SA Water Regulatory Business Proposal 2016-2020 Attachment F NPR Cost Benchmarking Study, KPMG

SA Water Regulatory Business Proposal 2016-2020 Attachment F NPR Cost Benchmarking Study, KPMG

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

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Contents 1 Executive summary 1 1.1 Background 1 1.2 Purpose 1 1.3 Process 1 1.4 Results 2 1.4.1 Operating costs summary 3 1.4.2 Capital costs summary 7 2 Scope and purpose 9 3 Background 10 3.1 Introduction 10 3.2 Efficiency in water utilities 10 3.3 Benchmarking 11 3.3.1 Why it is used and where are its limitations 11 3.3.2 Approaches to benchmarking 12 3.4 SA Water services 13 3.5 NPR data introduction 13 3.5.1 NPR Inputs used in the analysis 14 3.5.2 Outputs 17 3.6 The diverse nature of the Australian water utilities 18 3.6.1 Peer group 18 3.6.2 Key differences 24 3.6.3 Benchmarking adjustments made to SA Water data 29 4 Operating expenditure - water 31 4.1 Establishing SA Water relative costs 31 4.2 Partial water performance indicators 32 4.2.1 SA Water operating expenditure per water connection 32 4.2.2 Peer group operating expenditure per connected property 33 4.2.3 SA Water operating expenditure per kilometre of water mains 36 4.2.4 Peer group operating expenditure per kilometer of water mains 36 5 Operating expenditure sewerage 38 5.1 Establishing SA Water relative costs 38 5.2 Partial sewerage performance indicators 39 5.2.1 SA Water operating expenditure per sewerage connection 40 5.2.2 Peer group operating expenditure per sewerage connection 41 5.2.3 SA Water operating expenditure per kilometre of sewer mains and channels 42 5.2.4 Peer group operating expenditure per kilometre of sewer mains and channels 43 6 Compounding of factors 45 24439860_1-26 ii

6.1 Background to compounding 45 6.2 Result of compounding 46 6.2.1 Water operating expenditure compound benchmarking 47 6.2.2 Sewerage operating expenditure compound benchmarking 48 7 Capital expenditure 49 7.1 Capital costs background 49 7.2 Introduction to capital cost measures of efficiency 50 7.3 NPR data 51 7.3.1 Base data 51 7.3.2 Adjustments to NPR capital expenditure data 51 7.4 SA Water capital expenditure 51 7.4.1 Water capital expenditure 51 7.4.2 Sewerage capital expenditure 52 7.5 Capital expenditure benchmarking - Water 53 7.5.1 Average capex per customer 53 7.5.2 Adjustments for Water 54 7.5.3 Water capital expenditure conclusion 56 7.6 Capex benchmarking Sewerage 57 7.6.1 Average capex per customer 57 7.6.2 Adjustments for sewerage 57 7.6.3 Sewerage conclusion 60 Index of Figures and Tables Figure 1-1: Total operating expenditure multi factor productivity (2013-14)... 3 Figure 1-2: Average water operating expenditure per connection (2005-2014)... 4 Figure 1-3: Average sewerage operating expenditure per connection (2005-2014)... 5 Figure 1-4: Average water operating expenditure per km of water mains (2005-2014)... 6 Figure 1-5: Average sewerage operating expenditure per km of sewer mains (2005-2014)... 6 Figure 1-6: Average adjusted water capex per customer (2005-2014)... 8 Figure 1-7: Average adjusted sewerage capital expenditure per customer (2005-2014)... 8 Figure 3-1: Correlation between operating expenditure and key output drivers... 16 Figure 3-2: Map of Australian water service providers (2013-14)... 20 Figure 3-3: Map of SA Water s - Water service area... 22 Figure 3-4: Map of SA Water s - Sewerage service area... 23 Figure 3-5: Size of Australian water service providers (2013-14)... 24 Figure 3-6: years of supply in storages... 26 Figure 3-7: Tertiary treatment (2005-14)... 27 Figure 3-8: Tertiary treatment (2013-14)... 27 Figure 3-9: Percentage of recycled water (2005-14)... 28 Figure 3-10: Recycled water percentage (2013-14)... 29 Figure 4-1: SA Water historical water operating expenditure (nominal 2006-2014)... 32 Figure 4-2: SA Water historical water operating expenditure (nominal) & connection growth. 33 Figure 4-3: Average water operating expenditure per connection (2005-2014)... 34 Figure 4-4: Water operating expenditure per connection and density 2013-14... 35 24439860_1-26 iii

Figure 4-5: SA Water historical nominal operating expenditure and length of water mains... 36 Figure 4-6: Average water operating expenditure per km of water mains (2005-2014)... 37 Figure 5-1: SA Water historical sewerage operating expenditure (nominal)... 39 Figure 5-2: SA Water sewerage operating expenditure and number of connections... 40 Figure 5-3: Average sewerage operating expenditure per customer (2005-2014)... 41 Figure 5-4: Sewerage operating expenditure and length of sewer mains and channels... 42 Figure 5-5: Average sewerage operating expenditure per km of sewer mains... 43 Figure 6-1: Total operating cost CLD analysis (2013-14) Water and Sewer... 46 Figure 6-2: Operating cost CLD analysis (2010-11) (SA Water Country and Metro)... 47 Figure 6-3: Water operating cost CLD analysis (2013-14)... 47 Figure 6-4: Sewerage operating costs CLD analysis (2013-14)... 48 Figure 7-1: SA Water historical water capital expenditure... 52 Figure 7-2: SA Water historical sewerage capital expenditure... 53 Figure 7-3: Average adjusted water capex per customer... 55 Figure 7-4: Average adjusted sewerage capital expenditure per customer... 59 Table 1-1: Operating expenditure per connection (2005-2014)... 4 Table 1-2: Average operating expenditure per km of water mains (2005-2014)... 5 Table 3-1: Approaches to benchmarking... 12 Table 3-2: Definitions of NPR metrics... 17 Table 3-3: Water service peers... 18 Table 3-4: Sewerage service peers... 19 Table 3-5: Service area highlights pipeline distances (current)... 21 Table 3-6: Service area highlights non-metro service areas (current)... 21 Table 3-7: Storages and city consumptions... 25 Table 3-8: Adjustments to NPR 2013-14 data... 30 Table 4-1: SA Water changes in operating costs 2006-07 to 2013-14... 32 Table 4-2: SA Water historical operating expenditure (nominal) changes... 33 Table 4-3: Average operating expenditure per connection (2005-2014)... 34 Table 4-4: SA Water historical nominal operating expenditure and length of water mains... 36 Table 4-5: Average operating expenditure per km of water mains (2005-2014)... 37 Table 5-1: SA Water sewerage operating expenditure over time... 40 Table 5-2: SA Water sewerage operating expenditure and number of connections... 41 Table 5-3: Average sewerage operating expenditure per connection... 42 Table 5-4: Sewerage operating expenditure and length of sewer mains and channels... 43 Table 5-5: Peer group sewerage opex per km of sewer mains and channels... 44 Table 7-1: Adjustments to NPR water capital expenditure ($m Nominal)... 54 Table 7-2: Adjusted NPR water capital expenditure ($ 000 Nominal)... 54 Table 7-3: Highlights - Average adjusted water capex per customer... 55 Table 7-4: Relative size of geographic area (relative to Logan)... 56 Table 7-5: Adjustments to NPR sewerage capital expenditure ($ 000 Nominal)... 57 Table 7-6: Adjusted NPR sewerage capital expenditure ($ 000 Nominal)... 58 Table 7-7: Highlights - Average adjusted sewerage capital expenditure per customer... 59 24439860_1-26 iv

