SA Water Regulatory Business Proposal Attachment F NPR Cost Benchmarking Study, KPMG

Transcription

1 SA Water Regulatory Business Proposal Attachment F NPR Cost Benchmarking Study, KPMG

2 NPR Cost Benchmarking Study A benchmarking study of the operating and capital costs of SA Water in support of a regulatory business proposal RBP2106, using NPR 2014 data This report contains 66 pages

3 Blank page _1-26 i

4 Contents 1 Executive summary Background Purpose Process Results Operating costs summary Capital costs summary 7 2 Scope and purpose 9 3 Background Introduction Efficiency in water utilities Benchmarking Why it is used and where are its limitations Approaches to benchmarking SA Water services NPR data introduction NPR Inputs used in the analysis Outputs The diverse nature of the Australian water utilities Peer group Key differences Benchmarking adjustments made to SA Water data 29 4 Operating expenditure - water Establishing SA Water relative costs Partial water performance indicators SA Water operating expenditure per water connection Peer group operating expenditure per connected property SA Water operating expenditure per kilometre of water mains Peer group operating expenditure per kilometer of water mains 36 5 Operating expenditure sewerage Establishing SA Water relative costs Partial sewerage performance indicators SA Water operating expenditure per sewerage connection Peer group operating expenditure per sewerage connection SA Water operating expenditure per kilometre of sewer mains and channels Peer group operating expenditure per kilometre of sewer mains and channels 43 6 Compounding of factors _1-26 ii

5 6.1 Background to compounding Result of compounding Water operating expenditure compound benchmarking Sewerage operating expenditure compound benchmarking 48 7 Capital expenditure Capital costs background Introduction to capital cost measures of efficiency NPR data Base data Adjustments to NPR capital expenditure data SA Water capital expenditure Water capital expenditure Sewerage capital expenditure Capital expenditure benchmarking - Water Average capex per customer Adjustments for Water Water capital expenditure conclusion Capex benchmarking Sewerage Average capex per customer Adjustments for sewerage Sewerage conclusion 60 Index of Figures and Tables Figure 1-1: Total operating expenditure multi factor productivity ( )... 3 Figure 1-2: Average water operating expenditure per connection ( )... 4 Figure 1-3: Average sewerage operating expenditure per connection ( )... 5 Figure 1-4: Average water operating expenditure per km of water mains ( )... 6 Figure 1-5: Average sewerage operating expenditure per km of sewer mains ( )... 6 Figure 1-6: Average adjusted water capex per customer ( )... 8 Figure 1-7: Average adjusted sewerage capital expenditure per customer ( )... 8 Figure 3-1: Correlation between operating expenditure and key output drivers Figure 3-2: Map of Australian water service providers ( ) Figure 3-3: Map of SA Water s - Water service area Figure 3-4: Map of SA Water s - Sewerage service area Figure 3-5: Size of Australian water service providers ( ) Figure 3-6: years of supply in storages Figure 3-7: Tertiary treatment ( ) Figure 3-8: Tertiary treatment ( ) Figure 3-9: Percentage of recycled water ( ) Figure 3-10: Recycled water percentage ( ) Figure 4-1: SA Water historical water operating expenditure (nominal ) Figure 4-2: SA Water historical water operating expenditure (nominal) & connection growth. 33 Figure 4-3: Average water operating expenditure per connection ( ) Figure 4-4: Water operating expenditure per connection and density _1-26 iii

6 Figure 4-5: SA Water historical nominal operating expenditure and length of water mains Figure 4-6: Average water operating expenditure per km of water mains ( ) Figure 5-1: SA Water historical sewerage operating expenditure (nominal) Figure 5-2: SA Water sewerage operating expenditure and number of connections Figure 5-3: Average sewerage operating expenditure per customer ( ) Figure 5-4: Sewerage operating expenditure and length of sewer mains and channels Figure 5-5: Average sewerage operating expenditure per km of sewer mains Figure 6-1: Total operating cost CLD analysis ( ) Water and Sewer Figure 6-2: Operating cost CLD analysis ( ) (SA Water Country and Metro) Figure 6-3: Water operating cost CLD analysis ( ) Figure 6-4: Sewerage operating costs CLD analysis ( ) Figure 7-1: SA Water historical water capital expenditure Figure 7-2: SA Water historical sewerage capital expenditure Figure 7-3: Average adjusted water capex per customer Figure 7-4: Average adjusted sewerage capital expenditure per customer Table 1-1: Operating expenditure per connection ( )... 4 Table 1-2: Average operating expenditure per km of water mains ( )... 5 Table 3-1: Approaches to benchmarking Table 3-2: Definitions of NPR metrics Table 3-3: Water service peers Table 3-4: Sewerage service peers Table 3-5: Service area highlights pipeline distances (current) Table 3-6: Service area highlights non-metro service areas (current) Table 3-7: Storages and city consumptions Table 3-8: Adjustments to NPR data Table 4-1: SA Water changes in operating costs to Table 4-2: SA Water historical operating expenditure (nominal) changes Table 4-3: Average operating expenditure per connection ( ) Table 4-4: SA Water historical nominal operating expenditure and length of water mains Table 4-5: Average operating expenditure per km of water mains ( ) Table 5-1: SA Water sewerage operating expenditure over time Table 5-2: SA Water sewerage operating expenditure and number of connections Table 5-3: Average sewerage operating expenditure per connection Table 5-4: Sewerage operating expenditure and length of sewer mains and channels Table 5-5: Peer group sewerage opex per km of sewer mains and channels Table 7-1: Adjustments to NPR water capital expenditure ($m Nominal) Table 7-2: Adjusted NPR water capital expenditure ($ 000 Nominal) Table 7-3: Highlights - Average adjusted water capex per customer Table 7-4: Relative size of geographic area (relative to Logan) Table 7-5: Adjustments to NPR sewerage capital expenditure ($ 000 Nominal) Table 7-6: Adjusted NPR sewerage capital expenditure ($ 000 Nominal) Table 7-7: Highlights - Average adjusted sewerage capital expenditure per customer _1-26 iv

