gosford city council and wyong shire council...1 gosford city council, pricing submission to ipart...

Independent Pricing and Regulatory Tribunal

Gosford City Council andWyong Shire CouncilPrices for water, sewerage and stormwater drainage services from 1 July 2013 to 30 June 2017

Water — Final ReportMay 2013

Gosford City Council and Wyong Shire Council Prices for water, sewerage and stormwater drainage services from 1 July 2013 to 30 June 2017

Water — Final Report May 2013

ii IPART Gosford City Council and Wyong Shire Council

© Independent Pricing and Regulatory Tribunal of New South Wales 2013 This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included.

ISBN 978-1-922127-81-5

The Tribunal members for this review are: Dr Peter J Boxall AO, Chairman Mr James Cox PSM, Chief Executive Officer and Full Time Member Mr Simon Draper, Part Time Member

Inquiries regarding this document should be directed to a staff member: Lucy Garnier (02) 9290 8453 Scott Chapman (02) 9290 8449 (Gosford City Council) Veronika Henkel (02) 9290 8487 (Wyong Shire Council)

Independent Pricing and Regulatory Tribunal of New South Wales PO Box Q290, QVB Post Office NSW 1230 Level 8, 1 Market Street, Sydney NSW 2000 T (02) 9290 8400 F (02) 9290 2061 www.ipart.nsw.gov.au

Contents

iii IPART Gosford City Council and Wyong Shire Council

Contents

1 Introduction and executive summary 1 1.1 Overview of determinations 2 1.2 Key differences between draft and final determinations 3 1.3 Details of our determinations 4 1.4 Impact on residential customer bills 13 1.5 Impact on non-residential customers 16 1.6 Impact on the Councils 20 1.7 Structure of this report 23

2 Context for this review 25 2.1 IPART’s review process 25 2.2 Other matters we were required to consider 26 2.3 The Councils’ operations 29 2.4 Overview of the Councils’ submissions to our Issues Paper 32 2.5 Overview of the Councils’ submissions to our draft report and

determination 35

3 IPART’s approach to setting prices 38 3.1 Overview of price setting approach 38 3.2 Length of the determination period 39 3.3 Approach for determining the notional revenue requirement 40 3.4 Approach for converting the notional revenue requirement into prices 42 3.5 Approach to addressing the risk of significant variation between actual

and forecast water sales 45 3.6 Approach to addressing the costs of bulk water purchased from Hunter

Water Corporation 47 3.7 Approach to inter-regional transfers for water banking 50 3.8 Requirement to report on progress against output measures 50

4 Overview of the Councils’ revenue requirement 54 4.1 Summary of findings and decisions on revenue requirements 55 4.2 The Councils’ proposals 56 4.3 Notional revenue requirement 57 4.4 IPART’s decision on revenue from trade waste, miscellaneous and other

charges 60

Contents

iv IPART Gosford City Council and Wyong Shire Council

5 Revenue required for operating expenditure 64 5.1 Summary of IPART’s decisions 65 5.2 The Councils’ submissions 65 5.3 Oakley Greenwood’s review 71 5.4 Stakeholders’ Submissions 74 5.5 IPART’s analysis 75

6 Revenue required for capital investment 81 Decisions on the Councils’ past and forecast capital expenditure 82 6.1 Review of Past Capital Expenditure 82 6.2 Review of Future Capital Expenditure 89 6.3 Calculating the annual value of the RAB over the determination period 97 6.4 Calculating the allowance for a return on assets 101 6.5 Calculating the allowance for regulatory depreciation 103 6.6

7 The Councils’ forecast water sales 107 7.1 Water sales 107 7.2 The Councils’ Proposed Approach 108 7.3 IPART’s Analysis 109

8 Outcomes from review of price structures 110 8.1 Price structures review for the 4 water utilities 110 8.2 Water usage charge 112 8.3 Residential water service charge 112 8.4 Non-residential water service charge 114 8.5 Water prices for unmetered properties 115 8.6 Residential sewerage service charge 117 8.7 Non-residential sewerage service charge 119 8.8 Non-residential sewerage usage charge 120 8.9 Non-residential sewerage discharge allowance 121 8.10 Stormwater drainage 122 8.11 Impacts on the Councils’ customers from proposed price reform 123

9 Pricing decisions for the Councils 125 9.1 Water charges 125 9.2 Sewerage charges 131 9.3 Stormwater drainage charges 138 9.4 Trade waste charges 140 9.5 Miscellaneous charges 147

10 Implications of pricing decisions 151 10.1 Implications for customers 151 10.2 Implications for the Councils’ service standards 160 10.3 Implications for the Councils 160 10.4 Implications for general inflation 162 10.5 Implications for the environment 162

Contents

v IPART Gosford City Council and Wyong Shire Council

Appendices 165 A Matters to be considered by IPART under section 15 of the IPART Act 167 B Gosford Council’s output measures and capital expenditure program 169 C Wyong Council’s output measures and capital expenditure program 172 D Implementation of our new approach to tax in the 2013 Determination 175 E Weighted Average Cost of Capital 177 F Decisions on Gosford Council’s and Wyong Council’s trade waste fees

and charges 192 G Decisions on Gosford and Wyong Councils’ miscellaneous service

charges 196

Glossary 203

1 Introduction and executive summary

Gosford City Council and Wyong Shire Council IPART 1


The Independent Pricing and Regulatory Tribunal of NSW (IPART) is responsible for setting the prices Gosford City Council (Gosford Council) and Wyong Shire Council (Wyong Council, together the Councils) can charge for water supply, sewerage and stormwater drainage services to residential and non-residential customers, and a range of miscellaneous services (including trade waste). We recently completed our review of the maximum prices for these services over the 4 years from 1 July 2013 to 30 June 2017 (the 2013 determination period).

This report explains our determination, for each Council on its prices and charges, including the rationale and analysis that underpin our decisions. Each Council submitted a proposal with forecast sales and expenditures, and a schedule of charges, however we have undertaken our own analysis in reaching our decisions.1 We have also applied the set of principles we determined during a recent review of price structures of the 4 metropolitan water agencies, including the Councils.2

During the period covered by our determinations, the Councils are expected to transfer their functions to the Central Coast Water Corporation, however we have not included the likely costs and impacts of this in our decisions.3

Simultaneously with this determination, we reviewed the parameters to apply to the developer charges for each Council and have released our determination of these charges.4

1 Gosford City Council, Pricing submission To IPART 2012, September 2012, and Wyong Shire

Council, Pricing submission to the Independent Pricing and Regulatory Tribunal Price Path from 1 July 2013 – 30 June 2017, September 2012.

2 IPART, Review of price structures for metropolitan water utilities - Final Report, March 2012. 3 See section 2.3.2. 4 IPART, Gosford City Council and Wyong Shire Council, Review of calculation parameters for developer

charges - Final Report, May 2013.


2 IPART Gosford City Council and Wyong Shire Council

Box 1.1 Dollar values used in this report

This report sets out the Councils’ costs of operating their services, the charges they canlevy and the amounts of customers’ bills. We express the dollar values of these figures indifferent ways. Costs and charges are expressed in real dollars ($2012/13). Real dollar costs and

charges in future years do not include inflation. We indicate that the increases are“without inflation” or “before inflation is applied”.

We have presented the amounts of customers’ bills in nominal dollars. Nominaldollars in future years include the relevant forecast inflation. We have usednominal dollars to make it easier for customers to understand the combined impact ofthe new prices and inflation on the amount they may be expected to pay.

The forecast annual inflation used in this report is 2.5% per annum between2013/14 and 2016/17.

1.1 Overview of determinations

Our determinations reflect our decisions regarding the efficient costs of operating a water and sewerage business. This has different outcomes for the customers in each Council’s area, as the Councils’ costs differ.

In their submissions to our price review, both Councils proposed significant increases in prices and customer bills. Gosford Council proposed average price increases of around 67%5, and Wyong Council proposed increases of around 55%6. After considering the Councils’ proposals, our determinations mean that prices and household bills will be significantly lower than the Councils proposed.

In Gosford Council’s area typical residential customers’ water and sewerage bills will increase by approximately 28% (or $297 including inflation). Customers’ bills in Wyong Council’s area will increase by 7.0% (or $73 including inflation).

The differences between the Councils arise in part from differences in the underlying cost structures, however, the primary differences are in operating costs, and are due to: costs arising from sludge management to be undertaken by Gosford Council,

and

an increase in the value of Gosford Council’s Regulatory Asset Base, resulting in a greater allowance for return on and of capital expenditure.

