densities of upwards of 20 dwellings a hectare. [Source; Southern Tasmania Regional Land Use Strategy: Providing for Housing Needs). The southern region had a population of 235,455 (2006 Census), with density of around 9.2 persons per square kilometre, though much of this area is uninhabited or uninhabitable. The greater Hobart area, which is more reflective of the majority of the Southern Water s customer base, has a population density of persons per square kilometre, but this is still relatively sparse when compared with greater Melbourne, which has a density of persons per square kilometre. This spread of population means utility service provision in the region will always be at a higher cost per capita than major cities as the same economies of scale cannot be realised. The trend of decreasing household size in the region (2.4 persons in 2006, down from 2.6 persons a decade earlier), will also require a greater stock of residential dwellings for a static population 5. Without increased population density in older areas, meeting dwelling development will occur at the outer reaches of the water and sewerage network. In the vast majority of cases, this will be more costly for the developer and ultimately the owner of the dwelling than if infill development was pursued. Southern Water services many different communities throughout the region, ranging from medium density city hubs to rural townships, which include tourism areas with significant transient populations. 5 Population growth in the region is not static, but for this section is illustrative of how decreasing household size results in the need for more dwelling. SW is forecasting connection growth of 0.7 per cent in the region, driven in part by this trend and from increasing population. Page 98 of 184

99 Service provision in some of these towns is highly dependent on the summer peak populations, which impacts on system capacity design and operating costs Income and concession According to labour cost forecasts, in Tasmanians will have an average disposal household income of $680 per week. Figure 6.1: Projected Disposable Household Income $1,200 $1,000 $800 $680 Pr o jected Disposable Household Income per week 2012/13* $902 $ $787 $820 $754 $979 $802 $600 $400 $200 $0 TAS NSW VIC QLD SA WA NT ACT AUS Based on the target tariffs for 20mm water meter connections and 1 equivalent tenement sewerage properties (largely residential properties) included in Section 7, our customers would spend 2.5 per cent of their weekly disposal income, on average, on water and sewerage services, or around $18.10 per week. Tasmania has the highest percentage of households in receipt of pensions or benefits, leading to the lowest median household income of any State or Territory. In greater Hobart, these socio economic groups have traditionally been concentrated in the large housing estate areas on the edge of the metropolitan area. Based on concession recipient data almost 25 per cent of Southern customer base receive a water and/or sewerage concession. Water s residential In the Budget the State Government indicated that water and sewerage concession payments would continue throughout the regulatory period and would be indexed by the Hobart consumer price index for those customers on low incomes and who are eligible for a water and sewerage concession (health care card holders, veteran affairs gold card holders and pensioners). 6.3 Customer Analysis Residential and non-residential To date, Southern Water has relied on the customer data transferred by councils that categorised customers by land-use codes. Under these codes customers are segregated into two broad customer classes; residential and non residential. Page 99 of 184

100 Residential land use includes properties with structures that were built for habitation. Examples include houses, flats, units and shacks. Southern Water classes these connections as residential. Non residential land use includes properties that are typically involved in commercial, not for profit, or public service related activities. Examples of non residential connections include commercial, industrial, primary production, public service and sporting. Figure 6.2: Summary of Customer Types by Land Use Summary of Customer Types Water Connections Sewerage Connections Customers , ,481 1, , Residential customers account for about 87 per cent (84,270), with around two-thirds of these being within the cities of Hobart, Clarence, Glenorchy and Kingborough. The next most populous municipal areas are Brighton, Derwent Valley, Huon Valley and Sorell. The balance of Southern Water customers (13 per cent or 12,163) are classified as non-residential. Within the cities there appears to be a trend towards higher population density and as consequence several properties have multiple water service connections to service a variety of property types, i.e. high rise flats, strata properties and other multiple residential dwelling units. The remaining balance of the residential customer base is scattered throughout the rest of the southern region; Brighton, Central Highlands, Derwent Valley, Glamorgan Spring Bay, Huon Valley, Kingborough, Sorell and Tasman, although in the rural municipalities the customers are more sparsely located. Page 100 of 184

101 Figure 6.3: Split of Residential Customers Residential Customers Water Connections Sewerage Connections Customers Figure 6.4: Split of Non Residential Customers Non Residential Customers Water Connections Sewerage Connections Customers 3,500 3,152 3,000 2,500 2,000 1,500 1, , , ,785 1, Within the municipality of Tasman there are no water services and currently only a limited number of sewerage service connections (5). It is worth noting that whilst nearly all Southern Water s residential customers have a water service (with the exception of towns such as Woodbridge, Dunalley, Bronte Lagoon, Nubeena, Karanja and Page 101 of 184

102 Flintstone ), not all towns have a Southern Water sewerage service and may utilise other systems, such as septic tanks, environmental systems or depend on private schemes Connection sizes and equivalent tenements However, given the pricing approach outlined in Section 7, the key customer attributes that will need to be maintained for billing are metered water connection size and the number of sewerage equivalent tenements (ETs) that a property represents. The latter will require Southern Water to maintain an understanding of land use (or more specifically industrial classification). The following chart summarises the type and deemed connection sizes throughout the region. The water metering project will provide a confirmation of these figures as it progresses. Table 6.1: Customers by Connection Size Estimated Water Connection Size 20mm 25mm 32mm 40mm 50mm 75mm 80mm 100mm 150mm 200mm Total Service connections 95, ,312 Equivalent 20mm service connections 95, ,004 2, ,875 1, ,216 As yet, the corresponding analysis is not available for ETs and will be completed during For billing purposes in and for the setting of a target tariff for the PSP, Southern Water used a proxy for ETs based on water meter connection size. The table below shows the indicative split of sewerage connections by the number of ETs. For example, the connections assessed as having an ET rating between 100 and 150 (5 customers) tally to 663 total ETs, with the total number of ETs for all properties totalling 95,405. As can be seen, most connections are assessed as 1 ET (a residential property). Table 6.2: Customers by Number of Equivalent Tenements >1 to >5 to >10 >25 to >50 to >100 to >150 >250 Estimated Sewerage ETs 1ET 5 10 to to 250 to 500 Total Equivalent 1 ET connections 84,944 1,923 1,646 2,619 1,707 1, Page 102 of 184

103 6.3.3 Trade Waste An analysis of Australian Business Registry data obtained from the Australian Tax Office indicates that there are an estimated 4,000 liquid trade waste customers as defined in the categories shown in Table 6.3. An in-depth analysis of all catchments for industrial customers or clusters of commercial customers has not been performed. However, it is estimated that the majority of impact from liquid trade waste customers occurs in the Clarence, Glenorchy, Hobart and Kingborough catchments, with some category 4 customers in outlying catchments such as Cambridge, Green Point and Ranelagh. Table 6.3: Estimated trade-waste customers in customer categories Category Definition Number of Number of potential current customers customers identified with consents# CATEGORY 1 Low volume and low impact liquid trade waste CATEGORY 2 Low to medium volume and low impact liquid trade waste CATEGORY 3 Low to medium volume and medium impact 84 2 liquid trade waste CATEGORY 4 High impact liquid trade waste 8 5 TOTAL > Customer growth assumptions In the absence of a time sequence of customer growth in the region, Southern Water has used data published by the State Government s Demographic Change Advisory Council (DCAC) to predict customer growth for its pricing and revenue projections. Using the DCAC s mid case projection, this analysis suggests an average increase in population of 0.7 per cent across the southern region. On the basis of the assumption, that there will be no significant change to the average number of persons per household, this 0.7 per cent population growth figure has been used to project residential customer growth. Without access to better data, this figure has also been used to project non-residential customer growth. 6.5 Water supply planning framework As stated in the introduction to this section, Southern Water currently is only able to provide a qualitative assessment of the demand picture in the region. The creation of modelling capability to forecast water and sewage demand is a priority for the business in the future, but is heavily dependent Page 103 of 184

104 Monthly Consumption in Megalitres Greater Hobart Population on land use planning and development trends, a historically difficult area to predict. However, it is an area Southern Water will investigate throughout the regulatory period. 6.6 Water volume forecasts Figure 6.5 below shows historical consumption in the greater Hobart bulk network for the past 12 years. As can be seen, while there has been moderate population growth (0.8 per cent per annum), the trend consumption has not changed in a statistically significant manner. Figure 6.5: Historical Water Consumption Greater Hobart Southern Water Greater Hobart Water Consumption /Population Total and Off Peak Monthly Consumption in ML 7, , , , , , , , , , Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb , , Total Off Peak Population Linear (Total) Linear (Population) This suggests that the average usage per household is declining, which may be influenced by a growing understanding of the environmental benefits of conservation as well as a proliferation of water efficient fixtures. Southern Water expects a reduction in demand in the first year of the regulatory period following the introduction of universal metering. Empirical evidence from rollouts in other jurisdictions suggests those customers receiving a meter for the first time moderate their usage by around 20 per cent, though a bounce often occurs afterwards. In 2009/10, at a whole of region level, Southern Water sourced 43,589 mega-litres of water across the region, with approximate usage of around 35,000ML (accounting for leakage assumed at 20 per cent). Using this figure as a benchmark, the table below shows an indicative projection across the region for the regulatory period for total water usage. This projection accounts for the introduction of metering (a 20 per cent reduction from those customers who face two part pricing from correcting to a 10 per cent reduction in , based on available empirical evidence). However, it is clear that without Page 104 of 184

105 universal metering in the region, these figures should be seen as being approximate only and will have a large margin of error as only a quarter of water consumption has historically been measured in the region. This forecast was used in the long run marginal cost study outlined in Section Table 6.4: A Projection of Water Consumption Financial Year Total Regional Demand (ML) 2010/11 35, /12 35, /13 32, /14 34, /15 34, Water zone demand analysis As indicated, Southern Water does not currently have detailed water demand forecasts. However, a qualitative analysis of each of Southern Water s water zones is provided. A water zone may either be a complete system (e.g. in most small towns), or it may be a section of the greater Hobart integrated network. This assessment includes an analysis of whether there is sufficient allocation from the raw water source and if the relevant treatment facility has sufficient capacity to service current demands. It should be noted that this analysis is based on the available capacity and estimated growth under current conditions. This analysis will need to be reviewed following the meter rollout as there will likely be reductions in usage that free up capacity in some zones which may flow through to some sewerage catchments. Table 6.5: Water Zone Demand Analysis Zone Current available capacity (H,M,L) Estimated growth (H,M,L) Campania L H Orford/ Triabunna L M Lenah Valley L M Sandy Bay High Level L M Notes Development driven investigation currently underway. Trunk system may require upgrade to meet increased demand. Orford to Triabunna link pipework requires upgrade. Significant reticulation renewals required in near future. Severe Seasonal restrictions are applied and extension of the allocation may be required. New Reservoir is required, construction approved for Development at max elevation causes low pressure issues. Extension of Trunk Main to Southern Extent is required. Page 105 of 184

106 Zone Cygnet Current available capacity (H,M,L) L Estimated growth (H,M,L) M Margate L M Electrona/Snug L M Mangalore L M Bridgewater/ Gagebrook/ Old Beach M H Brighton M H Risdon Vale M H Tranmere M H Cambridge/ Acton M H New Norfolk M H Notes Connection in future to HVRWS via new Balfes Hill reservoir will ensure supply to the town. A booster system to service Nichols Rivulet will be required in future to ensure quality is maintained. Severe seasonal restrictions will continue until HVRWS is operational. Duplication of trunk mains underway, sections 1 & 3 complete within 12 months will give high capacity. Trunk main duplication to Margate will improve supply. Reservoir required, land purchased construct 3-5 years. Development driven investigation currently underway to serve higher levels. There is a new reservoir proposed at Brighton to cater for increased demand. Many complaints in this region originate from wayside connections, new zones off the trunk mains may need to be considered. New trunk main from Pilchers Hill is required for high level growth including aged care facility High Growth on Droughty Point will require additional infrastructure that requires planning to ensure efficient design Development will be required to build additional infrastructure to service the growing demand in this area Hotspot for Growth & Development in the next 2 years but generally well serviced with exceptions being the higher areas where high level zones will be required Bicheno M H Wakehurst/ Austins Ferry M H Huonville M H Sorell M H Low pressure issues at higher levels in town. Reticulation renewals required in near future. Huon Valley Regional Water Scheme (HVRWS) under construction with new treatment at Glen Huon and new trunk mains to meet water standards. Extension of bulk main into town currently in design. Low pressure issues at higher levels in town. Page 106 of 184

107 Zone Swansea Current available capacity (H,M,L) H Estimated growth (H,M,L) H Notes Reticulation renewals are required in near future. Midway Point H H Future growth will be fed from Penna Reservoir (4.5ML). Minor reticulation upgrades required. Lake Fenton Bulk Supply System L L Quality is variable and better accounting for water is required. Renewal of some sections will be required in coming years. Hamilton L L Some seasonal restrictions. Allocations are not secured. Quality needs improvement. Flintstone L L No projected growth. Westerway L L Demand to Fentonbury is often reduced to zero due to excessive irrigation demand. Maydena L L Frequent maintenance of the system is required to ensure supply to the town reservoir. Poimena L L New high level reservoir required in coming years. Crabtree/Grove /Lucaston L L Upgrade of treatment and clarification and or catchment management may be required to meet standards. Franklin L L Future connection to the HVRWS will resolve pressure issues. Future requirement for one booster system to serve Jacksons Road. Judbury Increased storage is required if this system is to be L L maintained. Colebrook L L Seasonal restrictions are applied Allocation may require extension Tunbridge L L No projected growth Ellendale L L Treatment capacity and clean water storage may not be sufficient to meet demand. West Derwent Bulk Supply System M M Mount Wellington Bulk Supply System M M Barossa Heights M M Claremont M M Mount Nelson M M Lower Sandy Bay M M Berriedale to Elwick Duplication will provide increased security of supply to Hobart City and the eastern shore.-bryn Estyn Treatment Plant requires filter upgrade and possible conversion of Plant 2 to DAFF. Supply to Ridgeway Dam during dry periods requires investigation to determine optimum system configuration - including Cross City Link and upgrade of Fitzroy pump station. Page 107 of 184

