Securing Australia’s Urban Water Supply:
Research notes for selected case studies
Research notes prepared for
Department of the Prime Minister and Cabinet
To be read in conjunction with
Securing Australia’s Urban Water Supply: Opportunities and Impediments
20 November 2006
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TABLE OF CONTENTS
Page
1.
NEW SOUTH WALES ..................................................................................................................... 7
1.1.
Institutional and governance arrangements .............................................................. 7
1.2.
Case study : Sydney ................................................................................................... 8
1.2.1. Water availability ....................................................................................................... 8
1.2.2. Financial analysis of water utilities ........................................................................ 14
1.2.3. Key issues................................................................................................................ 20
1.3.
Case study: Hunter Water ........................................................................................ 21
1.3.1. Water availability ..................................................................................................... 21
1.3.2. Financial analysis of water utilities ........................................................................ 26
1.3.3. Key issues................................................................................................................ 31
1.4.
Case study: Gosford–Wyong .................................................................................... 33
1.4.1. Water availability ..................................................................................................... 33
1.4.2. Cost of options ........................................................................................................ 36
1.4.3. Financial analysis of water utilities ........................................................................ 37
1.4.4. Key issues................................................................................................................ 41
2.
VICTORIA ..................................................................................................................................... 42
2.1.
Institutional and governance arrangements ............................................................ 42
2.2.
Case study: Melbourne ............................................................................................ 44
2.2.1. Water availability ..................................................................................................... 44
2.2.2. Financial analysis of water utilities ........................................................................ 51
2.2.3. Key issues................................................................................................................ 56
3.
QUEENSLAND.............................................................................................................................. 58
3.1.
Institutional and governance arrangements ............................................................ 58
3.2.
Case study : SEQWater ............................................................................................. 59
3.3.
Case study : Brisbane Water .................................................................................... 63
3.4.
Case study : Gold Coast Water ................................................................................. 67
3.4.1. Financial analysis of water utilities ........................................................................ 68
3.5.
Key issues ................................................................................................................ 71
4.
SOUTH AUSTRALIA ..................................................................................................................... 72
4.1.
Institutional and governance arrangements ............................................................ 72
4.2.
Case study : Adelaide ............................................................................................... 74
4.2.1. Water availability ..................................................................................................... 74
4.2.2. Financial analysis of water utilities ........................................................................ 80
4.2.3. Key issues................................................................................................................ 84
5.
WESTERN AUSTRALIA ................................................................................................................ 85
5.1.
Institutional and governance arrangements ............................................................ 85
5.2.
Case study : Perth .................................................................................................... 86
5.2.1. Water availability ..................................................................................................... 86
5.2.2. Financial analysis of water utilities ........................................................................ 91
5.2.3. Key issues................................................................................................................ 96
6.
TASMANIA ................................................................................................................................... 98
6.1.
Institutional and governance arrangements ............................................................ 98
6.2.
Case study: Hobart ................................................................................................... 98
6.2.1. Water availability ..................................................................................................... 98
6.2.2. Financial analysis of water utilities ...................................................................... 100
6.2.3. Key issues.............................................................................................................. 102
7.
AUSTRALIAN CAPITAL TERRITORY ......................................................................................... 103
7.1.
Institutional and governance arrangements ..........................................................103
7.2.
Case study: Australian Capital Territory..................................................................104
7.2.1. Water availability ................................................................................................... 104
7.2.2. Financial analysis of water utilities ...................................................................... 109
7.2.3. Key issues.............................................................................................................. 113
8.
NORTHERN TERRITORY ........................................................................................................... 114
8.1.
Institutional and governance arrangements ..........................................................114
8.2.
Case study : Darwin ................................................................................................114
8.2.1. Water availability ................................................................................................... 114
8.2.2. Financial analysis of water utilities ...................................................................... 117
8.2.3. Key issues.............................................................................................................. 120
List of Figures
Figure 1: Available Storage in Sydney Dams 12 October 2006 ........................................................................... 9
Figure 2: Minimum Impact of Factors affecting Sydney Water Supply .............................................................. 10
Figure 3: Sydney Water - 2004/05 Revenue By Customer Group ..................................................................... 15
Figure 4: Total Supply from Sources – 1893 to 2005........................................................................................ 22
Figure 5: Historical and Projected Non-Residential Demand ............................................................................. 23
Figure 6: Yield and Demand Forecast ................................................................................................................. 23
Figure 7: Hunter Water - 2004/05 Revenue By Customer Group ..................................................................... 27
Figure 8: Water Restriction Rules and Total Water Storage as at October 2006 ............................................. 34
Figure 9 : Supply Demand Balance Through Time – Pre-drought Estimates .................................................... 36
Figure 10: Gosford Wyong - 2004/05 Revenue By Customer Group ................................................................ 38
Figure 11: Melbourne’s Main Water Storages .................................................................................................... 45
Figure 12: Total System Storage Growth since 1960 ......................................................................................... 46
Figure 13 : Inflows into Thomson Reservoir ........................................................................................................ 47
Figure 14: Melbourne’s Potential Supply/Demand Shortfall ............................................................................. 48
Figure 15: Existing and possible interconnections in the Central Region Sustainable Water Strategy ........... 49
Figure 16: Melbourne Retail Companies - 2004/05 Revenue By Customer Group ......................................... 51
Figure 17: Forecast of Dam levels ....................................................................................................................... 62
Figure 18: Brisbane Water - 2004/05 Revenue By Customer Group ............................................................... 64
Figure 19: Gold Coast Water - 2004/05 Revenue By Customer Group ............................................................ 68
Figure 20: Illustrative Water Cycle – Adelaide .................................................................................................... 74
Figure 21: Changing Sources in Drought............................................................................................................. 75
Figure 22: Mains Water Supply and Demand – pre Water Proofing Strategy ................................................... 76
Figure 23 : SA Water for Adelaide - 2004/05 Revenue By Customer Group .................................................... 80
Figure 24 : Yearly Streamflows for Major IWSS Surface Water Sources ........................................................... 87
Figure 25: Water Supply / Demand Balance over time ...................................................................................... 89
Figure 26: Canberra’s Water Supply System.................................................................................................104
Figure 27: Combined Dam Volumes in 2005/2006 ........................................................................................ 105
Figure 28: ACTEW - 2004/05 Revenue By Customer Group ........................................................................... 110
Figure 29: Darwin Water Supply Map ................................................................................................................ 115
Figure 30: Darwin River Dam Storage ............................................................................................................... 116
Figure 31: PAWC - 2004/05 Revenue By Customer Group.............................................................................. 117
List of Tables
Table 1: Bulk Water and Water Service Providers in NSW ................................................................................... 7
Table 2: Cost of Water Supply / Demand Options .............................................................................................. 13
Table 3: 2004/05 Sydney Water Cost Recovery - Water Only............................................................................ 16
Table 4: Sydney Water Cash Outflows 2000/01 to 2004/05 ($ million) .......................................................... 17
Table 5: Sydney Catchment Authority Cash Outflows 2000/01 to 2004/05,
($ million)............................ 17
Table 6: Sydney Water Performance Indicators .................................................................................................. 19
Table 7 : Cost of Water Supply and Demand Options......................................................................................... 25
Table 8: 2004/05 Hunter Water Cost Recovery - Water Only ............................................................................ 28
Table 9: Hunter Water Cash Outflows 2000/01 to 2004/05 ($ million) .......................................................... 29
Table 10: Hunter Water Performance Indicators ................................................................................................ 31
Table 11 : Current Water Storages, as at 2 October 2006 ................................................................................ 33
Table 12 : Preliminary Comparison of Unit Costs - Annual Cost/Yield at Full Capacity .................................... 37
Table 13: 2004/05 Gosford-Wyong Cost Recovery - Water Only ....................................................................... 39
Table 14: Gosford Wyong Performance Indicators ............................................................................................. 40
Table 15: Bulk Water and Water Service Providers in Victoria .......................................................................... 42
Table 16: Melbourne’s Water Sources ................................................................................................................ 44
Table 17: Cost of Water Supply / Demand Options ............................................................................................ 50
Table 18: 2004/05 Melbourne Cost Recovery (Water Only) .............................................................................. 52
Table 19: Melbourne’s Three Retail Companies Combined - Cash Outflows 2000/01 to 2004/05 .............. 53
Table 20: Melbourne Water Cash Outflows 2000/01 to 2004/05 ................................................................... 54
Table 21: Melbourne Performance Indicators .................................................................................................... 56
Table 22: Overview of operation and ownership in Brisbane and the Gold Coast ............................................ 60
Table 23: 2004/05 Brisbane Cost Recovery (Water Only) ................................................................................. 64
Table 24: Brisbane Water Dividends and Taxes 2000/01 to 2004/05 ($ ‘000) ............................................. 65
Table 25: Brisbane Water Performance Indicators............................................................................................. 66
Table 26: 2004/05 Gold Coast Cost Recovery (Water Only).............................................................................. 69
Table 27: Gold Coast Water Dividends and Taxes 2000/01 to 2004/05 ($ ‘000) .......................................... 69
Table 28: Gold Coast Water Performance Indicators ......................................................................................... 70
Table 29: Anticipated Water Savings .................................................................................................................. 77
Table 30 : Cost of Water Supply / Demand Options ........................................................................................... 79
Table 31: 2004/05 SA Water Cost Recovery (Water Only) ................................................................................ 81
Table 32: SA Water Cash Outflows 2000/01 to 2004/05................................................................................. 82
Table 33: SA Water Performance Indicators ....................................................................................................... 83
Table 34 : Water Service Providers in WA ........................................................................................................... 85
Table 35 : Cost of Water Supply / Demand Options ........................................................................................... 90
Table 36: 2004/05 Perth (Water Corporation) Cost Recovery - Water Only ..................................................... 92
Table 37 : Water Corporation Cash Outflows 2000/01 to 2004/05 ................................................................ 93
Table 38 : Water Corporation Performance Indicators ....................................................................................... 95
Table 39 : Sources of Supply for Hobart, 2003-04 to 2004-05 (ML) ................................................................ 99
Table 40: 2004/05 Hobart Water Cost Recovery (Water Only) ....................................................................... 100
Table 41 : Hobart Water Cash Outflows 2000/01 to 2004/05 ....................................................................... 101
Table 42 : Water Conservation Measures ......................................................................................................... 106
Table 43: Future Water Options for the ACT Region- Implementation Plan .................................................... 108
Table 44 : 2004/05 ACTEW Cost Recovery (Water Only) ................................................................................. 111
Table 45 : ACTEW Cash Outflows 2000/01 to 2004/05 ................................................................................. 111
Table 46 : ACTEW Performance Indicators........................................................................................................ 113
Table 47: 2004/05 PAWC Cost Recovery (Water Only) .................................................................................... 118
Table 48: PAWC Water Cash Outflows 2000/01 to 2004/05 ......................................................................... 118
Table 49: PAWC Performance Indicators .......................................................................................................... 119
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
1. NEW SOUTH WALES
1.1. Institutional and governance arrangements
In New South Wales, the two major bulk water storage operators are Sydney Catchment
Authority (SCA) and State Water Corporation. The former provides bulk water storage for
Sydney and the latter operates bulk storages in regional and rural areas. In general, the bulk
water providers do not treat the water or distribute water beyond the river systems, which is
the responsibility of water utilities and local councils. Hunter Water and local councils also
own and operate a number of other bulk storages throughout the State.
Distribution and retail services are provided by Sydney Water in the Sydney metropolitan
area, Hunter Water in Newcastle and local councils for the remaining urban areas.
The urban water delivery arrangements are summarised in Table 1.
Table 1: Bulk Water and Water Service Providers in NSW
Area
Name
Services
Institutional
Structure
Sydney
Sydney Water
Corporation
Treatment, distribution and
retail
Statutory
State owned
corporation
Sydney Catchment
Authority
Bulkwater, catchment
management
Statutory
Authority
Newcastle and Hunter
Valley region
Hunter Water
Bulkwater, treatment,
distribution and retail
Statutory
State owned
corporation
Other urban centres
Local Governments (e.g.
Wyong City Council,
Gosford City Council,
Goulburn Mulwaree
Council)
Bulkwater, treatment,
distribution and retail
Local
Government
State Water Corporation
Regional and rural
bulkwater delivery
Statutory
State owned
corporation
The Department of Natural Resources sets the overall policies for ensuring water resources
are sustainable and the department provides licences for the extraction and use of water in
NSW.
The private sector does not provide water services in NSW, but public-private partnership
arrangements have been developed by Sydney Water for the Prospect Water Treatment Plant
(Australia’s largest) and two smaller plants. Outside the metropolitan areas, there are Design
7
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Build Operate (DBO) arrangements either in place or in train for several municipalities
including Wagga Wagga and Bega.
A recent investigation by the Independent Pricing and Regulatory Tribunal (IPART) into
water service provision recommended that there be no major industry restructure at this time,
however the Tribunal made several recommendations, including:1

