Water Industry Overview 2000 - IPART...Water industry overview 2000 3 1.2 Scope of this report This overview seeks to: • highlight the information used by the Tribunal in making

Water Industry Overview 2000

I N D E P E N D E N T P R I C I N G A N D R E G U L A T O R Y T R I B U N A LO F N E W S O U T H W A L E S

I N D E P E N D E N T P R I C I N G A N D R E G U L A T O R Y T R I B U N A LO F N E W S O U T H W A L E S

Water Industry Overview 2000

Other Paper OP-9 June 2001

TABLE OF CONTENTS

1 INTRODUCTION 21.1 Background to this report 21.2 Scope of this report 31.3 Summary of findings 31.4 Sources of information 3

2 PRICING REFORM OF METROPOLITAN WATER SUPPLIERS 42.1 Shift to two-part pricing 42.2 Impacts of pricing reform 62.3 Stormwater charges 102.4 Developer charges 10

3 FINANCIAL PERFORMANCE OF METROPOLITAN WATER SUPPLIERS 113.1 Overview 11

3.1.1 Financial comparison 113.1.2 Financial indicator analysis 143.1.3 Revenue 163.1.4 Residential revenue per property 163.1.5 Non-residential revenue per property 17

3.2 Expenditure 183.2.1 Total costs 183.2.2 Operating expenditure 203.2.3 Capital expenditure 22

4 SERVICE PERFORMANCE OF METROPOLITAN WATER SUPPLIERS 244.1 Water 244.2 Wastewater 254.3 Stormwater 254.4 Customer service 26

5 SYDNEY CATCHMENT AUTHORITY 275.1 Pricing 275.2 Financial performance 285.3 Financial indicators 295.4 Revenue 305.5 Costs 315.6 Capital expenditure 325.7 Service performance 33

APPENDIX 1 MAJOR CHARGES AS AT 30 JUNE 2000 34Sydney Water Corporation 34Hunter Water Corporation 34Gosford City Council 34Wyong Shire Council 35

APPENDIX 2 FINANCIAL INDICATORS 36

DEFINITIONS 38

Independent Pricing and Regulatory Tribunal

2

1 INTRODUCTION

1.1 Background to this reportThe Independent Pricing and Regulatory Tribunal (the Tribunal) determines the maximumprices that can be charged by the four NSW metropolitan water businesses and the SydneyCatchment Authority (SCA). This report analyses the performance of the five agencies overthe period they have been regulated by the Tribunal. The SCA was established only recentlyand is analysed separately in this report because its business is bulk water supply to mainlyone large customer, the Sydney Water Corporation. The other agencies, Sydney WaterCorporation (SWC), Hunter Water Corporation (HWC), Gosford City Council (GosfordCouncil) and Wyong Shire Council (Wyong Council), supply water, wastewater andstormwater services to a multitude of residential and non-residential customers.

The Tribunal intends publishing regular overview reports that assess the performance of thefive water businesses. The statistical data in this report covers the period to 30 June 2000.Since that time two significant developments have occurred that will impact on futurereports.

On 1 November 2000, IPART took on the licensing and licence compliance functionsformerly undertaken by the Ministry of Energy and Utilities. These functions includereviewing the licence obligations of NSW water, gas and electricity utilities and makingrecommendations to the Minister for change.

In the second half of 2000, the Tribunal established medium term price paths for the fiveagencies. HWC, Gosford and Wyong Councils’ paths commenced on 1 July 2000 and theSCA’s and SWC’s commenced on 1 October 2000. A new pricing determination fordeveloper charges was made in October. The new price paths and the Tribunal’s role inlicence regulation will be reflected to a greater extent in the next Water Industry Overviewreport.

The main developments occurring after 30 June 2000 are listed in Table 1.1 below.

Table 1.1 Timetable of developments up to release of Overview ReportDate Description

I July 2000 Determination of three year price paths for HWC, Gosford Council, Wyong Council

I October 2000 Determination of price path for SWC ending 30 June 2003Determination of price path for SCA ending 30 June 2005Determination for developer charges for SWC, HWC, Gosford Council, Wyong Council

1 November 2000 Responsibility for licence regulation given to Tribunal

Water industry overview 2000

3

1.2 Scope of this reportThis overview seeks to:

• highlight the information used by the Tribunal in making a pricing determination

• demonstrate the extent of price reform over the period since the establishment of theTribunal in 1992

• highlight trends in operational and financial performance

• comment on performance that is concerned with the impacts on customers and theenvironment.

1.3 Summary of findingsMajor findings of this report are:

• Pricing reform of the water industry is almost complete with the focus on two partpricing. Charges based on property value are virtually eliminated.

• The four water businesses are in a healthy position financially, with prices well able tocover expenses.

• Costs are increasingly being influenced by higher expectations for the environment.

• SWC has recognised that its operating expenditures are high and has undertaken stepsto remedy this.

• Planned cost savings by SWC will be partially offset by the costs of the SCA, whoserange of activities is greater than those SWC was previously responsible for within thecatchment.

1.4 Sources of informationMost of the data used in this report has been drawn from annual information returns. Someis also drawn from published annual reports. When making pricing determinations, theTribunal relies on regulatory information provided by the water businesses. Each financialyear the businesses are required to complete an information spreadsheet package known asthe Annual Information Return (AIR). Accordingly, information in this overview of thewater industry, such as depreciation values, is based on ‘book values’ supplied by theagencies. The AIR requires information on physical performance measures, servicestandards, and financial data on an actual and on a projected basis. In 1993, the two councilschanged their reporting periods from a calendar year basis to a financial year basis. Toenable comparisons with later years, some estimates have been used for the earlier years toovercome this problem. Some of the water businesses compete in some areas of businesswhere they do not have a monopoly. Because the Tribunal does not regulate these areas, themajority of the information used in this report is taken from the monopoly areas of thebusinesses.

The Tribunal is now responsible for the annual audit of operating licences and will bemaking recommendations to the Minister regarding appropriate service standards forcustomers, and performance standards for systems.


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2 PRICING REFORM OF METROPOLITAN WATER SUPPLIERS

2.1 Shift to two-part pricingSince its inception in 1992, the Tribunal has shifted the water businesses towards two-partpricing. This involves a fixed access charge plus a usage charge which varies withconsumption. The Tribunal believes it is more efficient and equitable if customers arecharged according to the amount of services they consume. However, it is still difficult tomeasure flows of wastewater. Currently only HWC has a usage charge for residentialwastewater.

At 30 June 2000, the Tribunal acted to continue to remove property value as a basis forcharging, and prepared to remove the Councils’ pre-paid water allowance1. Figure 2.1shows how reform has progressed for water and wastewater charges.

Three percent of SWC’s revenue was obtained from property value based charges in 2000.However, property value based charging is restricted to non-residential sewerage andstormwater services. Most of SWC’s water revenue now comes from usage charges.

Except for a minor component of stormwater charges, HWC removed property value basedcharging in 1994/95. It is the only metropolitan water business in NSW with a usagecomponent for residential wastewater pricing. However, wastewater flow is not directlymeasured, but is estimated as a percentage of water used.

Both Councils have eliminated property value based pricing but, at 30 June 2000, retained apre-paid water allowance with an excess water usage charge. Their percentage of revenuefrom usage charges was therefore low2.

A summary of the major charges of the four water agencies can be found in Appendix 1 atthe end of this report.

1 The pre-paid allowance was removed in the 1 July 2000 pricing determinations.2 The pre-paid allowance was eliminated from charges from 1 July 2000.


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Figure 2.1 Sources of revenue (water and wastewater, including trade waste)

Sydney Water Corporation

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999 2000

Access Usage Property

Hunter Water Corporation

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999 2000Access Usage Property

Gosford City Council

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999 2000


Wyong Shire Council

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999 2000



6

2.2 Impacts of pricing reformBoth customers and the water businesses have been affected by the move towardsconsumption based pricing. While customer numbers have risen, Figure 2.2 below showsthat the total revenues of the four agencies have dropped in real terms. This indicates theimpact of pricing changes over the period.