108 Zone Current available capacity (H,M,L) Estimated growth (H,M,L) Notes Process audit currently underway in an attempt to Oatlands M M address limited supply in summer. Expected to boom once the Brighton Bypass is Kempton M M complete. Bothwell M L Some seasonal restrictions. Allocations are not secured Some seasonal restrictions. Allocations may require Ouse M L extension. Quality needs improvement. Wayatinah M L Requires a water licence. Quality needs improvement. No projected growth. Quality needs improvement, Gretna M L identified in small towns project. Merton/ Springfield M L Berriedale/ Investigation to remove zone leakage is required. Chigwell M L Development at maximum elevations results in low West Hobart M L pressure issues. South Hobart M L Tolmans Hill M L Geeveston M L Development at maximum elevation results in low pressure issues. Future connection to the HVRWS and new Geeveston reservoir. In addition there is the requirement for two booster systems, water tower and some reticulation to service higher areas. Dover M L Some seasonal restrictions. Water treatment and supply pumps need upgrading to maintain water quality and reliability. Allocation may require extension. Bagdad M L Bellerive/ Some infill development but well serviced. Howrah H L Coles Bay H L No significant issues. Elliot Road H L Tolosa H L Removal of the dam for safety reasons is required, high level pressure issues in Lutana need resolution. A number of the red systems are the subject of capital spending over the course of the regulatory period. See Section 5 for details. Page 108 of 184

109 6.7 Sewerage volume forecasts In 2009/10, Southern Water treated 23,695 ML of sewage. Of this, 79.5 per cent was treated to a secondary level, 19.2 per cent to tertiary level and 1.3 per cent to a primary level Sewer catchment demand analysis This section qualitatively assesses each of Southern Water s sewerage catchments. Sewerage catchments are based around treatment plants due to the (usually) linear nature of sewerage infrastructure (i.e. there is generally not the option to pump sewage to multiple sewerage treatment plants). The plants have been assessed against likely growth and capacity remaining based on the licensed flow allowed through the plant. Note that some plants, particularly Cameron Bay and Prince of Wales Bay, have licensed capacities significantly below the design capacity of the plant. Table 6.6: Sewer catchment demand analysis Sewage system Sewer Infrastructure Capacity (H,M,L) Estimated % treatment capacity Estimated Growth (H,M,L) Margate L -191% H Brighton L -33% H Ranelagh M -63% H Blackmans Bay M -4% H Bicheno L 3% H Swansea L 26% H Sewer system notes Removal of Margate WWTP in 3 years. Replace with SPS as current restriction on growth. Andrew Street Pump Station to be replaced in FY Treatment Plant is operating over capacity and needs major works. High demand from trade waste customer (fish processing) and new residential developments requiring upgrade of Ranelagh WWTP. Major trade waste customer to install a pretreatment system. Main pump station requires upgrade in next two or three years. Requires SPS as part of development. Headworks adequate, B Bay WWTP at bio capacity. Growth expected to be > 400ETs over next 10 years. Many existing SPS's do not comply with current standards for storage and pumps. Duck Park and Maria St SPS's have funding for upgrade in FY. Most existing SPS's do not comply with current standards for storage and pumps. Page 109 of 184

110 Sewage system Sewer Infrastructure Capacity (H,M,L) Estimated % treatment capacity Estimated Growth (H,M,L) Campania L 32% H Cameron Bay* L 1% M Sewer system notes Development driven investigation currently underway. Need new high level trunk main to service upper Granton. Most existing SPS's do not comply with current standards for storage and Orford L 5% M pumps. Oatlands M -20% L Low to moderate growth projected. Prince of Wales Bay* L 0% L Localised sewer capacity issues: Albert Rd Moonah, Bowden Street Glenorchy, Sunderland/Main Road Derwent Park, Showgrounds. Rosny L 3% L Treatment Plant is near capacity - all major pump stations and their trunk mains are at capacity due to high levels of infiltration. Most existing SPS's do not comply with current standards for storage and Triabunna M 3% M pumps. Midway Point L 11% M Green Point (Bridgewater) L 12% M Electrona M 16% H Cambridge Airport L 16% M East Risdon (Risdon Vale) L 17% M Turriff Lodge M 63% H Kempton M 14% M Macquarie Point L 28% L New/upgraded pump stations expected through future developments. Pumping stations and treatment plant require upgrades to meet growth. Electrona WWTP some capacity, replacement in 3 years with SPS and rising main to transfer via Margate to B Bay. WWTP - Growth is mainly infill. Poorly constructed system connected to a poorly constructed treatment plant that requires significant work. Trunk infrastructure is at capacity - significant aged care facility planned. Hot spot for growth and development in the next 2 years - trunk main upgrade is required to service Gateway sub-division. Expected to boom once the Brighton Bypass is completed. Trunk sewers nearing capacity most SPS need renewing. Page 110 of 184

111 Sewage system Sewer Infrastructure Capacity (H,M,L) Estimated % treatment capacity Estimated Growth (H,M,L) Geeveston L 39% L Sewer system notes The Geeveston WWTP requires an upgrade and extension of outfall from river to the bay to comply with EPA licence limits. Dover L 43% L Cygnet M 54% M Dover WWTP requires an upgrade to comply with EPA licence limits. Some capacity available in system. Any subdivision development near plant requires odour system and some other upgrades. Sorell M 55% M New/upgraded pump stations expected through future developments. Rokeby H 57% H Trunk main extension is required to service Pass Road developments. Tranmere pump stations are at capacity - treatment plant has additional capacity. Taroona M 67% M Removal of Taroona WWTP with storage and SPS will enable high hydraulic and biological capacity. Growth in demand is low but current system does not comply with AMT standards. Selfs Point M 17% L System basically sound. Bothwell M 19% L Some latent capacity in system. Richmond M N/R L Some latent capacity. * Indicates licence capacity is less than design or true capacity. Hence pressure on these treatment plants is much lower. Projects to address critical sewerage demand growth are under Section Trade waste volume forecasts Southern Water is not anticipating a significant increase in the number of commercial or industrial customers in the region. Information on the current trade waste impact by catchment is provided in Table 6.7. High Priority catchments are those which are most likely to see commercial or industrial customer growth in the future. Page 111 of 184

112 Table 6.7: Trade Waste Catchment Analysis High Priority Catchments Medium Priority Catchments Low Priority Catchments Significant or unassessed number of industrial and commercial customers in catchment Some industrial customers and/ or commercial customers in catchment Few commercial customers Ranelagh. Bridgewater. Macquarie Point, Self s Point, Prince of Wales Bay, Cameron Bay, Blackmans Bay, Rosny, Rokeby, Cambridge Sorell, Swansea, Bicheno Turriff Lodge, Orford, Taroona, Dover, Margate, Brighton, Cygnet, Triabunna, Geeveston, Risdon Vale Woodbridge, Maydena, Midway Point, Electrona, Oatlands, Ouse, Dunalley, Kempton, Penna, Hamilton, Nubeena, Gretna, Richmond, Bothwell, Bronte Lagoon, Campania, Howden, Bagdad, Colebrook 6.9 Lot growth forecasts Southern Water s Development and Compliance Services area experienced steady growth in applications for increased demand and loadings (capacity) on Southern Water s infrastructure network in the first two years post commencement. As the chart below shows, when Southern Water was formed economic conditions were favourable for development, with the Federal and State Governments financial crisis stimulus packages boosting residential and non residential building approvals from mid 2009 for around a year. However, increasing interest rates, the cessation of the first home owners grant scheme and minority governments at both State and Federal level has seen a fall in consumer and business confidence. Current predictions from industry groups and economic forecasters suggest a slowing in land use activities that will reduce the overall activity in lot creation and building approvals back towards long term trend levels for the foreseeable future. Page 112 of 184

113 Jul-2007 Sep-2007 Nov-2007 Jan-2008 Mar-2008 May-2008 Jul-2008 Sep-2008 Nov-2008 Jan-2009 Mar-2009 May-2009 Jul-2009 Sep-2009 Nov-2009 Jan-2010 Mar-2010 May-2010 Jul-2010 Sep-2010 Nov-2010 Jan-2011 Mar-2011 May-2011 Jul-2011 Dwelling Approvals Figure 6.6: Dwelling Unit Approvals 250 Dwelling Unit Approvals - 12 Month Rolling Average Houses Other Dwellings Total Approvals Non-residential Approvals The majority of development in the southern region is in the more affordable areas, with tracts of rural properties being rezoned to residential in areas such as Brighton, Margate and Howrah/Rokeby. This in turn has also led to commercial activities being established to serve these growing communities. Commercial/industrial investment is occurring, largely through redevelopment within the Hobart CBD, and in dedicated precincts at Cambridge Park and the Brighton Transport Hub. Activity predictions relevant to connection growth forecasts and capacity utilization in the Southern Water area are detailed below. In broad terms, Southern Water expects trend development to level over the regulatory period. Lot creation prediction that the creation of lots will drop back from levels to longer term trend for the regulatory period resulting in expected lower developer charge levels relative to the result (see Section 8). Residential building approvals drop in activity to a trend creation rate. Commercial building approvals continued moderate growth as larger retail and office opportunities are developed to meet the residential expansion which occurred through 2009 and Strata units creation will remain slightly above trend due to increased demand on rental properties close to amenities. Page 113 of 184

114 Municipal growth predictions: Huon Valley, Huonville minor drop off in growth in both lot creation and building approvals. Kingborough, Kingston/ Blackmans Bay/Margate/Commercial, continued steady, minor drop off in growth in lot creation and building approvals. Hobart, Commercial/Infill steady-minor drop off in building approvals Glenorchy, Infill- drop off in infill building approvals Brighton, Brighton/Old Beach steady, minor drop off in growth in both lot creation and building approvals. Clarence, Howrah, Tranmere, Commercial, Infill steady, minor drop-off in all activities. Sorell, Midway Point, Sorell steady, minor drop-off in growth in both lot creation and building approvals. Glamorgan Spring Bay, Swansea, Bicheno, Orford steady, minor drop-off in growth in both lot creation and building approvals. Derwent Valley, New Norfolk steady, minor drop-off in growth in both lot creation and building approvals. Southern Midlands, Campania drop-off in growth in both lot creation and building approvals. Central Highlands very minor growth expected. Tasman, Nubeena increase in growth based on very low growth in the past Demand management initiatives The costs associated with storing, treating and delivering water to homes and businesses continue to rise. These include electricity for pumping; the addition of chemicals to ensure it meets Australian Drinking Water quality guidelines and investment in fixing and upgrading infrastructure. Water usage in southern Tasmania is expected to be higher per residential property compared with the 156 kilolitres for customers of Barwon Water in Victoria. Eliminating wastage is essential if customers are to reduce their water bills. Education is the best way to achieve real change in customer behaviour. Southern Water is providing water saving tips and information through a number of avenues. Our membership of the national Save Water Alliance enables us to use a combination of web resources and practical programs to deliver important water saving messages to the community via our website at Water saving devices available from the Alliance at a reduced cost also can be viewed at the Southern Water display at the Building Selection Centre in Hobart which also provides a range of water saving tips. Page 114 of 184

115 Southern Water has invested in two drinking water trailers to provide a mobile source of drinking water for community events such as Agfest and the Wooden Boat Festival. Where appropriate, the trailers may also be used to supply drinking water to customers affected by water supply disruptions. One of the vehicles is specially equipped to provide important water saving and environmental messages. Water efficiency tips are also included in information brochures provided to customers with their water and sewerage accounts (see Attachment F). As part of our commitment to educate the community on water-related issues, we have entered into a three-year sponsorship agreement with Greening Australia, which is developing a Science and Ecology Learning Centre at Mount Nelson. The Southern Water Water and Sustainability Program involves Tasmanian schools engaging in practical science based environmental management projects, focusing on local water-based investigations. The Learning Centre will showcase models of best practice and be utilised as a site for professional development and school visits. It will be a Centre of Excellence in science and education delivery in Australia Water Metering Project With the roll-out of water meters to implement universal metering across southern Tasmania, the corporation s ability to deliver measureable demand management initiatives and to assist customers in water conservation has become possible. Empirical studies show that there is an immediate drop in consumption following the introduction of meters (up to 20 per cent for those receiving a meter). This indicates that even without further education the very presence of two part pricing will provide the appropriate signal for customers to consider water usage. In May 2010, the Australian Government awarded a $10 million grant to Tasmania s three water and sewerage corporations to support the roll out of water meters. Under the Water for the Future Initiative, through the National Water Security Plan for Cities and Towns Program, Southern Water will receive 50 per cent of this grant. A condition of the grant funding is the provision of an implementation plan for an education and demand management campaign linked to the introduction of the meters and pricing system. As part of the roll out of water meters, in the year, Southern Water is implementing a water conservation education program for customers. The program will begin with residential customers in year 1, industrial and commercial customers in year 2 and a schools education program to commence in year 3. The critical features of the program will include: How to read and use meters and understand new-look accounts; How to decide how much water your household should use; What appliances, tools and approaches households can take to minimising water use; and Page 115 of 184

116 Incentives and programs to minimise water waste through losses and actions. A sample of water saving tips being provided to customers is included as Attachment F Trade Waste Southern Water is implementing a number of trade waste customer management initiatives to provide drivers for demand management. The development of a standard template for a Trade Waste Agreement for industrial customers incorporates requirements for: installation and maintenance of flow monitoring and sampling equipment in accordance with Southern Water specifications; self monitoring and sampling of trade waste quality; and preparation of a Trade Waste Management Plan to improve parameters that breach a 90 th percentile maximum or those identified by the parties to the contract as a priority. These initiatives, combined with the new Trade Waste Pricing Model, are designed to reward improvements to trade waste effluent quantity and quality through pre-treatment in order to decrease the load on Southern Water s sewerage treatment plants. Page 116 of 184

117 7 Pricing and customer impact analysis 7.1 Summary Southern Water is very aware of the current cost of living pressures facing the community and has tried to manage price shocks for customers in preparing its pricing proposal. However, in this context, and as highlighted in the recent Productivity Commission Report into Australia s Urban Water Sector, April 2011, Tasmania s lowest quintile of households spend less than 2 per cent of their household disposable income on water and sewerage services. As has also been shown, Southern Water s compliance and customer service performance is considerably below its mainland peers and this is reflective of revenue recovery that is significantly below the full cost recovery revenue analysis presented in Section 5. For this reason, Southern Water is proposing a set of target tariffs that start a progression towards full cost recovery. The targets for to were arrived at by making an assessment of what a reasonable revenue target should be in 10 years and then calculating the target tariffs that would achieve this revenue. These year 10 target tariffs were then stepped back to arrive at the targets contained in the Price and Service Plan period. This led to the six per cent per annum increase in target tariffs, which are deliberately lower than those in other utility sectors and which are causing significant pain for customers. The above tariff setting process was based on several assumptions, including the split of revenue required between the services (water, sewerage, trade waste and one-off services), yearly capital expenditure, expected operational cost efficiencies, forecast customer growth, the expected volume of water sales, available information on water connection sizes and the number of sewerage equivalent tenements. In short, the target tariffs neither result in a step change to full cost recovery, nor do they monopolise customers. In addition, Southern Water will implement a transition approach to move customers from the myriad of current pricing arrangements to these target tariffs. In setting our target tariffs and transition approach, Southern Water has tried to blend an acceptable outcome for customers (minimising price increases while commencing a move to pricing equity), while addressing the requirements for business sustainability and the need for substantial investment to achieve improved compliance and customer service levels. To meet these demands, Southern Water is proposing to levy the following prices for the regulatory period. Page 117 of 184

