20 June 2014 Economic Regulation Framework Review Secretariat

Ref.: FOL/2493 – DOC14/33615
20 June 2014
Economic Regulation Framework Review Secretariat
Office of Living Victoria
Level 35
2 Lonsdale Street
MELBOURNE
3000
Email: [email protected]
Thank you for the opportunity to provide feedback on the preliminary advice on the review
of economic regulation, governance and efficiency in the Victorian water sector. The
feedback provided by Goulburn Valley Water (GVW) in this submission is related to the
specific characteristics of this business.
Goulburn Valley Water – Defining Aspects of the Business
GVW provides water and sewerage services to approximately 130,000 people in
54 separate cities and towns across more than 20,000 square kilometres in northern
Victoria, and also provide services to a large and diverse food processing industry. GVW
operates 37 separate water treatment plants, 26 wastewater management facilities,
hundreds of pump stations and tanks and thousands of kilometres of underground water
mains and sewers.
The 63 separate and geographically dispersed water and wastewater systems are a
defining aspect of this business, which has a major influence on operating costs and
capital investment program.
Many of these assets were built more than 50 years ago and are now approaching end of
life or have been upgraded many times resulting in complex integrated brown field sites
that require continuous asset maintenance, augmentation and renewal programs.
For instance, the Shepparton water treatment site comprises four discrete treatment
plants, each of different technology built over a 50 year period. We have established
asset monitoring and optimisation programs in place to ensure all our asset
maintenance, augmentation and renewal programs are economically efficient and that
the timing for replacement of assets does not occur before such investment is deemed
prudent and efficient. As an example, a $17 million project to build a new water
treatment plant at the Shepparton site which was scheduled to commence in the current
Water Plan period has now been deferred indefinitely as a result of innovative operating
improvements implemented by our water treatment team over an 18 month period which
has greatly improved the capacity and efficiency of the existing DAFF plant at that site.
We have noted in information previously provided to the Independent Review that the
Board has concerns about the trajectory of GVW’s debt. Even with a rational economic
methodology such as the building block approach, the net result during the first 8 years
of independent price regulation has been an increase in total debt for GVW from $28M in
2005 to $101M in 2013.
- 2 Further, the Water Plan 3 price path for GVW, at CPI minus 0.2% results in GVW having
the lowest average water bills in the state (a great result for GVW customers), however
debt levels are projected to increase to $123 million by the end of Water Plan 3. This
provides our Board and executive management team with a pressing incentive to
continually find operating efficiencies and maintain an ongoing review of the priority and
timing of our capital program.
Approach to Regulating Water Prices
For a business with a large number of dispersed systems, often servicing small
populations, the building block approach has provided an open and transparent
approach to regulate water prices and provide consistent standards of service and pricing
for all customers. Further, the basis and methodology that underpins the building block
approach is capable of being understood by our customers.
The Preliminary advice does not provide detail on a number of aspects of the proposed
price-based approach that are currently understood in the existing framework. Further
detail of the price-based approach is required for GVW to gain an improved
understanding of how it would be applied. In particular, how is long term financial
sustainability of the business considered in the price-based approach and what
measures will be used to assess financial sustainability?
We are concerned that an economic regulatory arrangement based solely on a ‘price
based approach’ may not adequately address the high level of maintenance and renewal
of diverse assets required to provide safe and reliable water services whilst ensuring debt
can be managed at an appropriate level.
A specific area of uncertainty in relation to the price-based approach is the funding of
projects where there is no return on the investment. Three case studies are provided that
can be used by the Independent Reviewer to consider how this issue might be addressed
under a price-based approach.
Case Study 1 – New Marysville Water Treatment Plant
GVW is investing $5M in the construction of a new Water Treatment Plant in Marysville
during Water Plan 3. The plant will also require additional operating costs of $100K per
year. This investment is required to achieve regulatory compliance. The previous water
treatment system was chlorine only, regularly failed to meet public health water quality
standards and resulted in a compulsory Undertaking being entered into with the Health
Department to upgrade the treatment system to a fully filtered supply.
This project will not generate any additional revenue to support the investment.
Under the building block approach this investment is deemed prudent as it is required
to meet a regulatory obligation and is incorporated into the pricing decision.
How would the capital and operating expenditure associated with a new small town
Water Treatment Plant be addressed in the price-based approach?
- 3 -
Case Study 2 – Water Main Renewal Funding
Around 30% of GVW’s reticulated water supply network is asbestos cement pipe
constructed between 1940 and 1980, a large proportion of which will reach the end of
its service life in the next 10-20 years. Based on detailed failure prediction models,
GVW will need to increase renewal expenditure to maintain current service levels.
Under the building block approach a business case was prepared for Water Plan 3 to
increase water main renewal funding which was deemed prudent to maintain service
levels and incorporated into the pricing decision.
How would increased renewal expenditure to maintain service levels be addressed in
the price-based approach?
Case Study 3 – Renewal of the Nathalia Water Treatment Plant
The major components of the Nathalia Water Treatment Plant are reaching the end of
their service life and impacting on the achievement of regulatory obligations. The
components will require replacement within the next 10 years prior to failure at a cost
of $7 million. This project will not generate any additional revenue to support the
investment.
How would one-off renewal expenditure to maintain regulatory compliance be
addressed in the price-based approach?
Benchmarking
GVW acknowledges there are benefits to be obtained from effective benchmarking.
However, differences between businesses need to be understood before meaningful
comparisons can be made. Differences such as the number of systems or treatment
plants operated by a business, raw water sources, variable raw water quality, and
customer density are examples of differences that would need to be considered. To
enable the defining aspects of each business to be clearly identified, benchmarking
exercises must be comprehensive and have regard to the full range of factors that impact
on business costs and the definition of each factor must be clear and unambiguous.
GVW supports a more detailed transparent benchmarking approach that will ensure
consistency in cost categorisation and enable the differences between businesses to be
captured and understood.
GVW looks forward to working with the Independent Reviewer as more information is
made available regarding the proposed approach to economic regulation.
Yours sincerely
Peter Quinn
MANAGING DIRECTOR

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