making better use of competitive procurement practices. In particular, the Tribunal
noted that Sydney Water should be required to make greater use of competitive sourcing
to procure additional water supplies;

introducing open access to infrastructure. IPART recommended that access be
state-based using a negotiate-arbitrate model. The Australian Competition Tribunal was
unable to form a definitive view as to whether IPART’s state-based proposal would
develop into an effective access regime and therefore, following an application by
Services Sydney, handed down a decision to declare Sydney Water’s sewage
interconnection and transportation services for 50 years under Part IIIA of the Trade
Practices Act 1974; and

removing certain legal and regulatory barriers to competition, private sector
participation and innovation.
1.2. Case study : Sydney
In 1999, responsibility for water infrastructure in Sydney was divided between two
organisations  Sydney Catchment Authority and Sydney Water Corporation. The Sydney
Catchment Authority is a State government agency established to manage water catchments
to ensure water quality and to supply bulk water to Sydney Water from a system of dams and
other infrastructure.
Sydney Water Corporation is a statutory state-owned corporation that provides water,
wastewater and stormwater services to a population of around 4.2 million people in the
greater Sydney metropolitan area. The Sydney Water Act (1994) stipulates that Sydney
Water’s principal objectives are not only to be a successful business, but also to protect the
environment and public health.
1.2.1. Water availability
Water Supply
Sydney’s potable water supply is currently sourced from 11 major dams, of which the largest
is Warragamba Dam, with several smaller dams in the catchments of the Upper Nepean,
Woronora, Blue Mountains and Shoalhaven. Precipitation in Sydney occurs throughout the
year, trailing away slightly in the second half of the calendar year, however, on occasion
large proportions of the annual rainfall are delivered in a single event. In addition, El Niño
events can cause alternating wet and dry periods of between a few years up to a decade.
Consequently, runoff into Sydney catchments is highly variable and, to compensate for the
1
IPART (2005), Investigation into Water and Wastewater Service Provision in the Greater Sydney Region.
8
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
long, dry periods, Sydney’s dams can store around 2,400 gigalitres of water at full capacity –
around four years of supply under zero inflow conditions.2
Sydney is currently experiencing the second worst drought on record and dam levels have
fallen to 41.0 per cent compared with levels of 80 per cent – 90 per cent in 2001, as shown in
Figure 1.3
Figure 1: Available Storage in Sydney Dams
12 October 2006
Source: SCA Bulk Water Storage & Supply Report – 12 October 2006 http://www.sca.nsw.gov.au/dams/278.html
In response to the low storage levels, the NSW Government introduced Level One
restrictions in 2003 and these have been progressively upgraded to Level Three restrictions
on 1 June 2005.
Studies by CSIRO indicate that the amount of water available in NSW in the longer term
may reduce on average, while the frequency and intensity of storm events may increase.4
Over the next ten years, the following factors (which are already in place or agreed on by the
NSW Government) contribute to the amount of water now available annually from the
storage system:

the effect of low inflows during the current drought (recent inflow data has been
incorporated into the water supply modelling which recognises a reduction of annual
water availability by 25 GL);

agreed Upper Nepean environmental flows, which will reduce annual water availability
by 25 GL;

the effect of removing Level Four and Five restrictions from the suite of possible
drought response options (the Water Plan does not specify the impact on water
requirements);
2
NSW Government (2006) Metropolitan Water Plan.
3
Dam levels available at http://www.sca.nsw.gov.au
4
Hennessy, K. et al (2004) Climate Change in New South Wales - Part 1: Past climate variability and
projected changes in average climate, CSIRO.
Available at http://www.cmar.csiro.au/e-print/open/hennessy_2004b.pdf
9
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

building access to deep storages at Warragamba and Nepean Dams (boosting annual
water availability by 40 GL);

the Western Sydney Recycled Water Initiative, one component of which will replace the
current flow releases from Warragamba Dam and saving up to 27 gigalitres per year by
2015;

readiness to build a desalination plant in the event that storages fall to around 30 per
cent which will increase annual water availability by between 30 and 70 gigalitres; and

readiness to access groundwater if storages fall to around 40 per cent which may
increase annual water availability by between 5 and 10 gigalitres (the amount of water
available from groundwater sources is yet to be determined); and

the effect of the current Shoalhaven transfers scheme (without raising Tallowa Dam wall
and assuming current operational settings. The volume available is not specified in the
Water Plan).5
The identified impact on annual water availability is shown in Figure 2.
Figure 2: Minimum Impact of Factors affecting Sydney Water Supply
Change in Annual Water Availability
(GL)
40
30
20
10
0
-10
-20
gr
ou
nd
w
at
er
Sy
dn
ey
R
R
ec
ea
yc
di
ne
lin
ss
g
fo
rd
es
al
Ac
in
at
ce
io
s
n
to
de
ep
st
or
ag
es
w
s
W
es
te
rn
to
en
ta
lf
lo
Ac
ce
ss
vi
ro
nm
En
U
pd
at
ed
in
flo
w
da
ta
-30
Source: NSW Government (2006) Metropolitan Water Plan
After accounting for the above factors, the 2006 Metropolitan Water Plan indicates that a
sustainable supply of 575 gigalitres of water will be available on an annual basis.
5
NSW Government (2006) Metropolitan Water Plan, p. 12.
10
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Supply / Demand Balance
Prior to the introduction of water restrictions in 2003, Sydney used around 420 litres per
person per day, of which 256 litres per person per day was used for residential purposes
(within two per cent of the Australian average at the time). In 2004/05, after the introduction
of Level Two water restrictions, residential water use per capita fell by 17 per cent and
commercial and industrial water use fell by nine per cent.6
Sydney’s population is expected to grow to around 5.3 million by 2031.7 Without existing
and planned demand management strategies in place, water use would be expected to grow
to over 800 gigalitres per annum over the same period.8 It has also been foreshadowed that,
by 2015, the State Government will have the information needed to decide the environment
flows to be provided to the Hawkesbury River from Warragamba Dam, which could reduce
supply availability by approximately 80 gigalitres per annum.9
Without intervention, current storage levels would be inadequate to service the
pre-restriction level of water demand in Sydney, however, the 2006 Metropolitan Water Plan
outlines an aggressive strategy of demand reduction and wastewater recycling to address the
shortfall, including:10