Figure 2.2 Index of total tariff revenue (real, 1993 = 100)

Index of total tariff revenue (real, 1993 = 100)

70

75

80

85

90

95

100

105

1993 1994 1995 1996 1997 1998 1999 2000SWC HWC Gosford Wyong

Residential prices

Figure 2.3 shows that typical residential customers using 250 kilolitres of water a year, haveseen their total bills for water and sewerage services decline in real terms. The switch awayfrom property based charging has been the main reason for these reductions, with largereductions for residential customers of HWC, Gosford Council and Wyong Council. Thereductions for SWC customers have been less because their bills were significantly lower atthe start of the review period.

Importantly, the reduction in customer bills has occurred at the same time as standards forwater and sewerage services have increased. All the water businesses comply with 1996NHRMC water quality guidelines. The EPA has introduced a licensing system for sewageoverflows.

Only SWC water bills have increased since 1992/1993. The Tribunal increased SWC’s waterprices over the period to match the movement in costs. The Tribunal expects that SWC’soperating costs will decrease over the period of the next determination (1 October 2000 to30 June 2003) and usage will decrease in line with targets in SWC’s operating licence.Therefore the Tribunal has set water prices for the next three years that should result inaverage water bills levelling off in real terms.

Bills for residential sewerage services have reduced for all water agencies. Except for HWC,prices for sewerage are fixed without any regard to usage. Reductions over the period aredue to pricing changes, particularly the shift from property based charging.


7

Figure 2.3 Residential prices

Typical residential water and wastewater bills (real, 2000 $)

400

450

500

550

600

650

700

750

800

850

900

1993 1994 1995 1996 1997 1998 1999 2000

($ p

er y

ear)

SWC HWC Gosford Wyong

Typical residential water bills (real, 2000 $)

0

50

100

150

200

250

300

350

400

1993 1994 1995 1996 1997 1998 1999 2000

($ p

er y

ear)


Typical residential wastewater bills (real, 2000 $)

0

100

200

300

400

500

600

1993 1994 1995 1996 1997 1998 1999 2000

($ p

er y

ear)



8

Non-residential prices

Analysing averages on a per property basis for the three smaller agencies is difficult becausethe loss or gain of one large customer can have a significant effect on that average. SWCfigures are less sensitive because of SWC’s large customer base, but SWC’s figures have beenaffected because of the loss of a number of large customers since 1993. The propertynumbers for Gosford and Wyong councils have also been affected because the councils haveat times changed how they classify residential and non-residential properties. Average non-residential water consumption is shown in Figure 2.4 (some data for Wyong Council for1993 was not available).

Compiling a bill for an average non-residential customer is also difficult because individualcustomers’ water usage patterns vary greatly, and because the water businesses havedifferent pricing structures. Average revenue per non-residential property over the periodhas been used as a proxy for an average bill in Figure 2.5. This method is not ideal, butFigure 2.5 shows that non-residential customers have also enjoyed a reduction in the size oftheir combined bills.

Average water bills for non-residential customers have reduced, particularly for SWC, HWCand Wyong Council customers. Consumption by SWC customers has been relativelysteady. It follows that pricing changes have largely brought about the reductions for SWCcustomers, particularly the progressive removal of property based charges over the periodto 1996. Lower water bills for HWC and Wyong Council are due to reductions in pricescombined with reductions in consumption.

The reduction in wastewater bills over the period is largely due to the removal of propertybased charges. SWC has been removing property based charges gradually over the periodto 2000. HWC removed them in the first three years of the survey.

Figure 2.4 Average non-residential water consumption (kLs per property per year)

Average non-residential water consumption

500

1,000

1,500

2,000

2,500

3,000

1993 1994 1995 1996 1997 1998 1999 2000

kLs

per p

rope

rty

per y

ear



9

Figure 2.5 Non-residential prices

Note: Gosford's 1993 and 1994 wastewater revenue per property uses water properties as the denominator

Non-residential water revenue per property (real, 2000 $)

0

500

1,000

1,500

2,000

2,500

3,000

1993 1994 1995 1996 1997 1998 1999 2000

($ p

er p

rope

rty

per y

ear)


Non-residential wastewater revenue per property (real, 2000 $)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1993 1994 1995 1996 1997 1998 1999 2000

($ p

er p

rope

rty

per y

ear)


Non-res. water and w/water revenue per property (real, 2000 $)

1,000

2,000

3,000

4,000

5,000

6,000

7,000

1993 1994 1995 1996 1997 1998 1999 2000

($ p

er p

rope

rty

per y

ear)



10

2.3 Stormwater chargesCharging for stormwater on a consumption basis is very difficult. Most stormwater runsdirectly or indirectly into the street gutters and then into the stormwater system.

Revenue gained from stormwater charges is not large when compared to other sources. Inthe Sydney area there has been concern that insufficient money is spent on stormwatersystems. Stormwater can have damaging impacts on the environment.

In its submission to the October 2000 pricing determination, SWC proposes a method ofcharging for stormwater services that attempts to capture some of the elements of usagebased pricing. Charges would be based on the surface area of properties. The Tribunal didnot adopt this method because it believed that some customers would be unfairlydisadvantaged. The Tribunal therefore asked SWC to undertake further research to ensurethe scheme was fair to all customers.

Because usage based pricing of stormwater services is difficult, the four water businessesgenerally apply a fixed charge or a charge based on property value.

SWC and HWC customers pay a fixed service charge for stormwater, non-residentialcustomers additionally pay a charge based on the value of their property. Gosford Councilcustomers pay a fixed service charge, but Council’s General Fund covers most of the costs ofstormwater management. Wyong Council does not charge explicitly for stormwater, butrecovers the costs from wastewater charges. SWC removed property based charging forresidential customers in 1996. Other than this, stormwater charges have not changed muchsince 1992/93.

2.4 Developer chargesDeveloper charges are up-front charges paid by developers to help recover theinfrastructure costs of providing services to new land developments. In 1995 and 1996 theTribunal made determinations for the four water businesses which introduced a commonmethodology for calculating developer charges. Because issues have arisen in implementingthe methodology, the Tribunal made an updated determination3 in October 2000 to addressmany of those implementation problems.

The updated determination establishes a more prescriptive approach to setting developercharges. Charges in the updated determination have to be shown on the basis of the waterconsumed and discharged by an average residential dwelling. Costs and revenues arecalculated on a net present value basis and then are updated annually by the change in theconsumer price index. The aim of the methodology is to show the real costs of servicingspecific areas and to encourage development in areas where efficient use of infrastructureresources will be maximised. Based on the usage and cost of services, charges varydepending on the location of the development.

3 IPART, Sydney Water Corporation, Hunter Water Corporation, Gosford City Council, Wyong Shire

Council, Developer Charges from 1 October 2000, September 2000.


11

3 FINANCIAL PERFORMANCE OF METROPOLITAN WATERSUPPLIERS

3.1 Overview

3.1.1 Financial comparisonTable 3.1 indicates the relative sizes of the four water businesses, and some of the differencesbetween them. For example, SWC and HWC are liable to pay tax equivalents and dividendsto the State Government under the State Owned Corporations Act, 1989. Therefore they seekto earn a commercial return. The councils operate under the Local Government Act, 1993 andhave not paid dividends. However, in submissions to the 2000 pricing determinations, thecouncils stated that they were investigating whether they had the legal right to makefinancial distributions to their General Funds.

Differences can occur because of different internal policies. For example, while SWC has anon-regulated subsidiary business which provides services to SWC, Wyong Councilsubcontracts much of its work to the private sector. Allocating costs accurately in thesesituations can sometimes be difficult. Therefore, although comparing the performances ofwater businesses is helpful, results can be influenced by different institutional arrangements.

