CH2M HILL's Draft Report

Prepared for Queensland Competition Authority Seqwater Operating and Capital Expenditure Review Assessment of Prudency and Efficiency Final Report Novenmber 2014 Reference: 651197 Queensland Competition Authority Seqwater – Operating and Capital Expenditure Review Assessment of Prudency and Efficiency CH2M HILL Australia Pty Ltd Level 19, 215 Adelaide Street BRISBANE QLD 4000 Phone 07 3169 2900 Fax 07 3169 2999 This document may only be used for the purpose for which it was commissioned; and in accordance with the Terms of Engagement for the commission. This document should not be used or copied without written authorisation from CH2M HILL Australia Pty Ltd. November 2014 Ref: 651197 i Final Report Queensland Competition Authority Seqwater – Operating and Capital Expenditure Review Assessment of Prudency and Efficiency DOCUMENT CONTROL SHEET CH2M HILL Australia Pty Limited Level 19, 215 Adelaide Street Project No: 651197 BRISBANE QLD 4000 Report No: 1 Telephone: 3169 2900 Original Date of Issue: 3rd November 2014 Fax: 3169 2999 Email: [email protected] Project Leader: Brad Lawrence REPORT DETAILS Title: Seqwater Operating and Capital Expenditure Review Review of Prudency and Efficiency Author(s): Brad Lawrence David Somek Luis Fernandes Tony O’Neill Client: Queensland Competition Authority Client Contact: William Copeman Client Reference: 760931 Synopsis: This report presents the findings of CH2M HILL’s review of Seqwater operating and capital expenditure prudency and efficiency. It also presents the approach and results of CH2M HILL’s assessment of operating and capital investment planning and procedures against current good practice. REVISION / CHECKING HISTORY REVISION DISTRIBUTION – NUMBER OF COPIES NUMBER DATE REVIEWED BY APPROVED FOR ISSUE Client Seqwater Other CH2M File 0.1 08/09/14 BGL BGL 1 1 0.2 25/09/14 BGL BGL 1 1 0.3 07/10/14 GH BGL 1 1 1 0.4 16/10/14 BGL BGL 1 1 0.5 20/10/14 BGL BGL 1 1 1 1.0 03/11/14 GH BGL 1 1 November 2014 Ref: 651197 ii Final Report Queensland Competition Authority Seqwater – Operating and Capital Expenditure Review Assessment of Prudency and Efficiency Executive Summary The Queensland Competition Authority (QCA) has commissioned CH2M HILL to undertake a review of investment policy and planning procedures, operating expenditure and capital expenditure of the Seqwater bulk water authority. This Review forms part of QCA’s broader pricing review, which is the basis of recommendations for future bulk water charges. CH2M HILL has produced this report based on its review of current Seqwater process documentation, actual capital and operating expenditures for 2013‐14 and forecast expenditures over a 13‐year period from 1 July 2015 to 30 June 2028. Introduction and Background QCA regulates water and wastewater services in Queensland to manage the risk of monopoly pricing, where a business can charge higher prices or provide poorer services compared with those businesses that operate in an open and competitive market. By undertaking economic and pricing regulation of government‐owned monopoly water and wastewater services in Queensland, the QCA encourages monopoly businesses to operate responsibly and fairly in the absence of normal competitive market forces. To inform QCA’s recommendations on future water charges and provide assurance that Seqwater is operating responsibly and sustainably, regular reviews of investment prudency and efficiency are carried‐out. Recently these have been augmented by reviews of investment decision support instruments, including policy and procedures. The following sections outline the findings of CH2M HILL’s review, with greater detail provided in the body test of the report. Information Adequacy Seqwater provided a substantial amount of documentation in support of both its original Review Submission and in response to information requests during the review. The level of responsiveness of Seqwater to CH2M HILL information requests was generally high and the turn‐around time for provision of information was rapid. Not all documentation provided was material to the review and CH2M HILL identified a number of documentation gaps/anomalies that had a material impact on the evidence‐base for proposed capital and operational expenditures. Some of these information gaps were a result of new policies and business processes being relatively immature and inconsistently applied. In some instances, an evidence‐base could not be established and this resulted in adjustments to proposed expenditures. Review of operational expenditures was complicated by the late release of new figures that proved to be somewhat flawed. As a result CH2M HILL changed its analytical approach to the review of these figures to ensure robustness of the review outcomes. This involved deeper‐level analysis