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 2015. 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. 24439860_1-26 v

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 2016 2020 (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 2016 2019 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 2013-14 3 (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 43 http://www.escosa.sa.gov.au/library/121012-topdownefficiencyreviewsawater-ciereport.pdf 2 SA Water is referred to as SAW in some of the charts incorporated in this report. 3 http://www.bom.gov.au/water/npr/ 24439860_1-26 1

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 3.6.3. 3. 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 3.6.1. 24439860_1-26 2

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 2013-14 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 (2013-14) 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. 24439860_1-26 3

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 2014. 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 (2005-2014) SA Water $/Connection Median Major Utilities $/Connection 2005-2014 Average 2013-14 Water business (Table 4-3) 397 407 Sewerage business (Table 5-3) 198 309 Water business 488 563 Sewerage business 208 324 Figure 1-2: Average water operating expenditure per connection (2005-2014) Source: NPR Data 24439860_1-26 4

Figure 1-3: Average sewerage operating expenditure per connection (2005-2014) Source: NPR Data Operating costs per km of pipe Table 1-2: Average operating expenditure per km of water mains (2005-2014) SA Water $/km pipe Median Major Utilities $/km pipe 2005-2014 Average 2013-14 Water business (Table 4-5) 11 25 Sewerage business (Table 5-5) 14 17 Water business 14 33 Sewerage business 14 19 24439860_1-26 5

Figure 1-4: Average water operating expenditure per km of water mains (2005-2014) Source: NPR Data Figure 1-5: Average sewerage operating expenditure per km of sewer mains (2005-2014) 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 24439860_1-26 6

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 2012-13 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. 1.4.2 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 3.6.3. 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 2014 - http://www.esc.vic.gov.au/getattachment/3d735c8b-92af-4cc9-bc2e-0fa70b1e79cd/victorian-urban-water-utility- Benchmarking-prepare.pdf 24439860_1-26 7

Figure 1-6: Average adjusted water capex per customer (2005-2014) Source: NPR Data Figure 1-7: Average adjusted sewerage capital expenditure per customer (2005-2014) Source: NPR Data 24439860_1-26 8

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 2014 http://www.escosa.sa.gov.au/projects/206/economic-regulation-of-sa-water-from-1-july-2016-draft-framework-andapproach.aspx 6 http://www.bom.gov.au/water/npr/ 24439860_1-26 9

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 2016 2020 (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). 24439860_1-26 10

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 3.3.1 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 24439860_1-26 11

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. 3.3.2 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 24439860_1-26 12

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 2013-14 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, 7 http://www.bom.gov.au/water/npr/docs/national_performance_report_2013-14_partb.xlsx 8 ibid 24439860_1-26 13

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. 3.5.1 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. 3.5.1.1 Operating costs Operating cost is as defined in the National Performance Report 2012-13 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 2012. http://www.escosa.sa.gov.au/library/121012-topdownefficiencyreviewsawater-ciereport.pdf 10 National Performance Report 2012-13 Definitions Handbook available at http://www.nwc.gov.au/publications/topic/nprs/2012-13-urban-handbook. At the time of preparing our report, the 2013-14 definitions handbook was not available. 24439860_1-26 14

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. 3.5.1.2 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. 24439860_1-26 15

Figure 3-1: Correlation between operating expenditure and key output drivers Water Connections KM of Water Mains 2,500 2,000 R² = 0.9435 30,000 25,000 R² = 0.893 Connections ('000s) 1,500 1,000 Length (km) 20,000 15,000 10,000 500 5,000 - - 500 1,000 Opex ($m) - - 500 1,000 Opex ($m) Sewer Connections KM of Sewer Mains & Channels 2,500 30,000 R² = 0.952 2,000 R² = 0.9717 25,000 Connections ('000s) 1,500 1,000 500 Length (km) 20,000 15,000 10,000 5,000 - - 200 400 600 800 Opex ($m) - - 200 400 600 800 Opex ($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. 24439860_1-26 16

3.5.1.3 Capital costs background Capital cost is as defined in the National Performance Report 2012-13 Definitions Handbook 11. Capital costs, are comprised of the following expense types: Included New works 3.5.2 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 2012-13 Definitions Handbook available at http://www.nwc.gov.au/publications/topic/nprs/2012-13-urban-handbook The Definitions Handbook for 2013-14 could not be located publicly. 12 NPR definitions 2012-13 Urban Definitions Handbook. http://www.nwc.gov.au/publications/topic/nprs/2012-13- urban-handbook 24439860_1-26 17

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. 3.6.1 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) (2013-14) Length of Water Mains (2013-14) SA Water (All) SA Yes 753 26,984 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 787 13,859 Source: NPR data 24439860_1-26 18

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 (2013-14) Connectio ns ( 000) (2013-14) Length of Sewer Mains/ Channels (2013-14) Customers per km pipe and channel (2013-14) SA Water (All) SA 95% 586 8,807 67 ACTEW ACT 100% 161 3,234 50 Barwon Water Vic 10% 131 2,459 53 City West Water Vic 100% 400 4,118 97 Gold Coast City Council Qld 100% 224 3,180 70 Hunter Water Corporation NSW 43% 224 4,903 46 Logan City Council Qld 0.5 13 93 2,053 45 Queensland Urban Utilities Qld 98% 534 9,185 58 South East Water Vic 92% 664 8,761 76 Sydney Water Corporation NSW 23% 1,799 24,786 73 Unity Water QLD 99% 262 5,430 48 Yarra Valley Water Vic 93% 694 9,310 75 Water Corporation - Perth WA 95% 713 11,637 61 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 2013-14, did not supply data for 2012/13, but in 2007/08 through to 2009/10 it reported 67%. 24439860_1-26 19

The following figure shows the location and geographic size of Australian water utilities included in the 2013-14 NPR data. Figure 3-2: Map of Australian water service providers (2013-14) 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 2013-14 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 2013-14 Urban Water Utilities page 9 http://www.bom.gov.au/water/npr/docs/bom_npr_final_hr.pdf 24439860_1-26 20

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 3,139 132 Port Lincoln to Ceduna to Whyalla 858 7,052 366 Port Augusts, Whyalla, York Peninsula The Mid North and Far North and the Riverland 21 4,997 488 Adelaide Hills regions, Kangaroo Island and Fleurieu Peninsular 37 1,760 360 Bordertown to Mount Gambier Source: SA Water data (April 2015) 16 15 Tailem Bend to Keith SA Water website http://www.sawater.com.au/sawater/education/ourwatersystems/pipelines.htm 16 SA Water regional data from SA Water web site Supplying rural areas http://www.sawater.com.au/sawater/yourhome/ruralliving/ 24439860_1-26 21