Covering the Sydney metropolitan area, and serving over 1.5 million customers, SWC is thelargest water supplier in Australia. Most of the figures in Table 3.1 reflect that size, eg arevenue more than ten times that of HWC’s. SWC’s performance in future overview reportswill be further differentiated now that the Sydney Catchment Authority has taken overresponsibility for bulk water supply in Sydney. HWC, Gosford Council and WyongCouncil will continue to be responsible for both bulk water and retail sales of water in theirown areas.

Table 3.1 shows that:

• revenues over the four years to 2000 have varied only marginally on a year to yearbasis

• only SWC’s operating expenditures have risen consistently, as reflected in decreasingearnings figures

• operating cashflows have been decreasing for SWC and HWC while remaining steadyfor the councils

• operating cashflows can be used to pay back debt and fund capital expenditure, andthe councils have been able to reduce their debt levels significantly

• nonetheless, when compared to revenues earned, debt levels for all agencies are low

• employee numbers have decreased in all instances, but this figure can be difficult tomeasure when employees may work for both the regulated and unregulated areas ofthe business.

Generally, all water businesses are in a strong financial position.


12

Table 3.1 Financial characteristics ($m, 2000)Sydney Water financial characteristics

1997 1998 1999 2000Total revenue (excludes cap cons) 1,157 1,187 1,159 1,195 Operating and misc expenditure 657 661 688 773 Net interest payments 144 138 159 126 Depreciation and amortisation 175 179 182 165 Abnormal items 33 43 56- 15 Earnings before interest, tax, abnormals 325 347 290 256 Tax paid 115 98 93 59 Dividends paid 41 151 162 99

Property, plant & equip (book) 13,239 13,566 12,889 12,533 Total assets (book value) 14,245 14,472 13,514 13,006

Total debt (incl overdraft) 1,888 1,878 1,857 1,809 Total liabilities 2,594 2,564 2,503 2,406

Operating cashflow 236 305 173 134 Capital expenditure 145 197 416 521

Number of metered properties(000s) 1,416 1,443 1,471 1,501 Number of employees 4,357 4,225 4,080 3,438

Hunter Water financial characteristics1997 1998 1999 2000

Total revenue (excludes cap cons) 119 124 118 113 Operating and misc expenditure 57 56 54 54 Net interest payments 1 1 2 2 Depreciation and amortisation 29 28 27 27 Abnormal items 19 5 2 12 Earnings before interest, tax, abnormals 34 39 37 32 Tax paid 3 14 15 15 Dividends paid 30 37 40 45

Property, plant & equip (book) 1,944 1,966 1,984 1,881 Total assets (book value) 2,088 2,111 2,117 1,968

Total debt (incl overdraft) 88 87 86 84 Total liabilities 196 192 203 171


Number metered properties (000s) 179 182 185 188 Number of employees 531 465 450 452


13

Gosford Council financial characteristics1997 1998 1999 2000

Total revenue (excludes cap cons) 42 42 41 41 Operating and misc expenditure 18 20 21 20 Net interest payments 6 5 4 3 Depreciation and amortisation 9 10 10 10 Abnormal items - - - - Earnings before interest, tax, abnormals 14 12 11 10 Tax paid - - - - Dividends paid - - - -

Property, plant & equip (book) 550 544 533 520 Total assets (book value) 604 603 593 581



Number of metered properties (000s) 59 60 61 62 Number of employees 217 203 163 162

Wyong Council financial characteristics1997 1998 1999 2000

Total revenue (excludes cap cons) 34 36 34 34 Operating and misc expenditure 18 20 16 17 Net interest payments 4 3 3 1 Depreciation and amortisation 10 10 10 10 Abnormal items - 5 1 - Earnings before interest, tax, abnormals 5 6 8 7 Tax paid - - - - Dividends paid - - - -

Property, plant & equip (book) 519 520 522 518 Total assets (book value) 537 540 545 548



Number of metered properties (000s) 49 49 50 53 Number of employees 203 203 155 155

Note: Operating cashflow figures refer to the consolidated businesses whilst all other figures refer to theregulated portions of the businesses only.


14

3.1.2 Financial indicator analysisWhen setting prices, the Tribunal uses various techniques to examine the impacts of itsdecisions, one of these being indicators of financial performance. The Tribunal uses theindicators with a view to assessing the financial viability of the regulated business underdifferent pricing outcomes.

Indicative ratios for each ratio for each year during the medium term price paths set in 2000were published in the Tribunal’s Determinations for each of the regulated water businesses.In Table 3.24, the Tribunal has:

• calculated various financial ratios for the one year of results considered in this reportin accordance with the methodologies used by S&P; and

• indicated the rating applicable for each ratio based on the bands published by S&P.

The calculation and assessments are those of the Tribunal and not S&P. More informationon the Tribunal’s use of ratings, together with definitions of the indicators, can be found inAppendix 2.

The ratios set out in Table 3.2, showing the agencies’ ability to service debt, ability to repaydebt and ability to finance investment from internal sources, generally point to an indicativeinvestment grade (at least BB) rating being achieved by each of the regulated businessesduring the year. The regulated businesses appear to be financially sound, based on thissuite of ratios.

• Ability to service debtAll water businesses can readily pay for the costs of their debt such as interest. The fundsflow interest cover ratio shows that each agency is well placed to pay annual interestpayments from operational cashflows. The pre tax interest coverage ratio also shows a strongcapacity to pay interest payments from pre tax profits.

• Ability to repay debtThe water businesses are also well placed to repay their debt principals. The funds flow netdebt payback ratio measures the number of years needed to repay net debt from operationalfunds flows. The funds from operations to total debt ratio shows the size of total debt comparedto funds from operations. The ratio of total debt to total capital is also strong for the waterbusinesses.

• Ability to finance investment from internal sourcesThe internal financing ratio measures how easily capital expenditure can be funded byinternal cashflows without further borrowings. Looking at this ratio for one year only canbe misleading for those businesses whose capital expenditure varies significantly on a yearto year basis. For example in 1998/1999, SWC’s capital expenditure program was large

4 Two sets of ratios have been used, for consistency with the financial analysis undertaken by the Tribunal

during the 2000 determination process. The “NSW Treasury Rating” indicators are from The CapitalStructure for NSW Government Trading Enterprises report produced in August 1994 by NSW Treasury aspart of its financial policy framework for GTEs, and are based on ratios provided to Treasury by S&P.The “S&P” criteria are from S&P’s Corporate Finance Criteria for 1995. More information on theTribunal’s use of ratings, together with definitions of the indicators, can be found in Appendix 2.


15

compared to previous years. Gosford Council’s ratio is extremely robust in 1999/2000because cash received from capital contributions exceeded funds needed for capitalexpenditure. Consequently, no internal financing or external borrowing for capitalexpenditure was needed.

Because water businesses are capital intensive, the measure before depreciation(EBITDA/total revenue) is significantly higher than the after depreciation measure(EBIT/revenue). Both ratios show how well the agencies can convert revenue into operatingprofit. Although Gosford and Wyong Councils’ ratios are not as strong as HWC’s, theytranslate into a strong cashflow because the councils do not pay dividends or tax equivalentsout of their operating profits.