7 Inherent Limitations This report has been prepared as outlined in the Scope Section. The services provided in connection with this engagement comprise an advisory engagement, which is not subject to assurance or other standards issued by the Australian Auditing and Assurance Standards Board and, consequently no opinions or conclusions intended to convey assurance have been expressed. No warranty of completeness, accuracy or reliability is given in relation to the statements and representations made by, and the information and documentation provided by, SA Water management and personnel consulted as part of the process. KPMG have indicated within this report the sources of the information provided. We have not sought to independently verify those sources unless otherwise noted within the report. KPMG is under no obligation in any circumstance to update this report, in either oral or written form, for events occurring after the report has been issued in final form. The findings in this report have been formed on the above basis. Third Party Reliance This report is solely for the purpose set out in the Scope Section and for SA Water s information, and is not to be used for any other purpose or distributed to any other party without KPMG s prior written consent. ESCOSA is however recognised in the Scope section. This report has been prepared at the request of SA Water in accordance with the terms of KPMG s engagement letter/contract dated 5 February Other than our responsibility to SA Water, neither KPMG nor any member or employee of KPMG undertakes responsibility arising in any way from reliance placed by a third party on this report. Any reliance placed is that party s sole responsibility _1-26 v

8 1 Executive summary 1.1 Background In May 2013, the Essential Services Commission of South Australia (ESCOSA) made its first revenue determination for SA Water. As the first revenue determination for SA Water, ESCOSA administered a significant challenge to SA Water s Regulatory Business Proposal (RBP) including numerous reviews of SA Water s efficiency through benchmarking analysis. Evidence from the Centre for International Economics (CIE) Top Down Efficiency Review 1 indicated that SA Water was highly efficient (within the top 25 percent) however despite this evidence, the final determination required SA Water to achieve significant savings in operational and capital expenditure over the three year regulatory period covered by that decision. ESCOSA recently released its Final Framework and Approach (Framework) for the SA Water price determination (RBP2016). This paper requires SA Water to provide cost benchmarking analysis to support the RBP2016 expenditure proposal. 1.2 Purpose The purpose of this report is to assist SA Water 2 to understand its relative efficiency based on historical costs and outputs when compared with regulated water and sewerage utilities across Australia. It is envisaged that SA Water will utilise the findings of this report in its regulatory business proposal to ESCOSA for the period to support assertions around its relative efficiency. 1.3 Process To measure the relative efficiency of SA Water against other Australian water providers, we undertook a four staged approach: 1. Data collection In the preparation of this report we have used publicly available data to ensure transparency and to facilitate a replicable process of comparison. In a benchmarking exercise it is important that the process is transparent so that the reader can understand the nature of the data, and the process used to make the comparison. The data used in this report has been sourced from the Bureau of Metrology s National Performance Report (NPR). This information is publicly available and has been assembled by the Bureau based on submissions from the responding utilities. 2. Data adjustment A number of different environmental factors impact the maximum potential efficiency of a given water utility. To reliably measure efficiency, the NPR data was adjusted where 1 CIE Top Down Efficiency Review prepared for ESCOSA September 2012, page SA Water is referred to as SAW in some of the charts incorporated in this report _1-26 1