Figure 3-3: Map of SA Water s - Water service area Source: SA Water Retail Licence to ESCOSA 17 17 Retail licence available at http://www.escosa.sa.gov.au/library/130102-waterretaillicence-sawater.pdf 24439860_1-26 22

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 http://www.escosa.sa.gov.au/library/130102-waterretaillicence-sawater.pdf 24439860_1-26 23

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 (2013-14) Source: NPR data 3.6.2 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. 19 http://www.nwc.gov.au/ data/assets/pdf_file/0015/36411/urban-performance-report-2012-13.pdf 24439860_1-26 24

3.6.2.1 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 197 152 1.3 Brisbane 2,220 305 7.3 Canberra 277 52 5.3 Melbourne 1,812 434 4.3 Perth 585 291 2.0 Sydney 2,582 629 4.1 Source: NPR data for water sourced, and Bureau of Metrology for storages 24439860_1-26 25

Figure 3-6: years of supply in storages Approximate number of years consumption in storage (if full) 8.0 7.0 7.3 Years water in storage 6.0 5.0 4.0 3.0 2.0 1.3 5.3 4.2 2.0 4.1 1.0 - 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. 3.6.2.2 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 24439860_1-26 26

more so that water that is recycled and reused on land. The following chart shows the percentage of water treated to a tertiary level in order to compare the treatment levels across the peer group. SA Water, along with ACTEW and City West Water for example treat 100% (or nearly 100%) of sewerage to a tertiary level. This is in contrast to Barwon Water, Sydney Water and Hunter Valley Water which treat less than 50% to this level, exploiting the less costly treatment processes before discharging the sewerage to the ocean environment. Figure 3-7: Tertiary treatment (2005-14) Source: NPR Data Figure 3-8: Tertiary treatment (2013-14) 24439860_1-26 27

Source: NPR Data It is noted that the NPR data shows that SA Water treated only 95% of sewerage to a tertiary level in 2013-14. This is unusual for SA Water which had previously reported that it had treated 100% to a tertiary level for the period 2006 to 2012. Because of the higher level of treatment to comply with the relevant environmental conditions, we would expect that SA Water s costs should be higher than its peers for this attribute. Nitrogen Another measure of the differences in underlying treatment is the discharge of Nitrogen. As SA Water discharges treated sewerage into the Gulf environment rather than a deep water ocean, the levels of Nitrogen in total load and concentrations are important. High levels of Nitrogen in shallow ocean environments change seagrass conditions and adversely impact on the environment, more so that deep ocean discharges. Nitrogen is difficult to remove, however SA Water is working to make this more effective and economically more efficient through new processes such as Anommox and new hydrodynamic-biomechanical processes as mentioned in the 2013 annual report 20. Further changes were identified with the reduction of a further 100 tonnes of Nitrogen per annum in the 2014 Annual report 21. In conjunction to the treatment by the removal of Nitrogen, re-using sewerage reduces Nitrogen discharge to the ocean and therefore the need for treatment. SA Water has a higher re-use percentage than its peers because of these environmental constraints. This is not to say that re-use is substantially cheaper, as there is an additional cost in conveying recycled water to its markets, but rather it needs to be recognised that there are cost differences in the way treatment is managed across the industry. Figure 3-9: Percentage of recycled water (2005-14) Source: NPR data 20 SA Water Annual Report 2013 page 28 http://www.sawater.com.au/nr/rdonlyres/b92d4546-e3bc-4343-98ac-fd83fdcdc32f/0/annualreport201213.pdf 21 SA Water Annual Report 2014, page 23 http://www.sawater.com.au/nr/rdonlyres/d8272847-a88f-4d65- B7A0-D6E8410DF55C/0/SAWaterAnnualReport201314.pdf 24439860_1-26 28

The chart above demonstrates that SA Water has maintained the highest percentage of sewerage reuse as compared to its major utility peers for the period to 2012-13, and matched that of Yarra Valley Water in 2013-14. The chart above shows SA Water has been consistently higher than its peers over the period as it recycles a significant amount of water in response to: The SA Government s Adelaide Coastal Waters Improvement Plan Legislated EPA requirements for discharge of treated sewerage to the marine environment The fact that Aldinga, Bird-in-Hand and Murray Bridge cannot discharge into a receiving environment and must supply water of a quality for reuse. Figure 3-10: Recycled water percentage (2013-14) Source: NPR data For the 2013-14 year, SA Water shares the position of the highest amount of water reuse alongside Yarra Valley Water. 3.6.3 Benchmarking adjustments made to SA Water data As mentioned above, the NPR data is the basis for the benchmarking analysis presented in this report. This is because it is publicly available data, was collected nationally through a standardised request and represents the most recent data available for the analysis set. NPR data represents the data presented by the peer group, and includes some expenditures that are specific to the relevant business and may distort comparisons. It is not possible to adjust the data for a significant number of distortions to normalise the underlying service conditions across the peer group, as this would have the effect of introducing a new bias into the process. This is because it is not appropriate to make these adjustments without knowing the intricate detail of the 24439860_1-26 29

underlying data, the detail of the operating environments, and the differences in those environments. The NPR data has been applied in benchmarking before and a limited number of adjustments made in an open and transparent manner is deemed appropriate to improve the comparative analysis. Indeed ESCOSA in the last determination of SA Water s prices employed this approach as it considered the prices currently offered by SA Water to its customer base. So, similar to the CIE Top Down Efficiency Review of SA Water 22 considered by ESCOSA previously, we have made a small number of discrete adjustments for a number of items where we have information that would reduce the risk of a material bias in the data samples. These adjustments have been summarised in the following table, and explained further in the chapters below. Adjustments have been made for the following: Table 3-8: Adjustments to NPR 2013-14 data Adjustment SA Water length of water mains (2007-08) Adjust capital expenditure for desalination plant acquisition costs, a significant water storage project and a significant sewerage treatment plant Explanation Through our review of the NPR data, we identified an anomaly in the length of water mains for SA Water for a particular year. NPR data indicated that SA Water had a sharp increase in the length of water mains in 2007-08 which subsequently decreased back to trend in 2008-09. It was identified that this was an error in the data, and the length of water mains in 2007-08 was adjusted downward by 225km to its correct level. SA Water provided the source of this adjustment. During the data period, several water utilities undertook significant capital investment programs in water security including investment in water desalination. The capital cost associated with this investment is one off in nature and not reflective of the ordinary capital spend. To improve the consistency of the data, all desalination capital costs and one significant WWTP have been removed from the capital cost benchmarking comparisons. SA Water desalination plant Water Corporation (Perth) desalination plant Sydney Water desalination plant ACTEW storage Water Corporation (Perth) sewerage treatment plant 22 http://www.escosa.sa.gov.au/library/121012-topdownefficiencyreviewsawater-ciereport.pdf 24439860_1-26 30