Table 3.2 Financial indicators of the regulated business($ of the year) (i)(ii)

Sydney Water

Hunter Water

Gosford Council

Wyong Council

Financial year ending 31 July 1999 2000 2000 2000

Ability to service debtFunds flow interest cover ratio 2.9 26.2 8.8 12.6 NSW Treasury rating (1994) A AAA AAA AAAS&P rating (1995) A AA AA AA

Pre-tax interest coverage ratio 1.8 13.2 4.0 4.8 S&P rating (1995) BBB AA AA AA

Ability to repay debtFunds flow net debt payback ratio 6.3 0.7 0.5 0.7 NSW Treasury rating (1994) A AAA AAA AAA

Funds from operations/total debt ratio 12% 57% 40% 46%S&P rating (1995) BBB AA AA AA

Total debt / total capital ratio 14% 4% 9% 7%S&P rating (1995) AA AA AA AA

Ability to finance investment from internal sourcesInternal financing ratio 19% 42% -7100% 333%NSW Treasury rating (1994) AAA AAAS&P rating (1995) AA AA

EBIT / total revenue 25% 28% 26% 19%EBITDA / total revenue 41% 53% 50% 50%EBIT ($ m) 284 32 10 7 EBITDA ($ m) 463 60 20 17

Notes:i) The Tribunal particularly relies on indicators based on cashflows because these are not as subjective as

indicators that use components derived from estimates (eg asset value and depreciation). Indicators forSWC were taken from the 1999 year because the transfer of assets and liabilities to the SCA distorted thefinancial data for 2000.

ii) The information in this table should be read and understood only after reviewing the accompanyingoverview, particularly paragraph 3.1.2 and Appendix 2 and the explanations and qualificationsmentioned there.


16

3.1.3 RevenueChanges in usage and price determine levels of revenue. Both aspects must be consideredwhen analysing changes in revenue over time.

3.1.4 Residential revenue per propertyFor all four water businesses, the water consumption of an average residential property for2000 (see Figure 3.1) is similar to consumption for 1993. There are variations on a year toyear basis over the period, but weather conditions help to explain those changes. Forexample, the increase in consumption for 1998 coincided with a year of lower than averagerainfall. Because consumption has been relatively steady, changes in revenue have beenmainly brought about by changes in price. Whilst the figures for average revenue perproperty for HWC, Gosford Council and Wyong Council in 2000 are significantly lower thanin 1993, SWC’s have increased. This is because higher prices were determined for SWC torecover rising maintenance costs and capital expenditure.

Figure 3.1 Average residential water consumption (kL per property)

Average residential water consumption

150

170

190

210

230

250

270

290

1993 1994 1995 1996 1997 1998 1999 2000

kLs

per p

rope

rty


Figure 3.2 Average residential revenue per property (2000 $ per property)

Average residential water and wastewater tariff revenue per property

200

300

400

500

600

700

800

900

1,000

1993 1994 1995 1996 1997 1998 1999 2000

$ pe

r pro

pert

y pe

r yea

r



17

3.1.5 Non-residential revenue per propertyMaking judgements on trends based on averages is less certain for non-residential than forresidential customers. Nonetheless, average revenues have fallen for all water businesses,with SWC showing the greatest reductions (see Figure 3.4). The decline in SWC’s revenuesis largely due to the removal of charges based on property values. This has reduced theextent to which residential customers are subsidised by business customers. Reductions forHWC customers to 1995 are due mainly to price reductions. The next significant drop in1999 coincides with a reduction in consumption when two large industrial customers ceasedoperating in the HWC area. Wyong Council’s average revenue and consumption have bothdecreased considerably over the period. However, the property numbers for Gosford andWyong councils have been affected because the councils have at times changed how theyclassify residential and non-residential properties.

Figure 3.3 Average non-residential water consumption (kLs per property)

Average non-residential water consumption

500

1,000

1,500

2,000

2,500

3,000

1993 1994 1995 1996 1997 1998 1999 2000

kLs

per p

rope

rty

per y

ear


Figure 3.4 Average non-residential revenue per property (2000 $ per property)

Average non-residential water and wastewater tariff revenue per property

400

1,400

2,400

3,400

4,400

5,400

6,400

7,400

1993 1994 1995 1996 1997 1998 1999 2000

$ pe

r pro

pert

y pe

r yea

r



18

3.2 Expenditure

3.2.1 Total costsCosts or expenditure can be viewed from the customer’s perspective. This section looks atthe revenues earned by the water businesses because they equate to the costs borne bycustomers. Water businesses need to receive sufficient revenue to cover the cost of theiroperations (operating costs), replacement of the existing stock of assets (measured bydepreciation), and a profit (return on capital) which is used to make payments such asdividends to shareholders and to fund new works. Figure 3.5 shows the trends in thosecomponents. For all four water businesses, revenue per property, or alternatively, costs tocustomers, has decreased from 1993 to 2000.

Revenue is a result of price and usage. In the short term, revenue is relatively fixed for thefour water businesses. The Tribunal sets prices for the water businesses in its pricingdeterminations; the promotion of water usage is constrained by demand managementobjectives. Therefore the goal for water businesses is to control the proportions of thecomponents that make up their revenue. A decrease in one component, such as operatingcosts, can result in an increase in another component, such as return on capital.Consequently there is an incentive to increase efficiencies because that allows higher returnsto be available for shareholders. When setting prices, the Tribunal relies on this incentivemechanism to encourage water agencies to achieve greater efficiencies.

The total cost to SWC customers has fallen between 1993 and 2000. While operating costsand returns on capital have decreased marginally, the main driver of the reduction is adecrease in depreciation. Depreciation is actually a book keeping entry based on estimatesof the cost to a business from the ageing and deterioration of assets. It is difficult to interpretchanges in depreciation, firstly, because it is an estimate, and secondly, because the methodsof calculation often change. In 1996 for example, SWC reviewed the useful lives of some ofits major assets. The review brought about a decrease in depreciation charges of $78 million.However, lower depreciation may mean lower rates of replacement of existing assetsbecause existing assets are being driven harder rather than replaced. The Tribunalinvestigates such changes because they may indicate that levels of service to customers aredropping.

HWC customers have also experienced a general decrease in costs brought about byreductions in all components. As long as service standards are maintained, decreasingoperating costs are generally good for water businesses and customers alike, because theycan indicate an increase in the efficiency of the water business. This means higher returnson capital for the business in the short run, and lower prices for customers in the longerterm.

Gosford Council’s reductions have resulted from reductions in depreciation and return oncapital. Wyong Council’s reductions result from a decreasing return on capital. Thecouncils do not rely on returns on capital to pay for dividend and tax equivalents, theyapply any return to debt reduction and new capital works.


19

Figure 3.5 Costs to customers (real, 2000 $)

SWC costs and return per property

-

200

400

600

800

1,000

1,200

1993 1994 1995 1996 1997 1998 1999 2000

$ pe

r pro

pert

y

Operating costs Depreciation Return on capital

HWC costs and return per property

-

200

400

600

800

1,000

1993 1994 1995 1996 1997 1998 1999 2000

$ pe

r pro

pert

y


Gosford costs and return per property

-

200

400

600

800

1,000

1,200

1993 1994 1995 1996 1997 1998 1999 2000

$ pe

r pro

pert

y


Wyong costs and return per property

-

200

400

600

800

1,000

1,200

1993 1994 1995 1996 1997 1998 1999 2000

$ pe

r pro

pert

y



20

3.2.2 Operating expenditureOperating expenditure is the most controllable element of costs incurred by the waterbusinesses. Dividends and tax payments are often determined by shareholders.Depreciation is linked to past capital expenditure, itself often driven by standards set for theenvironment and for customer service. During the seven year period, the agencies havereduced their operating costs, measured both on a volume basis and on a per property basis.

On a volume basis (Figure 3.6), the trends for operating costs are similar to total water andwaste water costs on a property basis. SWC’s costs compare more favourably to HWC on avolume than a property basis, although SWC’s costs rise in the last two years.

Operating costs per property for water operations for HWC, Gosford Council and WyongCouncil have dropped steadily since 1993. HWC particularly has overseen significantreductions and in absolute terms has the second lowest costs of the four water businesses.SWC’s costs remain steady until they rise in 2000 when SWC first started purchasing bulkwater from the Sydney Catchment Authority.