118 7.1.1 Fixed Water Target Tariffs by Water Meter Connection Size Table 7.1: Summary of Fixed Water Target Tariffs by Water Meter Connection Size Fixed Water Service Charge per Connection (Base year) Annual % increase 20mm $ $ $ $ % 25mm $ $ $ $ % 30mm $ $ $ $ % 32mm $ $ $ $ % 40mm $1, $1, $1, $1, % 50mm $1, $1, $1, $1, % 65mm $2, $2, $3, $3, % 75mm $3, $3, $4, $4, % 80mm $4, $4, $4, $4, % 100mm $6, $6, $7, $7, % 150mm $14, $15, $16, $17, % 200mm $25, $27, $28, $30, % Page 118 of 184

119 7.1.2 Variable Water Charge Table 7.2: Summary of Variable Water Charge Volumetric Charge Water (Base year) Annual % increase Full Quality $/kl (Potable Supply) $ $ $ $ CPI Limited Quality $/kl (Non- Potable Supply) $ $ $ $ Potable rate 80% of potable rate Fixed Sewerage Target Tariffs by Equivalent Tenement (ET) Table 7.3: Summary of Fixed Sewerage Target Tariffs by Equivalent Tenement (ET) Fixed Sewer Service Charge per Connection Annual % increase 1 ET $ $ $ $ % 2ET s $ $ $1, $1, % 10 ET s $4, $4, $5, $5, % 25 ET s $11, $12, $12, $13, % 6 A customer ET is calculation based on the property land use, all single dwelling residential houses = 1ET Page 119 of 184

120 7.1.4 Vacant Land Service Charges Table 7.4: Summary of Service Charge Service Charge (base year) Annual % increase Service Charge Water $ $ $ $ % Service Charge Sewer $ $ $ $ % Fire Service Charge Table 7.5: Summary of Fire Service Charges Fire Service Charge per Connection Annual % increase 20mm $68.08 $72.16 $ % 25mm $ $ $ % 30mm $ $ $ % 32mm $ $ $ % 40mm $ $ $ % 50mm $ $ $ % 65mm $ $ $ % 75mm $ $1, $1, % 80mm $1, $1, $1, % Page 120 of 184

121 Fire Service Charge per Connection 100mm Annual % increase $1, $1, $1, % 150mm $3, $4, $4, % 200mm $6, $7, $7, % Target tariff at statutory limit and upper limit It should be noted that if the statutory limit recovery level was achieved immediately, as per the revenue requirement derived in Section 5.9, the target tariff for a 20mm water connection in would be $432.09, the 1ET sewerage charge would be $ and the volumetric rate would be $0.90. If the upper limit (Section 5.10) were achieved immediately, the target tariff for a 20mm water connection would be $ and $ for a 1ET sewerage charge, again with a volumetric target of $ Regulatory pricing framework Southern Water has a licence to own and operate water and sewerage infrastructure and to provide water and sewerage services. These services are considered regulated, as customers receiving services through Southern Water infrastructure cannot access the service from a competitor. As such, the services provided are price regulated to ensure Southern Water does not monopolise its customers. In the Water and Sewerage Industry Act 2008, regulated services have been determined to be: Water Service a service that is provided in connection with the collection, storage, treatment, conveyance, reticulation or supply of water and includes a retail service for the supply of water, but does not include: (a) supply or use of water for irrigation purposes; or (b) supply or use of water in connection with the generation of electricity. Sewerage Service a service that is provided in connection with the collection, storage, treatment, conveyance or reticulation of sewage and includes a retail service for the collection of sewage. In addition, the Minister for Primary Industries and Water declared that stormwater services, water recycling services and re-use services are not regulated services. This chapter details the regulated services and their sub-elements, the rationale behind the structuring of tariffs and the tariffs themselves. Page 121 of 184

122 7.3 Rationale behind structure of regulated services and tariffs Regulated services The diagram below captures, at a high level, how the regulated services Southern Water provides have been split into tariffs. Categories one and two represent the standard water and sewerage services that is the ongoing annual charges paid for turning on the tap or for flushing the toilet. The third category, Other Fees and Charges, include one-off fees for water or sewerage related services for example, a fee for connecting to Southern Water s water and sewerage infrastructure. Figure 7.1: Structure of Tariffs Tariff Structure for Regulated Services 1. Water Services 2. Sewerage Services (including Trade Waste) 3. Other Fees and Charges The water tariffs have been split into the following sub-elements: fixed water tariff an annual charge contributing to the maintenance and replacement of water infrastructure; variable water tariff a charge per kilolitre for water usage, split between potable and nonpotable sources; fire service tariff an annual charge for the provision of capacity to support fire fighting in private buildings; water service charge an annual charge for the ability to connect to Southern Water s infrastructure, even though a physical connection may not be in place (vacant land charge). Sewerage tariffs have been split into the following sub-elements: fixed sewerage tariff an annual charge covering infrastructure maintenance and flow contributed to the sewerage network. trade waste tariffs annual fixed charges and, depending on the category of customer, strength and flow based charges for the disposal of greater than domestic strength sewage. Page 122 of 184

123 Other Fees and Charges tariffs have been split into the following sub-elements: connection charges cost recovery charges levied for connecting to Southern Water s water or sewerage infrastructure, or disconnection from our infrastructure; metering charges cost recovery charge levied for items such as special meter reads, meter testing and meter relocation; development services fees cost recovery charges levied for Southern Water s assessment of development applications, certificates for certifiable works and post development compliance assessments; asset contribution charges cost recovery charges levied to cover the cost of the expansion of Southern Water infrastructure required to support development or the consumption of excess infrastructure capacity (includes developer charges and service introduction charges); miscellaneous fees and charges cost recovery charges levied for a number of sundry fees such as location of services or pressure and flow testing. To determine the proposed prices for these tariffs, Southern Water has applied a set of tariff design principles Tariff principles for standard water and sewerage service Southern Water believes that the first principle for tariff design for its standard water and sewerage services is that there should be like charges for like services. By that we mean that if two properties are both being provided a water service through a 20mm pipe (the standard residential size), the fixed charge they get should be the same. In such a case, the only difference to their total water bill should be reflected in their water consumption. Principle 1: A like fixed price for a like service By extension, Southern Water believes that tariffs should reflect demand on the system. Those who utilise a bigger water connection or who contribute more load to sewer, e.g. a hotel, should pay more than a standard residential charge. Principle 2: Greater capacity usage, larger fixed price The third principle is if you use it, you should pay for it. For water services, the installation of meters across the region will enable us to capture information on how much water you use and charge you accordingly. For most parts of Australia there is no variable price for the amount of sewage disposed of, and Southern Water will not go down this path. Page 123 of 184

124 Principle 3: User pays In accordance with these three principles, Southern Water has developed a set of target tariffs, which also aim to comply with statutory and regulatory requirements and principles. Southern Water s proposed tariff design has been structured to address the following considerations: Be easy and simple for customers to understand; Achieve social equity and reflect the actual cost of service to customers; and Provide financial sustainability to meet regulatory levels of service Tariff principles for other fees and charges The majority of the other regulated tariffs, particularly the miscellaneous fees and charges, have been built according to a cost recovery approach, where the direct costs incurred in providing the service are recovered by the charge. For example, in determining the fee for a standard water connection, Southern Water has included the cost of labour, excavation equipment, pipe, plumbing supplies, pavement reinstatement and vehicle costs associated with travel to site Unregulated services Southern Water has unregulated services of bulk water supply for irrigation, re-use and tankered waste Pricing Zones Southern Water s annual charges for for residential customers range from in excess of $40,000 (institutional residential) to as little as $50 per annum. The tables below provide some examples of the spread of charges and methodologies between areas within the Southern Water region. Figure 7.2: Average Residential Charges Projected Average Residential [Fixed Charges] Southern Midlands Fixed Water Tasman Brighton $600 $400 $200 Fixed Sewer Central Highlands Clarence City Sorell $0 Derwent Valley Kingborough Huon Valley Hobart City Glamorgan Spring Bay Glenorchy City Page 124 of 184

125 Southern Water inherited around 150 different tariffs. These were a mixture of fixed charges (e.g. $300), variable charges (e.g. 0.78/kL) and AAV based charges (e.g. $ cents in the dollar multiplied by the assessed annual value of a property). Given AAV based charging applied to around 80% of our customer base and different properties have different AAVs; more than 6,000 different individual prices were being paid by customers. It should be noted that while the 100 percentile has been included for completeness, the 100 percentile values are somewhat distorted mainly due to a handful of deemed residential properties displaying significantly high water use. It is likely that these farming, institutional residential or industrial properties were wrongly classified. Table 7.6: Residential Projected Total Charges Residential Projected Total Charges (2011/12) Percentile Percentile Percentile Percentile Percentile Percentile Municipality 5% 25% 50% 75% 95% 100% Brighton $ $ $ $ $1, $19, Central Highlands $ $ $ $ $ $2, Clarence City $ $ $ $ $ $5, Derwent Valley $ $ $ $ $1, $37, Glamorgan Spring Bay $ $ $ $ $1, $9, Glenorchy City $ $ $ $1, $1, $38, Hobart City $ $ $ $ $1, $26, Huon Valley $ $ $ $ $ $10, Kingborough $ $1, $1, $1, $1, $18, Sorell $ $ $ $1, $1, $35, Southern Midlands $ $ $ $ $1, $37, Tasman $ $ $ $ $ $ The pricing inherited by Southern Water includes significant cross subsidies being paid by nonresidential customers which, in the areas charged on an AAV basis, have lowered the average charge for residential customers. Similarly, residential customers with high AAV value properties are cross subsidising low AAV value residential customers. Southern Water believes that the best approach to pricing is to have like customers paying like prices for like services (postage stamp pricing), rather than zonal or nodal pricing. Southern Water would prefer to send signals about the costs of being serviced by a particular water or sewerage scheme through the levying of developer charges for newly-created lots and through trade waste acceptance limits that are specific to each catchment. Postage stamp pricing would result in all like customers across the region paying the same fixed amounts for like services. That is, if a customer resides in Swansea they pay the same fixed fee as someone who lives in Dover for a water service. One of the benefits of this approach is that all customers pay the same for what they are likely to perceive as the same service. The issue of postage stamp versus nodal pricing was explained and debated at customer consultative group meetings. The group provided feedback that they understood that postage stamp pricing was Page 125 of 184

126 another form of cross subsidy. As long as this was highlighted, they felt it was one that the community would accept as they saw that paying the same price equated to equity. They were also keen to get away from the differential pricing inherited by Southern Water. We believe that a nodal pricing approach could put a huge burden on customers attached to small regional schemes as the operating costs and necessary upgrades could be well above the ability of that customer base to pay, rendering the scheme unsustainable. As an example, if customers in one of the small towns in the region were to pay tariffs reflecting the statutory limit for that service for an upgraded water supply, they would need to pay upwards of $2,500 per annum for the one service 7. The administrative cost of nodal prices would also force a lower level of cost data capture within the corporation, which, given the above example, may be for little benefit and could not be practically implemented in a timely fashion ahead of the first regulatory period. For these reasons, Southern Water sees postage stamp pricing as being a just and reasonable pricing policy across the southern region. 7.4 Pricing transition objectives and side constraints Consistent with the need to increase revenues towards the benchmark revenues presented in Section 5, Southern Water has set a series of increasing target tariffs over the regulatory period. However, we recognise that to move customers immediately to the target tariffs (specifically for standard services) would cause substantial price shocks for some customers who simply will not be able to afford it. To mitigate the impact of price shocks, we propose to transition customers to the target tariffs over several years, by utilising a mechanism of side constraints. In this context, Southern Water s pricing objectives for the regulatory period are to: Minimise price shocks for customers; Introduce two part pricing; Commence the transition to equitable pricing; and Make progress towards unwinding cross subsidies. Southern Water proposes the following side constraints to minimise price shocks for customers. 7 In compiling this example, assumptions were made regarding the cost of the upgrade and the opex cost for the system. Page 126 of 184

127 Table 7.7: Side Constraints SIDE CONSTRAINTS ($, nominal) Maximum $50 or 10 per cent per service increase (whichever the greater) on fixed charges for those customers below their target tariff. Maximum of 10 per cent increase on volumetric rate for those below target volumetric tariff. Charges for customers above target tariffs (fixed and volumetric) to be frozen for the first two years, before reducing at 5 per cent in 2014/15. The $50 per service side constraint also will be increased proportionally for those customers with a greater than 20mm water connection or who are assessed to have a property greater than 1 equivalent tenement for sewerage. (E.g. a 40mm water connection will have a potential side constraint increase of $50 x 40mm connection size ratio (4) = $200). Strata title properties will share the increased side constraint associated with a larger diameter boundary water meter. The side constraints will move customers towards the target tariff until they reach the target tariff. Customers will then move each year with the target tariff increment (6 per cent increase for fixed charges). This transition will be explored in more detail under Section 7.7. The proposed proportional increase of the $50 side constraint aims to ensure that those customers who have current charges which are very low, but have larger diameter connections/multiple ET sewerage properties, are able to transition more quickly to their target tariff. For example, a customer who has a current $200 water charge, but a 100mm connection, may take decades to transition to their $6,808 target at a $50 or 10% increase. Only a small number of customers are in such a circumstance, but it is important that the cross subsidy they receive is corrected in a sensible time period. The table below shows the side constraint for different water meter connection sizes. Similarly, the side constraint for a customer who has their property assessed as 6 equivalent tenements will be $300. Table 7.8: Connection Size Ratios Connection Size Ratio Diameter Nominal (DN) Meter Connection Size [DN] 20mm 25mm 32mm 40mm 50mm 65mm 75mm 80mm 100mm 150mm 200mm Ratio [R] Water Side Constraint ($) $50 $78 $128 $200 $313 $528 $703 $800 $1,250 $2,813 $5,000 Page 127 of 184