5 Gosford City Council submission, September 2012 p 3, includes expected inflation of 2.5%. 6 Wyong Shire Council submission, September 2012, includes expected inflation of 2.5% and

IPART analysis.



We have reviewed the Councils’ forecasts which both proposed that operating expenditures needed to increase to deliver services over the next 4 years. In each case, we decided to set a lower operating expenditure allowance than that proposed.

In our analysis we assessed the operating costs per property in each area and considered that operating costs per property of each Council are similar. However, we acknowledge that there is a difference in the trend and level of operating cost per property between Gosford Council and Wyong Council.

Increase in sludge management costs is an issue specific to Gosford Council in this determination period. The cost of disposal has significantly increased for the Council due to the location of suitable disposal sites and the greater costs required to comply with its sewerage system licence.

The other factor that drives the difference in the level of increases between the Councils’ bills is capital expenditure. In recent years, Gosford Council has delivered a large capital program with focus on sewerage infrastructure. As a result Gosford Council spent significantly more than was allowed for in the last determination. Wyong Council was also allowed an ambitious capital program in the last determination, but its program was to deliver infrastructure in growth areas. Forecast growth rates were not achieved and, as a result, Wyong Council’s capital program was largely deferred.

Given the magnitude of the over-expenditure of capital by Gosford Council over the period of the last determination, we spent considerable time investigating the causes of the increases. Our Consultant, Oakley Greenwood, considered the projects with the largest over-expenditure in great detail. Based on its recommendation, and our own investigations, we concluded that the projects were necessary. We accept that the changes in the scope of works for those projects that drove the over-expenditure were required. Our decision is that Gosford Council’s capital expenditure over the last determination was prudent and efficient and should be added to its Regulatory Asset Base. However, we have made a downward adjustment to forecast expenditure in 2012/13.

1.2 Key differences between draft and final determinations

Prices in our final report and determinations are slightly higher than those in our draft determinations. We have made changes to some of the inputs we use to generate the Councils’ revenue requirements and hence the prices required to generate that revenue. These changes mean that Gosford Council’s notional revenue requirement has increased by $14.0 million (4.0%) relative to the draft determination and Wyong Council’s by $13.6 million (4.9%).



Since the draft determination, we have made a change to the methodology we use in estimating the WACC7. We reached the view that the methodology used to derive the WACC in the draft determinations may yield estimates of the WACC that are too low by market standards. The transitionary approach used in the final report gives greater weight to the WACC estimated using long-term averages. The result of this change means the WACC has increased from 4.2% in the draft determinations to 4.6%. This increase in the WACC accounts for around two-thirds of the increase in Gosford Council’s notional revenue requirement relative to the draft determination and about half of Wyong Council’s increase. A full discussion of our WACC methodology is set out in Appendix E.

We made other changes in response to stakeholder submissions on our draft report (including the Councils) and our analysis of the issues raised. All of these changes contributed to an increase in the notional revenue requirement. These include:

An increase in our assessment of Wyong Council’s efficient operating expenditure to take into account new information on the allocation of corporate overheads, backlog maintenance on water assets and higher water treatment costs.

An increase in the value of Wyong Council’s Regulatory Asset Base to allow for higher stormwater drainage capital expenditure and the construction of the Mardi to Warnervale transfer pipeline.

An increase in Gosford Council’s efficient operating expenditure.

Operating expenditure is discussed in detail in chapter 5. Capital expenditure is discussed in chapter 6.

1.3 Details of our determinations

Our decisions cover both revenue and pricing. This section sets out:

our decisions about the revenue each Council will require our decisions to apply our pricing principles to the structure of prices for

Gosford and Wyong Councils

the price outcomes for a range of different charges for each of the Councils.

7 We are currently reviewing our existing WACC methodology. Further work is being

undertaken on the issues identified and there will be further consultation with stakeholders on these issues. We now expect to publish a final decision on our WACC methodology by the end of 2013.



1.3.1 Our decisions on the Councils’ revenue requirement

For both Councils, our decision on the revenue requirement is lower than was proposed. This occurred primarily for 2 reasons: In our view, the appropriate level of post-tax weighted average cost of capital

(WACC) for the Councils should be 4.6%, which is lower than the WACC proposed by either Council.

We allowed for lower capital and operating expenditures than the Councils proposed.

Gosford Council

We have decided that Gosford Council’s revenue requirement will increase by an average of 4.4% per year (or 19% over 4 years) over the determination period. This is significantly lower than Gosford Council’s proposed average increase of 11.3% per year (or around 53.5% over 4 years).8

Gosford Council did recognise that the price impacts of recovering its revenue requirement in the earlier years of the determination were too great and proposed a glide path approach.9 We have also applied a glide path approach, which means that Gosford Council does not recover its full revenue requirement until the final year of the determination. This will reduce the price impacts on customers.

Wyong Council

We have decided that Wyong Council’s revenue requirement will remain fairly stable during the determination period, increasing by an average of 0.9% per year in real terms. This is significantly less than Wyong Council’s proposal of an average increase of 9.6% per year (or around 44.3% over 4 years).10 We have also applied a glide path approach to setting Wyong Council’s prices, though the Council proposed smoothed prices.

8 Gosford Council proposed revenue in 2016/17 that was $42.3 million ($2012/13) higher than its

revenue in 2012/13. 9 A glide path approach calculates the prices required in the final year and sets prices in the

interim years to transition to those prices. It reduces price shocks to customers but also allows the Councils to recover their required revenue in the final year.

10 Wyong Council proposed revenue in 2016/17 that was $31.77 million ($2012/13) higher than its revenue in 2012/13.



1.3.2 Our decision to restructure prices

In 2012 we concluded a broad review of the price structures of the 4 metropolitan water agencies we regulate,11 engaging stakeholders and the Councils. The review found that under existing price structures, the fixed charges that some customers are paying do not reflect the cost of making the services available to them. This suggests that other customer groups are paying more than the cost of providing their service. The review defined a set of principles around which each agency’s price structures should be designed.12 These principles were first implemented in Sydney Water’s 2012 determination.13 We have continued their use in our consideration of the Councils’ price structures.

To remove cross-subsidies and improve the equity and cost-reflectivity of the Councils’ prices for all customers, we made decisions to: Set a standard water service charge for all residential customers, regardless

of their type and ownership structure. – For Gosford Council this fixed charge is $201.54 in the final year (including

inflation) and for Wyong Council the final year fixed charge is $167.72 (including inflation).

– This change affects a few multi-dwelling property types and ownership structures (although only in Wyong Council’s area) that currently pay a meter based charge. To minimise the costs of this price restructuring on these customers, we have set their water service charges so they transition towards the standard charge over the 4-year period.

– We note that differences in customers’ water usage are already accounted for through the water usage charge.

Introduce a sewerage discharge factor to be applied to Gosford Council’s non-residential sewerage service charge. This will make Gosford consistent with all the other 3 metropolitan agencies.

Introduce a sewerage usage discharge allowance for non-residential customers in both Council areas. A sewerage discharge allowance provides customers with a ‘free’ level of sewerage discharge before a volumetric charge is levied. We have set the discharge allowance for both Gosford and Wyong Councils at 150 kL per year.

Maintain Wyong Council’s non-residential sewerage usage charge ($0.83/kL in nominal terms) over the full period of the determination, and reduce Gosford Council’s non-residential sewerage usage charge over the 4 years so that it will be the same as for Wyong Council by 2016/17. This decision will move the charge towards a level that reflects the short run marginal cost of sewerage services.

11 Sydney Water Corporation, Hunter Water Corporation, Gosford Council and Wyong Council. 12 IPART, Review of price structures for metropolitan water utilities - Final Report, March 2012. 13 IPART, Review of prices for Sydney Water Corporation’s water, sewerage, stormwater drainage and

other services – Final Report, June 2012.



Maintain the Councils’ current price structures for stormwater drainage charges. Given the transition of water and sewerage services to the Central Coast Water Corporation during the period covered by the determination, we consider that our future regulation of stormwater drainage charges is uncertain.

1.3.3 Price Outcomes

For each Council we have determined prices for 4 categories of charges:

1. Water supply services

2. Sewerage services

3. Stormwater drainage services

4. Trade waste and miscellaneous charges.

Gosford Council

Customers of Gosford Council pay a combination of service charges and usage charges. Under our determination, prices for all Gosford Council’s service charges increase in real terms. Usage charges for water will only rise with inflation and sewerage usage charges (paid only by non-residential customers) will decrease.

1. Water supply services (see Table 1.1) The fixed service charges ($ per year) increase in each year of the

determination period. By 2016/17, the standard charge for residential customers and non-residential customers with 20mm individual meters increases by 83.9% from its current level. For other non-residential customers,14 the standard charge increases by 64.2%.