Operating costs per property for wastewater services have also decreased over the period.SWC has reduced its wastewater costs by the largest margin, but they are still higher thanthose of the other three agencies.

Aware that its operating costs in general are higher than other Australian water businesses,SWC has undertaken to reduce them by 23 per cent between 1999 and 2002. Although thiswill mean increases in efficiency for SWC, the full savings will not flow on to customersbecause savings will be offset somewhat by increased costs for the bulk water nowpurchased from the SCA, and costs associated with the BOO infiltration plants.

However, because of the unique conditions under which each operates, care is needed whendirectly comparing water businesses. A better measure is the trend in performance overtime for the individual business.

Figure 3.6 Operating costs per kL (c/kL, 2000 $)

Operating costs per kl of water sold (c/kl)

-20406080

100120140160180

1993 1994 1995 1996 1997 1998 1999 2000

c/kl



21

Figure 3.7 Water and wastewater operating costs per property (2000 $)

Total water and wastewater operating costs per property

150200250300350400450500550600

1993 1994 1995 1996 1997 1998 1999 2000

$s p

er p

rope

rty

per y

ear


Water operating costs per property

-

50

100

150

200

250

300

1993 1994 1995 1996 1997 1998 1999 2000

$s p

er p

rope

rty

per y

ear


Wastewater operating costs per property

-

50

100

150

200

250

300

350

400

1993 1994 1995 1996 1997 1998 1999 2000

$s p

er p

rope

rty

per y

ear



22

3.2.3 Capital expenditureCapital expenditure in the water industry includes: replacement or renewal of current assetsto maintain the capacity of the system, expenditure to meet new standards or environmentalrequirements, and expenditure on new assets to expand the system to meet growth. Figure3.8 and Table 3.3 relate to the period from 1996 to 2000, when large increases in expenditureoccurred for SWC, HWC and Wyong Council.

Expenditure on wastewater infrastructure is the largest component of capital expenditure.Expenditure on stormwater is difficult to analyse and compare because of the different waysit is accounted for by the four water businesses (see 2.3 Stormwater charges) and becauseSWC and HWC own only a portion of the total stormwater assets in their areas of operation.

SWC’s capital expenditure increased substantially in 1999 and 2000 because of theconstruction of the Northside Storage Tunnel. SWC expects to spend over $1.5 billionduring the next price path from 2001 to 2003, mainly on wastewater works to allow it tomeet its commitments under WaterPlan 215. The figures for environmental works inTable 3.3 clearly show that the primary driver for capital expenditure by SWC is improvedstandards. This trend will continue over the new price path.

HWC, Gosford Council and Wyong Council direct most of their capital expenditure towardsgrowth assets. Forecasts supplied by the agencies for the new price path show thatexpenditure on growth assets will continue to be the primary user of funds.

Figure 3.8 Index of capital costs (1997=100)

Index of real capital expenditure (1997 = 100)

0

50

100

150

200

250

300

350

400

450

1997 1998 1999 2000


5 WaterPlan 21 is Sydney Water's strategy for sustainable wastewater management across the Sydney

region. It establishes priorities and water quality goals, and a time frame during which these goals will bedelivered. It was published in 1997 with a 20 year time frame.


23

Table 3.3 Capital expenditureCapital expenditure by business (000, 2000 $)

1997 1998 1999 2000Total capital expenditureSWC 145,429 197,090 416,437 521,300HWC 16,732 38,387 37,289 60,450Gosford 4,868 3,302 5,907 5,788Wyong 4,160 7,978 16,750 10,373WaterSWC 53,492 56,575 95,444 76,960HWC 3,686 5,497 17,539 18,156Gosford 1,848 1,659 3,335 3,305Wyong 1,768 2,571 5,546 2,737WastewaterSWC 90,198 135,578 317,929 436,840HWC 13,042 32,795 19,750 42,118Gosford 3,020 1,643 2,572 2,483Wyong 1,760 3,910 6,916 4,050StormwaterSWC 1,740 4,938 3,063 7,500HWC 3 95 0 176Gosford 0 0 0 0Wyong 631 1,498 4,288 3,586

Capital expenditure by purpose (000, 2000 $)1997 1998 1999 2000

SWCAsset renewal/replacement 60,678 91,606 105,522 125,000Environmental 81,632 101,379 304,131 380,700Growth 3,119 4,106 6,783 15,600Total capital expenditure 145,429 197,090 416,437 521,300HWCAsset renewal/replacement 1,949 2,572 6,600 5,999Environmental 2,884 15,050 7,423 15,678Growth 11,899 20,766 23,266 38,773Total capital expenditure 16,732 38,387 37,289 60,450GosfordAsset renewal/replacement 1,789 56 1,408 2,926Environmental 0 0 0 0Growth 3,079 3,246 4,499 2,862Total capital expenditure 4,868 3,302 5,907 5,788WyongAsset renewal/replacement 1,699 2,624 3,544 3,059Environmental 0 0 2,910 1,632Growth 2,461 5,354 10,296 5,682Total capital expenditure 4,160 7,978 16,750 10,373


24

4 SERVICE PERFORMANCE OF METROPOLITAN WATERSUPPLIERS

The two corporations and the two councils operate under different regulatory frameworks.The corporations have operating licences granted by the government and regulated by thelicence regulator. These operating licences set minimum standards (targets) for quality,reliability and pressure for water, for measures of sewage surcharges on private property,and for measures of customer service such as the handling of complaints. In its new role aslicence regulator, the Tribunal is currently reviewing the system performance standards setin SWC’s operating licence.

The councils do not have operating licences but are required by the Local Government Act1993 to develop management plans. All four water businesses are regulated by other bodiesincluding the Environmental Protection Authority (EPA), the Department of Health, and theDepartment of Land and Water Conservation.

The service performance section of this report will be expanded in future reports. In thepast, the Tribunal has had some difficulty getting appropriate information on serviceperformance. In particular, the information on standards in the Annual Information Returnshas not been as useful as the Tribunal would have liked. Having been appointed licenceregulator to SWC and HWC in November 2000, the Tribunal is now able to access betterquality information regarding the service performance of SWC and HWC.

In its role as licence regulator, the Tribunal will continue the process started in 1995 ofconducting annual audits of SWC’s and HWC’s performance against their operatinglicences. The audits report on compliance with standards set by the operating licences andby other regulators. Most of the information in this section is derived from current audits.

4.1 WaterThe Department of Health has primary responsibility for drinking water standards.Indicators of the quality of water are reported in the AIRs. Table 4.1 presents the results forthe four businesses over the past four years. Overall, compliance with the 1996 NationalHealth and Medical Research Council (NHMRC) Guidelines for drinking water quality washigh for those substances tested (standards for the presence of giardia and cryptosporidiumare not part of the NHRMC Guidelines). The water businesses are required to test for avariety of physical, chemical and microbiological conditions of the water samples, including:

• Physical - colour, turbidity, and temperature

• Chemical - acidity, aluminium, fluoride, manganese and iron

• Microbiology - faecal coliforms6 which might indicate the presence of sewagecontamination.

6 Organisms which are found in human and animal faeces.


25

Table 4.1 Drinking water quality

1997 1998 1999 2000Samples that meet the minimum requirements of NHMRC guidelinesPhysical/chemicalSydney Water Corporation 99% 100% 97% 98%Hunter Water Corporation 100% 99% 99% 100%Gosford City Council 100% 100% 100% 100%Wyong Shire Council 100% 100% 100% 100%

MicrobiologicalSydney Water Corporation 99% 100% 100% 100%Hunter Water Corporation 100% 100% 99% 99%Gosford City Council 100% 100% 98% 98%Wyong Shire Council 99% 98% 97% 96%

The latest audits of both SWC7 and HWC8 confirm their compliance with water qualitystandards. Other findings in the audits for water are:

• the audit of SWC’s operating licence reveals concerns that the North Richmonddelivery system did not comply with the 1996 guidelines for total coliforms

• both corporations complied with their licence requirements for continuity andpressure of water supply

• SWC’s licence sets targets for reductions in average water consumption. The auditorsbelieved that it was unlikely that SWC will meet its 2000/2001 target.