128 Side constraint increases for customers in strata title properties who sub-meter will be $50 or 10% (with the $50 being increased by the connection size ratio if the customer has larger than a 20mm sub-meter). However, for lot owners who share a boundary meter, the side constraint increase will be the increase for the strata s boundary meter size divided on the basis of unit entitlement (e.g. a 32mm boundary meter side constraint will be $128 and if shared equally between four lots would equate to a $32 increase for each lot), or 10% Residential versus non-residential transition Implicit in the methodology presented is that residential and non-residential customers will be treated in the same manner. That is, if the customer is below their target tariff they will see their charge increased according to the side constraints until they meet their target tariff. This approach aims to ensure cross subsidies are no worse for the first two years of the regulatory period but from that point onwards cross subsidies will start to be unwound. Once all customers, both residential and non residential, reach their target tariff the inherited cross subsidisation will be unwound. Page 128 of 184

129 7.5 Water and sewerage tariffs Water tariffs Southern Water s proposed water tariffs are captured in the chart below. Figure 7.3: Structure of Water Tariffs Page 129 of 184

130 Southern Water has adopted the following customer classes: 1. full service customers; 2. limited water quality - customers receiving water from a supply which has a permanent boil water alert in place or customers receiving water from a supply Southern Water has declared to be non-potable; 3. limited water supply - customers that: o are connected to a water main that periodically does not contain water under positive pressure; or o have a connection designed to provide low or intermittent flow, such as where the customer has been required to install, operation and maintain an individual tank or pump; or o are connected to a non-reticulation water main that is subject to significant pressure variations due to either: a pumped supply where the low pressure is below 50 kpa and the high pressure is above 500 kpa; or an inlet supply to a trunk reservoir such that when the reservoir inlet valve is open the pressure is below 50 kpa; or o receive a supply Southern Water determines to be inadequate; and 4. combined limited water quality and limited water supply Fixed water charges It is proposed that the fixed water tariff for full service customers be based on the size of a property s metered water connection. This approach is used in many other jurisdictions around Australia and is accepted as best practice. The relationship between the diameter of the metered connection and the potential flow that can be provided can be used to scale the fixed price. The relationship is captured in the table below, where a standard 20mm metered connection is a ratio of 1.00 and a 200mm metered connection is As the standard 20mm target tariff is $ in , the 200mm charge is $27,232. Table 7.9: Connection Size Ratios Connection Size Ratio Diameter Nominal (DN) Meter Size [DN] Connection 20mm 25mm 32mm 40mm 50mm 65mm 75mm 80mm 100mm 150mm 200 Ratio [R] The ratio table above is calculated by the following equation (1), below: R = [D² /400] where D = connection diameter Equation (1) Page 130 of 184

131 The future water tariff will be calculated by the following equation (2), below: Annual Water Fixed Charge Target Tariff = AW20 x R Equation (2) Where: AW20 = A calculated annual charge for property service water connection, using 20mm water connection proxy; and R = Connection Diameter Ratio. In those instances where a property has multiple connections there will be multiple fixed charges. Annual Water Fixed Charge Target Tariff = AW20 x R Page 131 of 184

132 Table 7.10: Fixed Water Charges Fixed Water Service Charge per Connection 20mm Annual % increase $ $ $ % 25mm $ $ $ % 30mm $ $ $ % 32mm $ $ $ % 40mm $1, $1, $1, % 50mm $1, $1, $1, % 65mm $2, $3, $3, % 75mm $3, $4, $4, % 80mm $4, $4, $4, % 100mm $6, $7, $7, % 150mm $15, $16, $17, % 200mm $27, $28, $30, % Page 132 of 184

133 7.5.3 Limited Water Supply A small percentage of customers receive a service that Southern Water considers is limited. Customers shall be considered to be Limited Water Supply Customers if they: are connected to a water main that periodically does not contain water under positive pressure; or have a connection designed to provide low or intermittent flow, such as where the customer has been required to install, operate and maintain an individual tank or pump; or are connected to a non-reticulation water main that is subject to significant pressure variations due to either - a pumped supply where the low pressure is below 50 kpa and the high pressure is above 500 kpa; or - an inlet supply to a trunk reservoir such that when the reservoir inlet valve is open the pressure is below 50 kpa; or where the corporation determines the supply to be inadequate. Southern Water will set a fixed water target tariff for these customers of 10 per cent lower than the full supply tariff. This reduction reflects the deficiency in the local water reticulation infrastructure, which the customer should not be expected to pay for. Limited Water Supply Charge per Connection 20mm Annual % increase $ $ $ % 25mm $ $ $ % 30mm $ $ $ % 32mm $ $ $ % 40mm $ $1, $1, % 50mm $1, $1, $1, % 65mm $2, $2, $2, % Page 133 of 184

134 Frequency Limited Water Supply Charge per Connection Annual % increase 75mm $3, $3, $3, % 80mm $3, $4, $4, % 100mm $6, $6, $6, % 150mm $13, $14, $15, % 200mm $24, $25, $27, % Variable water charge full water quality Only a small percentage of residential customers have had a metered water usage charge. These customers are located in Brighton, Glamorgan Spring Bay, Central Highlands, Huon Valley and Sorell (some of whom have a significant free water allowance). The table below expresses the current range of variable rates and respective residential customer numbers in 2010/11. Figure 7.4: Residential Variable Rates Residential Customers Volumetric Rates $/kl (2010/11) Frequency Cumulative % % % 80.00% 60.00% 40.00% 20.00% 0.00% To set the variable water charge, we completed an assessment of the long run marginal cost (LRMC) of delivering water. LRMC is determined as the price of producing an extra kilolitre of water when capacity can be varied to meet demand. LRMC is made up of two components, short run marginal cost (SRMC - the price of producing an extra kilolitre of water when capacity is fixed) and a Marginal Capacity Cost (the cost of bringing forward additional capital investment required to meet increased demand). Page 134 of 184

135 Three key components are required to calculate the LRMC for water. These are: operational expenditures that vary directly with the water production (water royalties, pumping costs and chemical/treatment costs); capital expenditure on growth projects (as listed in the capital expenditure section); and a projection of water demand. The findings of the LRMC analysis are summarised in the table below, which shows that the LRMC averages around $0.95/kL. On this basis, Southern Water will set the volumetric target tariff commencing at $0.90 and moving up by CPI to $0.9474/kL by year three of the PSP period. It should be noted that the calculation of the SRMC component does not include any allowance for environmental externalities. Table 7.11: Long Run Marginal Cost SRMC MIC LRMC Variable water charge limited water quality Customers receiving water from a supply which has a permanent boil water alert in place or customers receiving water from a supply Southern Water has declared to be non-potable will be classed as limited water quality and will receive a lower variable rate. To reflect that limitedq u a l i t y water goes through a reduced treatment process, a 20 per cent reduction will be applied to the full quality rate. This reflects the nil or minimal treatment/chemical costs in the supply process and the contribution these make to the SRMC component. Customers receiving a reduced volumetric rate for non-potable water will still pay the full fixed charge unless they receive also receive a limited supply (see Section 7.5.3). Table 7.12: Full Water Quality and Limited Water Quality Rates Full Quality (Potable) $ $ $ Limited Quality (Non-potable) $ $ $ In line with Section 5.2 of the Customer Service Code, Southern Water will read all customers meters every quarter. Page 135 of 184

136 7.5.6 Converting one part water pricing to two part pricing Less than 25 per cent of Southern Water s customers are currently on two part pricing. To facilitate the legislative requirement 8 to move to two part pricing, those customers who only receive a fixed water charge pre 1 July 2012 will effectively have their account split into two parts based on an assumption of likely variable usage. Southern Water has based its proposed conversion from one part to two part pricing, and from free water allowances to no free water allowances, on the basis of a 200kL per annum average usage for customers with a standard 20mm water connection (effectively residential households). Whilst there is a lack of usage data at the household level for much of the region, the data that does exist allows comparison of the council areas that used two part pricing. Of these, Central Highlands and Huon Valley have free water allowances, so were discounted from the comparison as customers in those areas are facing a distorted price signal upon which to base their usage. This left Glamorgan Spring Bay, Southern Midlands, Sorell and Brighton as council areas that apply a more pure form of two part pricing. Glamorgan Spring Bay has historically been subject to a greater level of water restrictions, resulting in the lowest average usage in the region, while the Southern Midlands customer base is more rural in nature and does not align with the profile of the majority of customers for whom pricing conversion is required. These two areas were also eliminated from consideration. Brighton and Sorell were therefore thought to be most representative of where average residential water usage in the region will settle post the introduction of two part pricing. Brighton and Sorell have both been on two part pricing for over a decade and are both supplied with water through what was the Hobart Water bulk water network (i.e. there were no supply security issues in those areas). The residential areas of Brighton and Sorell (Old Beach, Brighton, Bridgewater, Midway Point and Sorell) also have block sizes more in keeping with the residential areas of Kingston, Clarence, Hobart and Glenorchy. The average residential usage in each of these municipalities in and is presented below. On the basis of these averages, 200kL is considered to be a robust approximation of where residential usage should fall under two part pricing. Table 7.13: Average Residential Usage in 2008/ Average Brighton Sorell Two part pricing is a result of a policy decision of the Australian and State Government that has been agreed under the National Water Initiative arrangements. Page 136 of 184

137 Historical usage for the mainland water corporations in the last year prior to drought, , also show average residential usage generally clustered around 200kL. Table 7.14: Mainland Water Corporations Average Residential Usage 2005/06 Provider Average Residential Usage ( ) Sydney Water 203 Water Corporation 268 Yarra Valley Water 198 South East Water 187 SA Water 233 Brisbane 185 City West Water 183 Gold Coast 200 Hunter Water 205 ACTEW 261 Barwon Water 216 While usage for customers currently under one part pricing may be higher than 200kL, a 20 per cent reduction is expected immediately post metering (see SW s Metering Cost Benefit study), such that this level of usage would be expected to result. The proposed method for the conversion to two part pricing for a 20mm metered connection (which should be the vast majority of residential customers) will work as follows. Assume a customer has a single fixed water bill of $400 in and the customer uses 200kl of water per year (the expected future regional average) at a cost of $0.90 per kilolitre this would equate to $180 of variable usage which is implicit in their one part charge. The bill would then be converted to a $220 fixed water charge (original $400 fixed $180 usage) and variable usage would then be measured and charged. For customers with a 20mm meter connection Southern Water proposes to use the expected regional average under two part pricing of 200kL of usage with which to reduce one part tariffs from However, the process for customers with larger meter connection sizes (generally non-residential customers) will be more challenging due to the variability in expected usage. For these customers Southern Water will use an average expected usage under two part pricing by connection size and reduce the fixed charge on this basis. The same ratio used for scaling fixed charges is proposed to be used to scale the expected usage for a particular size connection. To ensure that customers do not have a negative fixed charge when their conversion is completed, a $0 floor will be implemented. Southern Water recently read 275 of the first meters rolled out in the Clarence area, which at the time had been in place for exactly a year. These readings were taken to gain an understanding of average usage in a previously unmetered residential setting where the pricing signal relating to usage has not yet changed. The average usage across these meters was 191kl. The chart below shows the usage by 50kl bands. This data supports the 200kl usage assumption proposed and suggests the vast majority of Page 137 of 184

138 customers (nearing 80 per cent) will either see a decrease in their bill or a small (up to $10 per quarter) increase on moving to two part pricing (prior to the application of side constraints). It should be noted that for larger size connections, particularly commercial customers with potentially large usage, this conversion methodology may lead to significant changes in the total bill, both up and down, when the conversion is completed and usage is being measured. We will assess these pricing implications on a case by case basis if raised by the customer. It is planned for all customers to be metered by July 2012 which will facilitate two part pricing. Customers will not receive volumetric charges until such time as a meter is installed, though the reduction to the customer s fixed charge will occur regardless. That is, Southern Water risks revenue loss if a meter is not in place prior to 1 July See Section for information on the conversion to two part pricing for customers in strata title arrangements. Page 138 of 184

139 Table 7.15: Usage assumptions for conversion to two part pricing Connection Size Ratio Diameter Nominal (DN) Meter Connection Size [DN] 20mm 25mm 32mm 40mm 50mm 65mm 75mm 80mm 100mm 150mm 200mm Ratio [R] Usage Allowance (kl) Reduction from fixed charge 200kl 312kl 512kl 800kl 1,250kl 2,112kl 2,812kl 3,200kl 5,000kl 11,250kl 20,000kl $180 $281 $461 $720 $1,125 $1,901 $2,531 $2,880 $4,500 $10,125 $18, Removing free water allowances As with the conversion to two part pricing, customers currently receiving only a one part water charge, the removal of free water allowances will require the fixed water charge to be wound back and volumetric usage to be measured from the first kilolitre of usage. We propose this wind back of the customer s fixed charge should occur using the expected future regional average usage under two part pricing. That is, the fixed charge would be wound back by $180 (200kL per annum usage at $0.90 per kilolitre). Customers then will be charged for their actual usage at $0.90 per kilolitre. Customers who have their free water allowances removed will then need to moderate their usage to the expected regional average to ensure they do not see an increase in their bill of more than the side constraints described in Section 7.4. The large majority of Southern Water s free water allowances are in municipalities that are largely residential. Any non-residential free water allowances will be unwound using the average usage by connection size assumption referred to in The allowances will be assessed for their appropriateness once the actual usage is billed Fire Service charges Many customers, particularly commercial and industrial customers, have a water service provided to their property to support a sprinkler system or hose reel in the event of fire. This may be combined with the standard potable service, or in addition to it. While fire services are not metered connections and are not often called upon, the need for the service still requires Southern Water to build capacity into its network to meet peak supply requirements. Page 139 of 184

140 It is appropriate that a charge be levied for the fire service. It is intended that the relationship between pipe diameter and flow again be used to scale the charges. However, given this service is only called into use infrequently, there will be a reduced charge to the equivalent domestic service charge (25 per cent). A 40mm fire service would be the same tariff as a standard 20mm metered water service, which is one quarter of the price of the same sized domestic water meter connection. Table 7.16: Fire Service Connection Charges Fire Service Charge per Connection 20mm Annual % increase $68.08 $72.16 $ % 25mm $ $ $ % 30mm $ $ $ % 32mm $ $ $ % 40mm $ $ $ % 50mm $ $ $ % 65mm $ $ $ % 75mm $ $1, $1, % 80mm $1, $1, $1, % 100mm $1, $1, $1, % 150mm $3, $4, $4, % 200mm $6, $7, $7, % Page 140 of 184