The usage charge ($ per kilolitre) for drinking water does not change, in real terms, over the determination period and will only increase in line with inflation.

14 Those with a shared meter or individual meter larger than 25mm diameter.



Table 1.1 Gosford Council prices for water supply services ($2012/13)

Current2012/13

2013/14 2014/15 2015/16 2016/17 % change 2013-17

Service charges ($/year) Residential - individual meter

99.28 122.74 142.00 162.34 182.58 83.9%

Non residential 20mm individual meter 99.28 122.74 142.00 162.34 182.58 83.9% 25mm connection 155.13 171.35 198.18 226.56 254.79 64.2% 40mm connection 397.14 438.66 507.34 579.99 652.26 64.2% 100mm connection 2,482 2,742 3,171 3,625 4,077 64.2% Usage charges ($/kilolitre)

Usage 2.12 2.12 2.12 2.12 2.12 0.0%

2. Sewerage services (see Table 1.2) For residential customers and small non-residential customers,15 the fixed

service charge ($ per year) increases by 16.1% over the determination period. For other non-residential customers (those with shared meters or individual meters of 25mm diameter or greater) this charge increases by 127.9%.

However, the impact on smaller customers, particularly those sharing a meter, will not be as great as implied by the dollar increases. We have altered the composition of the charges that apply, making direct comparisons with 2012/13 charges difficult. Currently they are subject to a ‘minimum bill’ which aligns (and increases) the overall charges that they pay. In addition, the application of a discharge factor reduces the service charge payable in the upcoming determination period.

The sewerage usage charge (paid only by non-residential customers) decreases by 33.6% in real terms to align with Wyong Council’s charge by the end of the determination period, and reflect the short run marginal cost of sewage transportation, treatment and disposal.

15 Those with an individual 20mm meter.



Table 1.2 Gosford Council prices for sewerage services ($2012/13) 2012/13 2013/14 2014/15 2015/16 2016/17 % change

2013-17

Availability charges ($/year) Residential 534.83 561.93 580.52 599.73 620.87 16.1% Non residential 20mm individual meter 534.83 561.93 580.52 599.73 620.87 16.1% 25mm connection 624.76 926.66 1,104 1,275 1,424 127.9% 40mm connection 1,599 2,372 2,826 3,264 3,644 127.9% 100mm connection 9,964 14,827 17,662 20,400 22,777 128.6% Usage charges ($/kilolitre)

Non-residential 1.13 1.04 0.94 0.85 0.75 -33.6%

3. Stormwater drainage services (see Table 1.3) All Gosford customers (both residential and non-residential, regardless of

size) pay the same standard stormwater drainage service charge. Our decision is to maintain the current price structure. The current charge increases by 39.5% in real terms, from $82.52 in 2012/13 to $115.08 in 2016/17.

Table 1.3 Gosford Council prices for stormwater drainage services ($2012/13)

2012/13 2013/14 2014/15 2015/16 2016/17 % change 2013-17

Availability charges ($/year)

Residential 82.52 89.68 97.45 105.90 115.08 39.5% Non-residential 82.52 89.68 97.45 105.90 115.08 39.5%

4. Trade waste and miscellaneous charges Generally, our decisions on trade waste charges reduce current levels of

charges in real terms, and maintain them over the determination period. Minor changes to a range of miscellaneous charges will result in increases and decreases, with some being reconfigured or removed. We consider that the charges are cost-reflective, and align pricing levels in Gosford Council with those charged by Wyong Council.

We have included a new ‘water carter fill charge’ for water carters in Gosford Council’s area of operations. For customers with the relevant equipment, this charge will replace the current metered standpipe hire charge.



Our decisions allow Gosford and Wyong Councils to move to more aligned prices for trade waste and miscellaneous charges by the end of the determination period. A more detailed review of trade waste charges and miscellaneous and ancillary charges should be undertaken at the first determination for the Central Coast Water Corporation.

Wyong Council

Customers of Wyong Council pay a combination of service charges and usage charges. Under our determination, prices for Wyong Council’s water service charge, and residential sewerage service charges, decrease in real terms. For non-residential customers with meter sizes greater than 20mm diameter, sewerage service charges increase. Water usage charges will only rise with inflation and sewerage usage charges (paid only by non-residential customers) will stay constant and will not increase in line with inflation.

1. Water supply services (see Table 1.4) The fixed service charges ($ per year) will decrease in each year of the

determination, although some residents (those with common meters) may see an increase. For residential customers (with individual meters) and non-residential customers with individual 20mm diameter meters, the standard charge falls by 9.2% from its current level by 2016/17. For all other non-residential customers, it falls by 19.5% by 2016/17.

The usage charge ($ per kilolitre) for drinking water does not change, in real terms, over the determination period. It will only increase in line with inflation.



Table 1.4 Wyong Council prices for water supply services ($2012/13)

Current2012/13

2013/14 2014/15 2015/16 2016/17 % change

2013-17

Service charges ($/year) Residential - individual meter

167.35 165.37 163.39 156.09 151.95 -9.2%

Residential - common meter

N/Aa 82.69 109.47 129.55 151.95

Non residential 20mm individual meter 167.35 165.37 163.39 156.09 151.95 -9.2% 25mm connection 261.47 222.32 222.02 214.15 210.59 -19.5% 40mm connection 669.36 569.14 568.37 548.22 539.11 -19.5% 100mm connection 4,184 3,557 3,552 3,426 3,369 -19.5%Usage charges ($/kilolitre)

Usage 2.12 2.12 2.12 2.12 2.12 0.0%a Some customers with a shared meter currently pay a share of the service charge which is based on the size of the meter. The share depends on the number of units being served by the meter and the size of the meter. Under our determination, all residential properties (except retirement villages) will now pay a set annual service charge.

2. Sewerage services (see Table 1.5) The fixed service charge ($ per year) for residential customers, and non-

residential customers with individual 20mm diameter meters, decreases by 3.7% over the period of the determination. However, for other non-residential customers (ie, those with shared meters or individual meters of 25mm diameter or greater) this charge increases by 57.1% over the 4 years.

However, the impact on smaller non-residential customers, particularly those sharing a meter, will not be as great as implied by the dollar increases. We have altered the composition of the charges that apply, making direct comparisons with 2012/13 charges difficult. Currently they are subject to a ‘minimum bill’ which aligns (and increases) the overall bill that they pay.

The sewerage usage charge (paid only by non-residential customers) decreases by 9.4% in real terms. The price will be the same as in 2012/13 if inflation is included.



Table 1.5 Wyong Council prices for sewerage services ($2012/13) 2012/13 2013/14 2014/15 2015/16 2016/17 %

change 2013-17

Availability charges ($/year) Residential 463.44 446.46 446.32 446.20 446.07 -3.7% Residential - common meter

N/Aa 221.75 292.62 363.50 446.07

Non residential 20mm individual meter 463.44 446.46 446.32 446.20 446.07 -3.7% 25mm connection 260.87 368.75 383.12 396.58 409.80 57.1% 40mm connection 668 944.00 980.79 1,015.24 1,049.09 57.1% 100mm connection 4,174 5,900 6,130 6,345 6,557 57.1% Usage charges ($/kilolitre)

Non-residential 0.83 0.81 0.79 0.77 0.75 -9.4% a Some customers with a shared meter currently pay a share of the service charge which is based on the size of the meter. The share depends on the number of units being served by the meter and the size of the meter. Under our determination, all residential properties (except retirement villages) will now pay a set annual service charge.

3. Stormwater drainage services (see Table 1.6) Wyong customers pay a stormwater drainage service charge based on

whether they are individually metered or on a common meter. Non-residential customers pay on meter based charge. Our decision is to maintain the current price structure, but increase the rate. The current charge increases in real terms by 31.9%, from $89.77 in 2012/13 to $118.44 in 2016/17.

Table 1.6 Wyong Council prices for stormwater drainage services ($2012/13)

2012/13 2013/14 2014/15 2015/16 2016/17 % change 2013-17

Availability charges ($/year)

Residential 89.77 96.21 103.11 110.51 118.44 31.9% Non-residential 89.77 96.21 103.11 110.51 118.44 31.9%

Note: This charge is for a non-residential customer with a 20mm individual meter. The charge increases proportionately with water meter size.



4. Trade waste and miscellaneous charges Our decisions mean that most of Wyong Council’s trade waste charges are

maintained or reduced in real terms. The exception is the trade waste usage charge for Category 2 (compliant) trade waste which will increase significantly over the period to align with that applying in Gosford. We have not set a maximum price for effluent or sludge removal as we do not consider these to fall within the Councils’ declared monopoly services. In addition, customers can use private service providers instead of the Council. Miscellaneous charges will generally be maintained, in real terms.