4.2 WastewaterThe auditors report that the two corporations have achieved high compliance withwastewater standards. The EPA grants licences that set standards for sewerage dischargesinto the environment. The operating licence sets standards for sewer surchages on privateproperties:

• HWC is judged to have complied with the EPA licences regarding discharges fromsewerage treatment plants (STPs). At the time of the SWC audit, the EPA had notissued new licences for SWC and so a rating for compliance could not be made.

• Both SWC and HWC comply with the operating licence standard regarding sewagesurchages on private land.

4.3 StormwaterBoth SWC and HWC share stormwater responsibilities in their areas of operation with otherorganisations, such as local councils. This spread of responsibility is a fundamental problemwith the management of stormwater in the SWC and HWC areas. To counter this problem,the EPA has initiated a scheme involving the water corporations and local councilsdeveloping stormwater management plans (SMPs) designed to address stormwaterproblems.

7 Licence Regulator, 1999 Operational Audit of the Sydney Water Corporation, July 2000.8 Licence Regulator, Hunter Water Corporation Operational Audit 1999/2000, 25 November 2000


26

The audit for SWC reports high compliance with the EPA’s requirements that SWCparticipate in the development of catchment-based SMPs and a stormwater environmentalimprovement program. However SWC’s response to flooding issues and stormwater hasbeen judged as achieving only partial compliance. The auditors had flagged these floodingissues in previous audits.

In their 1998/99 audit, HWC’s auditors make several recommendations that HWC take anactive role on local total catchment management committees. The current audit reports thatHWC has satisfied the intent of those recommendations. The audit also reports that HWChas assisted in the preparation of stormwater management plans and an environmentalimprovement plan.

4.4 Customer serviceThe operating licence for SWC contains a customer contract defining the rights andresponsibilities of customers and of SWC, and requiring that SWC establish and consult withcustomer councils. The purpose of the customer councils is to facilitate communityinvolvement in issues relating to SWC’s obligations under the operating licence.

SWC’s customer contract sets out the rights of SWC customers regarding matters such assupply of services, notice of interruption to supply, customer redress and compensation, anddisconnection and reconnection. Under certain conditions, individual customers are able toobtain rebates from their bill when supply is interrupted, and customers may obtaincompensation for damage or disruption incurred by SWC.

The audit of SWC’s performance reports overall high compliance with the customercontract. However, the customer complaints, redress and compensation results vary. Anew customer information and billing system is to be introduced to help remedy thesedeficiencies. SWC generally complied with the requirements regarding customer councils,but the auditor believes that the councils could be more effective in delivering clear outputsfor SWC customers. The auditors believe new benchmarks for customer councilperformance should be considered now that the system has been in place for some time.

HWC has obligations under its licence, but has also adopted a voluntary customer charterwhich covers other responsibilities. The charter sets out objectives for responding to serviceinterruptions, and rebates available to customers when service standards are not met. Theauditors report that HWC has met the service criteria in the charter and that the customermanagement and service aspects of HWC have improved since the last audit.


27

5 SYDNEY CATCHMENT AUTHORITY

In response to the recommendations of the Sydney Water Inquiry, the NSW Governmentcreated the Sydney Catchment Authority (SCA) in July 1999. The SCA’s purpose is tomanage the water catchment areas and infrastructure within its jurisdiction and to supplybulk water to Sydney Water and several smaller customers.9 This chapter focuses SCAactivities relating to its supply of bulk water to Sydney Water.

SCA’s bulk water supply business is unlike that of the other metropolitan water agencies,which are involved in not only retail water supply, but also sewerage and stormwater. Thusmany of the detailed comparators examined in the preceding chapters are irrelevant to SCA.However, some of the broader aspects of SCA’s performance may be compared with thoseof the other agencies. Useful comparisons are made in the following sections.

Because SCA has been operating for only one full financial year, it is impossible to make anytrend comparisons. The information provided below is for SCA’s first year of operations,1999/2000.

5.1 PricingDuring 1999/2000 SCA’s prices to its major customer, Sydney Water, were in accordancewith the Bulk Water Supply Agreement between the two parties. Covering the supply ofbulk raw water by SCA to SWC, this agreement was entered into pursuant to Section 22 ofthe Sydney Water Catchment Management Act 1998.10 Under the agreement, SCA’s price ofbulk water to SWC consists of a fixed availability charge of $4.8m per month and avolumetric charge of $104 per megalitre.

In August 1999 the Premier asked the Tribunal to determine maximum prices for SCA’swater supply services for the period 1 October 2000 to 30 June 2005. The Tribunaldetermined that SCA’s charges to Sydney Water are to be held at the 1999/2000 level in2000/01. In the following four years to 2004/05, these charges are to be maintained in realterms.11

9 The SCA supplies water to a number of customers other than SWC. They consume less than 0.5 per cent

of the annual total water demand placed on the SCA. These customers include Wingecaribee andShoalhaven Council, firms engaged in primary production and industrial activities, and small users (fordomestic stock and irrigation purposes).

10 In response to a request from the Premier in early 1999 the Tribunal facilitated the provision of an initialdraft of the agreement. The Tribunal also reviewed and reported on the terms of the agreement aspublicly exhibited.

11 The Premier declared all water supply services provided by the SCA to be monopoly services in February2000 (see NSW Government Gazette No 22 of 11 February 2000, p 816). The Tribunal’s determination isset out in full in its report, Sydney Catchment Authority, Prices of Water Supply Services, Medium Term PricePath from 1 October 2000, September 2000.


28

5.2 Financial performanceSCA’s financial performance is summarised in Table 5.1, and, SCA’s results are comparedwith those for the other metropolitan water agencies. The table shows that with totalrevenues of $120m, operating expenditure of $45m and operating cashflows of $38m, SCA iscomparable in financial size to Hunter Water (although not in terms of assets, properties oremployees).12 SCA’s financial indicators in the following section confirm that SCA is in ahealthy financial position.

Table 5.1 Financial performance 1999/2000

Financial characteristics for 1999/2000 ($ million)Sydney

WaterHunter Water

Gosford Council

Wyong Council SCA

Total revenue 1,195 113 41 34 120 Operating and misc expenditure 773 54 20 17 45 Net interest payments 126 2 3 1 9 Depreciation and amortisation 165 27 10 10 6 Abnormal items 15 12 - - - Earnings before interest, tax, abnormals 256 32 10 7 69 Tax paid 59 15 - - - Dividends paid 99 28 - - 11

Property, plant & equip (book) 12,533 1,881 520 518 678 Total assets (book value) 13,006 1,968 581 548 736

Total debt (incl overdraft) 1,809 84 50 36 161 Total liabilities 2,406 171 55 43 216

Operating cashflow 134 49 17 16 38 Capital expenditure 521 73 6 10 38

No. of metered properties (000s) 1,501 188 62 53 - Number of employees 2,124 509 162 155 147

12 The table does not show property numbers for the SCA. As previously discusssed, SCA’s major customer

by far is SWC.


29

5.3 Financial indicatorsTable 5.2 provides key financial indicators for SCA. The indicators are a measure of theagency’s ability to service debt, repay debt, and finance investment from internal sources.SCA rates well in all three areas. This means that it is well able to fund its operations,service its debt, and provide for capital expenditure and dividend payments.