141 Data on fire connection sizes are picked up as part of the ongoing metering rollout and renewal programs. It should be noted that where a property has a combined fire and domestic service, the customer will receive their domestic charge according to the combined pipe diameter until these services are separated. No usage will be charged for water used for fire fighting purposes. The active management of these customers will need to be balanced against the current level of charging of these customers for their regular water service, particularly those with high AAV prices Consequently, the following pricing transition approach is proposed for customers who will be required to pay a fire service charge: New customers requiring a dedicated fire service will immediately be charged their respective water service and fire service tariffs. for existing customers who are identified as having a dedicated fire service, fire service charges will be introduced by reducing the current fixed water charge by the applicable fire service target tariff. In the event the current fixed water charge does not allow for the full fire service target tariff to be split out, the resulting fire service charge and fixed water charge (which will have a $0 floor post fire services unbundling) will each increase under the applicable price constraints ($50 x connection size usage ratio). It should be noted, fire service charges shall apply to those customers who have a requirement to support a sprinkler system or hose reel in the event of fire Water pricing for strata titled residential properties Southern Water will provide fixed and volumetric charges to individual lot owners within strata arrangements. For new strata developments below 8 lots, we will require the installation of meter manifolds at the boundary of up to 9 meters (one to measure common areas usage), while for strata developments above this level individual sub meters will be required. Each customer will receive a fixed charge and their own measured usage. For strata developments that have not previously had water meters, the default will be to install a single boundary meter during the meter roll out. If all lot owners agree, sub meters can be installed to more accurately allocate costs (see Attachment M - Water Sub-metering Policy). Where the strata arrangement has only a single meter at the boundary, the target tariff for the fixed water charge will be based on the boundary meter connection size (e.g. 32mm = $ in ). This charge will then be allocated between the individual titles on the basis of general or special unit entitlement (as defined under the Strata Titles Act). For example, each lot within a four unit strata development with a 32mm boundary meter connection would each have a fixed charge target tariff for water of $ (if each lot has equal unit entitlement). The volumetric usage will also be split in the Page 141 of 184

142 same manner and itemised on the lot s own bill. If agreed by all lot owners in writing (or their body corporate), the unit entitlement allocation can be varied. For strata arrangements that elect to install sub-meters (and this requires all lots to agree to the install), each lot will have a target tariff of a standard 20mm metered connection ($ in 2012/13) and will receive their own volumetric usage bill measured by their individual sub-meter. The increased fixed cost of having a sub meter reflects the additional meter reading and depreciation costs when compared to sharing the cost of one boundary meter. Southern Water also sees considerable benefit in the greater densification of population as this will lower the average cost of service provision. The charging of strata titles in the way proposed reflects such economy of scale benefits Unbundling of two part pricing/removal of allowances for strata titled residential properties The conversion from one part to two part charging for strata lot owners not previously under two part pricing will also be dependent on whether sub metering is pursued. If each lot chooses to sub meter and has a 20mm meter installed, their current one part fixed charge will be reduced by the assumed 200kL average regional usage under two part $0.90) they will then pay based on their individual metered usage. If sub metering isn t pursued, the fixed charges of each lot owner will be reduced by the lot s share of the assumed usage which will pass through the boundary meter. For example, a 32mm boundary meter will have assumed usage of 512kl (200kl x 2.56), or usage valued at $ If there are 4 lots, each lot will have their one part charge reduced by $ ($460.80/4). Once a decision is made on whether to sub-meter or not, each individual lot will transition towards the target tariff according to the same side constraints outlined in Section Service charge - water Section 68A of the Water and Sewerage Industry Act allows Southern Water to levy a Service Charge for the availability of the service even if there is not yet a physical connection to Southern Water s infrastructure. This power ensures that all customers who could connect to a service contribute to the cost of the network, which is important in minimising prices in sparsely populated regions like Southern Tasmania. In addition, the availability of a reticulated water service has a positive impact on the value of customer s property or land. This charge will only be applied to properties where the service main passes the property and where the customer could receive the minimum service standard (see Attachment I). It is proposed that the service charge for water will be equal to the fixed water tariff for 20mm connections. The setting of this service charge reflects that no consumption occurs on these properties. Page 142 of 184

143 Table 7.17: Service Charge for Water Service Charge Annual % increase Service Charge Water $ $ $ % Water carriers and public filling stations Southern Water does not directly operate water cartage services. However there are around 50 to 60 registered water carters across the southern region, who transport potable water to properties not connected to Southern Water s infrastructure. Water carters are required to be licensed by the local council Environmental Health Officer in the areas in which they operate and they are able to source potable water from various Southern Water sites within the region. Bulk water dispatching is also important for customers undertaking road building. Provided Southern Water s consent has been granted, bulk water, can be drawn using a portable standpipe that can be attached to the Southern Water network. Southern Water also has several sites throughout the southern region which provide public potable water filling facilities (these are available not just to water cartage operators). There are effectively four ways in which bulk water can be provided to these mobile customers. These are through: Private filling stations (dedicated meter banks are provided at various points on the Southern Water network); Public filling stations e-card system (customers can utilise the Avdata system of e-cards for public filling points at various points in the Southern Water network); Public filling stations token based (some newsagents and councils are agents for token based filling points at various points in the Southern Water network); and Portable metered standpipes Private filling stations Some water carters use a dedicated private filling point to access bulk water. As these customers have a dedicated connection available, the customer will be charged a fixed charge equivalent to the meter size of the connection (usually 50mm meters) for the year (or part thereof) that the carter uses the private filling point. They will also be charged the volumetric target tariff for their usage. Page 143 of 184

144 Table 7.18: Private Filling Stations Fixed Charge Per annum As per meter size (see Section 7.5.2) As per meter size (see Section 7.5.2) As per meter size (see Section 7.5.2) Volumetric Charge $0.9000/ kl $ $ Public filling stations e-card system Southern Water inherited a number of public filling stations that use an e-card access system, where customers either prepay for usage, or utilise a credit system with monthly invoicing. We will levy a wholly volumetric charge for filling from this system which will encompass the target variable tariff and a component that represents a contribution to fixed costs (including administration of the e-card system). A security deposit of $30.00 also is required for each e-card issued. The contribution to fixed costs is based on the number and size of public filling sites: 11 x 75mm (tokens and e-cards) = 11 x 75mm fixed charge = $42, in 2012/13, divided by the average per annum water sales using the e-card system and tokens (approximately 95,675 kl based on historical records) to arrive at a volumetric fixed rate. It should be noted that in 2010/11 a $5.50 processing charge is being applied for each credit top-up for pre-paid E-key. Users of E-keys can add credit to their pre-paid E-Key in two ways: Either over the phone by contacting Southern Water s service provider, AVDATA during business hours on and providing credit card details and E-Key number; or by making a direct deposit to AVDATA s bank account via the internet or at any Commonwealth Bank branch. Alternatively some E-Keys are issued to registered account holders as unlimited E-keys, with monthly bills issued for water consumption. Unlimited E-Keys can only be obtained by applying directly to Southern Water. Table 7.19: Public Filling Stations E-card Based Variable water tariff $0.9000/ kl $0.9234/ kl $0.9474/ kl Fixed contribution $0.44/ kl $0.47/ kl $0.49/ kl Total charge $1.34/ kl $1.39/ kl $1.44/ kl Page 144 of 184

145 Public filling stations token based We also inherited a number of public filling stations that use token based payment systems. These systems utilise an agent who sells the tokens, which are in turn used by the customer to access a certain water allocation from the filling point. These agents are used due to their proximity to the filling points, which are largely in the regional areas. Tokens are for 500 litres of water. We will levy a wholly volumetric charge for customers using this system which will encompass the target volumetric tariff and a component that represents a contribution to fixed costs (including the agents administrative costs). The contribution to fixed costs is based on the number and size of public filling sites (tokens and e-cards) 11 x 75mm filling stations = 11 x 75mm fixed charge = $42, in 2012/13, divided by the average per annum water sales using the e-card system and tokens (approximately 95,675 kl) to arrive at a volumetric fixed rate. The recommended retail price for filling by a token based system is listed below. Table 7.20: Public Filling Stations Token Based Variable Water Tariff $0.9000/ kl $0.9234/ kl $0.9474/ kl Fixed contribution $0.44/ kl $0.47/ kl $0.49/ kl Total charge $1.34/ kl $1.39/ kl $1.44/ kl Charge per token $0.67 $0.70 $ Portable metered standpipes Southern Water will permit the use of portable metered standpipes that are authorised to our specifications, which will allow a customer to connect at authorised points throughout the Southern Water network and take water. Southern Water will levy a fixed charge for the standpipe based on the diameter of the meter attached (pro rate for time of usage). The customer will then be required to pay the variable charge for any water usage. Table 7.21: Portable Metered Standpipes Fixed Charge Per annum As per meter size As per meter size As per meter size Volumetric Charge $0.9000/ kl $0.9234/ kl $0.9474/ kl Page 145 of 184

146 Waysiders Waysider customers (those who receive a potable service off the bulk main) will receive a target fixed charge on the basis of their connection size (which may be a limited supply target tariff) and will be charged the applicable variable target rate. Existing waysider customers will transition to their respective target tariffs under the proposed side constraints. Page 146 of 184

147 Sewerage tariffs Southern Water s proposed sewerage tariffs are captured in the diagram below. Figure 7.5: Sewerage Tariff Structure Fixed sewerage charges Charging for sewerage services (i.e. non-trade waste) across Australia is much less consistent than for water services, with some authorities charging a fixed charge regardless of demand, some charging according to metered water connection size and some charging one price for residential and one for non-residential. Southern Water does not believe that one charge for all meets the Bigger Demand, Bigger Charge principle. The imperfect relationship between water in and water out (e.g. due to garden watering or water going out in commercial products like concrete), means that using water connection size for sewerage charging is not appropriate. Page 147 of 184

148 To reflect the greater demand for sewerage services, Southern Water proposes using a calculation of what is termed equivalent tenements. Effectively, this process calculates a property as multiples of one standard equivalent tenement (e.g. multiples of one residential property, where a hotel may be 50 times a standard house). While this is usually used as a sewerage system design criteria, Southern Water believes it will also be the most accurate and equitable pricing approach for domestic sewerage. The Water Services Association of Australia Sewer Code describes this calculation methodology in detail. The fixed charge generally covers the cost of the infrastructure in the ground that conveys the product to/from a property, plus a share of the administrative overheads of running the utility provider. Southern Water does not intend to have a volumetric pricing component for sewage disposed as this cannot be measured effectively for residential and low volume non-residential customers. The proxy approach used in Victoria (which is based on metered water usage) is complex and relies on assumptions about seasonal water usage. We propose just one fixed charge for sewerage which will be inclusive of volume disposed. The Sewerage Code of Australia provides a methodology for the estimation of equivalent tenements (ET) a measure for system design purposes of one standard single occupancy lot. The method requires the collection of various property attributes, including building and land size and number of occupants/visitors for customers such as pubs, general public entertainment facilities and available beds for hospitals. In deriving the ET tariff, Southern Water used a proxy for equivalent tenements as it had not yet assessed every non-residential customer property on an ET basis. However, the proxy used (water connection size) is thought to provide a reasonable indication of the number of ETs that are represented by the 86,208 sewerage connections (95,405 ETs). For this reason, Southern Water believes the tariff that has been constructed is defendable. Each customer s actual number of ETs will be assessed prior to their first bill being sent. ET s will then only be recalculated where the customer s property undergoes a significant change of use. Once an ET has been assessed for each customer, the total number of ETs across the region can be compared to that assumed in setting the 1 ET target tariff. This information will allow the 1ET sewerage charge to be reviewed for the 2 nd price determination and amended as necessary. Given the gap to full cost recovery, even if the number of ETs was 5,000 lower than Southern Water s ET assumption the resulting target tariff at the statutory limit would still be in excess of the ET target tariff proposed for the regulatory period. Sewerage Charge calculated on ET Example 1 ET = Minimum charge (single residential dwelling) Page 148 of 184

149 Table 7.22: Fixed Sewerage Charge Fixed Sewer Service Charge per Connection Annual % increase 1 ET $ $ $ % 2ET s $ $1, $1, % 10 ET s $4, $5, $5, % 25 ET s $12, $12, $13, % Below are examples of how ETs are calculated. The schedule of ET rates for each industry can be found on the Southern Water website. As can be seen in the final example, the ET calculation yields a charge of 0.3 ETs for the retail shop. However, for sewerage charging purposes, no customer can be less than 1ET. Table 7.23: Equivalent Tenement Calculation - Restaurant Example: Restaurant Base Sewerage Charge (1ET) $ $ $ Gross Building Floor Area ETs/M Total Chargeable ET's Annual Sewerage Charge (1. X 4.) $1, $2, $2, A customer ET is calculation based on the property land use, all single dwelling residential houses = 1ET Page 149 of 184

150 Table 7.24: Equivalent Tenement Calculation Small Rural School Example: Small Rural School Base Sewerage Charge (1ET) $ $ $ Number of Students ETs/Student Total Chargeable ET's Annual Sewerage Charge (1.x4.) $1, $1, $1, Table 7.25: Equivalent Tenement Calculation Retail Shop Example: Retail Shop Base Sewerage Charge (1ET) $ $ $ Gross Building Floor Area (M 2 ) ETs/M Total Chargeable ET's (2./3.) minimum ET charge = Annual Sewerage Charge (1.x5.) $ $ $ Sewerage pricing for strata titled residential properties We will provide individual fixed sewerage charges to separate lot owners within strata arrangements. Each lot owner will have a one equivalent tenement sewerage target tariff and each lot will transition towards the target tariff according to the same side constraints outlined in Section Service charge - sewerage Section 68A of the Water and Sewerage Industry Act allows Southern Water to levy a Service Charge for the availability of the service even if there is not yet a physical connection to Southern Water s infrastructure. This power ensures that all customers who could connect to a service contribute to the cost of the network, which is important in minimising prices in sparsely populated regions like Southern Tasmania. In addition, the availability of a reticulated sewerage service has a positive impact on the value of customer s property or land. This charge will only be applied to properties where the service main passes the property and where the customer could connect via a gravity feed to the main (see Attachment I). Page 150 of 184

