Review of capital and operating expenditure plans for Water Corporation Report Review of capital and operating expenditure plans for the Water Corporation Report 3606-23 Prepared for Economic Regulation Authority of Western Australia 17 August 2017 17 August 2017 Cardno i Review of capital and operating expenditure plans for Water Corporation Report Contact Information Document Information Cardno (QLD) Pty Ltd Prepared for Economic Regulation ABN 57 051 074 992 Authority of Western Australia Job Reference 3606-23 Level 11, North Tower Green Square 515 St Paul’s Terrace Date 17 August 2017 Locked Bag 4006 Fortitude Valley, Qld 4006 Version Number 3.0 Telephone: 07 3369 9822 Facsimile: 07 3369 9722 International: +61 7 3369 9822 Effective Date 17/08/17 www.cardno.com.au Date Approved: 17/08/17 Document History Version Effective Description of Revision Prepared by: Reviewed by: Date 1.0 26/05/17 Draft for review Stephen Walker, Tracey Morgan, Stephen Graydon Jeal, Simon Walker, Graydon Jeal, Ingall Simon Ingall 2.0 21/06/17 Draft for issue Stephen Walker, Tracey Morgan, Stephen Graydon Jeal, Simon Walker, Graydon Jeal, Ingall Simon Ingall 2.1 21/07/17 Draft for issue Stephen Walker, Tracey Morgan, Stephen Graydon Jeal, Simon Walker, Graydon Jeal, Ingall Simon Ingall 3.0 17/08/17 Final Stephen Walker, Tracey Morgan, Stephen Graydon Jeal, Simon Walker, Graydon Jeal, Ingall Simon Ingall © Cardno 2017. Copyright in the whole and every part of this document belongs to Cardno and may not be used, sold, transferred, copied or reproduced in whole or in part in any manner or form or in or on any media to any person other than by agreement with Cardno. This document is produced by Cardno solely for the benefit and use by the client in accordance with the terms of the engagement. Cardno does not and shall not assume any responsibility or liability whatsoever to any third party arising out of any use or reliance by any third party on the content of this document. 17 August 2017 Cardno ii Review of capital and operating expenditure plans for Water Corporation Report Executive Summary Background and purpose The Economic Regulation Authority of Western Australia was requested by the Treasurer of Western Australia in October 2016 to undertake an inquiry into the efficient costs and tariffs of the Water Corporation, Aqwest and Busselton Water. The Authority is to inquire into the efficient costs for the services of the Water Corporation, Aqwest and Busselton Water for the five year period commencing 2018/19. The purpose of this Review is to provide advice to ERAWA on the prudence and efficiency of Water Corporation’s proposed capital and operating expenditure as well as the prudence and efficiency of historical capital expenditure. Scope There are four complementary elements of scope in the brief set by the Authority: > Review of governance arrangements > Detailed review of capital and operating expenditure forecasts > Review of actual and forecast capital expenditure > Review treatment of disposed assets. Review of governance arrangements The Authority requires that as an initial task, the systems and processes used by the water corporations to manage capital and operating expenditure are evaluated. The purpose of this review is to determine whether these systems and processes can be relied upon to generate expenditure that is prudent (or will be prudent for future expenditure). Detailed review of capital expenditure and operating expenditure forecasts The Authority requires a detailed assessment of the capital and operating expenditure forecasts of each of the water corporations to determine if the expenditure is consistent with that which a prudent service provider acting efficiently would incur – in line with good industry practice and to realise the lowest sustainable costs. Review of actual/forecast capital expenditure The Authority requires capital expenditure in the current regulatory period to determine whether it is appropriate to include this expenditure in the Regulated Asset Base, a key input into the building blocks for pricing. The review is to cover actual expenditure in 2011/12 to 2015/15 and forecast for 2016/17 and 2017/18. Review treatment of disposed assets The Consultant is required to review a recent major asset disposal from between 2011/12 and 2015/16 to assess the efficacy of the water corporations’ method for disposing of assets. Methodology To complete this review, the following activities were undertaken: 1. An initial request for information was provided to Water Corporation, along with a plan for on-site interviews with key staff 2. Face to face meetings were held with Water Corporation staff from 3 April 2017 to 6 April 2017 3. Following these meetings, further requests for information were made of Water Corporation and Water Corporation provided the information and analysis requested. Analysis and investigation was undertaken based on the information provided. 