We have also included septic waste charges for customers who discharge from private septic systems directly into Council’s sewerage system. These services are currently provided by Wyong Council’s general functions, but will now be undertaken by Council’s water and sewerage functions in the new determination.

Our decisions allow Gosford and Wyong Councils to move to more aligned prices for trade waste and miscellaneous charges by the end of the determination period. We consider that a thorough review of miscellaneous charges prior to the upcoming price determination for the Central Coast Water Corporation should be undertaken.

1.4 Impact on residential customer bills

Our determinations setting the prices of water and sewerage services for Gosford and Wyong Councils are based on our decisions about the efficient costs of operating a water and sewerage business. As costs differ between the Councils, the outcomes for the customers in each Council’s area are different.16

In Gosford Council’s area typical residential customers’ annual water and sewerage bills will increase by approximately 28% (or $297 including inflation). Customers’ annual bills in Wyong Council’s area will increase by 7.0% (or $73 including inflation).

Gosford Council

Our determination results in bill increases in real terms for residential customers over the determination period. For example, the annual water and sewerage bill for a household with an individual water meter and water usage of 200 kL per year17 will increase in real terms by 16% (or $169) over the 4-year period, or by an average of 3.8% per year.

16 See section 1.1. 17 Annual average consumption per household in Gosford Council’s area is lower than this, but

we use 200 kL to allow for comparisons to be made between water agencies.



When inflation is included in the prices (ie, in nominal terms), the annual bill for this household will increase by 28.0% (or $297) over the 4-year period, or by an average of 6.4% per year.

Table 1.7 shows the indicative impact of the determination on annual residential water and sewerage bills for customers in Gosford Council’s area with individual meters and various levels of water usage. We have calculated the changes both with and without inflation.

Table 1.7 Impact of determination on annual water and sewerage bills for residential customers with individual meters in Gosford Council’s area

Water use per year

Current 2012/13

2013/14 2014/15 2015/16 2016/17 Change 2013-17

Without inflation 100 kL pa 846 896.67 934.52 974.07 1,015.46 169.35 6.0% 4.2% 4.2% 4.2% 20.0% 200 kL pa 1,058 1,108.67 1,146.52 1,186.07 1,227.46 169.35 4.8% 3.4% 3.4% 3.5% 16.0% 300 kL pa 1,270 1,320.67 1,358.52 1,398.07 1,439.46 169.35 4.0% 2.9% 2.9% 3.0% 13.3% With inflation 100 kL pa 846 919.09 981.83 1,048.97 1,120.87 274.76 8.6% 6.8% 6.8% 6.9% 32.5% 200 kL pa 1,058 1,136.39 1,204.56 1,277.27 1,354.88 296.77 7.4% 6.0% 6.0% 6.1% 28.0% 300 kL pa 1,270 1,353.69 1,427.29 1,505.57 1,588.89 318.78 6.6% 5.4% 5.5% 5.5% 25.1%

Note: Totals may vary due to rounding.

Wyong Council

Our determination results in bill decreases, in real terms, over the determination period. For example, the annual water and sewerage bill for a household with an individual water meter and water usage of 200 kL per year18 will decrease in real terms by 3.1% (or $33) over the 4-year period, or by an average of 0.8% per year.

When inflation is included in prices, those annual bills will increase (in nominal terms) slightly by 7.0% (or $73) over the 4-year period, or by an average of 1.7% per year.

18 Annual average consumption per household in Wyong Council’s area is lower than this, but we

use 200 kL to allow for comparisons to be made between water agencies.



Properties in Wyong Council’s area with a shared water meter (such as flats in a multi-dwelling property) will experience different changes to their bill, as a result of our decision to set a standard water service charge by 2016/17 (see section 1.3.2 above). The impact of this decision will depend on a customer’s current water service charge, which varies from property to property. For example, the equivalent water bill19 for a household in a property with 10 dwellings and a 40mm meter and average usage of 135 kL per year20 will increase in real terms by 8.3% (or $68) over the determination period, or an average of 2.0% per year. When inflation is included, the bill will increase by 19.5% ($159.43).

Table 1.8 shows the indicative impact of the determination on annual residential water and sewerage bills for customers in Wyong Council’s area with individual meters and various levels of water usage. We have calculated the changes both with and without inflation.

Table 1.8 Impact of determination on annual water and sewerage bills for residential customers with individual meters in Wyong Council’s area

Water use per year

Current 2012/13

2013/14 2014/15 2015/16 2016/17 Change 2013-17

Without inflation 100 kL pa 843 824 822 814 810 -33% increase -2.3% -0.3% -0.9% -0.5% -3.9%200 kL pa 1,055 1,036 1,034 1,026 1,022 -33% increase -1.8% -0.2% -0.7% -0.4% -3.1%300 kL pa 1,267 1,248 1,246 1,238 1,234 -33% increase -1.5% -0.2% -0.6% -0.3% -2.6%With inflation 100 kL pa 843 844 863 877 894 51% increase 0.2% 2.2% 1.6% 2.0% 6.1%200 kL pa 1,055 1,062 1,086 1,105 1,128 73% increase 0.7% 2.3% 1.8% 2.1% 7.0%300 kL pa 1,267 1,279 1,309 1,334 1,362 95% increase 1.0% 2.3% 1.9% 2.1% 7.5%


19 We have calculated an equivalent bill per dwelling for comparison purposes. In single owner

multi premises the owner currently receives the bill for all occupants. 20 Based on our 2010 household survey 135 kL is the median consumption for residential

customers in flats and units: See IPART, Residential energy and water use in Sydney, the Blue Mountains and Illawarra, Results from the 2010 household survey, December 2010.



Pensioners in both Council areas

As the current pensioner concession is fixed, pensioners (not in retirement villages) in both Council areas will see the same dollar increases in their bills as other customers with similar water and sewerage service characteristics.

We have deferred our decisions regarding price structure changes affecting retirement villages to a future determination. They will continue to be charged on a meter basis and will experience impacts on their bills similar to non-residential properties. We consider that it is not appropriate to implement price structure changes within the current pensioner concession policy.

1.5 Impact on non-residential customers

The impacts of our decisions on non-residential customers are different for those in Gosford and Wyong Council areas, and will also depend on the characteristics of each customer. They will vary according to whether a customer has an individual meter or shares a meter, and the size of the meter (ranging from 20mm to 300mm in diameter), as well as the type of property (eg, strata or company title), the number of customers sharing a meter, and their sewerage volumes. This makes it difficult to define a ‘typical’ non-residential customer.

Gosford Council

Most non-residential customers in Gosford Council’s area will experience increases in their water and sewerage bills. This results from increases in the water and sewerage service charges. However, maintaining the water usage charge in real terms, reducing the sewerage usage charge and introducing a free discharge allowance of 150 kL will go some way to limiting the overall increase in non-residential bills.

Of the individually metered customers, small non-residential customers (ie, those exhibiting similar usage patterns to residential properties) will see the lowest percentage increases. They benefit from the introduction of the discharge factor and free discharge allowance, so their overall bill increase is reduced. For customers with large sewage volumes, the impact of higher service charges is offset by lower usage charges and the free discharge allowance, so their bill increases are also lower in percentage terms.

Table 1.9 shows the indicative impact of the determination (including the effects of inflation) on non-residential water and sewerage bills for customers with individual meters,21 various levels of water usage and average sewerage discharge volumes.

21 This includes shared meters in properties that are not strata properties.



Table 1.9 Impact of determination on annual water and sewerage bills for non-residential customers with individual meters in Gosford Council’s area (nominal $ per year)

Water usage per year

Meter size

2012/13 2013/14 2014/15 2015/16 2016/17 Total Change

200 20mm 1,058 1,136 1,205 1,277 1,355 297 % increase 7.4% 6.0% 6.0% 6.1% 28.0% 300 25mm 1,721 1,810 2,039 2,274 2,497 776 % increase 5.2% 12.7% 11.5% 9.8% 45.1% 1,000 40mm 5,134 5,607 6,174 6,755 7,303 2,169 % increase 9.2% 10.1% 9.4% 8.1% 42.3% 10,000 100mm 43,848 47,611 51,054 54,572 57,874 14,025 % increase 8.6% 7.2% 6.9% 6.0% 32.0%

Note: Totals may vary due to rounding. Note: Based on average sewerage discharge factors.