151 It is proposed that the service charge for sewerage will be 60 per cent of the 1 Equivalent Tenement Sewerage Tariff. The setting of these sewerage service charges reflects that no volume of sewage is discharged. Table 7.26: Service Charge Sewerage Annual % increase Service Charge Sewerage $ $ $ % Motor home dump point (sanitary dump station) A motor home dump point (MDP) or sanitary sump station is a facility intended to receive the discharge of wastewater from any holding tank or similar device installed in a recreational vehicle. There are at least 23 such facilities in Southern Water s serviced area. Southern Water will charge 1 equivalent tenement sewerage charge for properties providing these facilities. Southern Water will collect information on these sites over the next pricing period to determine if the load contributed by these sites is greater than 1ET, particularly given the peak loads that are disposed during the summer tourist period. Should these sites also have a water connection they will receive a fixed 20mm connection charge and their usage metered. Table 7.27: Motor Home Dump Point Charge Annual % increase Motor Home Dump Point $ $ $ % Septic tank effluent disposal (S.T.E.D.) schemes (limited sewerage services) Southern Water operates two limited sewerage services (Colebrook and Dunalley) which takes only the liquid waste from customers. In this instance, customer are required to manage their own septic tank for solids and it is recommended these septic tanks be pumped out once every 5 years (see AS1547:2000). As such, the service received is less than a full sewerage service. Southern Water will levy a 0.9 ET service charge annually for these properties. This discount (approximately $50), reflects the approximate annual cost of a septic tank pump out once every five years. Page 151 of 184

152 Table 7.28: S.T.E.D. Schemes Annual % increase Motor Home Dump Point $ $ $ % 7.6 Customer transition impacts With water and sewerage services historically being provided by 12 different local councils in the south of the state, the way in which the councils charged for these services was understandably different. Following the creation of Southern Water and the separation of water and sewerage billing from council rates, customers can now see the differences in pricing approaches. Given that the majority of customers receive exactly the same service, it is our intention to move customers to common target tariffs over a gradual transition period in an attempt to minimise price shocks. For this reason we propose to apply side constraints to all customers not at the target tariff in accordance with Section 7.4. Charges for customers who reach the annual target tariff will increase each year to the next annual target tariff, an increase of 6 per cent per annum for the fixed charges, while the variable target rate will start at $0.90 for the regulatory period, increasing annually by CPI (2.6 per cent). This will result in an orderly progression towards the common target tariffs. progression is explored in more detail in this section. The impact of this Comparing Southern Water s pricing Much has been made in the media of price increases for water and sewerage. Many people believe that they are paying too much. However, a comparison with bills in mainland metropolitan areas shows that Southern Water s target tariffs are actually at the lower end of the scale. The chart below compares a Southern Water customer at the target tariffs and using 200kl of water with a typical account in other metropolitan areas (also at 200kl). It should be noted that recent drought conditions have led to water restrictions and a lower than normal typical usage in mainland cities. By assuming a 200kL usage, as the graph displays, we have a standard way of comparing the costs in each area. Page 152 of 184

153 $1,171 1 $1,119 $1,105 $1,067 Figure 7.6: Average Water and Sewerage Bill in Metropolitan Areas (200kl usage) $1, $1, $1, $ , 1 3 $ $ $ $ $ Adelaide Brisbane Perth Sydney Melbourne Southern Wat e r Customer impact analysis The three charts below display the quantum of customers who move onto the targe tariff (water and sewerage) during the three year regulatory period. The majority of water customers will be at the variable target tariff by year 2 of the period, while around 38 per cent customers will be at their respective fixed water tariffs by year 3, with about 41 per cent of customers should be on their respective sewerage target tariffs by year 3 of the regulatory period. Figure 7.7: Number of Customers Relative to Fixed Water Target 40,000 30,000 20,000 N o t reaching target tariff 10,000 Reaching target tariff 0 On target tariff FY12/13 FY13/14 FY14/15 Above target tariff Page 153 of 184

154 Figure 7.8: Number of Customer Relative to Variable Target 100,000 50,000 Not reaching target tariff Reaching target tariff 0 On target tariff FY12/13 FY13/14 FY14/15 Above target tariff Figure 7.9: Number of Customer Relative to Sewerage Target 40,000 30,000 20,000 Not reaching target tariff 10,000 Re c hing target tariff 0 On target tariff FY12/13 1 FY13/14 FY14/15 Above target tariff Page 154 of 184

155 The following chart shows the typical transitional tariff path for customers within each municipal area. Figure 7.10: Transitional Tariff Path Typical bill for residential customer consuming 200kL p.a. on target tariffs Typical Residential Customer Bill Progression $1, $1, $1, $ $ $ $ $ $ / / / /15 Brighton Central Highlands Clarence Derwent Valley Glamorgan Spring Bay Glenorchy Hobart Huon Valley Kingborough Sorell Southern Midlands Target Tariff As an example of the transitional path, for the average residential customer in Sorell it will take only one year under the proposed side constraints to reach the target tariff, while for the average Hobart customer it may take 5+ years. The overall majority of customers will transition upwards under the proposed side constraints, but a percentage of customers will be paying more than the annual target tariff. The proposal is that these customers will have their bills frozen for a period before they are then reduced to the target tariff from year 3 of the regulatory period, at a rate of five per cent. Such an approach will enable Southern Water to build the necessary revenues to deliver on the intent of the reform (e.g. improving compliance) before the inherent cross subsidies in pricing are actively unwound. This approach will assist in balancing financial objectives, compliance improvement and owners expectations. Those customers impacted by the freeze will still receive a real reduction to their bills as tariffs converge to a consistent point over time. Under the proposed side constraints, our analysis of residential customers shows that the percentage of customers below the target tariff reduces from around 75 per cent to 33 per cent (64,000 to 28,000) over the regulatory period. Page 155 of 184

156 The following chart, Transition of Distinct Fixed Tariffs, displays the number of distinct charges that exist across the customer base for each service. Over time, this will tend to fall as customers move onto the target tariffs path under the proposed side constraints. The discrepancy in the first year for fixed water tariffs is due to customers who were on one part pricing and who may have faced the same charge in 2011/12 being converted to two part pricing based on different meter sizes. Figure 7.11: Transition of Distinct Fixed Tariffs Year 0 Year 1 Year 2 Year 3 Fixed Water Fixed Sewer The table below, Total Bill Range by Percentile, summarises the charges by percentile for customers across the three year regulatory period. It shows the narrowing in the band of charges as the side constraints commence the convergence of pricing towards the target tariff path. In the final year of the regulatory period there are a number of customers to whom the five per cent decrease will apply, which is reflected in the total bill at the 75 th and 95 th percentiles. Table 7.29: Total Bill Range by Percentile Average Min 5% 25% 50% 75% 95% 2011/12 Base Year 2012/13 - Year /14 Year /15 Year 3 $1,077 $50 $362 $690 $811 $990 $1,386 $1,143 $97 $408 $784 $889 $1,039 $1,437 $1,210 $147 $455 $872 $973 $1,071 $1,469 $1,255 $197 $496 $937 $1,045 $1,063 $1,453 Page 156 of 184

157 By way of further explanation, below is a table showing Average Total Bills by Council. As can be seen, the average charge in Kingborough will decrease in the third year as most customers are above the target tariff for both services. Table 7.30: Average By Council Year 0 Year 1 Year 2 Central Derwent Glamorgan Huon Southern Brighton Highlands Valley Spring Bay Glenorchy Hobart Valley Kingborough Midlands $802 $613 Clarenc $894 $949 $866 $1,515 $1,060 $858 Sorell $1,094 $1,003 $790 e $905 $741 $979 $1,000 $918 $1,533 $1,170 $857 $1,136 $1,049 $848 $972 $810 $1,061 $1,058 $963 $1,588 $1,267 $900 $1,164 $1,085 $892 $1,034 $879 $1,124 $1,106 $984 $1,609 $1,340 $956 $1,160 $1,094 $917 Year 3 Further to the customer segmentation by council area, the following table, Average Bill by Connection Size, illustrates the average total bill per customer by water meter connection type. This shows that by the end of the period, most customers with 20mm connections will be paying close to the target tariff, while those customers with 25mm, 40mm, 50mm and 80mm connections will begin to pay above their target tariff. It is Southern Water s intention that these cross subsidies will be unwound more aggressively in the second regulatory period. Table 7.31: Average By Connection Size Year 0 Year 1 Year 2 Year 3 20mm 25mm 32mm 40mm 50mm 80mm 100mm 150mm $943 $3,776 $1,740 $7,496 $20,217 $20,915 $16,227 $25,018 $1,004 $4,064 $2,045 $8,228 $19,217 $21,864 $18,997 $31,217 $1,065 $4,182 $2,277 $8,545 $19,885 $22,580 $20,570 $34,361 $1,107 $4,146 $2,467 $8,573 $20,144 $22,605 $21,646 $37,284 In the first year of the regulatory period , assuming water consumption of about 200kL of water p.a. for a standard customer, 65 per cent of customers will receive an annual increase of between $50 and $100, while a further 32 per cent will see less than a $50 increase to their bill. By year 3 of the regulatory period only about 45 per cent will see an annual increase of between $50 and $100 p.a., with a significant proportion of customers being at or close to their respective target tariff. The table below displays the projected average yearly increase by council area. The data shows that in the third year of the period, the average customer in Kingborough starts to see a decrease in their bill as the reducing side constraints kick in. Page 157 of 184

158 Table 7.32: Average By Council Year 0 Year 1 Year 2 Year 3 Brighton Central Highlands $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 e Clarenc Derwent Valley Glamorgan Spring Bay Glenorchy Hobart Huon Valley Kingborough Sorell Southern Midlands $104 $128 $85 $50 $52 $18 $109 -$1 $42 $46 $58 $67 $69 $82 $59 $45 $55 $97 $43 $28 $36 $44 $61 $69 $63 $47 $21 $21 $73 $56 -$4 $10 $25 As can be seen there is also a small reduction for customers in the Huon Valley in year one. The process of unwinding the free water allowances to a genuine two part pricing will result in the average customer experiencing a reduction, albeit small, to their total bill. This is due to the available data on water usage for Huon Valley which shows many customers using less than 200kL of usage, such that when their fixed bill is reduced by the 200kl amount proposed in Section it results in a small reduction. The increase for the majority of customers equates to about $2 a week, significantly less than a cost of a cup of coffee. That said, Southern Water acknowledges the current pressures on family income and regularly reminds customers of the availability of the State Government funded concession for eligible customers, as well as our flexible payment options and financial assistance available through the Residential Hardship Policy. It provides for an independent assessment by an external agency (the Salvation Army) using agreed criteria, processes and policies to determine eligibility for assistance. The table below, Customer Bill Increase Impact Frequency Distribution, illustrates the projected impact the proposed side constraints will have on customer billing and the frequency distribution. As the data indicates, the spread of pricing in narrows by the final year of the period. The blue solid line ( ) shows customers receiving both services will generally be charged between $1,050 and $1,250, with a small quantum at $950 (a cohort of Hobart customers), while the bulge in the tail between $500 and $550 represents the convergence of those customers receiving just one service. This frequency chart is reproduced for each municipality in Attachment G. Page 158 of 184

159 NUMBER OF CUSTOMERS Figure 7.12: Customer Bill Increase Impact Frequency Distribution 35,000 30,000 25,000 20,000 Under the proposed side constraints residential customers bills gradually transition towards a single target tariff 15,000 Customers receiving one service 10,000 5,000 - CUSTOMER BILL FY12/13 FY13/14 FY14/ Transition examples Following are examples of how a range of customers will see their charges 10 transition: Legend At Target Tariff - moving with annual Target Tariff Above Target Tariff - frozen until 2014/15, then reducing by 5% Below Target Tariff, increasing with side constraints ($50 or 10%) 10 Seasonality factors have been excluded from the examples Page 159 of 184

160 Table 7.33: Residential customer at target tariff (20mm water connection and Sewerage 1ET) Residential kl p.a. Charge Type* Base Yr 2011/12 Yr /13 Yr /14 Yr /15 W $ $ $ $ S $ $ $ $ Annual Water & Sewerage Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $ $ $ $1, W $64.23 $68.08 $72.16 $76.49 S $ $ $ $ Quarterly Water & Sewer Bill V ($/kl) $ $ $ $ V $ $45.00 $46.17 $47.37 Total $ $ $ $ W $0.70 $0.75 $0.79 $0.84 S $1.26 $1.34 $1.42 $1.50 Daily Water & Sewer Bill V ($/kl) $ $ $ $ V $0.48 $0.49 $0.51 $0.52 Total $2.45 $2.58 $2.72 $2.86 W = Fixed Water, S = Sewerage, V = Variable Page 160 of 184

161 Table 7.34: Residential customer below target tariff (20mm water connection and sewerage 1ET) Residential kl p.a. Charge Type* Base Yr 2011/12 Yr /13 Yr /14 Yr /15 W $ $ $ $ S $ $ $ $ Annual Water & Sewerage Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $ $ $ $ W $61.18 $68.08 $72.16 $76.49 S $80.00 $92.50 $ $ Quarterly Water & Sewer Bill V ($/kl) $ $ $ $ V $ $45.00 $44.77 $47.37 Total $ $ $ $ W $0.67 $0.75 $0.79 $0.84 S $0.88 $1.01 $1.15 $1.29 Daily Water & Sewer Bill V ($/kl) $ $ $ $ V $0.41 $0.49 $0.49 $0.52 Total $1.95 $2.25 $2.43 $2.65 Table 7.35: Residential customer above target tariff (20mm water connection and sewerage 1ET) Residential kl p.a. Annual Water & Sewerage Bill Quarterly Water & Sewer Bill Daily Water & Sewer Bill Charge Base Yr Yr01 Yr02 Yr03 Type* 2011/ / / /15 W $ $ $ $ S $ $ $ $ V ($/kl) $ $ $ $ V $ $ $ $ Total $1, $1, $1, $1, W $81.25 $81.25 $81.25 $77.19 S $ $ $ $ V ($/kl) $ $ $ $ V $ $45.00 $47.50 $47.37 Total $ $ $ $ W $0.89 $0.89 $0.89 $0.85 S $1.60 $1.60 $1.60 $1.52 V ($/kl) $ $ $ $ V $0.52 $0.49 $0.52 $0.52 Total $3.01 $2.99 $3.01 $2.89 Customers with a property connection greater than a 20mm water connection and/ or calculated equivalent tenement greater than 1 equivalent tenement for sewerage respectively will see the $50 per service side constraint increase proportionally. Page 161 of 184

