SEQ Grid Service Charges 2011-12
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Final Report SEQ Grid Service Charges 2011-12 July 2011 Level 19, 12 Creek Street Brisbane Queensland 4000 GPO Box 2257 Brisbane Qld 4001 Telephone (07) 3222 0555 Facsimile (07) 3222 0599 [email protected] www.qca.org.au Authority staff who contributed to this report include: Will Copeman, Peter Halligan, Michelle Kelly, Einar Oddsson, George Passmore, Rick Stankiewicz © Queensland Competition Authority 2011 The Queensland Competition Authority supports and encourages the dissemination and exchange of information. However, copyright protects this document. The Queensland Competition Authority has no objection to this material being reproduced, made available online or electronically but only if it is recognised as the owner of the copyright and this material remains unaltered. Queensland Competition Authority Preamble PREAMBLE The Authority has recommended Grid Service Charges (GSCs) for the Grid Service Providers (Seqwater, WaterSecure and LinkWater) to apply in 2011-12. Consistent with the Minister’s Direction Notice, the Authority’s regulatory scrutiny is limited to a review of the prudency and efficiency of non-drought capital expenditure and post-completion drought capital expenditure, and fixed and variable operating costs. It does not address capital charges related to existing assets (return on capital and depreciation), capital expenditure or depreciation on drought assets, or the QWC levy. As a result, only some 33% of the total recommended GSCs have been eligible for regulatory review. The Authority’s final recommendations for the 2011-12 GSCs are included in the table below, compared to the approved 2010-11 GSCs. Grid Service Provider Approved 2010-11 QCA Recommended 2011-12 $m $m Seqwater 370.0 398.8 WaterSecure 317.7 306.5 LinkWater 192.5 205.7 Total Grid Service Charges 880.2 911.0 On the basis of the volume forecast provided by the South East Queensland Water Grid Manager (WGM), the total GSCs across all GSPs average $3,299/ML. This compares to an average of $2,642/ML in 2010-11. The 25% increase in $/ML costs is largely due to a decline in expected volume of 17% in 2011-12 in association with a cost base that is largely fixed. While the GSCs have increased on a per ML basis, the bulk water price payable by the Distributor/Retailers has not been affected. At $3,299/ML, the GSCs compare to the bulk water prices charged by the WGM to Distributor/Retailers which have a weighted average of $1,736/ML. In other words, in respect of bulk water sold to Distributor/Retailers, the WGM is forecast to recover only 53% of the GSCs paid to the GSPs. The Authority has also recommended a process for adjusting the GSCs which provides incentives for the entities to invest, innovate and pursue efficiency improvements. i Queensland Competition Authority Table of Contents TABLE OF CONTENTS PAGE PREAMBLE I GLOSSARY IV EXECUTIVE SUMMARY VI Direction Notice vi Grid Service Providers (GSPs) vi Seqwater vii WaterSecure ix LinkWater xi Summary of GSCs xii Review Thresholds xiv 1. MINISTER’S DIRECTION 1 1.1 SEQ Water Market Rules 1 1.2 Direction Notice 1 1.3 Investigation Plan 1 1.4 QWC Manual 2 1.5 Draft Report 2 1.6 Conduct of the Investigation 2 1.7 Future Investigations 3 2. BACKGROUND 4 2.1 The SEQ Water Grid 4 2.2 Drought Assets 6 2.3 Bulk Water Prices 6 3. APPROACH TO THE INVESTIGATION 7 3.1 Regulatory Objectives 7 3.2 Grid Service Charges 7 3.3 Seqwater-WaterSecure merger 8 3.4 Capital Charges 8 3.5 Fixed Operating Charge 15 3.6 Variable Operating Charge 16 3.7 Allowable Costs 17 3.8 Other Services 20 4. SEQWATER 22 4.1 Background 22 4.2 Capital Charge 22 4.3 Fixed Operating Charge 49 4.4 Variable Operating Charge 65 4.5 Allowable Costs 70 4.6 Revenue Offsets 75 ii Queensland Competition Authority Table of Contents 4.7 Summary of GSC 76 5. WATERSECURE 78 5.1 Background 78 5.2 Capital Charge 78 5.3 Fixed Operating Charge 90 5.4 Variable Operating Charge 100 5.5 Allowable Costs 104 5.6 Summary of GSCs 107 6. LINKWATER 109 6.1 Background 109 6.2 Capital Charge 110 6.3 Fixed Operating Charge 124 6.4 Variable Operating Charge 132 6.5 Allowable Costs 138 6.6 Summary of GSCs for 2011-12 142 7. REVIEW THRESHOLDS 144 7.1 Background 144 7.2 Framework and Approach 145 7.3 Cost Impacts of Changes in Law, Government Policy and Emergency Events 148 7.4 Changes in Forecast Demand or Water Sources 150 7.5 Adjustments for RAB and Cost of Debt 152 7.6 Adjustments for Under- or Over-Spend of Capital and Operating Costs 153 7.7 Procedures for Reviewing GSCs and Review Thresholds 158 7.8 Summary of Review Thresholds 158 REFERENCES 160 DEFINITIONS 161 iii Queensland Competition Authority Glossary GLOSSARY Term Definition ADWG Australian Drinking Water Guidelines AWTP Advanced Water Treatment Plant Capex Capital Expenditure CNF Competitive Neutrality Fee CSO Community Service Obligation DERM Department of Environment and Resource Management DR Distributor-Retailer IT Information Technology Investment State Water Authorities Investment