4 Operating expenditure - water 4.1 Establishing SA Water relative costs Base NPR data The data used in this report is sourced from publically available data published by BoM in their most recent 203-14 National Performance Report (NPR) 23. This data set is the most comprehensive, relevant and reliable available for Australian water utilities. It was published in April 2015. We have also sourced additional data for SA Water Country directly from SA Water where it was not produced in the NPR. In our analysis to 2012-13 we had considered the metropolitan and country operations separately but from 2013-14 the country and metropolitan data was not separated in the NPR data. The combined operations of metro and country represent the total efficiency of SA Water and is most comparable with other total organisations. Quantitative adjustments As identified in section 3.6.3, no adjustments have been made to the SA Water water operating costs. The following data was extracted from the BOM, NPR data report 2013-14. Period 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 NPR Water Operating Costs ($m) SA Water Adelaide SA Water Country SA Water All 119.7 119.1 155.7 141.9 135.6 160.9 212.8 N/A 93.5 100.1 126.0 118.6 135.3 137.6 134.2 N/A 213.2 219.3 281.7 260.5 270.9 298.5 347.1 367.5 Adjustments ($000s) N/A - - - - - - - - Normalised SA Water Operating Costs ($000s) SA Water All 213.2 219.3 281.7 260.5 270.9 298.5 347.1 367.5 Source 2013/14 NPR data 23 http://www.bom.gov.au/water/npr/ 24439860_1-26 31

4.2 Partial water performance indicators To understand SA Water s water business efficiency we first sought to understand how its performance and efficiency has changed over recent years. To do this we examined how changes in key cost drivers (the number of connections and the length of water mains) had impacted operating costs. The table below shows SA Water s nominal operating costs over recent years. Figure 4-1: SA Water historical water operating expenditure (nominal 2006-2014) Source: NPR data Table 4-1: SA Water changes in operating costs 2006-07 to 2013-14 Average per annum Total Nominal opex increase 8.1% 72.4% Inflation 2.5% 18.9% Real opex increases / (decreases) 5.5% 45.0% SA Water s real steady state operating expenditure has increased by 45% over the past 8 years, at an average of 5.5% per annum. The analysis period of 2006 to 2014 included a particularly difficult time for SA Water as it responded to drought conditions in the Murray Darling Basin. With low rainfall and the need for pumping a significant amount of water for its customers from the River Murray, higher pumping costs, combined with increases in treatment costs dealing with the higher use of River Murray water added to the cost pressures on the organisation. These have been some of the drivers of cost increases over this period. 4.2.1 SA Water operating expenditure per water connection The figure below illustrates the change in SA Water s nominal operating expenditure and connections over the eight years ending 30 June 2014. The cost per connection for each year is indicated on the chart and shows an increase in the 2010-11, 2011-12, 2012-13 and 2013-14 years after a slight decrease in the 2009-10 year. 24439860_1-26 32

Figure 4-2: SA Water historical water operating expenditure (nominal) & connection growth Source: NPR Data Table 4-2: SA Water historical operating expenditure (nominal) changes Average per annum Total Real opex increase (refer Figure 4-1: SA Water historical water operating expenditure (nominal 2006-2014) 5.5% 45.5% Connection growth 1.3% 9.1% Connection adjusted real opex increases 4.2% 36.4% During the analysis period, the number of SA Water connections has increased by 9.1% since 2006-07. After accounting for the expected impact of new connections on real water opex, SA Water s opex has increased by 36.4% over the period or 4.2% per annum in real terms. 4.2.2 Peer group operating expenditure per connected property The following figure, shows the average operating expenditure per connection for Australian water providers with major water providers highlighted. The relative density (calculated as properties served per km of pipe), of each provider is overlayed using the scale on the right hand side of the chart. 24439860_1-26 33

Figure 4-3: Average water operating expenditure per connection (2005-2014) Source: NPR Data Table 4-3: Average operating expenditure per connection (2005-2014) Opex per connection ($) Density (connections / km of pipe) SA Water All 397 27 Minimum (all utilities) 227 47 Minimum (major utilities) 227 47 Median (all utilities) 407 35 Median (major utilities) 397 55 In comparison to its peers, SA Water s is operating at the median of the major utilities and below the median for all water utilities. SA Water s relative performance in this measure should be considered in light of the large service area compared to its peers. SA Water s Country business has reduced the relative density of the total organisation as compared it the peer group. The costs of servicing rural communities comes at a greater cost than for metropolitan services due to the length of water mains required to service remote locations and the density of the customer base. In section 4.1.3 we examine operating expenditure in comparison to length of water mains. 24439860_1-26 34

The lowest average operating expenditure per connection was $227 (Hunter Water Corporation) with a density of 47 customers per km of pipe. SA Water s total opex per connection was $397 with a density of 27 customers per km of pipe. As density increases, it is reasonable to expect that operating costs per connections would decrease. Hence, while Hunter Water Corporation s opex per connection is 43% lower than SA Water s, its density is 74% higher indicating that SA Water s efficiency may exceed Hunter Water Corporation s if the relative density issue could be adjusted. The chart below demonstrates the relationship between density and operating expenditure per connection for major water utilities. The chart shows that SA Water is operating amongst those at the frontier of operating efficiency based connection and density cost drivers. It is noted that others operating at the frontier such as Hunter Water Corporation and Barwon Water do not operate a desalination plant, which is a cost that SA Water is currently funding. Figure 4-4: Water operating expenditure per connection and density 2013-14 Opex efficient frontier Source: NPR Data We have drawn a set non-statistical frontier curves where we consider the frontier to be for this measure. We observe that Hunter Valley Water might set the frontier on this measure with Barwon Water and Water Corp operating close to that. Overall SA Water is more efficient against major utilities in this measure, with overall density in the lowest 15% of all peer utilities. The optimal position on this chart would be towards the lower part (lower costs per customer), but recognising the issue of density, a higher performing utility would be left of a utility with a similar cost per customer. So therefore those with a position approaching the lower and left most parts of the chart are those performing more efficiently having considered the density of their networks. SA Water is trending to the lower and left most portions of the chart and this is consistent with SA Water s overall performance in operating costs. 24439860_1-26 35

4.2.3 SA Water operating expenditure per kilometre of water mains The figure below illustrates the change in SA Water s nominal operating expenditure and length of water mains over the eight years ending 30 June 2014. Figure 4-5: SA Water historical nominal operating expenditure and length of water mains Source: NPR Data Table 4-4: SA Water historical nominal operating expenditure and length of water mains Real opex increase (refer Figure 4-1: SA Water historical water operating expenditure (nominal 2006-2014) Average per annum Total 5.5% 45.5% Growth in length of pipe 0.7% 4.4% Pipe length adjusted real opex increases 4.8% 41.1% The length of SA Water mains has increased by 4.4% since 2006-07. Using 2012-13 data we identified that even though 72% of water connections are in metropolitan areas, these connections utilise only 35% of the total length of mains with the remaining 65% relating to country areas. This relationship drives a cost impost for SA Water as it serves the lower density areas of the state. Contry and Metropolitan data was not available through the NPR for 2013-14. 4.2.4 Peer group operating expenditure per kilometer of water mains The following figure, shows the average operating expenditure per kilometer of water mains for Australian water providers with major water providers highlighted. The line on the chart identifies the density of connections (number of connections per km of water mains). It is observed that the utilities present a different level of efficiency when measured on an opex per 24439860_1-26 36

km of pipe basis compared with a per connection basis covered above. Both measures are highly correllated to the level of operating expenditure however they lead to slightly different conclusions on the relative efficiency of each provider. Neither chart can be used autonomously to conclude on efficiency and the results of both should be considerd on their relative merits. Figure 4-6: Average water operating expenditure per km of water mains (2005-2014) Source: NPR Data Table 4-5: Average operating expenditure per km of water mains (2005-2014) Opex per km of pipe ($) Density (connections / km of pipe) SA Water All 11 27 Minimum (all utilities) 3 6 Minimum (major utilities) 11 27 Median (all utilities) 15 3 Median (major utilities) 25 55 Most major metropolitan water providers fare poorly on the graph with smaller regional providers exhibiting higher relative efficiency. This is because the length of pipe biases the longer piped networks. Overall, SA Water sits 27% below the median (all utilities) and 45% of the median (major utilities). It has the lowest cost per kilometre of water mains of the major water providers. 24439860_1-26 37

