SEQ Interim Price Monitoring: Assessment of Capital and Operational Expenditure
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SEQ Interim Price Monitoring: Assessment of Capital and Operational Expenditure 2010/11 Interim Price Monitoring of SEQ Water and Wastewater Distribution and Retail Activities Queensland Urban Utilities, Allconnex Water and Unitywater December 2010 SEQ Interim Price Monitoring CAPEX OPEX REVIEW Rev 3 13 December 2010 Sinclair Knight Merz ABN 37 001 024 095 Cnr of Cordelia and Russell Street South Brisbane QLD 4101 Australia PO Box 3848 South Brisbane QLD 4101 Australia Tel: +61 7 3026 7100 Fax: +61 7 3026 7300 Web: www.skmconsulting.com COPYRIGHT: The concepts and information contained in this document are the property of Sinclair Knight Merz Pty Ltd. Use or copying of this document in whole or in part without the written permission of Sinclair Knight Merz constitutes an infringement of copyright. LIMITATION: This report has been prepared on behalf of and for the exclusive use of Sinclair Knight Merz Pty Ltd’s client, and is subject to and issued in connection with the provisions of the agreement between Sinclair Knight Merz and its client. Sinclair Knight Merz accepts no liability or responsibility whatsoever for or in respect of any use of or reliance upon this report by any third party. The SKM logo trade mark is a registered trade mark of Sinclair Knight Merz Pty Ltd. Document history and status Date Revision Date issued Reviewed by Approved by Revision type approved Rev 1a 12/10/10 S. Hinchliffe D. Lynch 11/10/10 Draft for Client Review Rev 2 28/10/10 P. Nixon P. Nixon 28/10/10 Final Rev 3 13/12/10 P. Nixon P. Nixon 13/12/10 Final Distribution of copies Revision Copy no Quantity Issued to Rev 1a Electronic Electronic Cath Barker, QCA Rev 2 Electronic Electronic Cath Barker, QCA Rev 3 Electronic Electronic Cath Barker, QCA Printed: 13 December 2010 Last saved: 13 December 2010 09:29 AM File name: T:\1106.3\Jules\QCA Interim Price Monitoring Main Report_20101029_Rev 3_JH.docx Author: M Swatman, A Feast, S Hinchliffe Project manager: S Hinchliffe Name of organisation: Queensland Competition Authority Name of project: SEQ Interim Price Monitoring Name of document: Draft Report Document version: 3 Project number: QE09780 PAGE xii Limitation Statement The sole purpose of this report and the associated services performed by Sinclair Knight Merz Pty Ltd (SKM) is to assist the Queensland Competition Authority (the Authority) in its interim price monitoring obligations to review the capital expenditure and operational expenditure of the newly formed water and wastewater distribution/retail entities within south-east Queensland (the Entities) in accordance with the scope of services set out in the contract between SKM and the Authority. That scope of services, as described in this report, was developed with the Authority. In preparing this report, SKM has relied upon, and presumed accurate, any information (or confirmation of the absence thereof) provided by the Authority, the Entities and/or from other sources. Except as otherwise stated in the report, SKM has not attempted to verify the accuracy or completeness of any such information. If the information is subsequently determined to be false, inaccurate or incomplete then it is possible that our observations and conclusions as expressed in this report may change. SKM derived the data in this report from information sourced from the Authority, the Entities and/or available in the public domain at the time or times outlined in this report. The passage of time, manifestation of latent conditions or impacts of future events may require further examination of the project and subsequent data analysis, and re- evaluation of the data, findings, observations and conclusions expressed in this report. SKM has prepared this report in accordance with the usual care and thoroughness of the consulting profession, for the sole purpose described above and by reference to applicable standards, guidelines, procedures and practices at the date of issue of this report. For the reasons outlined above, however, no other warranty or guarantee, whether expressed or implied, is made as to the data, observations and findings expressed in this report, to the extent permitted by law. This report should be read in full and no excerpts are to be taken as representative of the findings. No responsibility is accepted by SKM for use of any part of this report in any other context. This report has been prepared within the time restraints imposed by the project program. In addition, concerns and discussions regarding confidentiality resulted in delays to the provision of information. These time restraints have imposed constraints on SKM’s ability to obtain and review information from the Entities. This report has