Hunter Water’s prices from 1 July 2020 Public hearing 19 November 2019
Two parts to the day Structured hearing Drop-in sessions ▼ 4 sessions (see agenda) ▼ After the hearing is closed, until 7pm ▼ Present an overview of the issues ▼ IPART staff members will answer ▼ Roundtable participants to provide questions & take comments comments or questions ▼ Comment forms available ▼ Open to the floor for comments or questions ▼ Feedback will be taken into account Roving microphone – Slido: www.sli.do ; #H325 – ▼ Transcript will be available
We are using “Slido” to take questions Go to slido.com and enter the event code: #H325 Enter event code 3
Over 50 submissions to our Issues Paper We will discuss the key topics raised in the first 3 sessions Topic raised in submissions Session • Hunter Water’s efficient costs • The balance of usage charges versus fixed charges in your bill Session 1 • Setting usage prices in drought • Removing discounts for very large water users • Customer bills and affordability • Hunter Water’s services Session 2 • Expenditure and efficiency • Discretionary expenditure Session 3 • Recycled water • Other prices Open Session - Other topics and questions Session 4 4
Prices
Changes to Hunter Water’s proposal Hunter Water has since revised its forecasts - 1 July Proposal – key points Price rises would be less than July Proposal Bill increases over 5 years ▼ Bill increases over 5 years ▼ 24% for ‘typical’ house 6% for ‘typical’ house – – 34% for ‘typical’ apartment 11% for ‘typical’ apartment – – Differing increases for non-residential Differing increases for non-residential – – Higher forecast demand ▼ Higher costs than in the current price path ▼ Infrastructure Drought and restrictions – ▼ Day-to-day operations – Risk of reduced revenue and increased costs – Incorporating lower interest rates ▼ Set prices for 5 years ▼ Set prices for 4 years ▼
Revised proposed – 2020-2025 Current – 2016-2020 (average proposed Total $348 m Total $321 m for each year) Return Return Other $13 m $9 m on assets on assets $40 m Depreciation $76 m Deciding the revenue Hunter Water $130 m Return on Assets $101 m needs $410m $410m Operating Operating Operating $158 m Costs $143 m expenditure expenditure 7
Hunter Water’s revised proposed prices Hunter Water proposes modest increases in most charges over the next five years Water charges Wastewater charges Higher usage charge per kilolitre ▼ Residential ▼ Lower fixed charge Apartment prices increase more than ▼ – houses Stormwater charges ▼ Non-residential Lower usage charge per kilolitre – Higher charges, but off relatively low ▼ Higher fixed charge – base
Setting water usage charges Setting usage charges to reflect future costs sends the right signals to users During droughts, water is scarce ▼ Should we set higher water usage charges in drought? ▼ May better reflect the cost of providing water – Results in lower fixed charges – This may not have much impact on consumption, as water restrictions reduce usage – 9
Location based pricing Some very large water users pay a lower water usage charge Hunter Water proposes phase-out of Impacts ▼ ▼ discounts for >50,000 kL/year usage 0% to 27% increase over 5 years for large – customers Result - a single water usage price for all ▼ $2.3 million per year customers by end of 5 years – - $10/year for other customers – Background to the discounts Since 2001 ▼ We support the proposal, in principle ▼ 19 industrial/commercial customers ▼ 7 different discount rates, based on ▼ customer location 10
Environmental Improvement Charge (EIC) The EIC funded wastewater systems to communities that were previously unsewered EIC funds wastewater services to towns without reticulated wastewater ▼ Scheme in place since 1980s – Last extended to June 2020 to fund backlog services to Wyee – Hunter Water proposes removal of EIC from July 2020 ▼ Currently all sewered properties pay $41.20 – Will be zero from 1 July 2020 – Our preliminary view is to support Hunter Water’s proposal ▼ 11
Demand forecasts Water usage is forecast to increase – but slower than population growth From 2016 to 2019 water sales were ▼ higher than forecast Water sales volumes, 2016-17 to 2024-25 (‘000 ML) low rainfall – higher population growth – From 2020, forecast sales are 2% ▼ higher than recent actual sales The demand forecasts are based on ▼ average weather conditions Water consumption per residential ▼ customer is expected to fall 12
Demand volatility adjustment mechanism Hunter Water sold more water than we forecast in 2016 – we may reduce prices to compensate We consider whether to adjust revenue ▼ Variance of actual water sales volumes from IPART’s 2016 when water sales are more than 5% out allowance Hunter Water expects sales to exceed ▼ forecasts for the first 3 years of the 2016 determination period Level 1 water restrictions started in ▼ September 2019 – this will impact sales volumes in 2019-20 13
www.slido.com Our questions Code: #H325 Q1 Do you have any comments on Hunter Water’s proposed prices? Q2 Should we consider higher water usage charges during droughts? Q3 Should we remove the discounts for very large water users? Q4 Should apartments pay the same water and wastewater service charge as houses? Q5 Should we set prices for four or five years?