162 Table 7.36: Non Residential customer below target tariff Residential kl p.a. Charge Type* Base Yr 2011/12 Yr /13 Yr /14 Yr /15 W $ $1, $1, $1, S $1, $1, $2, $2, Annual Water & Sewerage Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $3, $3, $3, $4, W $ $ $ $ S $ $ $ $ Quarterly Water & Sewer Bill V ($/kl) $ $ $ $ V $ $ $ $ Total $ $ $ $1, W $2.33 $2.88 $3.16 $3.35 S $4.11 $4.79 $5.48 $6.16 Daily Water & Sewer Bill V ($/kl) $ $ $ $ V $1.92 $1.97 $2.03 $2.08 Total $8.36 $9.64 $10.67 $11.59 For customers converting to two part pricing who have a 20mm water connection, the fixed water charge in 2012/13 will be corrected by 200kL of usage at $0.90/kL ($180) and then they will be charged for each kilolitre of usage. The example below shows this conversion and their transition towards the target tariff. Following the water fixed component conversion; the customers fixed charge is still above the target tariff and will be frozen. Page 162 of 184

163 Table 7.37: Customer converting to two part pricing (Customer conversion from one part to two part pricing with 20mm water connection and sewerage 1ET) Residential kl p.a. Annual Water & Sewerage Bill Quarterly Water & Sewer Bill Daily Water & Sewer Bill Charge Base Yr Yr01 Yr02 Yr03 Type* 2011/ / / /15 W $ $ $ $ S $ $ $ $ V ($/kl) $ - $ $ $ V $ - $ $ $ Total $ $ $1, $1, W $ $75.00 $75.00 $76.49 S $ $ $ $ V ($/kl) $ - $ $ $ V $ - $45.00 $46.24 $47.37 Total $ $ $ $ W $1.32 $0.82 $0.82 $0.84 S $1.26 $1.34 $1.42 $1.50 V ($/kl) $ - $ $ $ V $ - $0.49 $0.51 $0.52 Total $2.58 $2.65 $2.75 $ Circumstances Requiring Immediate Application of Target Tariffs and Circumstances in which Transition by Side Constraints Will Apply Southern Water will have differing billing arrangements for customers with changing circumstances, and these billing arrangements will depend on the nature of the change. Customers who can be increased directly to the target tariffs are defined as: an existing customer that changes their property s predominant use (impacting on their sewerage charge); an existing customer requires altered connection arrangements; previously unconnected properties connect to water and/or sewerage infrastructure (includes new sub-divisions); and where a tariff has not previously been charged for a property already connected to water and/or sewerage infrastructure. Those customers defined by the third dot point will be connected in accordance with the Customer Connection Policy (Attachment J) All customers transitioning downwards to target tariffs will do so in accordance with the transition arrangements (Section 7.4), notwithstanding any changes to a customer s connection arrangement, amalgamation of titles, conversion of strata titles to a single title, or other arrangement. The exception is where there has been a change of use resulting in: Page 163 of 184

164 a genuine and permanent reduction in water demand resulting in a change in the number and/or size of water connections; and/or a genuine and permanent reduction in the number and/or size and/or load of sewerage connections. In these circumstances the customer s charges will be moved immediately to the prevailing target tariffs 7.7 Trade waste pricing Southern Water provides a service to convey and treat industrial and commercial liquid trade waste. Trade waste customers are categorised using a risk ranking model based on the Water Services Association of Australia, National Wastewater Source Management Guideline July This places customers in a category that reflects the risk Southern Water takes on in accepting the liquid trade waste. An increasing level of risk corresponds to a higher customer category number Category 1 and 2 Trade Waste Customers Category 1 and 2 customers will be tariff customers. That is, they will face the charges listed in the schedule below, will be covered by the standard customer contract and receive the protections of the customer code. There are three discrete groups that fall into these lower risk categories: Customers who have applied to Southern Water post 1 July 2009 to receive trade waste services and who have been approved; Customers inherited from municipal councils and who were approved through special plumbing permits or Trade Waste Agreement contracts pre 1 July 2009; Premises discharging liquid trade waste to Southern Water s sewerage system with no consent, special plumbing permit or trade waste agreement contract in place (unmanaged trade waste customers), which represent a large majority of trade waste customers. Included in the standard Customer Contract (Attachment D) is a Trade Waste Consent. The Consent sets out the standard terms and conditions of connection for newly applying Category 1 and 2. Similarly, for those previously unmanaged trade waste customers, or for those customers where the term of their inherited arrangements or approved consent ends, they will be deemed to be a trade waste customer under the standard Customer Contract and the terms and conditions of connection will apply. At the time the Trade Waste Consent is issued to unmanaged trade waste customers, Southern Water will supply an accompanying explanation letter covering: Information about trade waste explaining what it is and why it is managed; Easy to understand descriptions of trade waste pre-treatment including typical examples for relevant industries; An explanation of exceedance charges and how they apply where the conditions are not met; Page 164 of 184

165 A statement that a moratorium on exceedance charges will be in place until 1 July 2015 unless failure to meet the conditions is causing an identified problem; and A guide to what the customer s needs to do to ensure they do not get charged exceedance. Charges for trade waste for category 1 and 2 customers (lower risk) will be fixed price charges for quantity and strength disposed. The following target trade waste tariffs are proposed to apply for the financial year and will be increased by 2.6 per cent in the following two years of the regulatory period. Table 7.38: Liquid Trade Waste Fees and Pricing Liquid Trade Waste Fees And Pricing ($, Nominal) Description Fee Category 1 Category 2 GENERAL Application Fee $/unit $117 $234 Management Fee $/annum $206 $299 Sampling $/unit At cost At cost Fixed Usage Charge compliant $/annum $387 $1,319 Fixed Usage Charge non-compliant $/annum $3,874 $13,193 NON-COMPLIANCE Exceedance Charge** noncompliance with acceptance criteria or deemed status criteria Non-compliance recovery of additional costs fixed 10 times Fixed Usage Charge $ At cost e.g. sampling, analysis, investigation, damaged infrastructure reinstatement or replacement and/or biosolids disposal Pricing Transition for Category 1 and 2 Trade Waste Customers As indicated above, only a small subset of the trade waste customer base is actively managed and charged. As such, there is a potential revenue upside in focusing on those unmanaged customers, though they are not technically new customers. However, the active management of these customers will need to be balanced against the current level of charging of these customers for their regular sewerage service, particularly those with high AAV prices who could already be considered to be paying an implicit trade waste component. Page 165 of 184

166 Consequently, the following pricing transition approaches are proposed for new, existing and unmanaged category 1 and 2 customers. Newly applying trade waste customers will move directly to their applicable trade waste tariffs. Existing trade waste customers will have their existing trade waste charge added to their sewerage charge and the applicable trade waste target tariff will be subtracted, resulting in unbundled sewerage and trade waste charges, with trade waste being at target; and for previously unmanaged trade waste customers, trade waste charges will be introduced by reducing the sewerage service charge by the applicable trade waste target tariff. In the event the current sewerage charges do not allow for the full trade waste target tariff to be split out, the resulting sewerage and trade waste charges will each increase under the applicable price constraints ($50 x number of property ETs or 10% whichever is greater). Table 7.39 Transition example for customer with a 4ET property for sewerage and category 2 for trade waste Unbundled Sewerage Target $1, $2, $2, Tariff Increase (side $ $ $ constraint) Sewerage charge $2, $2, $ $ $1, $ $1, = $ TW Management Fee - $ $ $ $ TW Cat 2 Usage - $1, $1, $1, $1, Charge Combined Total $2, $2, $2, $2, $2, Combined Target Total - $3, $3, $3, In the above example the sewerage service charge ($2,183.00) is initially reduced by the corresponding trade waste category 2 tariff; TW management fee ($299.00) and TW fixed usage charge ($1,319.00). As the sewerage charge is now below the calculated 4ET sewerage target tariff, it is to be increased by the side constraint (4 x $50= $200.00). The unbundled sewerage charge would be ($2, $ $1, = $565.00, with a $200 increase applied towards the target tariff in The total TW charges for would be $1, moving annually with the TW target tariff. The $200 increase continues to be applied to transition the customer to the sewerage service charge over the regulatory period. Page 166 of 184

167 In the event the current sewerage charges do not allow for the full trade waste corresponding reduction, the resulting TW charges will increase under the side constraints ($50 x number of property ETs). As the water and sewerage charges are treated as outgoings in commercial lease agreements, the above principle will apply to the total bill regardless of who occupies the commercial property i.e. by the tenant or owner, which will minimise any price shock to the occupier and or property owner Category 3 and 4 Trade Waste Customers Category 3 and 4 trade waste customers are those higher volume and strength customer, larger industrial customers, whose discharge poses a significant risk to Southern Water s infrastructure if not managed through individual analysis of the contaminants. As such, Southern Water will manage these customers through individual negotiations and formalise the service arrangements in commercial contracts (Section 61 contracts under the Water and Sewerage Industry Act 2008). In doing so, Southern Water will seek to transition to new pricing arrangements having regard to the specific circumstances of the customer and over a time period reasonable to design, install and commission pre-treatment facilities (if the customer is required to do so). More information on Southern Water s intended management of Category 3 and 4 trade waste customers can be found at Commitments to customers in respect of trade waste services Southern Water undertakes to publish on our website: why and how the application fee is charged; how the application process integrates with the Trade Waste consent form attached to the Standard Customer Contract; the basis for calculating and imposing exceedance charges, including the limits over which exceedance charges will be applied; the required pre-treatment for differing waste streams and strengths; information on the option of category 1 and 2 trade waste customers to enter into Section 61 contracts with Southern Water; the interaction between sewerage and trade waste target tariffs and the transitional arrangements; and information for category 3 and 4 customers regarding the intent to negotiate a Section 61 contract with them (i.e. commercial contracts). Page 167 of 184

168 7.8 Developer charges Southern Water will install excess capacity in its network when the opportunity arises in the expectation that this capacity will be taken up at some point by future growth. This is the most efficient way to plan and roll out the water and sewerage network, but requires developers to contribute to the cost of these previously installed assets when consumption of capacity occurs through development. Alternatively, a development may require expansion of the network to support it and in this case a contribution from the developer is also required. Southern Water s Developer Charges Pricing Policy (Attachment H) documents the three parts that may make up a developer charge: Headworks a capital contribution towards consumption of capacity in water or sewerage network, or its expansion, which results from a development; Works internal where a subdivision is constructed a developer will be required to install necessary water and sewerage reticulation infrastructure within the subdivision and gift it to Southern Water; and Works external where a development requires stand alone assets (e.g. a pump station) to be installed to support the development, at the cost of the developer. The headworks charge in a development is based on the number of equivalent tenements of capacity the development consumes as a percentage of the total number of equivalent tenements of capacity in the headworks infrastructure (treatment plants, reservoirs, reticulation mains, pump stations). Developer charges have been required by most councils in the region for water and sewerage services for some time. The councils who previously provided water and sewerage services maintained these charges based on various methodologies of calculation and distribution. Southern Water has a range of developer charges in place (specifically the headworks component), and intends to replace all inherited headworks charges with charges by water zone/sewerage catchment, which reflects the Independent Pricing and Regulatory Tribunal (IPART NSW) approved methodology. This is a sound and well-established methodology for calculating cost-reflective developer charges for water supply and sewerage infrastructure. The calculation is based on the replacement cost of assets servicing the development and is usually presented as a cost per equivalent tenement (ET). In brief, the IPART methodology: Starts with the value of existing headworks assets in the zone/catchment at replacement cost; Adds the value of the planned works within the zone/catchment in the short to medium term (5 years); Calculates the total available capacity in the network, reflected as a number of equivalent tenements; Page 168 of 184

169 Divides the capital value, including additions, by the number of equivalent tenements to get a capital charge per equivalent tenement; Assesses the time until full take up of capacity and adjusts the capital charge to reflect the present value of the capital charge; and Discounts this figure by 50% in recognition of retail return for the corporation of adding new customers. The schedule of current headworks charges at the time of writing is set out below. Southern Water will replace the inherited charges with new charges as they are calculated. The schedule will be updated to reflect this. Southern Water also commits to develop a calculator by the end of the first regulatory period (30 June 2012), that allows developers to: estimate the number of equivalent tenements a potential development may equate to; ascertain the headworks charge per ET for each headworks zone; and calculate an indicative total headworks charge for the development. Page 169 of 184

170 Table 7.40: Southern Water Headworks Charges - Water WATER ($, nominal) Council Zone Sub-zone Brighton Clarence Glenorchy Hobart Kingborough Central Highlands All Water Zones Actbridge Water Zones Calculated By 2012/ / /15 Brighton Council $1, Cambridge Acton Seven Mile Beach Council $2, Westcamb Council $3, Cilwen Council $4, Tara Drive Council $5, Canopus Council $1, HiPasmorah Council $1, Lauderdale Water Zones Lindisfarne Water Zone Lauderdale, Acton Council $1, Richardsons Hill Council $3, Hilindstaff Council $2, Otago Council $2, Pasmere Council $1, Richmond Council $1, Risdon Risdon Vale Council $ East Risdon Council $5, Sugarloaf Council $3, Lindstony Council $ Warrah Council $ Wakehurst Council $2, Other Glenorchy Water Zones All Water Zones All Water Zones All Water Zones IPART (SW) $2, Hobart IPART (SW) $2, Council $2, IPART (SW) $2, $1, $1, $2, $2, $4, $4, $5, $5, $5, $5, $2, $2, $1, $1, $1, $1, $3, $3, $2, $2, $2, $2, $1, $1, $1, $1, $ $ $5, $5, $3, $4, $ $ $ $ $2, $2, $2, $2, $2, $2, $2, $2, $2, $2, Page 170 of 184

171 Council Zone Sub-zone Calculated By 2012/ / /15 Derwent Valley Glamorgan Spring Bay Huon Valley Sorell Southern Midlands Tasman All Water Zones All Water Zones All Water Zones Sorell, Midway Point All Water Zones All Water Zones IPART (SW) $2, Council $1, Council $1, Council $2, Council $2, IPART (SW) $2, $2, $2, $1, $1, $1, $1, $2, $2, $2, $2, $2, $2, Table 7.41: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Calculated Council Catchment Sub-catchment By Brighton Clarence Green Point Brighton Rosny Beauty Bay Bellerive Clarence College Corinth St Geilston Creek Howrah Howrah Beach Kangaroo Bay Koomela Bay Lindisfarne Rosny Montagu Bay Venice St Warrton Council Council Council Council Council Council Council Council Council Council Council Council Council Council Council Council Council 2012/ / /15 $1, $1, $1, $1, $1, $1, $3, $3, $3, $2, $2, $2, $2, $2, $2, $2, $2, $2, $3, $3, $3, $5, $5, $5, $2, $2, $2, $3, $3, $3, $2, $2, $2, $3, $3, $3, $2, $2, $2, $2, $2, $2, $2, $2, $2, $4, $4, $4, $2, $2, $2, Page 171 of 184