been prepared on behalf of, and for the exclusive use of, the Authority, and is subject to, and issued in accordance with, the provisions of the agreement between SKM and the Authority. SKM accepts no liability or responsibility whatsoever for, or in respect of, any use of, or reliance upon, this report by any third party. PAGE 1 Contents 1. Executive summary 2 1.1. Introduction and background 2 1.2. Key issues 3 1.3. Capital expenditure review 5 1.3.1. Overall findings 6 1.4. Operational expenditure review 8 1.4.1. Overall findings 9 1.5. Summary and conclusions 11 2. Introduction 12 2.1. Background 12 2.2. The role of the Authority 12 2.3. Formation of Entities 13 2.3.1. Council amalgamations 13 2.3.2. Water reforms 13 2.4. Background to capital expenditure and operating expenditure review 16 2.5. Terms of reference 16 2.5.1. Capital expenditure review 16 2.5.2. Operational expenditure review 17 2.6. Exclusions from scope 18 2.7. Structure of the report 19 2.8. Reference documentation 19 3. Key issues 20 3.1. Data collection 20 3.2. Cost drivers 20 3.2.1. Growth driver 21 3.2.2. Renewals 21 3.2.3. Improvements 22 3.2.4. Compliance 27 3.3. Polices and processes 27 3.4. Expenditure versus commissioning 27 3.5. Operational expenditure/capital expenditure split 28 3.6. Consumer Price Index (CPI) 29 3.7. Good industry practice for CAPEX and OPEX budgeting 36 3.7.1. Capital project budgeting 37 3.7.2. Operational expenditure budgeting 40 3.7.3. Benchmarking 42 3.8. Opportunities for synergies and economies of scale 44 PAGE i 4. Queensland Urban Utilities 45 4.1. Introduction to Queensland Urban Utilities 45 4.1.1. Formation of Queensland Urban Utilities 45 4.2. Structure of Report 46 4.3. Capital expenditure 46 4.3.1. Overview of submission to the Authority 46 4.3.2. Detailed Queensland Urban Utilities forecast capital expenditure review55 4.3.3. Adequacy of capital expenditure information provision 56 4.3.4. Summary of data adequacy 60 4.3.5. Capital project sample selection 61 4.3.6. Capital project assessment method 63 4.3.7. Commentary on business processes for capital projects 66 4.3.8. Overview of policies and procedures 66 4.3.9. Capital project assessments 75 4.3.10. Summary of assessment of Queensland Urban Utilities capital expenditure spend 85 4.3.11. Proposed revised template 87 4.3.12. Capital assessment summary 88 4.4. Queensland Urban Utilities Operational Expenditure Review 89 4.4.1. Overview of submission to Authority 89 4.4.2. Operational costs definition 94 4.4.3. Adequacy of operational expenditure information provision for completion of operational expenditure templates 95 4.4.4. Operational expenditure data selection 96 4.4.5. Operating expenditure assessment method 97 4.4.6. Workforce Agreement 98 4.4.7. Commentary on business processes for operational expenditure budgeting 99 4.4.8. Summary of assessment of Queensland Urban Utilities operational expenditure 100 4.4.9. Summary of analysis of operational expenditure for Queensland Urban Utilities 117 4.4.10. Proposed revised template 118 4.5. Overall summary for capital expenditure and operational expenditure 118 5. Allconnex Water 120 5.1. Introduction to Allconnex Water 120 5.1.1. Formation of Allconnex Water 120 5.2. Structure of Report 120 5.3. Capital expenditure 121 5.3.1. Overview of submission to the Authority 121 5.3.2. Detailed Allconnex Water forecast capital expenditure review 130 5.3.3. Adequacy of capital expenditure information provision 130 PAGE ii 5.3.4. Summary of data adequacy 137 5.3.5. Capital project sample selection 138 5.3.6. Capital project assessment method 140 5.3.7. Commentary on business processes for capital project option study 143 5.3.8. Capital project assessments 154 5.3.9. Summary of assessment of Allconnex capital expenditure spend 165 5.3.10. Capital assessment summary 166 5.4. Allconnex Water operational expenditure review 168 5.4.1. Overview of submission to Authority 168 5.4.2. Operational costs definition 172 5.4.3. Adequacy of operational expenditure information provision for completion of operating expenditure templates 172 5.4.4. Operational expenditure data selection 173 5.4.5. Operational expenditure assessment method 174 5.4.6. Workforce Agreement 175 5.4.7. Commentary on business processes for operational expenditure budgeting 176 5.4.8. Summary of assessment of Allconnex Water operational expenditure177 5.4.9. Summary of analysis of operational expenditure for Allconnex Water 193 5.4.10. Proposed revised template 193 5.5. Overall summary for capital expenditure and operational expenditure 193 6. Unitywater 195 6.1. Introduction to Unitywater 195 6.1.1. Formation of Unitywater 195 6.1.2. Council amalgamations 195 6.1.3. Water Reform 195 6.2. Report Structure 195 6.3. Capital Expenditure 196 6.3.1. Overview of submission to Authority 196 6.3.2.