Table 5.2 also lists SCA’s earnings before interest and tax (EBIT) and earnings before interest,tax, depreciation and amortisation (EBITDA) as percentages of total revenue. These ratiosare the highest of all the agencies (see also Table 3.2). This is mainly because in its first yearof operation, SCA did not incur its expected level of operating expenditure. The Tribunaltook this fact into consideration when determining SCA’s prices for the coming years.

Table 5.2 Sydney Catchment Authority financial indicators 1999/2000 (i)(ii)

Financial year ending 31 July 2000

Ability to service debtFunds flow interest cover ratio 8.6 NSW Treasury rating (1994) AAAS&P rating (1995) AA

Pre-tax interest cover ratio 7.9 S&P rating (1995) AA

Ability to repay debtFunds flow net debt payback ratio 2.6NSW Treasury rating (1994) AAA

Funds from operations/total debt ratio 28%S&P rating (1995) AA

Total debt/total capital ratio 22%S&P rating (1995) AA

Ability to finance investment from internal sourcesInternal financing ratio 120%NSW Treasury rating (1994) AAAS&P rating (1995) AA

EBIT / total revenue 57%EBITDA / total revenue 62%EBIT ($ m) 69EBITDA ($ m) 75

Notes:i) The Tribunal particularly relies on indicators based on cashflows because these are not as subjective as

indicators that use components derived from estimates (eg asset value and depreciation).ii) The information in this table should be read and understood only after reviewing the accompanying

overview, particularly paragraph 3.1.2 and Appendix 2 and the explanations and qualificationsmentioned there.


30

5.4 RevenueSCA’s charges to Sydney Water consist of an access charge and a usage charge. Figure 5.1shows that SCA’s revenue is sourced almost equally from access and usage charges. This iscomparable with the larger of the metropolitan water agencies, Sydney and Hunter. Duringthe year 1999/2000 Gosford and Wyong Councils had not yet moved to full usage basedcharging. The Tribunal has stated that it will review SCA’s tariff structure as part of its nextreview, in light of the overall trend in consumption that emerges over the next few years.13

Figure 5.1 Revenue by usage and access 1999/2000

0%

20%

40%

60%

80%

100%

Sydney WaterCorporation

Hunter WaterCorporation

Gosford CityCouncil

Wyong LocalCouncil

SydneyCatchment

Authority


13 Sydney Catchment Authority, Prices of Water Supply Services, Medium Term Price Path from 1 October 2000,

September 2000 p 25


31

5.5 CostsIn 1999/2000, SCA incurred total operating costs of $45.1m. Based on metered consumptionof 606,581 Ml, this equates to operating costs of 7.4c/kl. As is to be expected, these costs arevery much lower than those of the other agencies, due to the different nature of SCA’soperations. Being a bulk supplier, SCA incurs no treatment or reticulation costs.

SCA’s total for operating costs, depreciation and return on capital amounted to $120m in1999/2000. This is compared on a proportional basis with returns for the other agencies inthe figure below.

Figure 5.2 Proportion of operating costs, depreciation and return on capital asproportions of revenue 1999/2000

0%10%20%30%40%50%60%70%80%90%

100%

SWC HWC Gosford Wyong SCAOperating costs Depreciation Return on capital

The low proportion of (book) depreciation for SCA results from a combination of therelatively long lived nature of SCA’s assets and the relatively lower book value of itsunderlying asset base.14

SCA underspent on its expected operating expenditure for the year, resulting in a higherthan expected return (EBIT). This is reflected in the above figure, which indicates SCA’sreturn was proportionately much higher than for the other agencies. The Tribunal took thisinto consideration in determining the SCA’s prices for the period from 2000/01 to 2004/05

14 As detailed in SCA’s price determination report (see Sydney Catchment Authority, Prices of Water Supply

Services, Medium Tem Price Path from 1 October 2000, p17, the SCA’s book value of assets in 1999/2000 islinked to its economic value and is therefore comparatively much lower than for the other water agencies.


32

5.6 Capital expenditureSCA incurred $37.6m in capital expenditure during 1999/2000. Table 5.3 presents thisexpenditure in terms of the primary drivers underlying the capital expenditure.

Table 5.3 Capital expenditure 1999/2000Driver SWC HWC Gosford Wyong SCA

Asset renewal/replacement 125,000 5,999 2,926 3,059 2,336 Environmental and other standards 380,700 15,768 - 1,632 34,860 Growth 15,600 38,773 2,862 5,682 399 Total capital expenditure 521,300 60,540 5,788 10,373 37,595

Figure 5.3 compares the percentages of SCA’s capital expenditure driven by assetrenewal/replacement, environmental and other standards, and growth for 1999/200, withthat of the other metropolitan water agencies. The figure shows that the bulk of SCA’scapital expenditure is driven by ‘environmental and standards’ related expenditure15. Thisis similar to SWC, and contrasts with that of Gosford, Wyong and HWC which have a highproportion of ‘growth’ driven capital expenditure.

Figure 5.3 Capital expenditure by driver 1999/2000

0%10%20%30%40%50%60%70%80%90%

100%

SWC HWC Gosford Wyong SCA

Asset renewal/replacement Environmental and other standards Growth

15 This expenditure was on the Warragamba Dam auxiliary spillway project. The purpose of the project is to

render Warragamba Dam safe under probable maximum flood conditions.


33

5.7 Service performanceAs part of its new licence regulation functions, the Tribunal is required to report to the NSWgovernment on SCA’s compliance with its operating licence.16 SCA’s operating licencecovers a broad range of matters including bulk water quality, customers, management ofinfrastructure, as well as catchment management and protection, and environmentalmanagement.

SCA’s audit for 1999/2000 was completed in December 2000. Over the initial audit period,SCA made significant progress towards complying with its operating licence. Most licenceclauses were met to a full or high level of compliance. The greatest opportunities to improvecompliance are in regard to customers, and bulk water.

Noting SCA’s partial to high compliance in relation to customer service and complaints, theaudit report identifies the need for improvement in managing customers issues (other thanSWC) and following up complaints.17

As a bulk water supplier, SCA does not have to comply with the full NHMRC drinkingwater guidelines (unlike the other Metropolitan water agencies). It must, however, complywith a list of pesticide, chemical and radiological characteristics that the drinking waterguidelines list as unable to be treated effectively via filtration or other conventional watertreatment processes.18

The audit states that insufficient information was provided by SCA to enable assessment ofcompliance with bulk water quality monitoring requirements. However, partial to fullcompliance has been demonstrated across other clauses relating to water quality. The auditrecommends that SCA prepare an overarching document which describes all the waterquality monitoring programs being undertaken, the reports generated by these programs,and how these relate to the objectives and requirements of the operating licence.

Accordingly, SCA has prepared its first annual water quality monitoring plan for 2000/2001.Satisfying the auditor’s recommendations, it states that in 2000/01, SCA intends to fullymeet its licence obligations with respect to its monitoring program.

SCA has published all the results of testing carried out during the past year in its AnnualWater Quality Monitoring Report, 1999-2000. SCA reports that no serious drinking waterquality incidents were identified and water quality within the various dams and reservoirswas generally suitable for the production of high quality potable water.

16 The SCA operated under an interim licence for the period from 2 July 1999 to 18 April 2000. The current

licence came into effect on 19 April and expires on 31 December 2004. It will be subject to a mid-termreview in 2002.

17 Clause 5.2 of the Operating Licence requires that the Authority must use its best endeavours to reachagreement with its other customers on the arrangements to apply in relation to Bulk Water that theAuthority supplies to those Customers.