non-residential water conservation programs (38 gigalitres): A combination of
regulatory (Water Savings Action Plans), funding (Water Savings Fund) and
cooperative partnerships (Every Drop Counts Business Program) and other smaller
programs to work with organisations to reduce water use;

recycling (35 gigalitres): This involves the use of recycled water, from sewage treatment
plants, replacing potable water use in industry (notably BlueScope Steel);

pressure and leakage reduction (33 gigalitres): This includes Active Leak Detection
Program, pressure reduction and improved break/leak response time;

stepped tariff for pricing and outdoor water savings measures (24 gigalitres): This
includes the introduction of step pricing as recommended by IPART. The outdoor water
saving measures involve the Residential Landscape Assessment and Rainwater Tank
Rebate Programs, and the introduction of ongoing low-level outdoor water use measures
commencing at the end of the current drought and supported by ongoing community
education;

BASIX (23 gigalitres): The Building Sustainability Index (BASIX) is an assessment tool
that mandates a level of water demand reduction in new and renovated homes and
apartments;

appliance standards (15 gigalitres): This program involves the introduction of mandatory
labelling followed by minimum standards for a range of water-using appliances under
the Commonwealth Government’s Water Efficiency Labelling Scheme (WELS); and
6
For the years 2002/03 and 2004/05. Source: WSAAfacts 2005.
7
See http://www.metrostrategy.nsw.gov.au/
8
Institute for Sustainable Futures, ACILTasman and SMEC (2006), Review of the Metropolitan Water Plan:
Final Report, April.
9
See Institute for Sustainable Futures (2004), ACILTasman and SMEC (April 2006), Review of the
Metropolitan Water Plan: Final Report, p. 38 and Metropolitan Water Plan.
10
2006 Metropolitan Water Plan, p. 13.
11
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

residential indoor (12 gigalitres): Promotion of the use of water efficient appliances in
the home through retrofits and rebate programs.
Demand management targets endorsed in the Sydney plan are substantially higher than
targets developed in most other States (except Victoria). While plans for several capital
cities, including Brisbane, Adelaide, Perth and Canberra, are targeting per capita reductions
of around 20 per cent compared with unrestricted water use, the Metropolitan Water Plan
implies per capita reductions of around 35 per cent by 2030. It is unclear from the plan why
Sydney has adopted such aggressive, and potentially difficult, targets compared with other
cities.
The base case demand, water availability and water saving strategies are shown graphically
in Figure 10 below.
Figure 10: Supply/Demand Balance Through Time
Base case demand
WELS/appliance standards
BASIX
Recycling
Pressure and leakage reductio
Non-residential sector
Outdoor residential
Indoor residential
Available Supply
Projected demand
Reduced available supply
with potential Warragamba
environmental flows
(demand lower than
supply gives surplus)
Drought restricted demand
Year end June
Source: Institute for Sustainable Futures, ACILTasman and SMEC (2006), Review of the
Metropolitan Water Plan: Final Report, April.
In addition to the proposed recycling and demand management targets, the NSW
Government has indicated that water restrictions “will remain an important, socially
acceptable and relatively low cost tool for responding to future droughts.”11 In a January
2005 survey of Sydney Water’s customers (when Level Two restrictions were in force),
more than 60 per cent of people surveyed thought the level of water restrictions was “about
right” while 28 per cent believed that the restrictions were “not severe enough”.12
11
2006 Metropolitan Water Plan, p. 20.
12
2006 Metropolitan Water Plan, p. 21.
12
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Cost of Options
Financial considerations are one element of a complete economic, social and environmental
analysis of proposed options for water management. Table 2 provides the cost of various
options examined in the Metropolitan Water Plan.
Table 2: Cost of Water Supply / Demand Options
Option
Total Water
Supplied / Saved
(GL pa)
Levelised Cost /
Kilolitre
($/kL)
Appliance standards and labelling1
15
$0.04-$0.05
Residential outdoor (excluding rain tanks) 1
22
$0.10 - $0.20
Pressure and leakage reduction1
30
$0.20
Non-residential1
36
$0.30 - $0.50
Residential indoor - retrofits and rebates1
12
$0.50 - $0.60
500ML/day Desalination3
182
$1.73 - $1.984
500 ML/day Indirect Potable Recycling3
182
$2.23 - $2.615
28
$1.00 - $3.00
2
$3.00
BASIX1
23
$0.30 – $4.00
Western Sydney Recycled Water Initiative1, 2
27
$5.80
Committed/approved recycling schemes1
Rainwater tank rebates - residential and schools1
Sources:
1. Institute for Sustainable Futures, ACILTasman and SMEC (April 2006), Review of the
Metropolitan Water Plan: Final Report.
2. Institute for Sustainable Futures confirmed that the total water supplied/saved was 27 GL13 (pers.
comm. 8 August 2006) at a cost of $5.80/kL. 2 GL identified in ISF report relates only to potable
replacement, net of BASIX. The Western Sydney Recycled Water Initiative consists of a number
of sub-initiatives, including a residential dual pipe scheme, recycled water for agriculture and
environmental flow replacement. MJA understand that the environmental flow replacement
program is significantly less expensive than the $5.80/kL average cost for the entire project.
3. A smaller, 125 ML/d has also been considered – details were unavailable. Sydney Water, Indirect
potable recycling and desalination - a cost comparison, available at www. sydneywater.com.au
[accessed 24 July 2006].
4. Range represents uncertainty over asset lives, which was not provided in the fact sheet.
Calculation utilises 100 years and 25 years respectively. Based on capital expenditure $2.5
billion, operating $165 million per annum, discounted at 6 per cent (real pre-tax).
5. Range represents uncertainty over asset lives, which was not provided in the fact sheet.
Calculation utilises 100 years and 25 years respectively. Based on capital expenditure $3.8
billion, operating $175 million per annum, discounted at 6 per cent (real pre-tax).
13
Comprising 4.2 gigalitres for dual reticulation supply, 3.3 gigalitres for local non-potable schemes, 18.25
gigalitres for environmental flows, 1.5 gigalitres for irrigation.
13
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 2 indicates that several proposed projects, including the Western Recycling Initiative,
BASIX and rainwater tank rebates, may be significantly more expensive than a major
desalination plant or indirect potable recycling. Environmental and other considerations may
provide additional benefits that outweigh the financial cost for these programs.
Demand management options (other than BASIX and rainwater tank rebates) appear
significantly less costly than any of the other options examined in the Water Plan. As
indicated above, the demand reduction targets are substantially higher than those proposed
by other States and may therefore be more difficult to achieve. Furthermore, it is unclear
which costs have been included in the calculation of demand management costs. In some
cases, regulatory requirements for new water efficiency standards may avoid the cost of
augmenting water sources, but increase the cost burden to developers, appliance
manufacturers or customers. To analyse options from the standpoint of all stakeholders,
demand management costs should include the incremental costs to business and the
community in addition to the costs to the utility (e.g. the additional compliance costs for
appliance manufacturers).
Third party proposals, such as the wastewater recycling scheme proposed by Services
Sydney, have not been reviewed in the Metropolitan Water Plan. Services Sydney proposes
to construct a new water reclamation facility that would extract and then treat raw
wastewater from Sydney Water’s main sewers and return the treated water to the base of
Sydney's catchment dams to replace water otherwise needed for environmental flows.
A comprehensive review of options should examine the risk associated with each project in
addition to the economic, social and environmental consequences.
1.2.2. Financial analysis of water utilities
Revenue and Cost Recovery
In 2004/05, Sydney residents were charged the highest average water price of any Australian
capital city ($330.87 for 250 kilolitres).14 The charge for residential wastewater was 4 per
cent higher than the Australian average (Sydney Water charged a flat annual fee of $346.66).
Residential revenue represented 78 per cent of Sydney Water’s total water revenue,
significantly more than the proportion of water used by residential customers (residential use
represented 63 per cent of the total water supplied to Sydney15). A breakdown of revenue
sources is shown in Figure 3.
14
WSAAfacts 2005
15
WSAAfacts 2005
14
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 3: Sydney Water - 2004/05 Revenue By Customer Group
Wastewater NonResidential
12%
Water NonResidential
10%
Water Residential
36%
Wastewater
Residential
42%
Source: Extrapolated from WSAAfacts 2005
Sydney Water’s revenue over the past five years has been insufficient to recover all cash
costs (including operating, capital investment, taxation, interest and dividend payments), as
demonstrated by the organisation’s increase in net debt from $1.6 billion to $2.7 billion over
the period.16 Increasing debt is not uncommon in industries with a growing customer base
and significant capital expenditure, where investors expect new customers to provide
sufficient revenue to service both debt and shareholder requirements over time.
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating costs, depreciation and a standard industry return
on the written down replacement cost of assets.17 Sydney (consolidated) had the third lowest
annualised cost recovery for water (76 per cent) for a capital city after Melbourne (68 per
cent) and Perth (74 per cent). Annualised cost recovery for all capital cities falls between 68
per cent and 84 per cent. Table 3 shows the cost recovery from Sydney customers compared
with other Australian cities.
16
WSAAfacts 2005.
17
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
15
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 3: 2004/05 Sydney Water Cost Recovery - Water Only
Sydney Water
SCA
Consolidated5
Notes: 1.
2.
3.
4.
5.
Annual
revenue/property1
Annual
cost/property2
Annualised Full
Cost Recovery3
Ave Australian
Cost Recovery4
349
450
77%
80%
72
82
88%
80%
349
460
76%
80%
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a 6
per cent return on assets. See footnote 17 for further information. Differs from the Productivity
Commission’s measure of cost recovery, which does not include a return on assets.
Sydney Water’s cost recovery peaked at 84 per cent in 2003/04. SCA cost recovery peaked at 97 per
cent in 2002/03.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported). Excludes SCA and Melbourne Water to avoid double counting.
Consolidated revenue/property equals retail revenue only to avoid double counting. Consolidated
cost/property equals retail cost plus the average loss per property for Sydney Catchment Authority
(cost/property minus revenue/property) to represent additional cost not captured in bulkwater charges
to Sydney Water.
Expenditure
Over the past five years, cash outflows from Sydney Water have averaged $1.7 billion per
annum (including payments to Sydney Catchment Authority). Just over 50 per cent of these
outflows was expenditure for operations, while 27 per cent of outflow was used for property,
plant and equipment (capital investment).18 On average, a net $139 million was returned to
the State Government each year in the form of:

an average $99 million of dividend payments to the State Government from Sydney
Water and $19 million from SCA (representing 54 per cent of combined net profit after
tax);

an average $83 million of tax payments to the State Government19 from Sydney Water
and $14 million from SCA; and

Sydney Water received an average of $77 million from the State Government in the
form of “cash receipts for social programs” (primarily for pensioner and other rebates).
Table 4 shows Sydney Water’s total cash outlays over the past five years and Table 5, those
of Sydney Catchment Authority.
18
Purchases of water from Sydney Catchment Authority are regarded as operating expenditure. SCA’s
invested an average of $23 million per year over the period (compared with average cash operating
expenditure of $73 million per year). Treating SCA capital expenditure as a capital rather than as an
indirect operating expense for Sydney Water increases capital expenditure to 28 per cent.
19
Sydney Water and SCA make “tax equivalent payments” to the State government. Tax equivalent payments
are similar to the tax payments made by the private sector, but are paid to the State rather than the
Commonwealth government.
16
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 4: Sydney Water Cash Outflows 2000/01 to 2004/05 ($ million) 20
2000/01 2001/02 2002/03 2003/04 2004/05
Total
5 Years
%
Operations
791
818
904
881
905
4,298
51%
Property, plant and
equipment
420
507
528
442
398
2,295
27%
Borrowing costs paid
162
156
160
181
185
845
10%
Tax equivalent payments
114
91
98
70
40
413
5%
Dividends payments
104
53
110
115
115
497
6%
87
26
15
12
9
150
2%
1,678
1,651
1,815
1,702
1,652
8,498
100%
Other21
TOTAL
Source: Sydney Water annual reports
Table 5: Sydney Catchment Authority Cash Outflows 2000/01 to 2004/05, ($ million)22
2000/01 2001/02 2002/03 2003/04 2004/05
Total
5 Years
%
Operations
55
74
76
87
74
366
45%
Property, plant and
equipment
32
23
12
19
31
116
14%
Borrowing costs paid
12
12
13
13
13
62
8%
Tax equivalent payments
36
13
9
5
8
71
9%
Dividends payments
11
30
19
19
18
96
12%
-
21
26
39
14
100
12%
146
172
154
181
158
812
100%
Other23
TOTAL
Source: Sydney Catchment Authority annual reports
Note:
Discrepancies in totals may occur due to rounding.
Constraints to investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and

the financial capacity of the State Government.
20
Sydney Water Authority Annual Reports 2000/01, 2002/03, 2004/05.
21
‘Other’ includes net repayment of borrowings (i.e., borrowing repayments minus proceeds from borrowings,
where aggregate result is a cash outflow).
22
Sydney Catchment Authority Annual Reports 2000/01, 2002/03, 2004/05.
23
See footnote 21.
17
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Each is examined in turn below.
Ability to recover costs: Sydney Water is regulated by the Independent Pricing and
Regulatory Tribunal (IPART), which uses a building block methodology (i.e., operating,
maintenance and administration costs, depreciation, return on assets and adjustments for tax)
for calculating total revenue requirements for the business. Through this mechanism,
Sydney Water is able to pass on the efficient cost of constructing new water sources or
managing demand. The current price determination by IPART for the period 1 October 2005
to 30 June 2009 saw customer charges for water, wastewater and stormwater increase by an
average of 7.5 per cent above inflation in 2005/06 and further increases of 1.1 per cent above
inflation have been approved for each of the remaining years. Prices were also restructured
to include a two-tiered water tariff to encourage water conservation.
If Sydney Water were required to construct a 500 ML per day desalination plant (32 per cent
of existing supply) in addition to the other options outlined in IPART’s recent price
determination, prices could rise by $175 for an ‘average’ customer (an additional 20 per cent
on combined water, wastewater and stormwater charges).24 Note that that this represents the
maximum price to customers, as future growth in population would share the cost over a
greater customer base and therefore lower the overall cost per household.
Financial constraints: Sydney Water has a strong balance sheet and steady income stream.
IPART has indicated that both Sydney Water and Sydney Catchment Authority should be
able to meet operating, capital and borrowing repayments and still maintain an overall credit
rating of at least BBB+ and BB+ respectively until 2008/09.25 According to IPART, the
NSW Government believes that a BBB rating is the minimum target rating to ensure
financial viability.
Over the past five years, Sydney Water and SCA have taken on an additional $1.3 billion in
debt. Of this, $693 million has been required to meet net returns to the State Government
(i.e., dividends plus tax payments less community service obligation payments). However,
debt levels remain low at only 37 per cent of the total regulatory asset value for both Sydney
Water and SCA,26 compared with the international industry ‘benchmark’ rate of 60 per
cent.27 Sydney Water and SCA could afford to borrow a further $1.9 billion and $240
million respectively before reaching the ‘benchmark’ gearing level of 60 per cent.
State Government’s financial capacity: Sydney Water’s and SCA’s dividend and tax
payments are included as revenue in the State budget and therefore impact on State
Government financial policy and credit rating. The NSW Government has maintained a
‘triple A’ domestic credit rating with Standard & Poor’s and Moody’s since ratings
24
Based on capital expenditure $2.4 billion (excludes $94m approved in current price path), operating $165
million per annum, using the Building Block method (operating and maintenance, depreciation based on a
50 year life and a return on assets based on the WACC applied by IPART of 6.5 per cent real pre-tax
(IPART determination, p. 70)). Total revenue requirement equals $369 million in the first year, divided by
IPART’s estimated total metered water sales of 525,686 ML in 2008/09 (desalination plant would require a
year or more for construction), totalling $0.702/kL or $175 per year for an “average” customer using 250
kilolitres. On a levelised cost basis, the cost would be $0.624/kL or $156 for an “average” customer.
25
IPART determination, p. 133.
26
IPART determination, p. 146 and p. 133. 2005/06 regulatory asset base $8,311m and $1,040m respectively
(p. 70).
27
60 per cent gearing has been adopted for the calculation of the Weighted Average Cost of Capital by
IPART, ESC and ERA.
18
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
commenced in 1987.28 The net dividend and tax payments from Sydney Water and SCA
accounted for only 0.4 per cent of general State government revenue in 2004/05.29
By contrast, the net debt positions of Sydney Water and SCA have a significantly greater
impact on the State Government’s net debt level. The organisations had net debt totalling
$2.9 billion in 2004/05, which represented 10 per cent of total State government borrowing
or 25 per cent of net debt ($11.7 billion).30 With almost $2.8 billion of capital expenditure
anticipated between 2005/06 and 2008/09, Sydney Water and SCA’s net debt is expected to
grow to $4.7 billion by 2008/09 (excluding any major source augmentation costs).31 The
impact on the State’s credit rating has not been determined at this stage.
Performance
Table 6 shows several key indicators of performance for Sydney Water in 2004/05. (SCA
does not provide treatment, transmission or retail services and therefore the indicators shown
below are not relevant for this authority.)
Table 6: Sydney Water Performance Indicators
Performance Indicator
Number of water main breaks per 100 km of water
main
Sydney Water
Australian Average1
37.8
29.9
Infrastructure leakage index (real losses /
unavoidable real losses)
1.8
1.7
Percentage of water recycled
2.8%
8.2%
Number of water quality complaints per 1,000
properties
1.1
4.5
25.9
27.6
Average connect time to operator (seconds)
Water quality standard
ADWG 1996
See below
Note: 1. Weighted average of Australian organisations appearing in WSAAfacts 2005.
The number of main breaks in Sydney is higher than the Australian average, however, with
37.8 breaks per 100 kilometres, Sydney Water’s performance is better than five of the 18
Australian water utilities reported in WSAAfacts.
Sydney Water’s leakage performance was similar to the Australian average, as was the
average time to respond to telephone enquiries.
In 2004/05 Sydney recycled only 2.8 per cent of wastewater compared with the Australian
capital city average of 8.2 per cent. This will be significantly bolstered by the wastewater
28
NSW Treasury (2005), Treasury Focus Newsletter, March.
29
2004/05 NSW General Government revenue $41,364 million. ABS Catalogue 5512.0, 2004-05 Government
Finance Statistics.
30
Net debt includes offsetting financial assets such as cash and investments. State Government total public
sector borrowing $29.1 billion. ABS Catalogue 5512.0, 2004-05 Government Finance Statistics.
31
IPART Final Determination, p. 133 and p. 146.
19
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
recycling initiatives outlined in the 2006 Water Plan.
wastewater is expected to be recycled by 2015.32
Approximately 15 per cent of
Sydney has comparatively few water quality complaints and provides water in accordance
with the 1996 Australian Drinking Water Guidelines. The more recent Australian Drinking
Water Guidelines 2004 focus on a multiple barrier approach to managing water quality,
however, most water businesses are still under transition from the 1996 guidelines to these
new arrangements.
In 2004/05, Sydney Water met microbiological and physical-chemical compliance. It had
quality approved systems in place and had public disclosure of its compliance. The SCA
met its physical-chemical compliance requirements, had a quality approved system in place
and publicly disclosed its compliance.
1.2.3. Key issues
The analysis highlights the following key issues with regard to water management in
Sydney.