9 appropriate for the differences between water utilities that we consider necessary to improve the comparison of the data. The adjustments are few in number and have been detailed in section Plan and undertake benchmarking Globally, a number of different benchmarking techniques have been utilised to assess the efficiency of regulated utilities. We analysed the range of benchmarking approaches and determined that a combination of partial performance analysis and multi-factor productivity provided comprehensive, repeatable and understandable results. 4. Analysis and qualitative assessment We then analysed the benchmarking results and undertook a qualitative assessment of the environmental factors which may impact the benchmarking conclusions. Final efficiency conclusions were drawn from each of the analysis to feed into an overall conclusion on SA Water s relative efficiency. 1.4 Results We have conducted efficiency benchmarking analysis on the Australian water and sewerage industry using a variety of benchmarking methods and considering a range of qualitative and quantitative cost drivers. The benchmarking considers the range of water utilities that have responded to the NPR data request, but more specifically, within the NPR data is a set of water utilities defined as major water utilities. These utilities are most comparable to SA Water and have been defined in the report as the peer group. They are explicitly identified in section _1-26 2

10 1.4.1 Operating costs summary Multi factor productivity analysis Overall, SA Water s performance is amongst the most efficient utilities for a combined water and sewerage service. This is despite being exposed to a number of unfavourable environmental conditions including its large geographic footprint, unfavourable topography and low rainfall. The figure below measures productivity based on total operating expenditure for major Australian utilities applying the methodology that was used in SA Water s first regulatory business proposal to ESCOSA and shows that SA Water has: improved its efficiency since benchmarking undertaken in 2010/11; and established itself as one of the efficient utilities in Australia based on this measure. Figure 1-1: Total operating expenditure multi factor productivity ( ) Note: This analysis limited to major water utilities, and includes water and sewerage operating costs. Source: NPR Data The chart above also demonstrates that all water utilities in the sample have improved their efficiency over the last few years as indicated by the shift in the average efficiency line for CLD. CLD is a term used to define a mixed volumetric measure to compare utilities and is explained in the operating cost section below _1-26 3

11 Single factor analysis In addition to the multi factor productivity analysis described above, separate measures were calculated for operating costs per customer and operating costs per km of pipe from the NPR data. This was calculated for water and sewerage over the NPR reporting period of 2005 to A summary of the analysis is presented below, and discussed in more detail in section 4 for the water business and section 5 for the sewerage business. Operating costs per customer Table 1-1: Operating expenditure per connection ( ) SA Water $/Connection Median Major Utilities $/Connection Average Water business (Table 4-3) Sewerage business (Table 5-3) Water business Sewerage business Figure 1-2: Average water operating expenditure per connection ( ) Source: NPR Data _1-26 4

12 Figure 1-3: Average sewerage operating expenditure per connection ( ) Source: NPR Data Operating costs per km of pipe Table 1-2: Average operating expenditure per km of water mains ( ) SA Water $/km pipe Median Major Utilities $/km pipe Average Water business (Table 4-5) Sewerage business (Table 5-5) Water business Sewerage business _1-26 5

13 Figure 1-4: Average water operating expenditure per km of water mains ( ) Source: NPR Data Figure 1-5: Average sewerage operating expenditure per km of sewer mains ( ) Source: NPR Data In summary, SA Water performs well amongst its major water utilities peers in all measures. In particular, SA Water is operating amongst the frontier of major water utilities in the measures of: Water operating costs per km Sewerage operating costs per km Sewerage operating costs per customer _1-26 6

14 and is operating better than the median, but within the middle of the range of major water utilities for: Water operating costs per customer which includes the costs of operating the country operations in a lower density service area than many of its peers. SA Water is a vertically integrated business serving 98% of the state s population in a service area of more than 900,000 square kilometres (including sparsely populate regions) and with low volume storages. As a result of the lower connection density than the major utility peer group benchmarking SA Water costs with a bulk water supplier, or a water supplier only offering retail services without recognising the structural differences for example could be misleading. As was recognised in the 2012 report by CIE on water benchmarking, SA Water s relative position compared favourably with its peers. SA Water s relative position has held or improved based on the measurement data available in the NPR. In July 2014, Economic Insights prepared a benchmarking analysis for the Victorian Urban Water utilities 4. In that report data was collected from the NPR to benchmark utilities in Australia. That Stochastic Frontier model scored SA Water near the average of all water utilities (small and major) in Australia. This is not inconsistent with the results of the benchmarking conducted through this report. Apart from the Economics Insights and the older CIE report, we have been unable to find any other water benchmarking reports that have recently considered SA Water in the analysis Capital costs summary Benchmarking capital expenditure across the major water utilities in Australia represents a challenge due to different environmental, topographical and climactic conditions across the peer group service areas. However, considering the large service area SA Water is delivering to, the capital expenditure incurred by SA Water for the delivery of water infrastructure is comparable to the peer group when measured on a dollar spent per customer basis. The figure below measures average capital expenditure per customer amongst major Australian utilities. Calculations have been carried out using adjusted NPR data discussed in section Calculations of averages over the past four years and past eight years are made for comparison due to the variability in expenditure patterns over the period. The charts show that: SA Water average capex spend per customer in the water business over the past eight years is not that dissimilar to the median of its major water utility peers. SA Water average capex spend per customer in the sewerage business over the past eight years is lower than the median of its major water utility peers. Section 7 discusses this in more detail. 4 Economic Insights Victorian Urban Water Utility Benchmarking July Benchmarking-prepare.pdf _1-26 7