5 Operating expenditure sewerage 5.1 Establishing SA Water relative costs Base NPR data The data used in this report is sourced from publically available data published by the BOM in their most recent 2013-143 National Performance Report 24. This dataset is the most comprehensive, relevant and reliable available for Australian water utilities. We have also sourced additional data for SA Water Country directly from SA Water where it was not produced in the 2013-14 NPR. In our analysis to 2012-13 we had considered the metropolitan and country operations separately but from 2013-14 the country and metropolitan data was not separated in the NPR data. The combined operations of metro and country represent the total efficiency of SA Water and is most comparable with other total organisations Quantitative adjustments As identified in section 3.6.3, no adjustments have been made to the SA Water sewerage operating costs. The following data was extracted from the BOM, NPR data report 2013-14. Period 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 NPR Sewerage Operating Costs ($m) SA Water Adelaide SA Water Country SA Water All 83.3 85.2 104.9 98.6 94.1 88.8 108.3 N/A 20.4 22.8 26.4 21.7 28.4 24.7 25.5 N/A 103.7 108.0 131.3 120.3 122.5 113.5 133.7 122.1 Adjustments ($m) N/A - - - - - - - - Normalised SA Water Sewerage Operating Costs ($000s) SA Water All 103.7 108.0 131.3 120.3 122.5 113.5 133.7 122.1 Source: NPR data 2013-14 24 http://www.bom.gov.au/water/npr/ 24439860_1-26 38

5.2 Partial sewerage performance indicators To understand SA Water s sewerage business efficiency we first sought to understand how its performance and efficiency has changed over recent years. To do this we examined how changes in key cost drivers (the number of connections and the length of sewer mains and channels) had impacted operating costs. The table below shows SA Water s nominal sewerage operating costs segregated into metropolitan and country costs. Figure 5-1: SA Water historical sewerage operating expenditure (nominal) Source: NPR data 24439860_1-26 39

Table 5-1: SA Water sewerage operating expenditure over time Average per annum Total Opex increase 2.3% 17.7% Inflation (average over the period) 2.5% 18.9% Real opex increase/(decrease) (0.1)% (1.2)% Note Small variances due to rounding SA Water s sewerage operating expenditure has increased by an average of 2.3% per annum or a marginal decrease in real dollars over the period. Peaks in operating expenditure occurred in 2008-09 and 2012-13. Expenditure for 2013-14 subsequently declined from 2012-13 levels. 5.2.1 SA Water operating expenditure per sewerage connection The figure below illustrates the change in SA Water s nominal operating expenditure and sewerage connections over the eight years ending 30 June 2014. Figure 5-2: SA Water sewerage operating expenditure and number of connections Source: NPR Data 24439860_1-26 40

Table 5-2: SA Water sewerage operating expenditure and number of connections Real opex increase/(decrease) (refer table 5-1) Average per annum Total (0.1)% (1.2)% Growth in connections 1.2% 9.1% Connection adjusted opex increase (1.3)% (10.3)% Connections have increased by 9.1% over the eight years at an average of 1.2% per annum. Similar to SA Water s water business, there were a greater proportion of new connections made in regional locations which increased the overall average sewerage cost per connection. 5.2.2 Peer group operating expenditure per sewerage connection The following figure, shows the average sewerage operating expenditure per connection for Australian utilities with major water providers highlighted in orange. The line on the chart identifies the density of connections (number of connections per km of pipe). Figure 5-3: Average sewerage operating expenditure per customer (2005-2014) Source: NPR Data 24439860_1-26 41

Table 5-3: Average sewerage operating expenditure per connection Opex per connection ($) Density (connections / km of pipe) SA Water All 198 65 Minimum (all utilities) 198 65 Minimum (major utilities) 198 65 Median (all utilities) 390 41 Median (major utilities) 309 58 According to the analysis, SA Water s sewerage business is operating amongst the most efficient of Australia water utilities when measured by opex cost per connection. SA Water s customer density in the country areas for sewerage is much higher than for the customer density in the country water business. This is because the country sewerage business operates predominantly in towns where there is a relatively higher density. The SA Water owned water networks serve customers outside of country towns and provide water to many customers who do not receive a sewerage service. This is consistent with the results presented above. 5.2.3 SA Water operating expenditure per kilometre of sewer mains and channels The figure below illustrates the change in SA Water s operating expenditure and length of sewer mains and channels over the eight years ending 30 June 2014. Figure 5-4: Sewerage operating expenditure and length of sewer mains and channels Source: NPR data 24439860_1-26 42

Table 5-4: Sewerage operating expenditure and length of sewer mains and channels Real opex increase/(decresase) (refer table 5-1) Average per annum Total (0.1)% (1.2)% Growth in pipe length 0.6% 4.2% Pipe growth adjusted opex increase (0.7)% (6.4)% The length of sewer mains and channels has increased by 4.2% over the eight year period. After adjusting for the increase in length of mains, the relative decrease in operating costs becomes slightly more substantial. 5.2.4 Peer group operating expenditure per kilometre of sewer mains and channels The following figure, shows the average operating expenditure per kilometer of sewer mains and channels for Australian providers with major providers highlighted in orange. The line on the chart identifies the density of connections (number of connections per km of water mains). Figure 5-5: Average sewerage operating expenditure per km of sewer mains Source: NPR Data 24439860_1-26 43

Table 5-5: Peer group sewerage opex per km of sewer mains and channels Opex per km of pipe ($) Density (Connections per km) SA Water All 14 63 Minimum (all utilities) 8 40 Minimum (major utilities) 12 44 Median (all utilities) 17 41 Median (major utilities) 17 58 Based on the chart above, SA Water is the third most efficient major utility for sewerage services based on opex per km of pipe. Logan City Council is the most efficient major utility and 15% more efficient than SA Water based on the analysis above. However, for a large utility, SA Water is still performing well below the national median, and operating in the top quartile for this measure. 24439860_1-26 44