Non-residential customers with a shared meter will experience varied impacts on their bills, depending on whether or not they are in a strata property, the number of customers that share the property’s meter, and their sewage volumes. This is because we have changed the structure of water service charges for some non-residential multi-premises. The current meter based sewerage charge has been maintained.

Table 1.10 shows the indicative impact of the determination (including the effects of inflation) on non-residential water and sewerage bills for customers in strata properties with shared meters, various levels of water usage and average sewerage discharge volume. Customers in other non-residential properties that share a meter will experience impacts on their bills similar to customers with individual meters.



Table 1.10 Indicative annual water and sewerage charges for strata units in Gosford Council’s area sharing a meter (nominal $ per year)

Water use (kL pa per unit)

Meter size

Equal strata connections

2012/13 2013/14 2014/15 2015/16 2016/17 Change 2012/13-

16/17

75 kL pa 25mm 3 543 525 602 680 755 212 % increase -3.3% 14.6% 13.1% 11.0% 39.1% 300 kL pa 25mm 3 1,249 1,229 1,303 1,379 1,450 201 % increase -1.6% 6.0% 5.8% 5.2% 16.1% 75 kL pa 25mm 8 413 344 372 401 428 15 % increase -16.8% 8.2% 7.8% 6.8% 3.7% 300 kL pa 40mm 8 1,240 1,248 1,317 1,387 1,453 213 % increase 0.6% 5.5% 5.3% 4.7% 17.2% 75 kL pa 40mm 14 449 412 452 494 533 84 % increase -8.3% 9.8% 9.2% 7.9% 18.7%

Note: We have applied an average discharge factor of 90%. We have also distributed the free threshold allowance for sewerage evenly between strata units.

Wyong Council

In Wyong Council’s area the bills of individually metered non-residential customers increase roughly in line with inflation. This occurs because of a combination of the meter-based water service charge decreasing and the sewerage service charge increasing, and the introduction of the free discharge allowance and a reduction in the sewerage usage charge.

Table 1.11 shows the indicative impact of the determination (including the effects of inflation) on non-residential water and sewerage bills for customers with individual meters,22 various levels of water usage and average sewerage discharge volumes.

22 This includes shared meters in properties that are not strata or company title properties.



Table 1.11 Impact of determination on annual water and sewerage bills for non-residential customers with individual meters in Wyong Council’s area (nominal $ per year)

Water usage per year

Meter size

2012/13 2013/14 2014/15 2015/16 2016/17 Total Change

200 20mm 1,055 1,062 1,086 1,105 1,128 73 % increase 0.7% 2.3% 1.8% 2.1% 7.0% 300 25mm 1,356 1,437 1,470 1,496 1,526 170 % increase 5.9% 2.3% 1.7% 2.1% 12.5% 1,000 40mm 4,137 4,250 4,374 4,480 4,600 462 % increase 2.7% 2.9% 2.4% 2.7% 11.2% 10,000 100mm 36,610 38,164 39,147 40,015 40,979 4,369 % increase 4.2% 2.6% 2.2% 2.4% 11.9%

Note: Totals may vary due to rounding. Note: Based on average sewerage discharge factors.

Non-residential customers with a shared meter will experience varied impacts on their bills, depending on whether or not they are in a strata (or company title) property, the number of customers that share the property’s meter, and their sewage volumes. This is because we have changed the structure of water service charges for some non-residential multi-premises. The current meter based sewerage charge has been maintained.

Table 1.12 shows the indicative impact of the determination (including the effects of inflation) on non-residential water and sewerage bills for customers in strata (or company title) properties with shared meters, various levels of water usage and average sewerage discharge volumes. Customers in other non-residential properties that share a meter will experience impacts on their bills similar to customers with individual meters.



Table 1.12 Indicative annual water and sewerage charges for strata units in Wyong Council’s area sharing a meter (nominal $ per year)

Water use (kL pa per unit)

Meter size

Equal strata connections

2012/13 2013/14 2014/15 2015/16 2016/17 Change 2012/13-

16/17

75 kL pa 25mm 3 481 406 416 423 432 -49 % increase -15.6% 2.4% 1.7% 2.1% -10.2% 300 kL 25mm 3 1,106 1,063 1,085 1,105 1,126 21 % increase -3.9% 2.1% 1.8% 2.0% 1.9% 75 kL pa 25mm 8 412 289 295 301 307 -105 % increase -29.8% 2.1% 1.8% 2.0% -25.5% 300 kL pa 40mm 8 1,103 1,042 1,067 1,090 1,115 13 % increase -5.5% 2.4% 2.1% 2.3% 1.1% 75 kL pa 40mm 14 425 314 323 331 340 -86 % increase -26.2% 2.9% 2.4% 2.7% -20.2%

Note: We have applied an average discharge factor of 90%. We have also distributed the free threshold allowance for sewerage evenly between strata units.

1.6 Impact on the Councils

In the case of both Gosford and Wyong Councils, under our determinations the Councils will generate less revenue than they proposed in their submissions to us. Our decisions exclude the costs of setting up the Central Coast Water Corporation and reflect our views about each Council’s past and forecast expenditures and the current market conditions.

Overall, our financial modelling indicates that Gosford Council’s financial ratios will continue to be sound under the determination, while Wyong Council will see some deterioration in its financial position. In both cases, however, we consider that the Councils will have adequate funds to continue to meet their financial distributions and operating and capital costs. Our conclusions depend on whether the Councils deliver their services at efficient costs, and on demand forecasts. The details and outcomes of our financial modelling are included in Chapter 10.

Our decision on the Councils’ revenue requirement also assumes that they will maintain current service levels, and not reduce these levels to achieve cost reductions and efficiency savings. We consider that our prices will continue to allow the Councils to meet the standards required by its regulators while reducing the potential for price increases to fund over-performance.



Gosford Council

Under our determination, Gosford Council is expected to generate a total of $352.0 million ($2012/13) in revenue over the 4-year determination period. This is $9.6 million more than the target revenue in our draft determination. We consider that this amount is sufficient to recover its efficient costs (by the last year of the determination) and earn a reasonable rate of return on its assets over this period. Our determination results in revenue that is approximately $73.1 million23 less than Gosford Council proposed to recover from charges.24

In its submission, Gosford Council indicated that its revenue requirement will increase by 53.5% over the determination period. This is due to costs incurred in setting up the Central Coast Water Corporation, increases in operating expenditure and in the return on and of assets due to a large capital program in recent years.

However, based on our views of the efficiency and prudence of its past and forecast expenditures (and the exclusion of the Central Coast Water Corporation set up costs), and the current market conditions, we found that its revenue requirement should only increase by 19% over the same period.

Table 1.13 compares our final decision on the notional revenue requirement with our draft decision and Gosford Council’s proposal.

23 Gosford Council’s submission to IPART, Erratum 26 October 2012, Table 1, p 2. 24 As IPART and Gosford both used a glide path approach to set prices, the revenue to be

recovered from charges is lower that the notional revenue requirement.



Table 1.13 Gosford Council’s notional revenue requirement ($million 2012/13)

2013/14 2014/15 2015/16 2016/17

Gosford Council’s proposal Notional revenue requirement 110.3 114.5 119.4 121.3 IPART’s draft decision Operating expenditure 49.0 48.9 50.1 50.1 Depreciation (regulatory) 7.6 8.1 8.4 8.6 Return on fixed assets 25.6 27.2 28.1 28.7 Return on working capital 0.1 0.1 0.2 0.2 Tax allowance 1.8 2.4 2.4 2.5 Notional revenue requirement 84.1 86.7 89.2 90.0 IPART’s final decision Operating expenditure 49.8 49.7 51.5 51.5 Depreciation (regulatory) 7.6 8.1 8.4 8.6 Return on fixed assets 28.0 29.8 30.8 31.4 Return on working capital 0.1 0.2 0.2 0.2 Tax allowance 1.6 2.2 2.2 2.3 Notional revenue requirement 87.1 89.9 93.1 94.0


Wyong Council

Under our determination, Wyong Council is expected to generate a total of $292.5 million ($2012/13) in revenue over the 4-year determination period. This is $10.1 million more than the target revenue in our draft determination. We consider that this amount is sufficient to recover its efficient costs and earn a reasonable rate of return on its assets over this period. Our determination results in revenue that is approximately $96.4 million less than the notional revenue requirement proposed by Wyong Council.

In its submission, Wyong Council indicated that its revenue requirement will increase by 44.3% over the determination period. This is due to costs incurred in setting up the Central Coast Water Corporation and increases in operating expenditure.