15 Figure 1-6: Average adjusted water capex per customer ( ) Source: NPR Data Figure 1-7: Average adjusted sewerage capital expenditure per customer ( ) Source: NPR Data _1-26 8

16 2 Scope and purpose In accordance with SA Water s contract CS7786, KPMG has been engaged to prepare a benchmarking report that would provide analysis of operating and capital expenditure data on SA Water s operations, as compared to its historical results and relevant peers in the Australian water industry. The purpose of this report is to support the South Australian Water Corporation in development of its 2016 Regulatory Business Proposal to the Essential Services Commission of South Australia through the provision of high-level benchmarking activities. The specific scope of the report includes: Analysis of historical results where SA Water s operating and capital expenditure is compared over time; and Peer analysis where SA Water s operating and capital expenditure is compared across a set of water utility peers as identified in this report. ESCOSA s Framework and Approach paper 5 issued to SA Water in respect to the development of the Regulatory Business Proposal requires SA Water to present a Benchmarking Analysis. Within the scope of this analysis, KPMG has been asked to rely on predominantly publicly available data to ensure that it is generally replicable in a regulatory process. To that extent we have relied upon the water industry data provided by the Bureau of Metrology - National Performance Report 2013/14 6 and have adjusted that data for uncontrollable differences which impact the usability and relevance of the benchmarking comparison. The adjustments are described in this report. 5 ESCOSA SA Water Price Determination Framework and Approach Paper November _1-26 9

17 3 Background 3.1 Introduction In May 2013, ESCOSA made its first revenue determination for SA Water. As the first revenue determination for SA Water, ESCOSA administered a significant challenge to SA Water s Regulatory Business Proposal (RBP) including numerous reviews of SA Water s efficiency through benchmarking analysis. Evidence from the Centre for International Economics (CIE) indicated that SA Water was highly efficient (within the top 25 percent of the utilities benchmarked). ESCOSA recently released its Final Framework and Approach (Framework) for the SA Water price determination (RBP2016). This paper requires SA Water to provide cost benchmarking analysis to support the RBP2016 expenditure proposal. 3.2 Efficiency in water utilities We consider that efficiency characterises the productivity of an entity compared with the productivity of a comparable entity. Productivity is measured by comparing the ratio of outputs to inputs after adjusting for non-controllable environmental factors which influence the output to input ratio. This process attempts to make a more valid comparison after adjusting for factors that drive costs, in an open and transparent manner. This is illustrated by the following diagram: Efficiency = Inputs Outputs + Correction for Environment Input Factors Water Utility Output Factors Employees Technology employed Operating expenditure Capital expenditure Environmental Factors Number of connections Volume supplied Length of pipe Topology and terrain Geographic locale Climate and rainfall Political & regulatory factors Measuring the efficiency of regulated water utilities focuses on comparing the observed input (measured as expenditure) against the minimum potential input required to produce a given quantity of output. Inefficiency is represented by a material deviation from the optimal point on the production or cost frontier. There are three factors which impact the efficiency of a water provider: 1. Use of technology (technical) Improvements in technology enable providers to reduce the quantity of inputs required to produce a given quantity of output (frontier shift) _

18 2. Allocation of inputs (productive) Optimising the mix of inputs to produce a given output based on the respective input prices. 3. Operating environment (environment) Changes to the operating environment including climate, political, social, economic and legal/regulatory may impact inputs or outputs. Efficiency is measured by considering the technical and productive efficiency in the context of the environment in which the entity operates in comparison to its peers. 3.3 Benchmarking Why it is used and where are its limitations The Australian water utilities industry is particularly challenging to benchmark. While there are differences in network services, topography and customer densities across the Australian electricity networks for example, there services are relatively comparable. Making comparisons through benchmarking in the water sector are more difficult as the environmental factors influencing the outputs in water services are quite different across the jurisdictions, as are the industry structures. SA Water is a vertically integrated business serving 98% of the state s population in a service area of more than 900,000 square kilometres (including sparsely populate regions) and with low volume storages. Benchmarking SA Water costs with a bulk water supplier, or a water supplier only offering retail services without recognising the structural differences for example could be misleading. However, there is a story to tell in the comparability of the benchmark participants, how one adjusts for this and how the benchmark data is presented, such that the benchmarking can be a useful tool in the analysis of a water utility operating in Australia. It is important to recognise the limitations when forming a conclusion on the results as there are relative similarities and differences across the businesses and jurisdictions due to issues including but not limited to: Topography Water source, rainfall and the use of catchments and ground water Structural separation of the industry (bulk water separated from distribution and retail) Environmental requirements and ability to discharge Locational issues for discharging sewerage (such as access to large oceans, coastal gulfs or if the utility is land locked) Density of customer base and the history of the development of the service area Size of the organisation Use of the private sector in utility operations Structure of operations and outsourcing of some services where some businesses may buy a service, as compared to others that may own the assets that provide the service. If a user can appreciate the differences and recognise how they might impact on a business relative position then benchmarking can be useful in determining where further to look for _