Demand management targets in Sydney are much higher than the targets adopted by
most other Australian cities and may be difficult to achieve. If demand targets are not
met, Sydney will be required to implement one or more contingency options including
groundwater access, desalination, ongoing restrictions, or additional water accessed
from the Shoalhaven River.

Some options, such as the Western Sydney Recycled Water Initiative, BASIX, and
rainwater tank rebates appear more expensive than desalination, indirect potable
recycling, or other forms of demand management. However, these programs may
provide other environmental and social benefits that outweigh the additional financial
cost.

If a 500 ML per day desalination plant were required to meet demand in Sydney, the
cost would be significant, increasing the average residential water bill by up to $175 per
year.

Neither Sydney Water nor SCA have any immediate cash constraints. Dividends and tax
paid to the State Government amounted to $693 million over the last five years;
however the organisations remain in a strong financial position and could effectively
borrow up to $1.9 billion and $240 million respectively before reaching the international
‘benchmark’ level of 60 per cent debt to total assets.

The dividend and tax payments made by Sydney Water and SCA to the NSW
Government accounted for only 0.3 per cent of State revenue in 2004/05. The net debt
of the two organisations accounted for almost 25 per cent of the State’s net debt. Over
the coming years, net debt is projected to grow, and could be even higher, if additional
source augmentations are required.

The proportion of wastewater recycled by Sydney Water is the lowest of any capital city
in Australia. The initiatives identified in the Water Plan are expected to increase
recycling in Sydney to around 15 per cent by 2015.
32
2006 Metropolitan Water Plan, p. 33.
20
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
1.3. Case study: Hunter Water
Hunter Water is a statutory state-owned corporation and provides water and wastewater
services for over half a million people in the lower Hunter region. The area of operation
covers 5,366 km2 with a population of 512,432 in the local government areas of Cessnock
(48,089), Lake Macquarie (192,797), Maitland (60,222), Newcastle (147,621) and Port
Stephens (63,703).
In addition, Hunter Water supplies bulk water to Dungog Council and to small parts of
Singleton and the Great Lakes area. Hunter also supplies an average six megalitres per day
to the Central Coast and provides some stormwater services to the lower Hunter, with 100
km of stormwater channels in Cessnock, Newcastle and Lake Macquarie.
In total, Hunter Water delivers on average 200 ML of water a day using assets worth around
$2 billion. There are 211,212 properties connected to the water network and 199,212 to the
wastewater network.
Hunter Water is responsible for the collection, treatment and delivery of drinking water, and
the transportation and disposal of the region’s wastewater.
1.3.1. Water availability
Water Supply
Hunter Water’s raw water storages are:33

Grahamstown Dam (190 gigalitres capacity) (from runoff in its catchment or when
water is pumped from the Williams River);

Chichester Dam (21.5 GL) (from the Chichester River);