6 Compounding of factors 6.1 Background to compounding In the data above we have compared the operating costs, using opex per connection and opex to length of pipe, to recognise that the size of the business (as measured by the number of connection it serves) as being a driver of costs. It is reasonable that there is a positive correlation between the operating costs, and the number of customers the business serves as there are connection points to maintain, meters to maintain and read, and customer interactions to deal with. There is also a positive correlation with the infrastructure that supports the customer connections such as the length of water/sewer mains. Each chart depicts differing outcomes in relation to the relative efficiency of each water provider. However, there are other attributes which also affect the operating costs of a business. These include: The quality of the source of water affects the costs of extracting water; The quantity of desalinated water supplied affects the costs of supplying water; The quantity of groundwater used in the supply Geography and topography influences transportation and pumping costs; The degree of treatment higher treatment standards increase costs Quantity that can be discharged to outfall which impacts the level of treatment required State based EPA requirements which differ between states and impact treatment and compliance costs. Asset life cycles aged assets may be more costly to maintain that recently procured/constructed assets. The compounding of factors can be applied through a statistical model that uses a regression analysis to determine an efficiency factor for all the parameters used. This was applied by CIE in the previous ESCOSA decision. We ran a regression model using a number of parameters but because of the relative data, and some missing data points in the NPR collection process for some utilities, the results were inconclusive and did not provide a clear frontier in which valuable comparisons could be made. Because the results were not intuitive, and the results appeared to be skewed by a few large data points, the use of this tool was discounted as uninformative. As an alternative to a regression model, we noted that SA Water ran a multi-dimensional efficiency analysis using three compounding input parameters in the development of their last submission to ESCOSA. This calculated a productivity number based on what was considered at the time to be three good indicators of the drivers of costs for the business. Those parameters were Customer Numbers (C), Length of pipe (L) and Volume of water or demand (D). The combination of the three volumetric parameters produces an acronym of CLD. The calculation of a total productivity number for the CLD requires some form of weighting to be applied as there are three different but positively correlated volumes identified that drive costs of the business. We have chosen a weighting that was used in the previous submission to ESCOSA simply to be able to make a comparative analysis with those results that were provided a few years ago. 24439860_1-26 45

CLD is calculated using the following formula: CCCCCC = CC 0.5 LL 0.3 DD 0.2 6.2 Result of compounding The following CLD analysis was prepared using the same methodology for 2013-14 as it was for 2010-11. The results show that SA Water displays above average efficiency based on the CLD analysis, charting strong efficiency for water and sewer services. Since the previous CLD analysis was prepared for the 2010-11 year, average efficiency has improved amongst the selected Australian water providers as shown by the move in the average efficiency trend line. (The opex trend line point has fallen for a given CLD volume between 2010-11 and 2013-14). SA Water has held its relative efficiency position against its peers and has improved its efficiency since the previous analysis was undertaken. SA Water remains amongst the most efficient water providers on this measure. Compared with the most efficient utility based on the CLD analysis (Water Corporation (Perth)), SA Water only slightly less efficient. Figure 6-1: Total operating cost CLD analysis (2013-14) Water and Sewer Source: NPR Data For comparison, the 2010-11 chart, with SA Water s relative position was repeated below. 24439860_1-26 46

Figure 6-2: Operating cost CLD analysis (2010-11) (SA Water Country and Metro) Source: SA Water RBP 2013 showing 2010-11 historical data 6.2.1 Water operating expenditure compound benchmarking The following chart shows CLD analysis undertaken for water supply operations only. Overall, SA Water is operating above the average efficiency achieved by the peer group. SA Water is performing only slightly behind Water Corporation (Perth) on this measure. Figure 6-3: Water operating cost CLD analysis (2013-14) Source: NPR Data 24439860_1-26 47

6.2.2 Sewerage operating expenditure compound benchmarking The following chart shows CLD analysis undertaken for sewerage operations only. Overall, SA Water is operating amongst the most efficient operators identified within the peer group. Figure 6-4: Sewerage operating costs CLD analysis (2013-14) Source: NPR Data 24439860_1-26 48

7 Capital expenditure 7.1 Capital costs background Capital expenditure is incurred by a water utility business to build an asset base that is capable, necessary and efficient in the delivery of water and sewerage services to its customers. For a water utility business supplying water services it includes the following categories of capital expenditure which can be quite different across a peer group if considered within the analysis of a benchmarking study. Category Business as usual and incremental growth Major projects Projects These projects include customer connections, replacement of equipment at end of life, refurbishments of a capital nature, network extensions, plant and equipment. Not all projects are separately identifiable. This might be relatively useful to benchmark if the underlying environmental and other service characteristics are able to be normalised across a peer group. One example of how environmental conditions impact the capital spend of a water utility is topography. A utility with a relatively flat geographic landscape may have a need to add replacement pumping requirements compared to one that can exploit the gravity based systems. The age of the existing infrastructure will also be important to consider. Capital cost programs increase as asses reach end of serviceable life. Costs of this nature can be significant however are not easily identifiable and have not been adjusted in our dataset. These projects are significant and non-recurring. These are important to water security are often politically directed and are financially material. The project costs are likely to be increasing over time within a network service area as cheaper options are almost always built first. The period of any benchmarking review may not reflect the longer term story of the development of infrastructure. The sorts of projects in this category for a water business include new dams or storage enhancements, new major water pipelines, new treatment plants and desalination plants. They are difficult to benchmark over a shorter period, and difficult to normalise for different environmental factors. What is typical of water utilities new infrastructure is that it is relatively expensive in relation to utilities generally. Many of the major components in water infrastructure require a large footprint 24439860_1-26 49

in the environment due to the need to treat, manage and store a large physical resource. This is so for water treatment plants, sewerage treatment, storages and catchment. Water transmission pipes also require significant physical space in the environment making the costs of delivering these projects quite material. Further, the costs of project delivery increase over time as they are overlayed and integrated within existing community infrastructure. These are generally more significant than the general network infrastructure components in electricity, gas and telecommunications for example (except for large scale electricity generation). In particular, the costs of developing a new storage reservoir would be very difficult to benchmark due to site specific issues and the fact that these occur very rarely. Unlike operating expenditure, capital spend is not recurring in nature and is likely to be uneven over a given period. This unevenness is caused by factors such as the timing of new projects, political incentives and the relative age of utility infrastructure. Over an extended time period, it may be possible to normalise capital expenditure, however this will lead to inaccurate conclusions in relation to the current operating efficiency of the utility given the need to incorporate less relevant historical data. It is our view that capital spend efficiency may be better assessed on a project by project basis, taking into consideration factors such as whole of life cost, economic efficiency and qualitative factors such as improvements to water security or broader customer benefits. 7.2 Introduction to capital cost measures of efficiency As mentioned in the introduction above, benchmarking of capital expenditure will present some difficulties if it is to be used to identify the relative efficiency of a water utility. Benchmarking might be useful to identify those utilities where an apparent inefficiency might be worthy of further investigation, however, the assessment of any relative efficiency is likely to require an engineering assessment of major projects to determine the efficiency of the response to needs of a customer base, and whether the response represents an economically efficient solution based on the various parameters that need to be considered. The needs assessment and solution are likely to be carried in a project business case document, and not attempted to be transparently identified in a benchmarking study. Having said that, to the extent that major projects can be removed, there is an opportunity to consider benchmarking of the business as usual capex if this is available through a transparent process. However the results can only considered at a high level because of the variability of factors that are present across jurisdictions and even within those jurisdictions. Within a water utility, the variables that would impact on an assessment of capital cost efficiency include: Environment availability of catchment and suitable space Climate Current capital needs compared with historical spend and future plans Operating environment Topography Water table and salinity Soil type and other engineering parameters 24439860_1-26 50

