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SEQ Water and Wastewater Distribution/Retail Activities SEQ Water and Wastewater Distribution/Retail Activities Market Factors Analysis A report to the Queensland Competition Authority November 2009 Synergies Economic Consulting Pty Ltd www.synergies.com.au QCA Disclaimer Synergies Economic Consulting (Synergies) has prepared this advice exclusively for the use of the party or parties specified in the report (the client) and for the purposes specified in the report. The report is supplied in good faith and reflects the knowledge, expertise and experience of the consultants involved. Synergies accepts no responsibility whatsoever for any loss suffered by any person taking action or refraining from taking action as a result of reliance on the report, other than the client. In conducting the analysis in the report Synergies has used information available at the date of publication, noting that the intention of this work is to provide material relevant to the development of policy. Mark Christensen is a Principal with Synergies and is also a member of the Queensland Competition Authority. Mark has had no involvement in the preparation of this report. SEQ WATER AND WASTEWATER DISTRIBUTION/RETAIL ACTIVITIES 14/01/2010 12:33:00 Page 4 of 205 QCA SEQ WATER AND WASTEWATER DISTRIBUTION/RETAIL ACTIVITIES 14/01/2010 12:33:00 Page 5 of 205 QCA Executive Summary Synergies has been asked to provide the Queensland Competition Authority (QCA) with a high level description of the physical and market characteristics of the water supply and wastewater distribution and retail activities in SEQ, and an economic analysis of the issues for access and price regulation. This includes an analysis of the potential the three new Distribution Businesses to exercise market power. For the purpose of this report, we have labeled these three businesses as follows: • DB North – which comprises Sunshine Coast and Moreton Bay council areas; • DB Central – comprising Brisbane, Scenic Rim, Ipswich, Somerset and Lockyer Valley council areas; • DB South – comprising Gold Coast, Logan and Redland. The QCA’s terms of reference for this task require Synergies to document prevailing and likely market conditions (including by geography and customer groups) with a particular focus on the demand and supply of water and wastewater, and other factors relevant to the potential exercise of market power by each new business. This report has been developed over a short timeframe, and has drawn heavily from publicly available information. In some cases, we have been constrained by the availability of information. It is also worth noting that some key policy issues and legislation are yet to be finalised in relation to these Distribution Businesses. SEQ WATER AND WASTEWATER DISTRIBUTION/RETAIL ACTIVITIES 14/01/2010 12:33:00 Page 6 of 205 QCA Demand and supply of water and wastewater Stocktake of current prices Existing water supply charges have the following features: • two-part tariffs are used in all areas for water supply, with many councils adopting inclining block tariffs; • residential users pay sewerage charges on a per property basis, while non- residential users pay on a different basis (usually per pedestal); • separate trade waste charges are commonly applied, and are differentiated by the volume of waste discharged, and in some instances by quality. In other cases, enterprise type is used as a proxy for volume and quality, using general categorisations; • infrastructure charges apply in relation to new development and expansions to the service footprint; • postage stamp pricing occurs across council areas for user tariffs, although some councils have retained charges based on pre-amalgamation boundaries. In contrast infrastructure charges are not set uniformly across council areas, but separate prices relate to different service areas ; and • residential water charges are often set at a discount to commercial and industrial users, and sewerage charges for some community and other organisations are often heavily discounted. The tables below describe the residential tariffs against the number of discrete service areas. SEQ WATER AND WASTEWATER DISTRIBUTION/RETAIL ACTIVITIES 14/01/2010 12:33:00 Page 7 of 205 QCA Summary of tariff structure – residential charges Distribution Council area Basis of access Nature of Number of Total number of business charge consumption residential tariffs supply zones charge DB Central Brisbane Per connection a Inclining block 1 3 (3 tiers) Scenic Rim Per connection a Single charge 1 6 Ipswich Per connection a Inclining block 1 1 (3 tiers) Somerset Per connection, Inclining block 1 7 (2 tiers) Lockyer Valley Per connection Inclining block 3 1 (2 tiers) TOTAL 7 18 DB South Gold Coast Per connection Single charge 1 3 Logan Size of connection Single charge 