19 analysis on the relative efficiency of a business. Benchmarking should not be the only tool applied in the analysis of an entity s relative performance, but rather should be used as one input in a broader approach to any analysis on a business s relative efficiency Approaches to benchmarking There are a number of approaches one could take to benchmarking one particular entity against another. The various approaches come with different data needs and a different level of transparency and understanding. Some of the various approaches are set out below. What is important is that the benchmarking must be able to be understood, be suitable for the purpose, and be appropriate for the application of the available data. Table 3-1: Approaches to benchmarking Approach Advantages Limitations Partial performance indicators Multi factor productivity Data envelopment analysis Stochastic frontier analysis The process uses other indicators (such as number of employees per connection or dollars of cost per connection) and thus provided indications of productivity Measures more than one input parameter Uses multiple inputs and outputs to measure efficiency and incorporates returns to scale. Uses multiple input parameters to develop relative comparisons of efficiency from data inputs There are limitations on availability of data, and difficulty in adjusting for differences in operating models in some parameters. Assumes that the relationship between the inputs is reasonably consistent across the peer group. Difficult for a reader to understand the impacts of parameters and the relationships of the data. Outliers and missing data points can influence results inappropriately Difficult for a reader to understand the impacts of parameters and the relationships of the data. Outliers and missing data points can influence results inappropriately One of the key parameters in any benchmarking exercise is the availability and the quality of the data. Benchmarking is by its nature an analytical tool, which prepares results applying a set methodology, to a set of data. If the data is not consistent, or of questionable quality, then the results may not be indicative of the underlying efficiency. Therefore, the analysis must match the data, and be able to exploit the relationships that can be interpreted from that data. In section 3.5 below, we have described the source of the data that we have applied in this benchmarking report. We have described in that section the consistency in collection and the _

20 rigor applied in explaining the definitions which makes that source of data reasonable for the purpose. So, based on the discussion above, and considering the data available, and with a view of making the process as transparent as possible, we determined that a combination of partial performance analysis and multi-factor productivity provide a comprehensive, repeatable and understandable result which met the needs of the users of the analysis. The partial performance analysis reduces costs to a per customer basis, and a multi factor productivity analysis is performed which replicates a three part formula that was developed and applied in the 2013 SA Water proposal and therefore makes an interesting and informative efficiency comparator over time. 3.4 SA Water services In performing benchmarking analysis, we need to understand the subject entity and how it compares to its peer group. SA Water is the major water utility in South Australia and as evidenced in the NPR data it provides: Water services to 753,000 7 customers in metropolitan and regional South Australia, supplying water from a number of catchment areas and ground water, and pumping water from the River Murray through long transmission pipelines. Some water is also sourced from a desalination plant constructed during 2011 to 2013 Sewerage services to 586,000 8 customers in metropolitan and regional South Australia The difference in customer numbers between the two service lines demonstrates that whilst SA Water provides potable water to the majority of South Australian businesses and households, it does not provide sewerage services to the same broader customer base, particularly in regional South Australia. In providing these services, SA Water has a number of outsourcing contracts including the operation of some water and sewerage treatment plants, and some of the field operations and maintenance of the Adelaide water network. These outsourcing contracts have resulted in the engagement of services selected through a competitive public tendering process. This is not an unusual undertaking for a utility business and many utilities (across gas, electricity, water and telecommunications) outsource varying inputs to their operating models as a way to drive further efficiencies in the delivery of the services. 3.5 NPR data introduction The benchmarking analysis described in this report is based on a number of data points produced in the Bureau of Metrology (BoM) National Performance Report (NPR). Until 2014, NPR data was collected by the National Water Commission. As from 2015, BOM collects performance data on the water utilities industry across all water utilities, large and small, ibid _