The ability of a utility to exploit and respond to these parameters over time will have shaped the size and nature of the existing regulatory asset base, and the current operating environment of the utility. These will be relatively different across jurisdictions and climatic zones. The current and short term future capital expenditure forecasts will necessarily reflect where the business is within a broader time horizon, and the product of those factors listed above. 7.3 NPR data 7.3.1 Base data The NPR data for capital costs reports total capital expenditure by each water utility for Water and Sewerage businesses. Rather than look at all the capital expenditure by water business, we have chosen to filter this down to the major utilities as defined in the NPR data base. This is because capital expenditure is quite different between the larger utilities as compared to the smaller businesses due to the size and frequency of the projects. 7.3.2 Adjustments to NPR capital expenditure data Having identified that comparisons are somewhat difficult, we have attempted to normalise some of the NPR capital expenditure data for known and identified significant capital projects. This process does not attempt to make adjustments for all projects as this would be difficult without access to non-public data. Therefore, we have applied an adjustment for the following items, to remove these projects from the relevant NPR data in an attempt to improve the comparisons. Adjustments have been made for: ACTEW Dams (water) SA Water Desalination plant (water) Sydney Water Corporation Desalination plant (water) Water Corporation Desalination plant (water) Water Corporation New sewerage plant (sewerage) The adjustments for the capital expenditure items is made to the data in sections 7.5.2 and 7.6.2 below. 7.4 SA Water capital expenditure 7.4.1 Water capital expenditure The chart below shows SA Water s water capital expenditure over the eight years ending 30 June 2014. The chart shows the significant expenditure incurred by SA Water during the period on the desalination plant (total of $1.8bn). Excluding the desalination plant capex has trended upwards marginally with other significant water capital investment programs including the North South Interconnection System Project with a cost of $403 million during the period. The most recent data for 2013-14 shows a reduction in capital expenditure back to those levels before the desalination plant project was identified. 24439860_1-26 51

Figure 7-1: SA Water historical water capital expenditure Source: NPR data 7.4.2 Sewerage capital expenditure The chart below shows SA Water s sewerage capital expenditure over the eight years ending 30 June 2014. Capex has trended upwards with significant water capital investment programs including: Christies Beach Wastewater Treatment Plant: $272 million Bird in Hand Wastewater Treatment Plant: $60 million Capex in 2013-14 represents a reduction on the previous five years. 24439860_1-26 52

Figure 7-2: SA Water historical sewerage capital expenditure Source: NPR Data 7.5 Capital expenditure benchmarking - Water 7.5.1 Average capex per customer The comparison of major water utility businesses within the NPR data is made with reference to a capital expenditure value (adjusted as mentioned above). A calculation of the Capex per customer is made by applying the relevant customer numbers for 2013-14 in the NPR data to the average capex for the reporting period. A calculation of the average capex for the previous four years and the previous eight years is carried out in the analysis. Where there is no data for a reported year, the average is adjusted so that the zero value does not distort the average. 24439860_1-26 53

7.5.2 Adjustments for Water As mentioned in the section above, some adjustments were made for the NPR capex water data as follows: Table 7-1: Adjustments to NPR water capital expenditure ($ 000 Nominal) Period 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 ACTEW 68,000 200,000 163,000 SA Water - Adelaide 400,000 850,000 370,000 210,000 Sydney Water 854,000 267,000 Water Corp (Perth) 168,000 500,000 287,000 Source: Individual Utility Annual Reports & CIE Top-Down Efficiency Review Table 7-2: Adjusted NPR water capital expenditure ($ 000 Nominal) Period 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 ACTEW 28,395 23,053 54,322 99,589 103,990 23,654 33,787 41,991 Barwon Water 28,231 35,661 45,336 66,084 67,434 130,638 176,639 69,211 City West Water 43,887 30,985 41,506 43,229 96,463 88,940 58,449 57,917 Gold Coast City Council - - 146,146 59,908 32,433 - - 13,742 Hunter Water Corporation 24,968 72,019 42,865 75,082 57,799 26,122 35,434 76,276 Logan City Council - - 10,028 23,155 32,339 - - 15,985 Queensland Urban Utilities - - - - - 40,758 39,278 63,578 SA Water - Adelaide 39,576 38,615 58,616 101,708 46,404 67,216 228,162 N/A SA Water - Country - 91,755 108,116 90,037 48,046 69,998 34,378 N/A SA Water - Total 39,576 130,370 166,732 191,745 94,450 137,214 262,540 167,479 South East Water Ltd 23,144 33,405 39,928 28,049 40,334 66,718 52,721 44,631 Sydney Water Corporation 208,511 268,155 182,560 1,337,29 0 864,112 306,191 284,901 195,694 Unitywater - - - - - 22,333 31,691 31,382 Yarra Valley Water 100,947 83,519 64,276 53,110 132,716 87,523 99,295 73,211 Water Corporation 368,865 248,859 197,781 148,910 331,109 494,949 424,785 136,970 Source: NPR data adjusted 24439860_1-26 54

Figure 7-3: Average adjusted water capex per customer Source: NPR data adjusted Table 7-3: Highlights - Average adjusted water capex per customer Water capex per customer Peer Group median $/Customer SA Water (all) $/Customer 4 year (2009-10 to 2013-14) 233 280 9 year (2005-06 to 2013-14) 226 217 Minimum (South East Water) 60 (9 yr) N/A Maximum (Barwon Water) 855 (4 yr) N/A Source: KPMG analysis of NPR adjusted data The Capex per customer shows some variability in the spending when compared to customer numbers. The median spend of the 8 year averages is drawn at $195 per customer for reference. The most significant capital expenditure was incurred by the following utilities: ACTEW which is spending $356 (eight year average) or $323 (four year average) per customer. This is quite significant, but ACTEW has a relatively small customer base with only 162,000 customers in the water business. The underlying spending is $518 million over eight years on an average of $57 million per year. The lower customer numbers will amplify their spending relative to others. Barwon Water which is spending $565 (eight year average) or $855 (four year average) per customer. Again his is significant, but Barwon Water has only 146,000 customers. The 24439860_1-26 55