Guidelines Guidelines kWh Kilowatt hour FAMP Facilities Asset Management Plan FTE Full-time Equivalent GIS Geographic Information System GSC Grid Service Charge GSP Grid Service Provider HR Human Resources LinkWater The Queensland Bulk Water Transport Authority OH&S Occupational Health & Safety O&M Operations and Maintenance Opex Operating Expenditure Market Rules The South East Queensland Water Market Rules ML Megalitre NPV Net Present Value NRW (the former Queensland Department of) Natural Resources and Water RAB Regulated Asset Base RBA Reserve Bank of Australia R&D Research and Development R&M Repairs and Maintenance iv Queensland Competition Authority Glossary QCA Queensland Competition Authority QTC Queensland Treasury Corporation QWC Queensland Water Commission SCADA Supervisory Control And Data Acquisition SEQ South East Queensland Seqwater The Queensland Bulk Water Supply Authority SEQwater Trading name of the former South East Queensland Water Corporation Limited SKM Sinclair Knight Mertz SOP SEQ System Operating Plan WACC Weighted Average Cost of Capital WAE Water Access Entitlements WCRW Western Corridor Recycled Water WGM South East Queensland Water Grid Manager WTP Water Treatment Plant WaterSecure The Queensland Manufactured Water Authority v Queensland Competition Authority Executive Summary EXECUTIVE SUMMARY Direction Notice Pursuant to a Direction Notice issued by the Minister for Energy and Water Utilities (the Minister1) on 9 February 2011, the Authority is required to investigate and recommend Grid Service Charges (GSCs) for the Grid Service Providers (GSPs) to apply in 2011-12, and to recommend a process for adjustments of the GSCs including Review Thresholds. Grid Service Providers (GSPs) The GSPs are state-owned statutory authorities and comprise the: (a) Queensland Bulk Water Supply Authority (trading as Seqwater). Seqwater supplies bulk water from dams, weirs and treatment plants to the SEQ Water Grid Manager (WGM) and some rural customers; (a) Queensland Manufactured Water Authority (trading as WaterSecure). WaterSecure supplies water from the Gold Coast Desalination Plant and the Western Corridor Recycled Water Project to the WGM, who supplies to power stations and Wivenhoe Dam; and (b) Queensland Bulk Water Transport Authority (trading as LinkWater). LinkWater provides water transport services to the WGM involving the transfer of water from dams and other water resources through bulk pipeline networks to Council owned water distributor-retailers. While Seqwater and WaterSecure were merged into one entity as from 1 July 2011, the Authority has continued to treat them separately for the purpose of recommending GSCs for 2011-12. This is consistent with the SEQ Water Market Rules prevailing at the time the Direction Notice was issued. The Authority also proposes to do so until the cost implications of the merger are assessed. To do otherwise could be interpreted as the Authority having considered merger cost implications which it has not. Limitations on the Authority’s Discretion The Direction Notice (which incorporates a Manual containing further requirements related to the estimation of GSCs) outlines key principles for risk allocation. These principles include the following: (a) GSPs are to be fully immunised from interest rate exposures, through recovery of the actual cost of debt; (b) GSPs are not to be subject to volume or source risk either in total or across production or dispatch points over the regulatory period; and (c) the regulated asset base (RAB) is to be as advised by the Queensland Water Commission (QWC) and not to be subject to optimisation. Expenditure on drought assets are to be incorporated in the RAB at project cost. The Authority is required to accept that: (a) the rate of return on drought assets is limited to the actual cost of debt provided by Queensland Treasury Corporation (QTC); and 1 At the time of the referral, the Minister for Energy and Water Utilities was designated the Minister for Natural Resources, Mines and Energy and the Minister for Trade. vi Queensland Competition Authority Executive Summary (b) the rate of return on non-drought assets must be set using parameters advised by the QWC, with the risk-free rate and actual cost of debt advised by the QTC. Review of Prudency and Efficiency The Authority engaged Sinclair Knight Mertz (SKM) to review the prudency and efficiency of proposed new non-drought and post-commissioning drought capex as well as fixed and variable operating costs. SKM used a sampling approach in conducting its analysis. Seqwater The QWC advised that Seqwater’s opening RAB for 1 July 2011 was $2,609.9 million and comprised 25% drought assets and 75% non-drought assets. Major adjustments to the RAB during 2011-12 include the completion of Wyaralong Dam at a value of $373 million ($10 million less than indicated in the Draft Report), final completion works on Hinze Dam of $30 million ($4.5 million higher than in the Draft Report) and non-drought capital expenditure of $44 million ($3.1 million higher than in the Draft Report).