Tomago sand beds (60 GL) (as a result of direct rainfall); and

Anna Bay sand beds (16 GL) (as a result of direct rainfall).
Two of the storages are coastal (Grahamstown Dam and Tomago sand beds) which means
that they often receive rainfall when inland storages miss out and Chichester Dam, is located
in a region that receives above average rainfall compared with the rest of the region.
When full the Hunter Water storages represent almost four years worth of water supply.34
As of June 2005 storage levels were at 95 per cent. With the current infrastructure, the
sustainable yield for the Hunter system is 73.5 gigalitres and on occasion, this yield has been
exceeded (presumably requiring a draw down of storage supplies) as shown in Figure 4.
33
The analysis that follows draws from the Integrated water Resource Plan 2003 and the IWRP Annual Report
2005.
34
Based on 2004/05 water use of 76.7 GL. WSAAfacts 2005.
21
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 4: Total Supply from Sources – 1893 to 2005
Sustainable
Annual Yield
79 GL
73.5 GL (prior to
new spillway)
User pays pricing introduced
Water restrictions due to drought
Source: IWRP Annual Report 2005
The current drought across Australia has resulted in seriously depleted water storages in
many parts of the east coast of NSW. The Central Coast region immediately to the south of
Hunter Water’s area of operations is also experiencing low and declining storage volumes
(currently around 25 per cent) and has severe water use restrictions in place. In contrast to
many other parts of the State, the Lower Hunter received good rainfalls in 2004/05 and
storage levels were as high as 94 per cent. Inflows have not been as good this year and
storage levels are currently at around 80 per cent of capacity (as at 25 September 2006).35
Unlike other regions, Hunter does not anticipate that water demand will exceed its annual
supply capacity.
The completion of a larger capacity spillway at Grahamstown Dam early in 2006 will
provide an increase of around 60 gigalitres to the safe capacity of the dam. The spillway will
increase the annual safe yield of all available sources to around 79 gigalitres per year,
compared with a current demand in average climate conditions of around 73 gigalitres per
year.
During each year, storage levels vary – in 2004/05 storage levels ranged from just under
70 per cent full in September to over 95 per cent in June.
Supply / Demand Balance
Demand on the Hunter Water system spiked in 1982 and then fell dramatically after the
introduction of user pays charges. Since that time demand has fluctuated, but industrial
water use has been trending down, in part due to the closure of several large water users (see
Figure 5). By contrast, residential water use has been steadily trending up with the growth in
population, almost exactly offsetting the reduced usage from industry (around 10 gigalitres
since 1985).
35
See www.hunterwater.com.au
22
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 5: Historical and Projected Non-Residential Demand
Source: IWRP Annual report 2005. Note vertical axis begins at 20 GL.
Total water demand estimates for the next ten to twenty years are driven almost entirely by
residential growth. Figure 6 shows the estimates of water supply and demand (taking into
account a number of demand management initiatives outlined in the Integrated Water
Resource Plan (IWRP) plus population growth). Assuming the continuation of average
annual streamflows, the projected demand for water does not approach Hunter Water’s
annual safe yield of 79 gigalitres until 2013 or later.
Figure 6: Yield and Demand Forecast
Source : IWRP 2005. Note vertical axis begins at 60 GL.
Hunter Water developed an Integrated Water Resource Plan in 2003 to examine the
requirements for balancing supply and demand into the future. A subsequent annual report
was developed in 2005. The 2005 report identifies projects to address water conservation
and water loss minimisation, but does not identify any specific resource augmentation
infrastructure works within the timeframe of the IWRP.
23
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Hunter Water provided an average of 4.5 ML/day of water to the Central Coast over 2004/05
to help alleviate water shortages.36 The Corporation is investigating construction of
additional pipelines to provide water to, and receive water from, the Central Coast and is also
developing a water recycling strategy.37
Hunter Water plans to ensure sufficient capacity exists to maintain the probability of
restrictions at less than 10 per cent, with the duration spent in restrictions at less than five per
cent. Planning is based on recent climate trends, with no allowance made for potential
changes in climate conditions.38
Hunter Water is also currently reviewing its drought management plan, including a review of
water restrictions and their trigger points. In parallel with revising the drought management
plan, Hunter Water has undertaken a detailed hydrogeological investigation of the North
Stockton Sandbeds. Installation of an emergency borefield in North Stockton Sandbeds is
the main approach for Hunter’s Water to meet drought contingency measures. While North
Stockton Sandbeds are not expected to provide a long-term reliable supply, they do hold a
significant volume of fresh water that could be accessed over the short term during drought.
Cost Of Options
Hunter Water’s IWRP does not contemplate augmenting supply to meet potential
supply/demand imbalances. The IWRP focuses primarily on demand management
efficiency and leakage reduction to redress future imbalances.
Both demand and supply side options were costed (including power savings) and are shown
in Table 7 (note that costs have not been indexed to the current year). Financial
considerations are only one element of a complete economic, social and environmental
analysis of proposed options for water management.
36
IWRP Annual Report 2005, p. 3.
37
IWRP Annual Report 2005 p. 9.
38
IWRP 2003, p. 35.
24
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 7 : Cost of Water Supply and Demand Options
Option
Total Water
Supplied / Saved
(ML)
Levelised Cost /
Kilolitre
($/kL)
DEMAND SIDE OPTIONS
Residential water efficiency
AAA showerheads
-0.80 – -0.76
Targeted residential indoor retrofit
-0.38 – -0.34
Toilet weight/cistern displacement device
0.16 – 0.20
Outdoor water efficiency measures
0.49 – 1.45
Dual flush toilets
0.91 – 1.01
Front-loading washing machines
0.90 – 1.00
Rainwater tank – outdoor use & flushing
1.90 – 2.10
Grey water reuse
2.04 – 2.44
Rainwater tank – outdoor use only
3.00 – 3.20
Net saving
Losses from water system
Reservoir replacement
0.06 – 0.08
Service replacement
0.19 – 0.23
Improved leakage response
1.40 – 1.50
Recycled water
Belmont WWTP
0.08 – 0.10
Urban landscapes
0.50 – 1.10
Industrial reuse
0.65 – 1.65
Direct potable
3.50 – 4.50
Urban dual reticulation
5.00 – 5.20
SUPPLY SIDE OPTIONS
Grahamstown Dam
Increase Transfer Rates through Balickera
pumping
stations
(requires
Stage
2
implementation)
9
0.15 – 0.19
Stage 3 spillway augmentation works
19
0.40 – 0.46
5.5
0.65 – 0.70
5 – 30
0.50 – 1.20
Small
55
0.95 – 1.05
Large
123
1.30 – 3.00
95
1.50 – 3.00
North Stockton Sand beds
Stages 1 and 2
Lostock Dam
Staged development
Tillegra Dam
Desalination plant
Sources: IWRP 2003, p. 45 and p. 64.
25
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Although water demand in not expected to be greater than water supply until 2013, Hunter
Water is pursuing a number of water conservation strategies including water recycling, leak
minimisation and public education campaigns. Hunter Water is also offering residential tank
rebates ranging from $300 to $650. From the measures costed by Hunter, rainwater tanks
(and some leakage minimisation strategies) appear to be among the most expensive water
conservation solutions.
Hunter Water are also selling REFIT kits including a AAA-rated showerhead, trigger nozzle
for a hose and two compact fluorescent light bulbs. It is unclear to what extent these kits are
subsidised if at all.
1.3.2. Financial analysis of water utilities
Revenue And Cost Recovery
In 2004/05, a Hunter resident would be charged $278 for consumption of 250 kL of water –
around eight per cent lower than the Australian average (Hunter Water’s fixed charge was
only $25.37 in 2004/05). It is important to note that Hunter residents also had one of the
lowest consumption figures across Australia at 197 kilolitres per property. Interestingly,
Hunter Water has had a declining block tariff, with usage under 1,000 kilolitres per year
attracting a charge of $1.01/kL and usage over 1,000 kilolitres charged at $0.93/kL. 39
Wastewater charges rely more on the fixed element – the indicative charge for residential
wastewater was $291.85 with over 80 per cent derived from the fixed charge.40
Residential revenue represented 71 per cent of Hunter Water’s total customer revenue,
significantly more than the proportion of water supplied to residential customers (residential
water consumption represented only 55 per cent of combined residential, commercial and
industrial and “other” water supplied by Hunter Water41). A breakdown of revenue sources
is shown in Figure 7.
39
This declining block tariff is to be phased out over the four years from 2005-06.
40
WSAAfacts 2005.
41
Excluding bulk water sales and environmental water.
26
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 7: Hunter Water - 2004/05 Revenue By Customer Group
Wastewater
non-residential
9%
Water
non-residential
20%
Wastewater
residential
40%
Water
residential
31%
Source: Extrapolated from WSAAfacts 2005
Hunter Water has also considered IPART’s recommendation that an inclining block usage
tariff should be applied to houses using more than 400 kilolitres per year. There are factors
that suggest such a pricing structure would achieve much less in the Lower Hunter than
could be expected in Sydney. For instance, only around 10 per cent of houses in the Lower
Hunter use more than 400 kilolitres per year and Hunter Water has reported that households
already have a solid track record of reductions in response to demand management measures.
Average household consumption in the Hunter region is some 20 per cent lower than the
average of other major Australian water authorities and 14 per cent less than the average per
property consumption in Sydney.42
Hunter Water’s revenue over the past six years has been insufficient to recover all cash costs
(including operating, capital investment, taxation, interest and dividend payments), as
demonstrated by the organisation’s increase in net debt from $60 million in 2001/02 to $150
million in 2004/05.43 Increasing debt is not uncommon in industries with a growing
customer base and significant capital expenditure, where investors expect new customers to
provide sufficient revenue to service both debt and shareholder requirements over time.
42
IWRP, p. 7.
43
WSAAfacts 2005
27
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating costs, depreciation and a standard industry return
on the written down replacement cost of assets.44 Hunter Water’s full cost recovery rate for
water (65 per cent) is well below the Australian average. For capital cities, annualised cost
recovery falls between 68 per cent and 84 per cent. Table 8 shows the cost recovery from
Hunter Water customers compared with other Australian cities.
Table 8: 2004/05 Hunter Water Cost Recovery - Water Only
Total annual
revenue/ property1
Total annual
cost/property2
Annualised Cost
Recovery3
Average Australian
Cost Recovery4
297
458
65%
80%
Hunter
Water
Notes: 1. Total revenue per property represents total revenue raised by the organisation (including
customer revenue and Community Service Obligation payments from government)
divided by the total number of properties.
2. Total cost represents the total annual cost of supply, including operating cost,
depreciation and a 6 per cent return on assets. This differs from the Productivity
Commission’s measure of cost recovery, which does not include a return on assets.
3. Hunter Water’s cost recovery has varied between 75 per cent and 83 per cent over the
past six years.
4. Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per
property not reported).
Expenditure
Over the past four years, cash outflows from Hunter Water have averaged $196 million per
annum. Just under 40 per cent of these outflows were expenditure for operations, while
29 per cent of outflow was used for property, plant and equipment (capital investment). On
average, a net $45 million was returned to the State Government each year in the form of:

an average $34 million of dividend payments to the State Government (representing 83
per cent of net profit after tax);

An average $20 million of tax payments to the State Government45; and

an average Community Service Obligation payment of $9 million received from the
State Government.
Table 9 shows Hunter Water’s total cash outlays over the past five years.
44
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
45
Hunter Water makes ‘tax equivalent payments’ to the State government. Tax equivalent payments are
similar to the tax payments made by the private sector, but are paid to the State rather than the
Commonwealth government.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 9: Hunter Water Cash Outflows 2000/01 to 2004/05 ($ million)
2000/011 2001/02 2002/03 2003/04 2004/05
Total
5 Years
%
Operations
54
66
72
75
93
306
39%
Property, plant and
equipment
43
53
50
46
80
228
29%
6
4
8
8
10
31
4%
Tax equivalent payments
17
13
19
25
21
78
10%
Dividends payments
28
30
31
38
36
135
17%
0
0
1
5
0
6
1%
148
166
181
198
239
785
100%
Borrowing costs paid
Other
TOTAL
Notes: 1. Data for 2000/01 are not included in the overall average as they appear inconsistent with later years –
both cash receipts and payments for operations appear to have been revised in consecutive years.
Discrepancies may occur due to rounding.
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and