underlying spending is $740 million over eight years, or an average of $82 million per year. Projects include new water storages and water pipelines in the Geelong area. Water Corporation which is spending $428 (eight year average) or $420 (four year average) per customer. This is reasonably significant but is underpinned by a significant capital expenditure program in water infrastructure. Even after adjusting for the desalination plant expenditure of $1 billion, the eight year capital expenditure reported in the NPR data is $2.8 billion, or an average of $311 million each year. Water Corporation is a highly comparable entity environmentally as it serves a large geographic area and encounters a range of similar challenges to SA Water. On this basis, SA Water appears relatively efficient in comparison. SA Water capex is slightly above the median of the Major Water Utilities identified in the adjusted NPR data, with an average of $217 per customer (eight year) and $280 per customer (four year). This is not unreasonable for a water utility serving a relatively large service area as compared to others in the NPR data which serve smaller, more compact areas where delivery of capital expenditure ought to be more efficient. There are seven utilities who perform comparatively well on the chart (shown above). In addition to customers, a key driver of capital spend is the geographic area served by the utility. To this point, SA Water covers an area significantly larger than the average of these utilities (measured by water mains length). We have summarised this comparison in the table below: Table 7-4: Relative size of geographic area (relative to Logan) Relative size Length of water mains ( 000s km) Relative Size compared to Logan SA Water (All) 27.0 1,286% Yarra Valley Water 9.6 457% South East Water 9.0 429% Queensland Urban Utilities 9.0 429% Unity Water 5.7 271% Hunter Water Corporation 4.8 228% Logan City Council 2.1 100% As a result of the above comparison, SA water s relative capital expenditure per connection should be higher than these peer entities because of the effective lower density, and the size of the service area covered by SA Water. Other factors would also contribute to this such as the need for water treatment and water security for a service area reliant on the River Murray. The capex data for SA Water includes a $400 million addition to water pipelines during this period. This project related to the delivery of a water security project for the metropolitan area. 7.5.3 Water capital expenditure conclusion It is difficult to conclude on the efficiency of capital expenditure based on top down analysis as there are many variables and environmental differences which are difficult to measure amongst peers. 24439860_1-26 56

However, based on the analysis above, it appears that while SA Water serves a significantly larger geographic area compared to its peers, its water capital expenditure costs are modest and only slightly above the median of the peer group. 7.6 Capex benchmarking Sewerage 7.6.1 Average capex per customer The comparison of major sewerage utility businesses within the NPR data is made with reference to a capital expenditure value (adjusted as mentioned above). A calculation of the Capex per customer is made by applying the relevant customer numbers for 2013-14 in the NPR data to the average capex for the reporting period. A calculation of the average capex for the previous four years and the previous eight years is made from the available data. Where there is no data for a reported year, the average is adjusted so that the zero value does not distort the average. 7.6.2 Adjustments for sewerage As mentioned in the section above, some adjustments were made for the NPR capex sewerage data as follows: Table 7-5: Adjustments to NPR sewerage capital expenditure ($ 000 Nominal) Period 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 Water Corporation 100,000 166,000 100,000 Source: Individual Utility Annual Reports & CIE Top-Down Efficiency Review The adjustment for Water Corporation relates to a new Sewerage Treatment plant at Alkimos north of Perth. This was a significant project for that utility representing more than 17% of the capital expenditure for the eight year data period. 24439860_1-26 57

Table 7-6: Adjusted NPR sewerage capital expenditure ($ 000 Nominal) Period 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 ACTEW 6,289 12,646 23,163 57,266 24,357 22,447 24,117 16,409 Barwon Water 23,520 25,363 20,174 29,232 33,810 55,129 55,989 19,010 City West Water 55,367 28,542 24,821 32,780 27,838 30,359 58,636 27,428 Gold Coast City Council - - 152,945 145,589 105,721 - - 30,174 Hunter Water Corporation 68,654 51,169 49,478 78,566 114,771 141,642 81,651 32,628 Logan City Council - - 14,541 16,697 25,893 - - 42,714 Queensland Urban Utilities - - - - - 165,143 225,894 131,793 SA Water - Adelaide 26,471 27,242 32,516 145,648 100,047 142,970 77,977 N/A SA Water - Country - 9,369 9,715 12,002 29,723 76,210 22,451 N/A SA Water - Total 26,471 36,612 42,231 157,650 129,770 219,180 100,428 98,292 South East Water Ltd 49,549 72,101 76,764 94,837 111,893 135,117 124,793 167,911 Sydney Water Corporation 396,803 476,862 505,272 435,752 490,950 437,427 452,823 390,817 Unitywater - - - - - 130,175 109,244 109,916 Yarra Valley Water 106,833 112,593 110,298 141,061 162,606 141,769 136,690 121,171 Water Corporation - Perth 226,104 277,851 327,747 275,901 163,233 143,443 165,174 123,809 Source: NPR data adjusted 24439860_1-26 58

Figure 7-4: Average adjusted sewerage capital expenditure per customer Source: NPR data adjusted Table 7-7: Highlights - Average adjusted sewerage capital expenditure per customer Average sewerage capex per customer Peer Group median $/Customer SA Water (all) $/Customer 4 year (2009-10 to 2013-14) 290 239 9 year (2005-06 to 2013-14) 263 175 Minimum (City West Water) 87 (9 yr) N/A Maximum (Gold Coast City 454 (4 yr) N/A Council) 25 Source: NPR data adjusted 25 The maximum spend per customer was Gold City Council, but this was based on four years data in the period 2005-06 to 2012-13. Some years data was not supplied, and some for the period of 2010 to 2012, the water services for this customer group were not reported as it was served by AllConnex. AllConnex data was not provided to this NPR survey. 24439860_1-26 59

Observations: SA Water s average capex per customer for sewerage is lower than the median for the major water utilities over the period. SA Water s capex per customer for the metro area is the fifth lowest of all measured utilities. Sewerage capex for SA Water represents an average of $175 per customer over the past eight years (or $239 per customer over the past four years). This is slightly less than the average in the peer group. The capital expenditure over eight years amounts to some $920 million. Over this time SA Water has completed major upgrades the Christies Beach, Bolivar, Aldinga and Glenelg and Bird in Hand wastewater treatment plants. SA Water spent $60 million alone in an upgrade to the Bird In Hand sewerage treatment plant servicing the Lobethal, Woodside and Inverbrackie areas 26. City West Water is the best performer, with expenditure of $87 million over eight years for 403,000 customers. The small geographic footprint of City West Water (4,118 km of sewer mains and channels) and relatively high density (81 connections per km of sewer mains and channels) assists with achieving this performance. SA Water (all) has more than double this length of water mains with 30% lower density. These factors contribute to the difference in efficiency as measured by the chart. The highest spend per customer was experienced by Gold Coast City Council, Hunter Water Corporation, Queensland Urban Utilities, and Unity Water. Each of these had average capital expenditure spends in the range of $300 to $500 per customer over the eight year period. 7.6.3 Sewerage conclusion Delivery of capital expenditure projects is likely to be quite variable over utilities and over the years. This is due to the attributes discussed in section 7.1 above. Comparing capital expenditure across different operating environments presents a challenge for benchmarking. For example, Sydney Water Corporation can discharge to deep ocean outfall, and treat only 20% of its sewerage to a tertiary level, whilst SA Water treats 90-100% of sewerage to a tertiary level. Sydney water recycles less than 10% of its sewerage, whereas SA Water needs to recycle 30% of its sewerage to reduce the nitrogen levels in the receiving environment. SA Water therefore needs to build significant sewerage treatment infrastructure to be able to meet environmental licencing requirements. Notwithstanding the comments above, our analysis indicates that SA Water is comparatively efficient compared with its peers after consideration of the large geographic area it serves and low customer density compared with the peer group. 26 Bird In Hand sewerage treatment plant announcement http://www.sawater.com.au/nr/rdonlyres/9f4aa67f- 1FA6-403B-A0F1-4C46EB542751/0/BirdinHandJune2010.pdf 24439860_1-26 60