21 and all types of businesses using a similar approach to that adopted by the NWC. This is a rich source of data, which is publicly available and replicable. It has been used in previous benchmarking reports including that commissioned by ESCOSA in 2012 when benchmarking of SA Water s costs was carried out by the Centre for International Economics 9. The NPR data is transparent in that it is available publicly. It has been collected through a standardised approach, which includes reasonably detailed instructions and definitions which should improve the consistency of interpretation of data categories by the surveyed utilities. Further, as the data is publicly available, the respondents can see how the data is used and applied leading to consistency in approach to collection. Finally, the collection mechanism has been in place for some years and this should improve the quality of the data assembled through this approach. Notwithstanding that the publication of the data set has been handed over to BOM, the process of collection, the format and the types of data collected remain similar to that when it was collected by the NWC. An alternative data source such as extraction from water utility annual reports for example would not yield the relevant data, and would not provide the consistency in approach to the assembly of data, leading to a less robust analysis and less transparent result. The following section describes the NPR data and provides definitions of the key metrics used in our analysis NPR Inputs used in the analysis Our analysis uses data on: Operating costs Capital costs Volumetric data such as customer numbers, length of pipe and volumes as defined by the NPR and as set out below Operating costs Operating cost is as defined in the National Performance Report Definitions Handbook 10. Operating costs, are comprised of the following expense types: Included Water resource access charge or resource rent tax (water supply only) Purchases of raw, treated or recycled water (water supply only) Excluded All non-core business operating costs Depreciation Any write-downs of assets to recoverable amounts 9 CIE Report Top down efficiency review of SA Water Prepared for ESCOSA September National Performance Report Definitions Handbook available at At the time of preparing our report, the definitions handbook was not available _

22 Included Excluded Charges for bulk treatment/transfer of Write-offs retired or scrapped assets sewerage (sewerage only) The written-down value of assets sold. Salaries and wages Overheads on salaries and wages Materials, chemicals and energy used Contracts Accommodation All other operating costs that would normally be reported Items expensed from work in progress (capitalised expense items) and pensioner remission expenses (CSOs). (CSOs are likely to have an equivalent inclusion in revenue.) Competitive neutrality adjustments, which include but are not limited to land tax, debits tax, stamp duties and council rates. Indirect costs should be apportioned to water and sewerage services and includes all expenses Volumetric inputs Using volumetric parameters helps to adjust efficiency measurement data to take account of different sized businesses. Simple measures of volumes were examined within the NPR data to determine measures that correlated to the size of the organisation. Measures of customer numbers (by water and sewerage) and the length of pipe (water and sewerage) make use of some of the volumetric data available within the NPR published data. The following charts demonstrate the strong correlation between operating expenditure, connections and length of water/sewer mains. The strength of this correlation is the basis for our partial performance analysis focusing on these two key drivers. We also use other data in our multi factor productivity analysis explained in the operating costs section of the report _

23 Figure 3-1: Correlation between operating expenditure and key output drivers Water Connections KM of Water Mains 2,500 2,000 R² = ,000 25,000 R² = Connections ('000s) 1,500 1,000 Length (km) 20,000 15,000 10, , ,000 Opex ($m) ,000 Opex ($m) Sewer Connections KM of Sewer Mains & Channels 2,500 30,000 R² = ,000 R² = ,000 Connections ('000s) 1,500 1, Length (km) 20,000 15,000 10,000 5, Opex ($m) Opex ($m) High R factors demonstrate a strong correlation between the two parameters, that being costs and the volumetric parameters of customer numbers and length of pipe. As the R factor approaches 1.0, the relationship become stronger so high R factors support the use of the volumetric measure in the analysis of costs against these drivers _

24 Capital costs background Capital cost is as defined in the National Performance Report Definitions Handbook 11. Capital costs, are comprised of the following expense types: Included New works Outputs Renewals or replacements Other expenditure that would otherwise be referred to as capital Recycling water assets Plant and equipment Excluded Gifted assets The NPR states that capital expenditure should be recognised in the year it is incurred. The following table provides the definition of key water services outputs included in our analysis: Table 3-2: Definitions of NPR metrics Metric Definition 12. Water connections Length of water mains and channels Volume of water supplied Sewerage connections Length of sewer mains and channels Volume of sewerage collected This is the same as water customers as defined in the NPR definitions handbook Metered, plus non metered (less any sub-metered connections) Excludes private mains, bore field mains, disused mains, and recycled water mains supplying water for agricultural uses. Total metered and estimated non-metered supplies (potable and non-potable) Includes all customer connections but excludes rated, but unconnected (eg. vacant blocks) Combined sewer and storm water mains are included. Excludes conduits and pipes downstream of a sewerage treatment plant Referred to as volume of sewerage collected 11 National Performance Report Definitions Handbook available at The Definitions Handbook for could not be located publicly. 12 NPR definitions Urban Definitions Handbook. urban-handbook _