However, based on our views of the efficiency and prudence of its past and forecast expenditures (and the exclusion of the Central Coast Water Corporation set up costs), and the current market conditions, we found that its revenue requirement should stay relatively constant, increasing by around 4% over the same period.



Table 1.14 compares our final decision on the notional revenue requirement with our draft decision and Wyong Council’s proposal.

Table 1.14 Wyong Council’s notional revenue requirement ($million 2012/13)

2013/14 2014/15 2015/16 2016/17

Wyong Council’s proposal Notional revenue requirement 92.0 94.5 99.0 103.5 IPART’s draft decision Operating expenditure 42.3 41.8 41.9 41.8 Depreciation (regulatory) 5.6 5.9 6.1 6.3 Return on fixed assets 18.3 19.2 19.9 20.3 Return on working capital 0.1 0.1 0.2 0.2 Tax allowance 1.8 1.9 1.8 1.7 Notional revenue requirement 68.2 68.9 69.9 70.2 IPART’s final decision Operating expenditure 43.6 43.1 43.2 43.1 Depreciation (regulatory) 5.6 5.9 6.2 6.5 Return on fixed assets 20.1 21.2 22.1 23.1 Return on working capital 0.1 0.1 0.2 0.1 Tax allowance 1.7 1.7 1.6 1.6 Notional revenue requirement 71.1 72.1 73.3 74.4


1.7 Structure of this report

This report explains decisions for the determination in detail, including analysis that guided each decision. The report is structured as follows:

Chapter 2 outlines the scope and context for the review, including our review process, the Councils’ operating and regulatory environment, and the Councils’ submissions and proposed prices

Chapter 3 outlines our price setting approach and decisions related to the regulatory framework

Chapter 4 explains the ‘building block’ approach we used to establish the Councils’ notional revenue requirements, and provides an overview of our decisions on this revenue requirement and its individual components

Chapters 5 and 6 discuss our decisions on these individual components in more detail: – Chapter 5 explains the decisions on the Councils’ efficient operating

expenditure



– Chapter 6 explains the decisions on the allowances for a return on assets and regulatory depreciation

Chapter 7 discusses our decisions on the Councils’ forecast water sales Chapters 8 and 9 explain the decisions on the Councils’ price structures and

set out the price levels

Chapter 10 assesses the implications of our pricing decisions, including the impacts on the Councils, their customers and the environment.

2 Context for this review



The purpose of this review is to determine the maximum prices Gosford City Council and Wyong Shire Council can charge for the water, sewerage and stormwater drainage services they provide to residential and non-residential customers of the Central Coast of NSW. We also determined charges for a range of miscellaneous and ancillary services that the Councils provide.

The following sections outline other contextual issues for the review, including our review process, the matters we have considered, the Councils’ operations and regulatory environment, and the Councils’ submissions to the review.

2.1 IPART’s review process

As part of our review process, we have undertaken an extensive investigation and public consultation process. We have:

released an Issues Paper in June 2012 to assist in identifying and understanding the key issues for review

invited the Councils to make a submission to the review detailing their pricing proposals, and requiring them to provide extensive financial and performance data on the future capital and operating expenditure necessary to maintain service levels and respond to regulatory demands25

invited other interested parties to make submissions on the Issues Paper and the Councils’ submissions26

held a public hearing on 12 November 2012 to discuss a wide range of issues raised by the Councils and other stakeholders

engaged an independent consultant, Oakley Greenwood, to review the Councils’ capital expenditure, asset planning, asset lives and operating expenditure proposals27

released a draft report and draft determination in February 2013 invited interested parties to make submissions on the draft report and

determination

25 The Councils’ submissions were received on 14 September 2012. 26 A total of 27 written submissions were received from other interested parties. 27 Oakley Greenwood’s final report was received in December 2012.



released this final report and determination.

We have considered all matters raised in the submissions in response to the draft report and draft determination before coming to our final decisions. The new charges are expected to apply from 1 July 2013.

IPART’s Issues Paper, stakeholder submissions, the transcript from the public hearing, information on the public workshops and Oakley Greenwood’s reports are available on our website (www.ipart.nsw.gov.au).

2.2 Other matters we were required to consider

Our power to determine prices is derived from our governing Act, the Independent Pricing and Regulatory Tribunal Act 1992 (IPART Act). This review was conducted under Section 11 of the IPART Act. Section 11 provides IPART with a standing reference to conduct investigations and make reports to the Minister on the determination of the pricing for a government monopoly service supplied by a government agency.28

Section 15 of this Act requires IPART to consider a broad range of matters when making determinations. These matters include:29 consumer protection – the protection of consumers from abuses of monopoly

power; the quality, reliability and safety standards of the services concerned; the social impact of pricing decisions; and the effect on general price inflation over the medium term

economic efficiency – the need for greater efficiency in the use and supply of services; the need to promote competition; and the need to consider demand management and least cost planning

financial viability – the cost of providing the services concerned; the appropriate rate of return on public sector assets; and the impact on pricing policies of the agency’s borrowing, capital and dividend requirements

environmental protection – the need to promote ecologically sustainable development through appropriate pricing policies.

In considering these matters, we aim to balance the diverse needs and interests of stakeholders, while also ensuring that the Councils are adequately recompensed for the services they provide.

28 The government agency must be specified in Schedule 1 of the IPART Act. Gosford City

Council and Wyong Shire Council are listed as Water supply authorities for the purposes of Schedule 1 of the IPART Act.

29 The section 15 requirements are listed in full in Appendix A.



We also took into account the principles issued by the Council of Australian Governments (COAG) and contained in the National Water Initiative.30

With these requirements in mind, we have developed a general approach to determining monopoly prices for water agencies. That approach is set out in Figure 2.1.

30 The National Water Initiative has built on the principles established in the 1994 COAG Water

Reform Framework.



Figure 2.1 IPART’s determination process

Obligations for service provision

Regulatory framework

What is the most appropriate approach to regulating the revenue and prices of agencies in this industry?

Given accuracy of forecasts and current industry dynamics, over what period should prices be set?

Revenue requirements

What are the efficient costs of providing these services?

How much will costs differ with variations in the levels of service provided?

What is an appropriate rate of return on the investment in the agency?

Will the agency have adequate access to capital to fund works that meet required standards and maintain services in the long term?

Price structure

How should the costs of delivering services be spread amongst consumer groups?

How should prices be structured to encourage consumer and agency responses that best achieve sustainability objectives?

What are the likely impacts of prices on the affordability of services for different groups of consumers?

What are the potential environmental impacts? What does the proposed outcome imply for the

ongoing viability of the agency? What are the likely impacts on competition?

Determining a regulatory balance

What are the services that water agencies are required to deliver to customers and to what standard?

What are consumers' expectations about the level of service to be provided?

What are the broader environmental and operational constraints within which water agencies must operate and what impacts do these have on their capacity to deliver services?



2.3 The Councils’ operations

2.3.1 The Councils’ operating environment

The Councils share a joint water headworks supply, with the major bulk water storages being Mooney Mooney and Mangrove Creek Dams in Gosford Council’s area and Mardi Dam in Wyong Council’s area. A schematic diagram of the Councils’ water supply system is shown in Figure 2.2.

Gosford Council provides water, sewerage and stormwater services to a population of approximately 160,000 people. Its area of operations covers approximately 1,029 square kilometres31 of the Central Coast region of NSW. It provides water supply services to approximately 70,000 properties and sewerage services to approximately 68,000 properties.32

Wyong Council is responsible for an area covering approximately 820 square kilometres of operations with a current population of over 150,000 people.33 Wyong Council provides water supply services to approximately 62,000 properties and sewerage services to approximately 61,000 properties.34

Gosford Council owns and manages over 1,000 km of water mains and approximately 1,300 km of sewerage mains and channels.35 On average Gosford Council supplied over 12.0 GL36 of water per annum over the 2009 determination period. Wyong Council owns and manages over 1,200 km of water mains and approximately 1,300 km of sewerage mains and channels.37 Over the 2009 determination period, on average Wyong Council supplied 11.8 GL38 of water per annum.

Unlike other metropolitan water agencies, the Councils do not have operating licences. Instead, under section 402 of the Local Government Act 1993, the Councils are required to develop annual management plans with respect to their activities, including water, sewerage and stormwater drainage services.

31 http://www.gosford.nsw.gov.au/council/introducingcouncil.html 32 http://www.gosford.nsw.gov.au/water_and_sewer 33 Wyong Shire Council Strategic Plan 2011-2015, p 9. 34 Wyong Shire Council Annual Information Return 2011/12 to IPART. 35 Gosford City Council Annual Information Return 2011/12 to IPART. 36 Gosford Council, Pricing submission to IPART, 14 September 2012, p 20. 37 Wyong Shire Council Annual Information Return 2011/12 to IPART. 38 Wyong Shire Council Annual Information Return 2011/12 to IPART.