3 2 Redland Size of connection Inclining block 1 4 (3 tiers) TOTAL 5 9 DB North Sunshine Coast Per connection a Inclining block 1 5 (2 tiers) Moreton Bay Per connection Inclining block 3 6 (3 tiers) TOTAL 4 11 a assumed to be charged per premise. No specific information found in council’s charges schedule. Notes: Lockyer Valley Regional Council, Logan City Council and Moreton Bay Regional Council charge different access charges for different areas, which largely relate to pre-amalgamation boundaries. However, the same consumption charges. In many cases, access charges also apply to vacant land or unconnected property. Supply zones include those connected to bulk transport infrastructure, as well as remote supply areas. Source: Synergies, Cardno, QCA information and publicly available Council information. SEQ WATER AND WASTEWATER DISTRIBUTION/RETAIL ACTIVITIES 14/01/2010 12:33:00 Page 8 of 205 QCA Summary of residential sewerage tariffs Distribution Council area Tariff structure Number of tariffs Number of wastewater business systems DB Central Brisbane City Council Per property 1 9 Scenic Rim Regional Per property a n/a 8 Council Ipswich City Council Per property a n/a 4 Somerset Regional Per property 4 b 6 Council Lockyer Valley Per property 1 c 4 Regional Council DB South Gold Coast City Per property 1 4 Council Logan City Council Per property b 1 1 Redland City Council Refer note 1. 1 7 DB North Sunshine Coast Per property d n/a 13 Regional Council Moreton Bay Regional Per property 3 e 8 Council a Information obtained from WSAA (2009), Annual performance report 2007/08 b Somerset Regional Council charges either per pedestal on premise or per vacant allotment. These charges differ between Lowood, Fernvale, Esk, Toogoolawah and the district of Kilcoy. c Although not entirely clear from published information, it appears that a single sewerage charge applies across the council. d Information obtained from Queensland Treasury (2003), Seventh annual report to the National Competition Council. Attachment 6. e Different charges apply for Caboolture, Pine Rivers and Redcliffe based on pre-amalgamation areas. n/a – not available from search of publicly available information Notes. 1. Charges in Redland refer to ‘sewer units’. This would appear to have the effect of charging residential customers on a per property basis, and commercial users on a per pedestal basis, however this is not clear from the published information. Source: Publicly available Council information, WSAA (2009) National Performance Report 2007/08 and QLD Treasury (2003). Source: Synergies, Cardno, QCA information and publicly available Council information. The draft guideline published by the Department of Infrastructure and Planning1 suggests that infrastructure charges reflect the new average cost of a discrete service area, after future augmentation and incorporating demand growth (in NPV terms). These charges vary within council areas and between councils. These charges are levied on developers, rather than water users, to recover the costs associated with ‘trunk’ infrastructure identified in a PIP and Infrastructure Charges Schedule (ICS). Trunk infrastructure relates to common infrastructure upstream of the development. There are a number of notable distinctions between infrastructure charges and user tariffs in SEQ: 1 Department of Infrastructure and Planning. IPA Infrastructure Guideline 2/08 – Infrastructure charges schedule. Working draft, December (2008). p18 SEQ WATER AND WASTEWATER DISTRIBUTION/RETAIL ACTIVITIES 14/01/2010 12:33:00 Page 9 of 205 QCA • infrastructure charges are typically set on a catchment of service area basis, whereas user tariffs are set across entire council boundaries encompassing a number of different service areas; • infrastructure charges are payable by developers, whereas user tariffs are paid by users;2 • infrastructure charges relate to capital costs, whereas user tariffs relate to capital and operating costs; and • infrastructure charges are set based on the replacement cost of the existing network, yet user tariffs are likely to be set using a different asset valuation.3 It is therefore difficult to reconcile any relationship between the two sets of charges, although they are both clearly dealing with existing assets. Historic and projected volumes Residential water use accounts for approximately 70% of total demand. Among non- residential use (including commercial, industrial and government sectors), 58% of use is from larger (>10MLpa) water users. The QWC has forecast the following growth in water use, incorporating significant reductions in water use from permanent conservation measures. 2 Although it is arguable that infrastructure charges are incorporated into the value of the users land. 3 For example, DORC or another value set
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