25 3.6 The diverse nature of the Australian water utilities As mentioned in Section 3.3 above, Australian water utilities are subject to a wide range of environmental conditions. These fundamental differences impact the perceived efficiency of water service utilities. Some of SA Water s comparative peers are listed in the following section. These include water utilities that are government owned. A number of other water services businesses are quite small in comparison and provide limited services. This is one factor that makes comparison difficult. Even within South Australia, it can be noted that SA Water provides water services to a significant number of customers for whom it does not provide sewerage services. The treatment of sewerage for those non-sa Water customers includes on-site customer treatment, small sewerage schemes, and Community Waste Water Management Schemes (CWMS) often run by the Local Government council. The benchmarking analysis recognises this and separates the comparisons for water and sewerage services. It also recognises groups by size of utility. Much of our comparative analysis has been focused on a peer group of Australian Water utilities, as defined below Peer group As an introduction to the key peer group of water utility businesses that are comparable to SA Water, we have prepared the following table to identify some of the key parameters that would drive a comparative analysis. A similar set is considered for the sewerage side of the business. Table 3-3: Water service peers Utility State Desal Connections ( 000) ( ) Length of Water Mains ( ) SA Water (All) SA Yes ,984 ACTEW ACT No 162 3,188 Barwon Water Vic No 146 3,903 City West Water Vic No 403 4,746 Gold Coast City Council Qld No 235 3,427 Hunter Water Corporation NSW No 236 4,893 Logan City Council Qld No 103 2,083 Queensland Urban Utilities Qld No 562 9,028 South East Water Vic No 696 9,432 Sydney Water Corporation NSW Yes 1,848 22,105 Unity Water QLD No 289 5,763 Yarra Valley Water Vic No 737 9,882 Water Corporation -Perth WA Yes ,859 Source: NPR data _

26 The peer group has been selected based on a combination of qualitative and quantitative factors including number of connections, length of water mains and type of provider. One notable exclusion from the peer group is Melbourne Water, who are a primary water utility servicing the Melbourne customer base. Melbourne Water is a bulk water provider and has considerably lower customer service requirements when compared with other utilities (as it does not operate or manage customer service connections). For non-bulk utilities, customer service is a significant cost driver and for this reason, Melbourne Water, along with other bulk utilities such as SEQ Water, are not considered to be a comparable utility for benchmarking purposes. Table 3-4: Sewerage service peers Utility State % Sewerage treated to tertiary ( ) Connectio ns ( 000) ( ) Length of Sewer Mains/ Channels ( ) Customers per km pipe and channel ( ) SA Water (All) SA 95% 586 8, ACTEW ACT 100% 161 3, Barwon Water Vic 10% 131 2, City West Water Vic 100% 400 4, Gold Coast City Council Qld 100% 224 3, Hunter Water Corporation NSW 43% 224 4, Logan City Council Qld , Queensland Urban Utilities Qld 98% 534 9, South East Water Vic 92% 664 8, Sydney Water Corporation NSW 23% 1,799 24, Unity Water QLD 99% 262 5, Yarra Valley Water Vic 93% 694 9, Water Corporation - Perth WA 95% , Source: NPR data The peer group here has been chosen as it is complimentary to the water services peer group. 13 Logan reported 0.5% in , did not supply data for 2012/13, but in 2007/08 through to 2009/10 it reported 67% _

27 The following figure shows the location and geographic size of Australian water utilities included in the NPR data. Figure 3-2: Map of Australian water service providers ( ) Source: NPR Report 14 Many of the networks serve a modest area in comparison to SA Water s regional service footprint which is demonstrated in the map included in the NPR report, and in the maps attached to SA Water s Water Licence presented below. There are a number of small islanded regional networks, but the vast majority of the water service area in South Australia, serving the majority of the South Australian population is underpinned by an extensive water pipeline network. Some of the highlights of the network are as follows: 14 Bureau of Metrology National performance report Urban Water Utilities page _

28 Table 3-5: Service area highlights pipeline distances (current) Water service area Distance in km Comment Morgan to Whyalla 379 km Significant pipeline servicing the upper Spencer Gulf region. Originally built in 1944, it was duplicated in 1960 to meet the demands of the region. Branches from Port Augusta were made to Woomera 181km, Iron Knob 70km, Peterborough 131km. (Approx) Morgan to Ceduna Morgan to Port Lincoln Approx 750 km Approx 650 km Series of pipelines that can supply River Murray water to the West Coast region of South Australia in support of ground water sources Series of pipelines that can supply River Murray water to the lower Eyre Peninsular in South Australia Tailem Bend to Keith 143 km This pipeline feeds 80km of branch mains serving an area of 6470 square kilometres. 15 Mannum to Adelaide 60 km This pipeline feeds part of the northern Adelaide metropolitan region Murray Bridge to Adelaide 48 km This pipeline feeds part of the southern Adelaide metropolitan region through the Onkaparinga Source: KPMG analysis (for the distances marked as Approx. and SA Water public data for the other distances Table 3-6: Service area highlights non-metro service areas (current) Water service area 000 of square km Water Mains km Sewerage mains km Comment Eyre region Northern Region Outer metro South East 64 3, Port Lincoln to Ceduna to Whyalla 858 7, Port Augusts, Whyalla, York Peninsula The Mid North and Far North and the Riverland 21 4, Adelaide Hills regions, Kangaroo Island and Fleurieu Peninsular 37 1, Bordertown to Mount Gambier Source: SA Water data (April 2015) Tailem Bend to Keith SA Water website 16 SA Water regional data from SA Water web site Supplying rural areas _