4. A draft report was prepared and provided to the Economic Regulation Authority of Western Australia and Water Corporation for fact checking and to identify any confidential items within the report 5. The report was finalised based on the feedback received from the the Economic Regulation Authority of Western Australia and Water Corporation 17 August 2017 Cardno iii Review of capital and operating expenditure plans for Water Corporation Report Water Corporation Water Corporation is a State government-owned entity that is the principal provider of water, wastewater, recycled water, drainage and bulk irrigation services in Western Australia. Its operating area covers Western Australia and it provides services where there is no other licenced supplier. Water Corporation is accountable to the Minister for Water. Water Corporation has offices located across Western Australia. Water Corporation has a significant asset base of $19.0 billion (historical cost of property, plant and equipment). This asset base includes two major desalination plants (the Perth Seawater Desalination and Southern Seawater Desalination plants) and six regional desalination plants, 128 drinking water dams and weirs and 94 licenced borefields for water supply. Water Corporation delivered 366GL of water in 2014/15. The largest water supply scheme is the Integrated Water Supply Scheme which supplies Perth, the Goldfields and Agricultural Region and some parts of the South West. This scheme delivered 291GL of water in 2014/15. Water Corporation’s wastewater collection and treatment network includes 16,416km of sewer mains, 1,129 pump stations and 113 treatment plants. 164 GL of wastewater was collected and treated in 2014/15. Water Corporation operates over 80 water recycling schemes across the state and is proactively increasing the proportion of wastewater that is reused. Findings from benchmarking operating expenditure We undertook benchmarking of Water Corporation’s operating expenditure for its water and sewerage services and for both services combined, and on both a per property and volumetric basis. The benchmarking also includes Water Corporation’s Perth and regional businesses separately and for the business combined. We make the following observations based on this benchmarking: > Understandably, Water Corporation’s operating costs per property as a total business (i.e. including regional areas) is higher than for the Perth metropolitan area alone > Combined operating costs per property for water and sewerage for the Perth region are amongst the lowest in the comparator group but Water Corporation rates second highest when considering all of its operating area > There is difficulty in ascertaining whether the combined and water-only operating costs per property are generally increasing, decreasing or remaining constant. However, sewerage operating costs per property generally appear to be remaining constant or decreasing. No significant peaks are observable in the annual combined/water-only operating costs. > Water Corporation (Total)’s water operating costs are mid-range after using water volume as the calculation basis rather than property numbers. Water Corporation (Perth only) remains amongst the lowest in its comparator group. This likely reflects higher per capita consumption by Water Corporation’s customers than the comparator companies. > Conversely, Water Corporation’s sewerage operating costs, when considered on a per-ML basis, are low to mid-range. Considering the benchmark analysis, we make the following conclusions: > Water Corporation displays relatively low operating costs for both water and sewerage operating expenditure per property compared with its peers. It is reasonable to conclude that Water Corporation is relatively efficient compared to its peers. However, it is not possible to separate out drivers and constraints on efficiency such as economies and diseconomies of scale, varying cost of inputs and varying product quality. > Water Corporation faces notably higher costs in delivering operations in its regional areas compared to the Perth region. This is not surprising. 17 August 2017 Cardno iv Review of capital and operating expenditure plans for Water Corporation Report Benchmarks on a volumetric basis are difficult to interpret due to the relatively high fixed costs in providing water and sewerage services and the different levels of consumption between businesses, i.e. high consumption will make a utility appear more efficient with all else being equal. Strategic management overview The Water Corporation Act 1995 is the primary piece of legislation