18 Sydney Catchment Authority, Operating Licence, Schedule 4


34

APPENDIX 1 MAJOR CHARGES AS AT 30 JUNE 2000

Sydney Water Corporation

Quarterly service charges (residential and non-residential, 20mm meter)Water Standard Charge $20.00

Unmetered Residential $76.00Vacant land (unconnected) $20.00

Sewerage Standard Charge $72.60Vacant Land (unconnected) $43.00

Stormwater Residential and Vacant Land $ 4.00Non-Residential $14.20

Usage charges (per kilolitre, residential and non-residential)Water Filtered Water $ 0.90

Unfiltered Water $ 0.71Water for Shipping $ 1.15Bulk Raw Water $ 0.44

Sewerage Non-residential discharges above 1.37kL/day $ 0.96

Property value-based charges (cents in AAV dollar, non-residential only)Sewerage Non-residential (on AAV > $2,500) $0.335Stormwater Non-residential (on AAV > $2,500) $0.313

Hunter Water Corporation

Annual service charges (20mm meter, residential and non-residential)Water Standard charge $ 24.60Sewerage Standard charge $405.15

(discharge factor applies to sewerage charge)Drainage Residential $ 24.30

Non-residential $ 15.75

Usage charges (per kilolitre, 20mm meter, residential and non-residential)Water For consumption up to 1000 kLs per year $ 0.922

For consumption in excess of 1000 kLs per year $ 0.849Sewerage Residential charge $ 0.476

Non-residential charge $ 0.405(discharge factor applies to sewerage charges)

Property value-based charges (cents in AAV dollar, non-residential only)Drainage Cents in AAV dollar $ 0.189

Annual environmental improvement charge (residential and non-residential)Standard charge $ 40.00

Gosford City Council

Annual service charges (20mm meter, residential and non-residential)


35

Water Metered base charge $153.00Vacant unconnected land $153.00

Sewerage Residential charge $371.00Non-residential charge $276.00

Drainage Standard charge $ 40.00

Usage charges (per kilolitre, 20mm meter, residential and non-residential)Water Consumption < 0.55 kLs per day $ 0.00*

Consumption > 0.55 kLs per day $ 0.65Sewerage Non-residential only $ 0.70

(discharge factor applies to sewerage charges)

Wyong Shire Council

Annual service charges (20mm meter, residential and non-residential)Water Metered base charge $176.00

Vacant unconnected land $176.00Sewerage Residential charge $347.00

Non-residential charge $347.00 minimum forservice and usage

Usage charges (per kilolitre, 20mm meter, residential and non-residential)Water Consumption < 0.55 kLs per day $ 0.00*

Consumption > 0.55 kLs per day $ 0.60Sewerage Non-residential only $ 0.60

(discharge factor applies to sewerage charges)

* The cost of consumption up to 0.55 kLs per day is incorporated as an allowance in theapplicable annual service charge.


36

APPENDIX 2 FINANCIAL INDICATORS

The indicators of financial performance include notional credit ratings of regulatedbusinesses. Indicative ratios supplied by Standard and Poor’s (S&P) ratings group that arepublished from time to time19 are used to estimate these ratings. The indicative ratios areused by S&P as one of its analytical tools in setting overall ratings, and the Tribunal uses theindicators in a similar manner, ie as part of the overall financial analysis of the regulatedbusiness. The overall ratings that have been or may be derived by S&P for a business cannotbe derived from simple inspection of these ratios.

Indicative ratios for each ratio for each year during the medium term price paths set in 2000were published in the Tribunal’s Determinations for each of the regulated water businesses.In Table 3.2, the Tribunal has

• calculated various financial ratios for the one year of results considered in this reportin accordance with the methodologies used by S&P; and

• indicated the rating applicable for each ratio based on the bands published by S&P.

The calculation and assessments are those of the Tribunal and not S&P.

The actual rating process used by S&P is very broad, involving subjective judgements ofindustry risk and cost structures, not just financial ratios. S&P use both qualitative andquantitative analyses in determining an entity’s rating. The ratios used by the Tribunal in itsfinancial analysis are part of the latter – they should be used as a guide rather than asblanket reasons for giving a certain rating. The overall ratings that have been or may bederived by S&P for a business cannot be derived from simple inspection of these ratios.

S&P divide its analysis into:

• business risk - including market position, technology, efficiency and managementcapabilities, the prospects for growth in the industry, and vulnerability totechnological changes or labour unrest or regulatory changes; and

• financial risk - looking at financial management policies, cash flow protection, capitalstructure and profitability.

S&P’s analysis incorporates an evaluation of a company’s business and financial risks. In itsguideline ratios, S&P provided financial indicator ranges for each of ‘above average’business position, ‘average’ business position and ‘below average’ business position.During the analysis undertaken in 2000 as part of the determination process, the Tribunaldecided that each of the regulated water businesses had an ‘excellent’ risk profile.

19 Two sets of ratios have been used, for consistency with the financial analysis undertaken by the Tribunal

during the 2000 determination process. The “NSW Treasury Rating” indicators are from The CapitalStructure for NSW Government Trading Enterprises report produced in August 1994 by NSW Treasury aspart of its financial policy framework for GTEs, and are based on ratios provided to Treasury by S&P.The “S&P” criteria are from S&P’s Corporate Finance Criteria for 1995.


37

An acceptable range of financial ratios for each rating category will differ from time to timeaccording to the unique characteristics of the business. There may not be a perfect matchbetween the ratios and the indicator rating; the ratios represent midpoints of ranges, andvary during an investment cycle, particularly the internal financing ratio. In addition, S&P’scredit ratings are prospective, with ratings reflective of a company’s expected financialprofile. For this reason, the ratings indicated by the ratios for each of the regulatedbusinesses based on one year’s financial results may not be the same as the actual ratinggiven by S&P.


38

DEFINITIONS

FINANCIAL INDICATORS GENERAL DESCRIPTION DEFINITION/COMPONENTS

Funds Flow InterestCoverage

How many times funds fromoperations covers interest

payments

(Pre-tax funds flow + net interest) / netinterest

Pre-tax Interest Coverage How many times profit before taxcovers interest payments

(EBIT – capital contributions) / net interest

Funds Flow Net Debt PayBack

How many years will it take topayback total debt

Net debt / funds from operations

Funds from operations /total debt

Proportion of funds fromoperations to total debt

Funds from operations / total debt

Total debt / total capital Proportion of debt to equity capital Total debt / (total debt + total equity)

Internal Financing Ratio Funds retained as a proportion ofcapital expenditure

(Net cashflow / net capital expenditure) x 100

Where:

Capital contributions = cash and non-cash contributions of/towards physical assets

Capital expenditure = purchase of property, plant and equipment

Cash holdings = cash + short term investments

EBIT = earnings before (net) interest, tax abnormal items, but after capital contributions

Funds from operations = profit after tax + depreciation and amortisation – capital contributions +movements inprovisions + cost of assets sold + change in working capital – non-cash abnormal items

Net cashflow = funds from operations – dividends paid in year

Net interest = interest payable – interest earnings

Net debt = (total debt – cash –LT&ST investments)

Pre-tax funds flow = funds from operations + tax expense

Total debt = all interest bearing debt

Total equity = retained profits + reserves + share capital

INTRODUCTIONBackground to this reportScope of this reportSummary of findingsSources of information

PRICING REFORM OF METROPOLITAN WATER SUPPLIERSShift to two-part pricingImpacts of pricing reformStormwater chargesDeveloper charges

FINANCIAL PERFORMANCE OF METROPOLITAN WATER SUPPLIERSOverviewFinancial comparisonFinancial indicator analysisRevenueResidential revenue per propertyNon-residential revenue per property

ExpenditureTotal costsOperating expenditureCapital expenditure

SERVICE PERFORMANCE OF METROPOLITAN WATER SUPPLIERSWaterWastewaterStormwaterCustomer service

SYDNEY CATCHMENT AUTHORITYPricingFinancial performanceFinancial indicatorsRevenueCostsCapital expenditureService performance

Documents

Water Industry Overview 2000 - IPART...Water industry overview 2000 3 1.2 Scope of this report This overview seeks to: • highlight the information used by the Tribunal in making