29 Figure 3-3: Map of SA Water s - Water service area Source: SA Water Retail Licence to ESCOSA Retail licence available at _

30 Figure 3-4: Map of SA Water s - Sewerage service area Source: SA Water Retail Licence to ESCOSA 18 In comparison to the water network, SA Water s Sewerage network is smaller, and correspondingly, serves fewer customers, focussing on the Adelaide metropolitan region (the largest part of the South Australian population) and a number of regional centres. Other sewerage services are supplied in the regions through local government agencies, and some customer (mostly of a residential nature) provide some onsite sewerage treatment. This is why SA Water does not provide sewerage services to the same number of customers as those that receive potable water services. 18 Retail licence available at _

31 Comparison of water utilities By way of initial comparison, the following chart illustrates the relative size of SA Water in comparison with other Australian water utilities. The chart shows that of the non-bulk water utilities, SA Water is the third largest provider (measured by customers) in Australia and that there are relatively few utilities of a similar size for comparison. The chart also demonstrates the strong correlation between the number connections and operating expenditure of water utilities. Figure 3-5: Size of Australian water service providers 19 ( ) Source: NPR data Key differences Benchmarking water service utilities represents a challenge due to the different operating environments that the peer group needs to contend with. This is discussed in our introduction to this section above. A reader will need to understand the differences in some of the inputs to understand and interpret the relative position of some of the outputs in this report, and this is set out below data/assets/pdf_file/0015/36411/urban-performance-report pdf _

32 Water Within the water business, SA Water meets a number of challenges in supplying water to the customer base, in an environment with limited catchment opportunity, and low rainfall. By comparison to many of its peers, SA Water has relatively modest access to rainfall/catchment storages as a source of water, and in fact sources much of its water from the River Murray particularly in drought years. As a result of this supply issue, we would expect that it will incur relatively higher operating costs than its peers (if all other parameters are equal), through having to pump water some significant distances to its customers. A comparison of capital city water storages is presented below and demonstrates the inability of SA Water to exploit catchment/storage options in its water supply chain. It should be recognised that whilst the consumption of water data is based on metro areas, SA Water sources a significant amount of its supply for country areas from the River Murray and so the relative costs of supplying water in regional areas is greater. Table 3-7: Storages and city consumptions City Storages for cities as listed by Bureau of Meteorology GL Water Sourced for metro customers from NPR data GL Calculated - Years usage in storage Years Adelaide Brisbane 2, Canberra Melbourne 1, Perth Sydney 2, Source: NPR data for water sourced, and Bureau of Metrology for storages _

33 Figure 3-6: years of supply in storages Approximate number of years consumption in storage (if full) Years water in storage Adelaide Brisbane Canbera Melbourne Perth Sydney Adelaide has much less opportunity to draw on storages for its water supply compared to other large metropolitan areas. This requires SA Water to source some of its needs from the River Murray at a higher cost, and potentially desalinated water from time to time. SA Water installed a desalination plant of 100GL annual capacity in response to drought conditions in the 2007 to 2012 period. Whilst the desalination plant attracted some Commonwealth Government capital funding, the operating costs are financed by SA Water. The Desalination plant was finished in December 2012 and has been in operation to ensure that its performance meets certain contractual specifications. SA Water s operating costs are higher than usual during this initial period, after which it will be cycled down substantially Sewerage Operating costs for the treatment of sewerage differ across jurisdictions due to a number of environmental factors which enable some utilities to exploit less costly options of treatment. These factors include: The type of receiving environment where the utility can dispose of sewerage The environment in which the network operates The topography SA Water s sewerage service area for the majority of its customer base is located in the Adelaide metropolitan region (refer map in section 3.6.1). The major SA Water sewerage treatment plants (WWTP) discharge treated sewerage to the ocean, as do many other large metropolitan water service providers in Australia. However, Adelaide s access to an ocean receiving environment is via a relatively shallow gulf Gulf St Vincent. This represents a different set of environmental issues compared to other cities that discharge to a deep water ocean with little tertiary treatment (Sydney Water Corporation for example). SA Water is not allowed to make untreated discharges to the ocean from its major sewerage treatment plants. We have been advised by SA Water that it is a requirement that discharges to the marine environment have a high level of treatment, even _