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Grid Services Charges Submission for the Period July 2012 to June 2013 Submitted February 2012

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Grid Services Charges Submission for the Period July 2012 to June 2013 Submitted February 2012 Grid Services Charges Submission For the period July 2012 to June 2013 Submitted February 2012 This page has been left blank intentionally CONTENTS EXECUTIVE SUMMARY ............................................................................................. I 1 INTRODUCTION ................................................................................................ 1 2 OPERATING ENVIRONMENT AND KEY CHALLENGES ................................ 3 3 BUSINESS IMPROVEMENTS AND KEY ACHIEVEMENTS .......................... 13 4 LINKWATER’S FINANCIAL POSITION .......................................................... 19 5 OPERATING OBLIGATIONS .......................................................................... 22 6 PLANNING ...................................................................................................... 28 7 FIXED OPERATING COSTS ........................................................................... 35 8 VARIABLE OPERATING COSTS ................................................................... 57 9 ALLOWABLE OPERATING COSTS ............................................................... 67 10 CAPITAL EXPENDITURE ............................................................................... 69 11 REGULATORY ASSET BASE ........................................................................ 89 12 DEPRECIATION .............................................................................................. 92 13 WORKING CAPITAL ....................................................................................... 94 14 WEIGHTED AVERAGE COST OF CAPITAL .................................................. 96 15 ANNUAL REVENUE REQUIREMENTS .......................................................... 99 16 PRICING ........................................................................................................ 101 17 MECHANISMS ............................................................................................... 104 18 GLOSSARY ................................................................................................... 106 19 REFERENCES ............................................................................................... 109 This page has been left blank intentionally EXECUTIVE SUMMARY This Regulatory Submission presents the Queensland Bulk Water Transport Authority‟s (trading as LinkWater) revenue requirements for Declared Water Services for the regulatory period from 1 July 2012 to 30 June 2013. Over the current regulatory period, LinkWater has achieved significant success and faced significant challenges. Most notable was LinkWater‟s operational performance during the January 2011 floods. Despite the interruption of treated water from Mount Crosby facilities, the two-way flow capability of the LinkWater network combined with adjustments to the level of production at other water treatment plants in the South East Queensland Water Grid allowed available drinking water to be moved around the Grid to meet system demand until full operations were restored. The continuation of supplies was achieved through LinkWater‟s ability to remotely monitor storage levels, flows and test water quality in real time within its transport network and this remained fully operational during the floods. LinkWater‟s role in the floods was recognised by the Queensland Floods Commission of Inquiry which noted that a key feature of the ability of the South East Queensland Water Grid to maintain bulk drinking water supplies during the floods was the continuous operation of LinkWater‟s Network Control Centre. Notwithstanding the floods, LinkWater transported 212,000 megalitres of water through its bulk water transmission network during 2011 with 100 percent compliance with Australian Drinking Water Guidelines (2004) and maintained continuous availability of the bulk water transport network at all times during the entire year. Despite major operational challenges, LinkWater also made significant progress against the commitments it made in its 2011-12 submission with respect to developing key operating processes in the critical area of asset management. However, while LinkWater has achieved exceptional operational performance during 2011, it will face a number of challenges in developing and operating its bulk water transport network over the next 12 months. In particular: Integrating the Northern Pipeline Interconnector Stage 2 into the business. This will involve significant work including completion of the defects period, integrating asset data into LinkWater‟s Asset Information Management System and integrating the asset into the Asset Management Framework to ensure correct and effective maintenance Responding to the requirements of the revised System Operating Plan. LinkWater needs to develop an annual Water Supply Asset Plan to develop a program of work to meet 20 year demand projections Review of the most appropriate method for the delivery of the annual maintenance program. This is intended to create a number of valuable outcomes for LinkWater including more clearly defined services and accountabilities, increased transparency of costs, and control over its asset maintenance management i Funding operational expenses in an environment of net operating cash shortfalls. These shortfalls are due to the imbalance between inflation adjusted revenues and costs generated in the nominal regulatory framework coupled with high gearing levels. This submission demonstrates how LinkWater will address these challenges and provides comprehensive evidence of the revenue needs for the next regulatory period to maintain the ongoing efficient functioning of both LinkWater‟s bulk water transmission network and the South East Queensland Water Grid. Planning Processes LinkWater has a documented planning framework to ensure its investment in the construction and maintenance of its infrastructure is timely and efficient and takes explicit account of customer and stakeholder interests. LinkWater‟s planning is driven by its: Strategic Direction set by the Board and Executive Management Team Asset Management Framework Business Planning Framework. Each year, Strategic and Operational Plans are developed by the Board and the Executive Management Team and detail the nature and scope of the activities to be undertaken during the coming financial year. These Plans are underpinned by the key obligations of delivering water consistent with the standards set out in LinkWater‟s Drinking Water Quality Management Plan and ensuring security of supply. The Asset Management Framework establishes a capital and maintenance program to enable LinkWater to meet its Strategic and Operational Plans, including service obligations. It does this by integrating asset related plans, processes and procedures to identify optimal asset management solutions. The Business Planning Framework provides a documented and structured process to be followed by each business group to support the delivery of the capital and maintenance programs generated by the Asset Management Framework and to meet other objectives arising from the Strategic and Operational Plans. These frameworks are the planning foundations of the business and ensure alignment with Government policy priorities, customer needs, regulatory requirements and prudent risk management. Proposed Capital Expenditure LinkWater‟s forecast capital expenditure has been prepared in accordance with the sound asset management principles within its Asset Management Framework to meet the requirements of the System Operating Plan and Water Market Rules. The proposed capital expenditure reflects a costed program of work a prudent operator would invest to meet the specified service requirements of the Distribution Retail Entities, the Water Grid Manager‟s proposed forecast demand volumes and LinkWater‟s Grid Contract obligations. ii LinkWater‟s proposed Capital Works Program of $21.8 million for 2012-13 is summarised according to the cost drivers below: 2012-13 Capital Expenditure by Cost Driver $ Maintaining Service 13,301,479 Compliance 0 Renewals 2,529,281 Business Efficiency 3,910,894 Growth 2,072,895 Total 21,814,549 Depreciation LinkWater is required to apply a straight line method of depreciation to reflect the consumption of its assets over time. LinkWater has forecast a regulatory depreciation allowance for revenue purposes of $30.9 million on its drought Regulatory Asset Base and an allowance of $18.3 million on its non-drought Regulatory Asset Base. Capital expenditure over the 2012-13 regulatory period accounts for a depreciation allowance of $2.5 million. Proposed Fixed, Variable and Allowable Operating Costs LinkWater has proposed a forecast operating expenditure allowance of $57.1 million for 2012-13. This operating forecast has been prepared following the process set out in its Business Planning Framework to efficiently support the Asset Management Framework outputs, deliver LinkWater‟s service obligations and to address the short-term challenges facing the business. With respect to electricity costs, LinkWater will become a contestable electricity customer in 2012-13. LinkWater estimates that it will achieve costs savings of $1.1 million in 2012-13 from this initiative. The breakdown of the proposed operating expenditure program is: 2012-13 Operating Expenditure $ Fixed Operating Costs 42,983,452 Variable Operating Costs 2,852,922 Allowable Operating Costs 11,270,692 Total 57,107,066 Return on Capital LinkWater has applied a pre-tax nominal Weighted Average Cost of Capital of 9.81
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