July 2008

Brett Mathieson

Manager Regulation & Planning

Yarra Valley Water, Melbourne, Australia

The Australian Water Industry

17 June 2008 2 2Yarra Valley Water Ltd

Australian Urban Water IndustryA Diverse Range of Utility Structures

Western AustraliaWater Corporation -

State Owned CompanyCovers whole State

South AustraliaSA Water -

State Owned CompanyCovers Whole State

VictoriaState Owned Retail Companies:

•Yarra Valley Water•South East Water •City West Water

State Owned Authorities:•Melbourne Water (wholesale)

•Rest: 15 Utilities

QueenslandWholesalers State Owned

Brisbane Water isfully Owned Business Unit of

Brisbane City CouncilRest: Local Government

NT - PAWA

Power/Water

CanberraACTEW

Power/Water

New South WalesState Owned

Sydney Catchment Authority (wholesale)

Sydney Water & Hunter Water -

Rest: Local Government

17 June 2008 3

Common Structural & Institutional Themes

Separation of Service Delivery, Regulation, Policy setting (and usually ownership)

Amalgamation of small rural and regional water authorities (not universal)

Progressive establishment of independent regulatory framework Corporatisation of water utilities Retention in public ownership Pricing Reforms –cost reflective/consumption based Strong role for private sector in the market National 3rd Party Access regime for essential infrastructure

DRY WET

Total River Murray System Inflows (including Darling River)

Planning for Long Drys

17 June 2008 5

Industry responses

Prolonged and severe restrictions Water conservation Integrated planning Major augmentations – desalination Recycling Water sensitive urban design Interconnected water systems and multiple sources of supply

17 June 2008 6

Victorian Water Grid

17 June 2008 7

State Water Grid - Benefits

Will accelerate state wide urban-urban water trading

Accelerate the introduction of third party access

Lower the cost of Wholesale water

Expand the scope of rural to rural trading

Will beak down city-country barriers

Will lead to uniform standards of water security and drought management across the state

Ensure water restrictions are spread more evenly across the State

Need a State based Water Grid Manager to exploit the potential of the Grid

17 June 2008 8

Yarra Valley Water’s

Smart Account

Need to make water bills more informative & effective……

17 June 2008 9

Conclusions

Demand/Supply balance has driven institutional reforms Integrated networks being established with multiple sources of supply

and customers Water grid manager has critical role to optimise the supply demand

balance How far a full market-oriented approach could be pursued requires

more analysis:• A competitive urban water market does not exist anywhere

No ‘off the shelf’ solutions. How is water special?• Monopoly, variable supply, competing environmental uses• Safe drinking water & ‘essential for life’

17 June 2008 10

Make Up of the ESC Building Block

Revenue Requirement for any year is the sum of:-• Operating Expenditure

• Controllable• Bulk Charges

• Return on Assets (RAV times WACC)• Existing Assets (constructed prior to start of regulatory period)• New Assets (constructed during regulatory period)

• Return on Assets (Asset value times depreciation rate)• Existing Assets (constructed prior to start of regulatory period)• New Assets (constructed during regulatory period)

• Benchmark Tax Liability• Adjustments from previous regulatory period

17 June 2008 11

Calculating Price Increase

Quantities for products are forecast for the regulatory period Prices for year 1 are input (or previous years prices increased

by X factor if tariffs not changed) Prices for following years are the previous year increased by

X factor Forecast revenue for each year is the sum of the product of

quantities and prices The X factor is set so that the NPV of the forecast revenue =

NPV of the revenue requirement

17 June 2008 12

Breakdown of Costs Regulatory vs Accounting Views

17 June 2008 13

Building Block -> Pricing

17 June 2008 14

Additionally (or consequently) we observe

Increased public awareness and scrutiny Many new private sector participants including strong

international interest (construction of pipelines & plants esp. desalination, interest in new instruments e.g. water trading)

Political interest (be seen to be responding) Desire for ongoing efficiency and service improvements Pressure to innovate Structural reform

17 June 2008 15

New South Wales

Sydney Water vigorously defended a third party access claim by Services Sydney Pty Ltd

Led to the 1995 IPART review into the Industry structure for Water and Wastewater services in the Greater Sydney Metropolitan area

Private sector involvement in water recycling and new developments

Water Industry Competition Act passed in 2006 with draft Regulations to support legislation released in 2008

17 June 2008 16

Western Australia

In July 2007 the Western Australia Treasurer announced an inquiry into competition in the water and wastewater sector focusing on:• Greater efficiency in developing and delivering new water sources and other services

requiring significant capital investment• Opportunities for enhanced competition including the introduction of third party access to

existing water and wastewater related infrastructure• Other reforms to the water and wastewater market which may enhance competition

The Economic Regulation Authority (ERA) was commissioned to undertake the inquiry A Further consultation report on the establishment of an independent procurement

entity was released in April 2008 which examines procurement models.• Noted introduction of competition via bulk supply water market would provide benefits but

problematic to introduce in the short term ERA’s final report is due by Government 31 July 2008

17 June 2008 17

Proposed Structure - South East Queensland

17 June 2008 18

Benefits of Vertical Separation

Increasing geographic diversity through inter-regional transfers Reduced system losses Increasing water efficiency and demand management Planning reforms based on total water cycle Improved accountability Improved Regulatory effectiveness through transparency of costs &

internal cross-subsidies Scope for ‘grid bypass’ below materiality threshold will facilitate small-

scale competitive wholesale sourcing Potential for wholesale trading

17 June 2008 19

Structure has potential for competition

Difficult to make competition ‘in the market’ work in a VI model• Ring-fencing and TPA regimes unlikely to be enough to support new entry• Incumbent has strong incentives to frustrate access

Platform for further competition where feasible• Competition provides improved scope for product innovation, retailer efficiency, promoting

localised solutions• Provision for development of market rules, licensing regime and customer protection

framework• New entrants require certainty of explicit policy / regulation• Separate network providers motivated to provide services to all customers

New entrants known to be interested in SEQ water sector• Wholesale Opportunities in localised sourcing, grid bypass mechanism• Retail opportunities in service bundling and differentiation

But competition has to pay its way• Challenges in pricing, minimising transaction costs

17 June 2008 20

Water Grid Manager

Assess scope for external trading (e.g. Urban/Rural trading) Statement of opportunities (Electricity and Gas Model) Technology and Interconnection require changes to cost

transparency• Financial performance and operational efficiency will require more

activity than “set and forget”• Must be able to explicitly price the trade offs in system cost/security