2.3.2 Central Coast Water Corporation

A major development since the 2009 Determinations is the formal establishment of the Central Coast Water Corporation (the CCWC). The CCWC was established as a legal entity under the Central Coast Water Corporation Act 2006 to undertake the water and sewerage functions of Gosford and Wyong Councils.

The Central Coast Water Corporation Act 2006 also provides for the granting of an operating licence to the CCWC that ensures that its water supply and sewerage management services meet the quality and performance standards specified in the operating licence. The establishment of the CCWC has implications for us in our role as pricing regulator and our role as operating licence regulator. Until the CCWC is named a ‘water supply authority’ and its services are declared to be government monopoly services, IPART does not have the power to determine maximum prices for the CCWC under our standing reference.

This means that in this determination we have set prices for Gosford Council and Wyong Council individually. However, we have taken the establishment of the CCWC into account in our decisions by considering some issues in tandem for both Councils.

In their submissions, the Councils have outlined their agreed operating model for the CCWC. The operating model includes the following key features:

water and sewerage staff and functions will be transferred to the CCWC in phases beginning 1 July 2014 and completed by 1 July 2017

Joint Service Business (JSB) will be established by 1 July 2017 to provide support services

the Councils will retain ownership of water and sewerage assets and lease these assets to the CCWC through a long term commercial arrangement

each Council will retain its stormwater service within its General Fund operation.



Figure 2.2 Water and sewerage supply system overview

Source: Gosford City Council’s submission, September 2012, p 8.



2.3.3 The Councils’ regulatory framework

IPART is one of the regulators that oversee Gosford and Wyong Councils’ water industry functions. The other regulators of the Councils are: The NSW Office of Water (NOW) is responsible for issuing water access

licences to the Councils - these licences regulate water extractions and environmental flow requirements in natural waterways and approvals to construct, maintain and operate water management works. Both Councils must also comply with NOW’s Best Practice Management of Water Supply and Sewerage Guidelines39 as a pre-requisite to receiving payment of dividends from the surplus of their water supply and sewerage businesses.

The Environment Protection Authority (EPA), which is responsible for monitoring and regulating sewage discharges from the Councils’ sewerage systems to the receiving waters. EPA issues environment protection licences for the Councils’ sewage transportation and treatment systems. These licences stipulate quantity and quality conditions for discharge from each sewage treatment works and specify reporting requirements and operational controls for the pipe network and pumping stations.

NSW Health, which is responsible for regulating the quality and safety of the Councils’ drinking water.

In addition to these regulators, the Councils are also subject to planning approvals and regulatory requirements relating to their proposed developments.

2.4 Overview of the Councils’ submissions to our Issues Paper

The Councils initially provided pricing submissions in response to our Issues Paper in September 2012. The submissions are similar in many ways. This is driven by the close proximity of the Councils’ operating areas and their joint water supply network. The establishment of the CCWC and the need to integrate both Councils’ operations results in both submissions sharing a number of themes and aligning with each other.

In their submissions, the Councils outline the timetable for the establishment of the CCWC and their agreed operating model. The transfer of functions to the CCWC should be finalised by no later than 1 July 2017. The CCWC timeline is one of the reasons why the Councils are proposing a 4 year determination period.

39 NOW (then DWE), Best Practice Management of Water Supply and Sewerage, Guidelines, August

2007.



The other commonalities across the Councils’ submissions are: Revenue requirements presented in the Councils’ submissions have been

calculated using a post-tax WACC of 5.6%. Proposed prices are based on the current price structures. The Councils

recognised that we will have regard to our price structure principles40 in setting prices for the 2013 Determination.

Both Councils are seeking significant price rises over the 2013 Determination period.

The Councils are seeking a demand volatility adjustment mechanism similar to the one used in the 2012 Sydney Water Determination.

The Councils support the use of the current method for calculating the price of water transfers between the Central Coast and Hunter Water.

The Councils engaged a consultant (Sinclair Knight Merz) to forecast water demand for the 2013 Determination. The Councils state that the current method of forecasting demand is similar to that used to forecast sales for the 2009 Determination. The sales forecasts are consistent with actual sales to date.

The following sections provide a summary of each Council’s proposed revenue requirement and proposed prices as detailed in their original submissions.

2.4.1 Gosford City Council’s proposed revenue requirement

For the 2013 Determination period Gosford Council’s forecast of its notional revenue requirement is $465.5 million.41 This is an increase of 54.0%42 on the actual revenue recovered in the 2009 Determination.

Gosford Council’s proposed operating expenditure over the next determination period is $246.2 million43. This represents an increase of 37.7%44 above the allowed operating expenditure for the 2009 Determination. Table 2.1 shows Gosford Council’s proposed operating expenditure and revenue for the 2013 determination period. Table 2.2 shows Gosford Council’s proposed price increases.

40 IPART, Review of Price Structures for Metropolitan Water Utilities - Final Report, March 2012, p 3. 41 Gosford City Council submission, September 2012, p 54. 42 Gosford City Council Annual Information Return 2011/12 to IPART 43 Gosford City Council submission, September 2012, p 1. 44 IPART’s Gosford City Council and Wyong Shire Council, Prices for water, sewerage and stormwater

drainage services from 1 July 2009 to 30 June 2013 - Final Report, May 2009, p 38.



Table 2.1 Gosford Council: Proposed operating expenditure and notional revenue requirement ($million 2012/13)

2013/14 2014/15 2015/16 2016/17 Total

Operating expenditure 59.3 60.4 63.1 63.4 246.2 Notional revenue requirement 110.3 114.5 119.4 121.3 465.5

Note: Figures may not add due to rounding. Source: Gosford City Council submission, September 2012.

Table 2.2 Gosford Council: Proposed price increases ($2012/13)

2012/13 2013/14 2014/15 2015/16 2016/17 Change 2012/13

to 2016/17

Water service charge 99.28 157.95 176.90 203.52 238.04 138.76 % increase 59.1% 12.0% 15.0% 17.0% 139.8% Water usage charge ($/kL) 2.12 2.35 2.50 2.60 2.70 0.58 % increase 10.8% 6.4% 4.0% 3.8% 27.4% Sewerage service charge 534.82 609.89 681.11 751.44 819.39 284.57 % increase 14.0% 11.7% 10.3% 9.0% 53.2% Sewerage usage charge ($/kL) 1.13 1.13 1.13 1.13 1.13 - % increase - - - - - Stormwater drainage charge 82.52 106.56 122.60 137.93 152.74 70.22 % increase 29.1% 15.1% 12.5% 10.7% 85.1%

Source: Gosford Council submission, September 2012, p 2.

2.4.2 Wyong Shire Council’s proposed revenue requirement

For the 2013 determination period, Wyong Council’s notional revenue requirement forecast is $389 million over the determination period.45 This is an increase of 44.1% on actual revenue recovered over the 2009 determination period46.

For the 2013 determination period Wyong Council is proposing operating expenditure of $196.2 million47, this is an increase of 16.6% compared to our 2009 operating expenditure allowance48. Table 2.3 shows Wyong Council’s proposed operating expenditure and revenue over the 2013 Determination. Table 2.4 shows Wyong Council’s proposed price increases.

45 Wyong Shire Council submission, 14 September 2012, p 62. 46 Wyong Shire Council submission, 14 September 2012, p 15. 47 Wyong Shire Council submission, 14 September 2012, p 27. 48 Wyong Shire Council submission, 14 September 2012, p 17.



Table 2.3 Wyong Council: Proposed notional revenue requirement ($million, 2012/13)

2013/14 2014/15 2015/16 2016/17 Total

Operating expenditure 48.8 48.8 49.3 49.3 196.2 Notional revenue requirement

92.0 94.5 99.0 103.5 389.0

Source: Wyong Shire Council submission, September 2012, p 62.

Table 2.4 Wyong Council: Proposed price increases ($2012/13)

2012/13 2013/14 2014/15 2015/16 2016/17 Change 2012/13

to 2016/17

Water service charge 167.35 175.05 195.00 215.50 238.00 70.65 % increase 4.6% 11.4% 10.5% 10.4% 42.2% Water usage charge ($/kL) 2.12 2.35 2.50 2.60 2.70 0.58 % increase 10.8% 6.4% 4.0% 3.8% 27.4% Sewerage service charge 463.44 515.81 577.00 656.50 745.00 281.56 % increase 11.3% 11.9% 13.8% 13.5% 60.8% Sewerage usage charge ($/kL)

0.83 0.83 0.83 0.83 0.83 -

% increase - - - - - Stormwater drainage charge 89.77 99.20 109.61 121.12 133.84 44.07 % increase 10.5% 10.5% 10.5% 10.5% 49.1%

Source: Wyong Shire Council submission 2012, Amended appendices 1,2,3, September 2012.