the financial capacity of the State Government.
Each is examined in turn below.
Ability to recover costs: Hunter Water is regulated by the Independent Pricing and
Regulatory Tribunal (IPART), which uses a building block methodology (i.e., operating,
maintenance and administration costs, depreciation, return on assets and adjustments for tax)
for calculating total revenue requirements for the business. Through this mechanism, Hunter
Water is able to pass on the efficient cost of constructing new water sources or managing
demand. The current price determination by IPART for the period 1 October 2005 to
30 June 2009 saw the usage charge for residential customers for water increase by an
average of 7.9 per cent (including inflation) in 2005/06 and further increases of 6.4 per cent
above inflation have been approved over the remaining years. As noted, Hunter Water
provided large users with a discounted price. This is to be phased out by 2008/09 with the
usage charge for usage above 1,000 kilolitres to equal the rate for usage less than 1,000
kilolitres by 2008/09.
The price rises approved by IPART includes revenue to meet the cost of augmentation of
Grahamstown Dam.
Financial constraints: IPART has indicated that Hunter Water should be able to meet
operating, capital and borrowing repayments and still maintain an overall credit rating of at
least A until 2008/09.46 According to IPART, the NSW Government believes that a BBB
rating is the minimum target rating to ensure financial viability.
46
IPART determination, p. 157
29
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Over the past four years, Hunter Water has taken on an additional $90 million in net debt.
Over the same period, Hunter has made dividend payments of $135 million and tax
equivalent payments just under $80 million. Debt levels remain low and are projected by
IPART to increase to only 30 per cent of the total regulatory asset value,47 compared with the
international industry ‘benchmark’ rate of 60 per cent.48 Hunter Water could afford to
borrow up to a debt level of $500 million before reaching the “benchmark” gearing level of
60 per cent.
The financial capacity of the State Government: Hunter Water’s dividend and tax
payments are included as revenue in the State budget and therefore impact State Government
financial policy and credit rating. The NSW Government has maintained a ‘triple A’
domestic credit rating with Standard & Poor’s and Moody’s since ratings commenced in
1987.49 The net dividend and tax payments from Hunter Water accounted for only
0.1 per cent of total State revenues in 2004/05.50
The net debt position of Hunter Water is not a significant component of the State
Government’s net debt level. The organisation had net debt totalling $150 million in
2004/05, representing one per cent of the net debt reported by the NSW State Government
($11.7 billion).51 IPART projects that Hunter Water’s net debt position will increase to $418
million by 2008/09.52 The impact on the State’s credit rating has not been determined at this
stage.
47
IPART determination, p. 158. 2005/06 regulatory asset base $1,105.9 (p. 70).
48
Sixty per cent gearing has been adopted for the calculation of the Weighted Average Cost of Capital by
IPART, ESC and ERA.
49
NSW Treasury (2005), Treasury Focus Newsletter, March.
50
2004/05 NSW State Government revenue $55,794 million. ABS Catalogue 5512.0, 2004-05 Government
Finance Statistics.
51
ABS Catalogue 5512.0, 2004-05 Government Finance Statistics.
52
IPART Final Determination, p. 158.
30
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Performance
Table 10 shows several key indicators of performance for Hunter Water in 2004/05.
Table 10: Hunter Water Performance Indicators
Performance Indicator
Number of water main breaks per 100 km of
water main
Hunter Water
Australian Average1
42.2
29.9
Infrastructure leakage index (real losses /
unavoidable real losses)
1.7
1.7
Percentage of water recycled
6.2%
8.2%
Number of water quality complaints per 1,000
properties
6.3
4.5
Average connect time to operator (seconds)
Water quality standard
34
ADWG 1996
27.6
See below
Note. 1. Weighted average of Australian organisations appearing in WSAAfacts 2005
The number of main breaks in the Hunter region is significantly higher than the Australian
average.
Hunter Water’s leakage performance was equal to the Australian average, but its average
time to respond to telephone enquiries was above.
In 2004/05 Hunter Water recycled 6.2 per cent of wastewater compared with the Australian
average for urban areas of 8.2 per cent. Hunter is developing a Recycled Water Strategy and
has set a target of 13 per cent reuse by 2007 within their Environmental Management Plan.
Hunter has only slightly above average numbers of water quality complaints. The
Corporation provides water in accordance with the 1996 Australian Drinking Water
Guidelines. Hunter Water met all microbiological and physical-chemical water quality
compliance requirements.
The more recent Australian Drinking Water Guidelines 2004 which focus on a multiple
barrier approach to managing water quality are yet to be implemented and most water
businesses are still under transition to these new arrangements.
1.3.3. Key issues
The analysis highlights the following key issues with regard to water management in the
Hunter region.

In contrast to many other regions in NSW, the Hunter region had good rainfalls in
2004/05, although inflows to storages have not been as strong thus far for the current
year. Hunter Water has also recently completed a major spillway upgrade that increased
sustainable annual yield by more than seven per cent. Hunter Water does not anticipate
demand will exceed supply capacity until around 2013. Therefore, no augmentations of
the water supply system are being considered in the short- to medium-term.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

A review of Hunter Water’s drought management plan is currently being undertaken,
including a review of water restrictions and their trigger points. Installation of an
emergency borefield in North Stockton Sandbeds is the main strategy for meeting
Hunter Water’s supply-side drought contingency measures.

Hunter Water plans to maintain sufficient capacity to ensure the probability of
restrictions at less than 10 per cent, with the duration of restrictions less than five per
cent. Planning is based on recent climate trends, with no allowance made for potential
changes in climate conditions.

In 2004/05, Hunter residents had one of the lowest consumption figures in Australia at
197 kL per property.

In recent years, industrial water use has reduced significantly in the Hunter region due,
in part, to the closure of several large water users. Forecast growth in water use is driven
almost entirely by residential growth.

Although water demand in not expected to be greater than water supply until 2013,
Hunter Water is pursuing a number of water conservation strategies including water
recycling, leak minimisation, and public education campaigns. Hunter Water is also
offering residential tank rebates ranging from $300 to $650. From the measures costed
by Hunter Water, rainwater tanks (and some leakage minimisation strategies) appear to
be among the most expensive water conservation solutions.

Hunter Water’s dividend and tax payments do not represent a significant component of
State Government revenue nor does the Corporation’s net debt represent a significant
proportion of State net debt.