172 Table 7.42: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Council Catchment Sub-catchment Calculated By 2012/ / /15 Duntroon Council $3, $3, $3, East Droughty Council $3, $3, $3, East Trywork Council $4, $4, $4, Gibsons Point Lauderdale (Gravity Only) Council IPART (SW) $3, $3, $3, $2, $2, $3, Tavern Council $3, $3, $3, Lowrok Council $3, $3, $3, Rokeby Oakdowns Oakshores Council Council $2, $2, $2, $3, $3, $3, Punches Reef Council $4, $4, $4, Rivulet Council $2, $2, $2, Clarence Skilrok Tranmere Council Council $2, $2, $2, $3, $3, $3, Tranmere Point Council $4, $4, $4, Trywork Point Council $4, $4, $5, West Droughty Council $3, $4, $4, Risdon Vale Council $3, $3, $4, Risdon East Risdon Council $4, $4, $5, Sugarloaf Council $4, $4, $4, Cambridge Kennedy Drive Prudentia Council Council $6, $6, $6, $6, $6, $6, Bilney Council $ $ $ Richmond Cosgrove Council $ $ $ Torrens Council $ $ $ Page 172 of 184

173 Table 7.43: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Calculated Council Catchment Sub-catchment By 2012/ / /15 Cameron Bay Council $4, $4, $4, Glenorchy Collinsvale IPART (SW) $2, $2, $2, IPART Glenorchy Prince of Wales Bay (GHD) $2, $2, $3, IPART Hobart Macquarie Point (GHD) $1, $1, $1, IPART Hobart New Town Selfs Point (GHD) $2, $2, $2, IPART Sandy Bay Blinking Billy (GHD) $2, $2, $2, Taroona Council $3, $3, $4, Kingborough Central Highlands Derwent Valley Blackmans Bay Council $3, $3, $4, Margate Council $3, $3, $4, Electrona Council $3, $3, $4, Woodbridge Council $3, $3, $4, Howden Council $3, $3, $4, IPART Hamilton (SW) $2, $2, $2, IPART Ouse (SW) $2, $2, $2, IPART Bronte (SW) $2, $2, $2, IPART Arthurs Lake (SW) $2, $2, $2, IPART Wayatinah (SW) $2, $2, $2, IPART Flintstone (SW) $2, $2, $2, IPART Bothwell (SW) $2, $2, $2, IPART New Norfolk (SW) $2, $2, $2, IPART Maydena (SW) $2, $2, $2, IPART Gretna (SW) $2, $2, $2, Page 173 of 184

174 Table 7.44: Southern Water Headworks Charges Sewerage SEWERAGE ($, nominal) Calculated 2012/ / /15 Council Catchment Sub-catchment By Orford Council $1, $1, $1, Glamorgan Spring Bay Huon Valley Sorell Southern Midlands Tasman Triabunna Council $1, $1, $1, Swansea Council $1, $1, $1, Coles Bay Council $1, $1, $1, Bicheno Council $1, $1, $1, Ranelaugh Council $1, $1, $1, Cygnet Council $1, $1, $1, Geeveston Council $1, $1, $1, Dover Council $1, $1, $1, Southport Council $1, $1, $1, Penna Council $3, $3, $3, Midway Point Council $3, $3, $3, Sorell Council $3, $3, $3, Dunalley Council $1, $1, $1, Kempton Council $1, $1, $1, Campania Council $1, $1, $1, Bagdad Council $1, $1, $1, IPART Port Arthur (SW) $2, $2, $2, IPART Nubeena (SW) $2, $2, $2, Service introduction charges Service Introduction charges are provided for under the Water and Sewerage Industry (Pricing and Related Matters) Regulations 2011 and are required to recover the capital costs associated with the roll out of water and sewerage services to existing properties. Service introduction charges are similar in nature and calculation to developer charges. While developer charges relate to greenfield development and are levied on the developer, service introduction charge are levied directly on the property owner to whom the service is being introduced. Southern Water will calculate service introduction charges under the same methodology as developer charges (IPART approved methodology).the areas to be considered for service introduction will be governed by Southern Water s Extension, Expansion and Introduction Policy, which includes the circumstances in which Service Introduction Charges will be levied (see Attachment C). Page 174 of 184

175 While a developer can pass the developer charge on when selling developed blocks and, traditionally, the purchaser meets that cost through a mortgage on the property, existing property owners may not have the facility to extend a mortgage to cover the service introduction charge. Consequently, Southern Water intends to provide long-term repayment options where service introduction charges are levied. A 10-year repayment horizon is proposed, with monthly instalments. Currently, Southern Water has only one service being introduced, that is the sewerage service to Lauderdale which was inherited from the Clarence City Council as a work in progress. Due to the elevation and geology of this area, a traditional gravity sewer system is not being pursued. Instead a pressure sewer option has been chosen, and this requires a two part service introduction charge, one part which covers the pressure sewer main (calculated as per the IPART methodology) and a second that covers the required on-property macerating pump unit (effectively a connection charge). Southern Water will market test the second part of the charge and undertakes to consult on the charge with the community once the combined cost is developed. Table 7.45: Service Introduction Charge Service Introduction Charge Contribution to headworks $2,985 $3,067 $3,151 Service Introduction Charge on site infrastructure TBA TBA TBA Southern Water is not intending to introduce any other services for the regulatory period, but will commence planning for a possible service extension to the Southern Beaches region in accordance with Southern Water s Service Extension, Expansion and Introduction Policy. Page 175 of 184

176 7.10 Miscellaneous fees and charges The following range of miscellaneous fees and charges are proposed for one off services. Figure 7.13: Miscellaneous fees and charges Tariff Structure Page 175 of 184

177 Table 7.46: Miscellaneous Fees and Charges Type of charge Details Property Service Connection Water (standard 20mm Ø connection) Property Service Connection Sewer (standard 100mm Ø connection) Disconnection/Capping Fee (residential water/sewerage) New water service connections to residential or a relocation of a water connection New sewerage service connections to residential or relocation of a sewerage connection Disconnecting the service to the main and capping the service connection $ $ $ $ $ $ $ $ $ Water Metering Fees Special Read Meter Assessment (Testing On Site) Meter Testing (Off Site) Meter Relocation (less than 3meters, above POA) The one off read of the meter outside the normal reading cycle, e.g. when there is change in property ownership Undertaking an initial flow test of a water meter with a measured quantity of water Undertaking an accredited, calibrated test of a water meter, payable only if the meter is found to be working correctly The relocating of an existing water at the property $80.00 $82.08 $84.21 $80.00 $82.08 $84.21 POA POA POA $ $ $ Sundry Fees Page 176 of 184

178 Type of charge Details Service Locator Fee business hrs Fee charged for staff to locate and advise external parties (utility companies and contractors, etc) where water and sewerage infrastructure is located. $ $ $ Right to Information Requests This represents access to information held by State Government departments, ministers, councils or authorities within the guidelines of the Right to Information Act 2009 (set under legislation at 25 fee units) 25 fee units 25 fee units 25 fee units Inspection Costs Pressure and Flow Testing This fee represents where another utility or development may be working around our pipes and we need to be on site to ensure that what they re doing will not affect our services This occurs where a developer may need to know the pressure/flow that could be provided to a proposed development before proceeding $/hr $/hr $/hr POA POA POA Section 56ZQ Request This represents the cost of assessing, processing and issuing a Certificate of the Corporation Rights or Powers over Land (set under legislation at 25 Fee Units) 25 fee units 25 fee units 25 fee units Page 177 of 184

179 Type of charge Details Property Information Plan Restriction Charge Backflow Prevention Management This represents the corporation s costs of producing a Property Information Plan detailing the services surrounding a property The fee represents the cost in the removal of a device used to restrict the supply of water Administration of boundary backflow devices $35.00 $35.91 $36.84 $ $ $ POA POA POA Table 7.47: Development Assessment Services - Fee Schedule Development Assessment Services - Fee Schedule Rezoning Minor $ $ $ Medium $ $ $ Major $2, $2, $2, Significant $2, $2, $3, >10Ha incurs additional fee/ha $ $ $ Development Application - Non Subdivision Minor $ $ $ Medium $ $ $ Major $ $ $ Significant $ $ $ Development Application Subdivision Minor $ $ $ Medium $ $ $ Major $ $ $1, Significant $1, $1, $1, >50 Lots incurs additional fee/lot $30.25 $31.04 $31.84 Page 178 of 184

180 Building & Plumbing Applications Minor $ $ $ Medium $ $ $ Major $ $ $ Significant $ $ $ CCW Exemption $36.00 $36.94 $37.90 Engineering Design Approval Minor $ $ $ Medium $ $ $ Major $1, $1, $1, Significant $4, $4, $4, >50 Lots incurs additional fee/lot $30.25 $31.04 $31.84 Certificate of Compliance - Bas & Pas All $ $ $ Asset Creation Inspection/Data Capture Minor $1, $1, $1, Medium $2, $2, $2, Major $3, $3, $3, Significant $6, $6, $6, Incomplete Works Bond Assessment All $ $ $ Final Plan Sealing All $ $ $ s.56w Consent All $39.60 $40.63 $41.69 Page 179 of 184

181 8 Calculation of transition revenue paths The transitional regulated revenue figure has been derived predominantly from Southern Water s customer impact model. However, this model has been built with the best available data and it is known that there are some revenues billed from legacy systems that have not yet been brought into the new customer impact model. Consequently, a supplementary revenue line has been included which we believe is representative of the quantum of those revenues. These include items such as additional fixed and volumetric revenue which has not yet been price plan matched into the new billing system, unprocessed new connections, and connections that have gone through significant changes of use and which attract increased charges. With regards to the other line items, the Price cap compensation phase out represents the last year of Southern Water s allocation of the State Government 5 per cent price cap top up. Other revenue includes revenues from miscellaneous fees and charges, which include revenues associated with the physical installation of a connection, development services assessment fees, special meter reads, 56ZQ applications and service locations. As can be seen, the transitional revenue path is still somewhat below the lower limit. Table 8.1: Transitional Revenue Path Fixed water 37,314 40,037 41,539 Variable water 22,467 23,134 23,762 Fixed sewer 50,477 53,553 55,732 Trade waste 1,345 1,359 1,374 Price cap compensation phase out 1, Other revenue 1,541 1,584 1,627 Unregulated Revenue Supplementary income 6,605 7,068 7,559 Expected transitional revenues 119, , ,764 Expected transitional revenues - real 116, , ,543 Upper limit - real 204, , ,620 Statutory limit - real 166, , ,476 Lower limit - real 135, , ,334 Page 180 of 184

182 9 Attachments A. A1 & A2 Charts of Area of Operation (water/sewer) B. Shareholders Letter of Expectations C. Service Extension, Expansion and Introduction Policy (covers Extensions Policy and Service Introduction Policy) D. Customer Contract E. Capex Plan for 3 years of Price and Service Plan F. Water savings brochure G. Customer Percentile/Council Impacts H. Developer Charges Pricing Policy I. Service Charge Policy J. Customer Connection Policy K. Schedule of Tariffs L. OTTER data sheets M. Water Sub-metering Policy Page 181 of 184

183 Glossary Word/Term Customer Definition Means a person who is- Equivalent (ET) Tenements (a) An owner and occupier of a property that is connected to a regulated entity s water infrastructure or sewerage infrastructure; or (b) An owner (but not an occupier) of a property that is connected to a regulated entity s water infrastructure or sewerage infrastructure; or (c) An occupier of a property that is connected to a regulated entity s water infrastructure or sewerage infrastructure and is liable for service charges; or (d) An owner or occupier of a property that is not connected to a regulated entity s water infrastructure or sewerage infrastructure but to which a regulated service is available from a regulated entity and the regulated entity imposes a service charge. Means a measure for system design purposes for one standard single occupancy lot. Local Government Kilolitre Price Means an administrative body for a small geographic area, such as a city, town, county, or state. A local council will typically only have control over their specific geographical region, and cannot pass or enforce laws that will affect a wider area. A metric unit of volume or capacity equal to 1000 litres. Means the price or price range however designed: (a) For the provision of a regulated service; or (b) For developer charges for water and sewerage infrastructure and includes a charge or tariff or particular factor, policy or a formula used in fixing the price. Price and Service Plan Sewage Means a price and service plan approved under Section 65 of the Water and Sewerage Industry Act Includes trade waste Page 182 of 184

184 Word/Term Sewerage Infrastructure Definition Means any infrastructure that is, or is to be, used for: (a) The collection or storage and includes the connection point; or (b) The conveyance or reticulation of sewerage; or (c) The treatment of sewerage, including any outfall pipe or other work that stores or conveys water leaving the infrastructure used for the treatment of sewage; or (d) Any other infrastructure used in connection with sewage and declared to be sewerage infrastructure by the Minister by order. It includes a combined system but does not include: (e) Any pipe, fitting or apparatus that is situated upstream of a customer s connection point to a sewer main; or (f) Infrastructure situated entirely within the one land holding and not connected to any other infrastructure situated within another land holding; or (g) Any other infrastructure used in connection with sewage and declared not to be sewerage infrastructure by the Minister by order. Shareholders Means one who owns shares of stock in a corporation. For Southern Water the shareholders are the 12 southern region councils. Southern Water Tariff Trade Waste The trading name for Tasmanian Water and Sewerage Corporation (Southern Region) Pty Ltd Charge structure for water and sewerage customers, the maximum regulated price that water and sewerage can charge for the provision of a regulated service. Tariffs are designed to suit or encourage various patterns of customers. The Water and Sewerage Industry Act 2008 defines trade waste as, the liquid waste generated by any industry, business, trade or manufacturing process. In more detail, trade waste acceptable for discharge into the corporation s wastewater systems includes (but is not limited to) any wastewater resultant from trade, industrial, commercial, institutional, medical, dental, veterinary, agricultural, horticultural or scientific research or experimental activities. Page 183 of 184

185 Word/Term Two part pricing Water Water Service Definition Section 68 (b)(i) of the Water and Sewerage Industry Act 2008 defines the requirement for two-part pricing for water, a fixed and variable pricing component. Includes recycled water and re-use water, but does not include sewerage. Means a service that is provided in connection with the collection, storage, treatment, conveyance, reticulation or supply of water includes a retail service for the supply of water, but does not include: (a) Supply or use of water for irrigation purposes; or (b) Supply or use of water in connection with the generation of electricity. Page 184 of 184