2.5 Overview of the Councils’ submissions to our draft report and determination

The Councils provided submissions to our draft report and determination in March 2013. Wyong Council also made a supplementary submission in early April.



2.5.1 Gosford Council

Under our draft determination, Gosford Council considers that its financial position will deteriorate significantly and will result in the CCWC being in a difficult financial position at the planned commencement date. In particular, Gosford Council considers that: the WACC used is too low the regulatory depreciation used does not reflect actual depreciation

our cost of debt calculations do not reflect the actual cost of debt the glide path approach used does not consider each service individually

resulting in questions about the stormwater business’s sustainability.

Regarding operating expenditure, Gosford Council is concerned about our deferral of set-up costs for the CCWC and our analysis of its labour costs. For the final report and determination, it asks that we review our decisions on the Hawkesbury River Bridge painting project, step changes in costs associated with the next stage of the Council’s Asset Management Development Program, electricity cost increases from 2012/13 to 2013/14 and the cost escalator for the carbon tax.

IPART’s consultants Oakley Greenwood judged some of Gosford Council’s capital expenditure projects to be imprudent. The submission notes that an assessment of prudence includes consideration of timing and that a project assessed as not currently prudent may well be prudent in the future. The submission also disputes various recommendations made by Oakley Greenwood to IPART including cuts to capital expenditure for the Mardi to Warnervale Trunk Main, the Mangrove Creek Dam upgrade, the Dissolved Air Flotation Plant project and the Sewerage Pump Station renewal program.

Gosford Council disagrees with the inclusion of minimum water pressure as an output measure and considers that the 5% efficiency target is too high. The submission lists concerns about some price structuring issues and some perceived calculation errors in the draft report.

2.5.2 Wyong Council

Under our draft determination, Wyong Council argues that its financial position will deteriorate significantly. Its main concerns relate to the WACC, regulatory depreciation and cost of debt used to determine the draft prices.

In regard to operating costs, Wyong Council has re-estimated the costs relating to the Mardi Treatment Plant for our consideration and considers that the CCWC set-up costs should be included. It disputes Oakley Greenwood’s recommendations for using 2011/12 costs as the base line for calculations and considers that Oakley Greenwood may have misunderstood Wyong Council’s



treatment of corporate overheads as well as the real cost of electricity cost increases from 2012/13 to 2013/14.

Wyong Council disputes some of Oakley Greenwood’s recommendations regarding capital expenditure. These include the Mardi to Warnervale Trunk Main and the Mangrove Creek Dam upgrade, the Dissolved Air Flotation Plant project, expenditure for Drainage Unallocated (unidentified works) and the recommendation that a 5% efficiency target be set.

The submission also lists concerns over changes brought about by our recent price structure review and issues relating to various individual charges such as septic waste charges.

3 IPART’s approach to setting prices



For this review, we used the same broad approach we have used in past determinations to calculate the Councils’ notional revenue requirement and then converted this revenue requirement into prices. We have made a range of decisions related to applying this approach. The following sections provide an overview of our price setting approach and discuss these decisions in more detail, including our decisions on: the length of the determination period our approach for determining the notional revenue requirement

our approach for converting the notional revenue requirement into prices whether to introduce a regulatory mechanism to address the risk that there is

significant variation between the Councils’ forecast water sales and actual water sales over the 2013 determination period

the Councils’ requirements to report on their progress against output measures.

3.1 Overview of price setting approach

Our first step was to determine the length of the upcoming determination period. We made this decision first so we could then align our analysis to derive prices on an annual basis.

We then calculated the notional revenue requirement. The notional revenue requirement represents our view of each Council’s full, efficient costs in providing the regulated services for each year of the determination period. To calculate the notional revenue requirement, we used the building block approach as we have done in previous determinations.49

Once we had calculated each Council’s notional revenue requirement, we considered the implications of this requirement on a range of other factors —including the level of prices and the rate at which they should change, the capacity of customers to pay the prices, the timeframe customers might need to adapt to changed price levels, and the future transfer of services to the Central Coast Water Corporation (CCWC).

49 This is discussed further in section 3.3.



In relation to service standards, we have made a decision to continue to monitor the Councils’ performance in delivering on their proposed capital programs over the determination period. In order to monitor such performance, we will require each Council to report on a range of activities, output measures and major capital projects.

Our price setting approach led us to make various decisions on a number of issues before deciding on the final prices. Discussions and explanations for our pricing decisions and other associated decisions can be found throughout this Final report.

3.2 Length of the determination period

Decision

1 To adopt a 4-year determination period from 1 July 2013 to 30 June 2017.

For each water pricing review we make a decision on the length of the period that determined maximum prices can be levied. The period reflects the circumstances that apply to that utility at that time.

The advantages of a longer determination period include stronger incentives for the Councils to increase efficiency, greater stability and predictability, and reduced regulatory costs. The disadvantages include increased risk associated with potential inaccuracies in the data, possible delays in customers benefitting from efficiency gains, and the risk that changes in the industry will affect the appropriateness of the determination.

3.2.1 The Councils’ proposals

Both Councils are proposing a 4-year determination period commencing from 1 July 2013 to 30 June 2017.

The Councils believe this is an appropriate length of time for the determination because it: provides a sustainable balance between certainty for customers and provision

of reasonable cost forecasts

maintains alignment with Hunter Water50 allowing for joint considerations between the regions

aligns with the full transfer of water and sewerage service functions to the CCWC by 1 July 2017.

50 Hunter Water proposed a 4-year determination period in their submission to our 2013 review of

Hunter Water’s prices.



3.2.2 Stakeholder views

In general, the stakeholders support a 4-year determination period based on the reasons provided by the Councils in their submissions. The Total Environmental Centre did make a cautionary note at the public hearing that concurrent pricing reviews make it difficult for a non-government organisation with limited resources to give full attention to each review.51

3.2.3 IPART’s analysis

In our analysis, we took into account the proposals made by the Councils and comments from stakeholders. We particularly considered the confidence we could place in the Councils’ forecasts. We also considered the benefits of aligning the Councils’ determination period with Hunter Water Corporation, the Councils’ management plan cycle52 and the establishment of the CCWC.

After considering these issues, we decided that, on balance, a 4-year determination period is appropriate for the Councils at this time. The main benefit is that this will align with finalisation of the transfer of water and sewerage functions, as well as staff, to the CCWC, thus allowing for the next determination to be set for the CCWC.

3.3 Approach for determining the notional revenue requirement

The notional revenue requirement represents our view of each Council’s full, efficient costs in providing the regulated services for each year of the determination period.

As in previous reviews, we have used the building block approach to calculate each Council’s notional revenue requirement over the determination period. To apply this approach, we made decisions on the revenue each Council will require in each year of the period, including: The revenue required for operating expenditure over the period. This

amount represents our estimate of each Council’s forecast efficient operating, maintenance and administration costs.

An allowance for a return on the assets used to provide the regulated services. This amount represents our assessment of the opportunity cost of the capital invested in the business by the Councils, and ensures that they can continue to make efficient investments in capital in the future.

51 Public Hearing, Review of Gosford City Council’s and Wyong Shire Council’s prices, 12 November

2012. 52 Ibid.



An allowance for a return of assets (regulatory depreciation). This allowance recognises that, through the provision of services to customers, a water utility’s capital infrastructure will wear out over time and therefore revenue is required to recover the cost of maintaining the regulatory asset base.

An allowance for meeting tax obligations. An allowance for working capital. This allowance represents the holding

cost of net current assets.

The sum of these amounts represents our view of each Council’s total efficient costs over the determination period, or its notional revenue requirement (Figure 3.1).

Figure 3.1 Building block approach

In the 2009 Determination for the Councils, we used a real pre-tax WACC in calculating the returns on and of the Regulatory Asset Base (RAB). In December 2011, after consultation, we decided to calculate a more accurate and commercially based tax allowance as a discrete building block, and to use a post-tax WACC.53 The tax allowance is intended to more accurately reflect the tax liability for a comparable commercial business. Our previous approach used a pre-tax WACC with an assumed statutory tax rate. In most cases, this overstated the tax that would be paid by a comparable commercial business.

gosford city council and wyong shire council...1 gosford city council, pricing submission to ipart...

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