of actual cost information provided from the Seqwater corporate information system and the expenditure forecasts based on these figures. November 2014 Ref: 651197 iii Final Report Queensland Competition Authority Seqwater – Operating and Capital Expenditure Review Assessment of Prudency and Efficiency Policies and Procedure Review The current Seqwater business is the result of a recent merger of three separate water business and business consolidation is not fully complete. Some energy has been put into the future business framework and CH2M HILL’s review of Seqwater Policies and Procedures indicated that Seqwater has a clear vision for its capital and operational planning framework. It is now working towards realising this vision, which in the opinion of CH2M HILL, is capable of achieving good practice outcomes into the future. It is clear from CH2M HILL’s review, that more work is required before a robust and tightly integrated suite of planning/management instruments, enabling processes/systems and a fully aware workforce are in‐place. Many of the instruments of the framework are in‐development or early roll‐out and other legacy processes are being transitioned‐out. The result is that there is a lot of inconsistency in how the current instruments are applied in‐practice. Seqwater capital planning processes are underpinned by a robust documentation/approval process and generally require limited staff awareness / guidance to ensure compliance and achieve good practice. The one exception to this is the planning and approvals for capital renewal programs. Minor structural changes to the program investment justification documents and tighter linkage to individual business cases for projects under each program is required to achieve good practice. The two primary factors linking a project to a program should be: 1. Scope (either asset‐specific, activity‐specific or outcome‐specific); and 2. Benefits, linked to currently defined cost drivers. This approach will eliminate the potential for approval of and draw‐down of program budgets by low‐ value or out‐of‐scope projects. Seqwater governance arrangements are well progressed in terms of process and accountabilities. The documents that support the Seqwater governance arrangements and the output documents that demonstrate good governance are however, at an early stage of maturity, impacting the consistency of document content and rigour. In the current Seqwater policy / procedure environment, it is certain that business efficiencies will be realised as business processes become more mature and therefore, more integrated and streamlined. It is difficult to quantify what these efficiencies may yield in terms of cost‐savings, when the recency of the merger impacts the establishment of robust cost baseline. Operating Expenditure Seqwater submitted total actual and forecast operating expenditures for the current price path (from 2013‐14 to 2017‐18) of approximately $1,226.9 million (real 2014 terms). An overview of Seqwater’s actual and forecast operating expenditure over this period is outlined in the Table below. It should be noted that the figures presented exclude accounting costs such as depreciation and amortisation and Seqwater’s interest expense to Queensland Treasury Corporation (QTC). Contract Services is the largest source of expenditure for the period, accounting for $439.5 million, or approximately 36 percent of total operating expenditure. The second largest cost category is Employee Expenses with $380.8 million over the period, or 31 percent of total operating expenditure. November 2014 Ref: 651197 iv Final Report Queensland Competition Authority Seqwater – Operating and Capital Expenditure Review Assessment of Prudency and Efficiency Seqwater’s actual and forecast operating expenditure, 2013‐14 to 2017‐18 ($M, real 2014) Cost Category 2013‐14 2014‐15 2015‐16 2016‐17 2017‐18 Total Employee 76.966 75.994 75.880 76.012 76.939 380.791 Expenses Contract Labour 4.187 2.805 2.487 2.509 2.509 14.499 Contract Services 79.686 91.788 88.281 90.669 89.063 439.488 Chemicals 12.986 13.845 14.430 14.945 15.495 71.702 Electricity 19.727 19.262 19.602 19.881 20.189 98.661 Other Materials 45.044 44.451 43.266 43.874 45.157 221.792 And Services Total Operating 238.596 248.145 243.947 247.892 248.354 1,226.934 Expenditure Source: Opex model 2014‐09‐25 Q1 FY15 revised.xlsm as amended by CH2M HILL CH2M HILL undertook a detailed examination of the prudency and efficiency of a representative sample of operating expenditure categories over the period from 2014‐15 to 2027‐28. The expenditure categories selected for detailed review are outlined as follows: Employee costs including: o Employee expenses o Contract labour Contract Services o General Maintenance Services

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