Service standards
Hunter Water’s performance and forecasts Service standards are the basis for expenditure levels Drivers of service standards Hunter Water’s operating licence Environmental Protection Licences ▼ ▼ Australian Drinking Water Guidelines – Account for customer preferences ▼ Interruptions to water supply – Water pressure level requirements – Sewer blockages and overflows – Economic level of water conservation – 16
Service standards and requirements Hunter Water states increased expenditure is needed to reduce risk of non-compliance Hunter Water reports a reduced Hunter Water reports deteriorating ▼ ▼ compliance with EPL requirements gap between performance and standards Hunter Water forecasts risk of falling service levels without further ▼ 17 investment
Expenditure
Expenditure Two major expenditure components Operating expenditure Capital expenditure Costs including: Assets ▼ Pipelines, treatment plants etc Labour ▼ – New, renewals, or upgrades ▼ Maintenance ▼ Operations contracts ▼ Electricity ▼ 19
Proposed operating costs Hunter Water proposes higher operating expenditure compared to 2016 Determination to improve services and maintain infrastructure. Around 45% of total proposed costs ▼ Hunter Water’s expenditure and IPART’s 2016 allowance $180 In the current period, Hunter Water spent ▼ $160 more than we used to set prices $140 $159m to $157m $120 Balance of higher expenditure in some areas ($ millions) – $100 $134m to $156m and lower expenditure in other areas. $80 $60 $40 $20 Proposed expenditure is based on 2019-20 ▼ $0 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 expenditure Total allowed opex Total actual opex Total proposed opex Increases from corporate costs (eg ICT), – changes to the capital program Decreases in labour and maintenance – 20
Capital expenditure – Infrastructure and assets Hunter Water proposes increased capital expenditure compared to 2016 Determination In the current period, Hunter Water spent ▼ Hunter Water’s expenditure and IPART’s 2016 allowance more than we used to set prices $250 Changes to project scopes and timing (eg, – Q2 $93m to $181m wastewater treatment plants) $200 More renewal of old infrastructure to reduce – ($ millions) $150 risk of supply interruptions (eg, Chichester $100 $201m to $147m Trunk Gravity Main) $50 $0 Proposed expenditure is higher than current ▼ 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 Total allowed capex Total actual capex Major wastewater treatment plant upgrades Total proposed capex Avg allowed capex – Avg actual capex Avg proposed capex Growth – ICT investment – 21
Expenditure We assess expenditure for efficiency, and expenditure becomes the basis for prices We assess whether expenditure is: ▼ The right decision based on available information at the time – The right time to invest – The right price – Consultants with expertise in this area are reviewing the proposal including: ▼ Performance and forecast performance – Risk appetites, including risk in planning – Business cases (options and cost estimates) – Contract management – Industry best practice – 22
www.slido.com Our questions Code: #H325 Do you agree with Hunter Water’s approach to improving performance? Do you have Q1 further questions or comments on Hunter Water’s performance? Q2 Has Hunter Water done enough to improve efficiency? Do you have any comments or questions on Hunter Water’s proposed capital Q3 expenditure?
Other issues Discretionary spending, trade waste, miscellaneous charges and dishonoured fees
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