The level of water recycling in the Hunter region is only 6.2 per cent, compared with the
national average of 12 per cent. Hunter Water is developing a Recycled Water Strategy
and has set a target of 13 per cent reuse by 2007 within their Environmental
Management Plan.
32
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
1.4. Case study: Gosford–Wyong
Located between Sydney and Newcastle, Gosford City Council is one of the largest
non-metropolitan water authorities in NSW, serving a population of approximately 160,000.
Gosford and Wyong councils and the NSW Government adopted a joint water supply
scheme to serve Gosford City and Wyong Shire in 1985, expanding the scheme adopted in
1975. As such, responsibility for water management and infrastructure is shared by the
Gosford-Wyong Councils Water Authority (GWCWA), resulting in the Gosford-Wyong
Joint Water Supply System.
The system was intended to service a future Central Coast population of 460,000 and to
supply projected future demand of up to 106 gigalitres per year. Water is harvested from
Wyong River, and Mangrove, Mooney Mooney and Ourimbah creeks, supported by a major
water storage dam on Mangrove Creek. The scheme was to be built in three stages,
however, given slower than expected population growth and decreasing per capita demand
(in 2003, this was half the demand envisaged in 1985), the scheme has developed more
slowly than under the original 1985 plan.
1.4.1. Water availability
Water Supply
The Gosford-Wyong Joint Water Supply System (GWWS) is sourced from four small
coastal streams: Wyong River, Ourimbah Creek, Mooney Mooney Creek and Mangrove
Creek. Drought security is provided by Mangrove Creek Dam (190,000 ML), Mardi Dam
(7,400 ML) and Mooney Mooney Dam (4,600 ML).
While storage levels were around 45 per cent in July 2002, they have reduced to 16 per cent
in October 2006 (see Table 11 and Figure 8). The Central Coast is currently experiencing
the worst drought in 100 years, and water restrictions have been in force since the end of
2002. As storage levels have declined since 2002, water restrictions have increased, with
Level 3 restrictions commencing in June 2006.
Table 11 : Current Water Storages, as at 2 October 2006
Storage
Capacity Full
(ML)
Mangrove Dam
Volume in
Storage (ML)
% Full
Storage Change
(ML) since 2002
190,000
24,954
13.1%
Down 984 ML
Mardi Dam
7,400
5,239
70.8%
Down 4 ML
Mooney Dam
4,600
2,196
47.7
Up 26 ML
202,000
32,389
16.0
Down 324 ML
Total
Source: http://www.gwcwater.nsw.gov.au/frame2.htm accessed 4 October 2006.
33
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 8: Water Restriction Rules and Total Water Storage as at October 2006
Source: http://www.gwcwater.nsw.gov.au/frame2.htm accessed 16 August 2006.
Current Urban Water Allocation
As at July 2003, the NSW Department of Natural Resources has flagged the conversion of
urban water licences to a volumetric basis, which would convert existing GWCWA licences
to a volumetric allocation totalling 47 gigalitres per year. This corresponds to the assessed
safe yield of the existing water supply headworks under licence conditions existing at the
introduction of the Water Management Act 2000 (the Act).
For the traditional demand projection (current population projections with current demand
levels), 47 gigalitres per year is sufficient to meet demand until 2031. Given the baseline
demand projection and expected increases in water efficiency, 47 gigalitres per year may be
sufficient to meet demand as far as 2051. Some uncertainty over this figure exists given the
nature of water sharing plans, which result in availability of less than the full allocation of 47
gigalitres in years of low flow, and therefore the need to harvest and store a larger amount of
water from high flows in wet years.
Water Sharing And System Limits
The amount of water that can be diverted for town water supply depends on the diversion
structures, pumping capacities and water sharing arrangements. A significant proportion of
the flows occurs as flood flows which exceed the capacity of the diversion pumps and cannot
be harvested. A proportion of the remainder is required to pass the GWWS diversion
structures to provide downstream environmental flows, and a proportion is diverted by rural
users.
34
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
The introduction of new water access rules and water sharing plans under the Act will limit
the capacity of the existing water supply headworks. Under the new arrangements, it is
proposed to allocate to water users between 30 per cent and 60 per cent of daily flows when
flows exceed the base flow, depending on existing usage and local environmental conditions.
There is an expectation that where circumstances allow, the long-term objective is to provide
the maximum allocation to the environment. The secure yield of the existing system after
upgrading of peak day capacity at Mardi will be between 35 gigalitres and 47 gigalitres per
annum depending on the precise water access rules to be adopted. It is important to note that
these estimates were made during the review of the water plan in 2003.
As noted earlier, the water supply situation has worsened dramatically since this time and
water storage levels are now at only 16 per cent. A number of emergency solutions have
been examined by the councils, including a connection with Hunter Water and seawater
desalination.
The $27 million connection with Hunter Water is currently being undertaken and could
increase water supply by 27 megalitres per day (up to 10 gigalitres per year). The project is
scheduled for completion by November 2006. The project involves a 19.8 kilometre water
main which will link the Central Coast system with that of the Hunter Region. The
Commonwealth Government will provide $6.6 million towards the project from the
Australian Government Water fund with the remaining funds to be contributed by Wyong
and Gosford Councils and Hunter Water Corporation.
The councils are considering the construction of a permanent seawater desalination plant as
one of the options to help secure their water supplies. The proposed plant would produce
over seven gigalitres per year from seawater, although the councils view this as a last resort
option. A development application has been lodged with the NSW Department of Natural
Resources so that if the desalination plant is required in the future, the necessary paperwork
will already have been completed. A comprehensive environmental impact assessment (EIS)
has also been prepared, to determine the impact of the desalination scheme on the
community and environment.
In addition, a temporary desalination unit has also been proposed, which could be in place in
as little as three months and would be located at Budgewoi Beach south. The unit would be
fed by seawater and would have the capacity to produce 0.7 gigalitres of water a year.
Wyong and Gosford councils are also currently considering a range of other drought
management options available to them, including groundwater access, reducing weir bypass
flows, a temporary weir on Porters creek and a link between lower Mangrove Weir and
Mooney Dam.
Quite apart from the current drought situation, if the new access rules limit the yield at Mardi
dam to 35 gigalitres per year (the lower limit of expected water access rules), there will be
insufficient surface water available to meet growth in Gosford-Wyong as early as 2011,
regardless of the additional surface water system improvements that may be implemented.
Harvesting would then be required from potentially more costly alternative water sources,
either remote surface water sources, roofwater harvesting, water reuse or desalination to
meet projected urban water needs through to 2050.
35
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Population and Tenement Projections
Population projections were made for Gosford City and the Wyong Shire in 2002, which
allow for a serviced population of approximately 464,000 by the year 2051. Newcastle
University has developed a detailed daily demand sequence for use in the WATHNET daily
simulation model. The model varies daily demand according to simulated rainfall and
temperature behaviour on the Central Coast. The average annual demand generated by the
model is consistent with the average annual demand. Average annual demand for all users is
expected to increase from 31 gigalitres in 2001 to 43 gigalitres in 2031, with uncertainty
ranging from around 37 gigalitres to 50 gigalitres, depending on the rainfall. By comparison,
the system is designed with a security buffer of approximately 10 per cent over the expected
average year demand (i.e. 47 gigalitres in 2031).
The water supply/demand balance – as outlined in 2003 – is summarised in Figure 9.
System Demand GL/a
Figure 9 : Supply Demand Balance Through Time – Pre-drought Estimates
Range of
possible water
access rules
Existing
Very Dry Year
Drought Design
Average Year
Very West Year
Source: NSW Department of Commerce, 2003. Development of Further Options for the Gosford
Wyong Joint Water Supply Scheme – Working Paper 1. July, 2003. page 6
1.4.2. Cost of options
Comparison Of Costs
Table 12 shows the comparative costs of the surface water options in terms of annual cost
per kilolitre.
The current access arrangements allow for different levels of water sharing being set
between water users and the environment. Different water sharing rules will imply a
different yield from each option. The yields of each option are shown for two cases - a
60 per cent urban and rural water share and for a 30 per cent urban and rural water share.
The corresponding annual costs per kilolitre are calculated assuming each system is
operating at full capacity.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 12 : Preliminary Comparison of Unit Costs - Annual Cost/Yield at Full Capacity
Source: NSW Department of Commerce (2003) Development of Further Options for the Gosford
Wyong Joint Water Supply Scheme – Working Paper 1, p. 36.
1.4.3. Financial analysis of water utilities
Revenue And Cost Recovery
In 2004/05, Gosford-Wyong residents were charged $190 for consumption of 250 kL of
water.53 Including the fixed charge of $25.37, this Gosford-Wyong resident would pay
12 per cent less than the weighted Australian average. It is important to note that
Gosford-Wyong residents also had one of the lowest consumption figures across Australia at
184 kilolitres per residential property. The fixed wastewater charge was $424.29.54
Residential revenue for water services represented 85 per cent of Gosford-Wyong’s total
customer revenue, slightly more than the actual proportion of water supplied to residential
customers (residential water consumption represented only 81 per cent of combined
residential, commercial and industrial water supplied by Gosford-Wyong55). A breakdown
of revenue sources is shown in Figure 10.
53
Note, however, there is no separate volumetric charge for water and wastewater usage.
54
WSAAfacts 2005
55
Excluding bulk water sales and environmental water.
37
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 10: Gosford Wyong - 2004/05 Revenue By Customer Group
Wastewater nonresidential
8%
Water non-residential
7%
Water residential
33%
Wastewater residential
52%
Source: Extrapolated from WSAAfacts 2005
IPART (2005)56 has set water usage prices for 2006/07 at $1.12/kL (in 2004/05 they were
$0.76) rising to $1.57 (plus CPI) in 2008/09. These prices represent real increases of 18 per
cent each year. IPART noted that the size of the increases reflected the effects of the
drought (storages were less than 18 per cent at the time) and the need to finance necessary
services.
The increased prices will allow financing of:

works to allow transfer of 20ML/day from Hunter Water;

fast-tracking of groundwater projects;

pre-construction work for a desalination plant;

augmentation works for pumping stations and raising Mardi Dam; and

various stormwater, wastewater and renewals works.
The price increases will also allow a better return on assets for the councils.
Separate net debt figures are not provided for Gosford-Wyong to examine a rudimentary
estimate of cost recovery.
One measure of cost recovery is the degree to which the organisation’s annual revenue
recovers the full annualised cost of providing water services. The full annualised cost
includes operating costs, depreciation and a standard industry return on the written down
replacement cost of assets.57 Gosford-Wyong’s full cost recovery rate for water, at
56
IPART (2005) Gosford City Council, Wyong Shire Council - Prices of Water Supply, Wastewater and
Stormwater Services : From 1 July 2006 to 30 June 2009
57
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
38
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
45 per cent, is just over half that of the Australian average and underlines the need for price
increases noted above. Indicatively, for capital cities, annualised cost recovery falls between
68 per cent and 84 per cent. Table 13 shows the cost recovery from Gosford-Wyong
customers compared with other Australian cities.
Table 13: 2004/05 Gosford-Wyong Cost Recovery - Water Only
GosfordWyong
Notes: 1.
2.
3.
4.
Total annual
revenue/ property1
Total annual
cost/property2
Annualised Cost
Recovery3
Average Australian
Cost Recovery4
244
545
45%
80%
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a
6 per cent return on assets. Differs from the Productivity Commission’s measure of cost recovery,
which does not include a return on assets.
Hunter Water’s cost recovery has varied between 75 per cent and 83 per cent over the past six years.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported).
Expenditure
Gosford-Wyong Councils Water Authority does not produce a separate annual report from
its controlling councils.
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and

the financial capacity of the State Government.
Each is examined in turn below.
Ability to recover costs: Gosford-Wyong is regulated by the Independent Pricing and
Regulatory Tribunal (IPART), which uses a building block methodology (i.e., operating,
maintenance and administration costs, depreciation, return on assets and adjustments for tax)
for calculating total revenue requirements for the business. Through this mechanism,
Gosford-Wyong is able to pass on the efficient cost of constructing new water sources or
managing demand. The current price determination by IPART was for the period 1 October
2006 to 30 June 2009. The price rises from this review were discussed above.
As noted, substantial price increases were set by IPART to enable the major works to be
funded.
Financial constraints: IPART has indicated that despite the low rates of return (albeit
improved), the councils should maintain a sound financial position through the price path.
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
39
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
For the purposes of its analysis, IPART believed that a payout ratio of 50 per cent would be
feasible. Under these circumstances, IPART believed the councils would maintain an
investment grade rating of BBB+.58
The financial capacity of the State Government: Gosford-Wyong does not pay tax or
dividends to the State Government.
In terms of the councils, water costs represented 14 per cent of Gosford City Council’s
operating expenses, 10 per cent of its revenues and 15 per cent of its capital expenditure in
2004/05. Water and wastewater revenues totalled around $47 million of total revenues of
$191 million. IPART’s analysis indicated that the necessary revenue required by Gosford
City Council is in excess of $60 million. Similarly for Wyong Council, IPART indicated
that the necessary revenue would exceed $50m by 2008/09. In 2004/05, Wyong received
$34 million from water and sewerage charges out of total Council revenue of $143 million.
Performance
Table 14 shows several key indicators of performance for Gosford-Wyong in 2004/05.
Table 14: Gosford Wyong Performance Indicators
Performance Indicator
Gosford-Wyong
Australian
Average1
Number of water main breaks per 100 km of water main
29.8
29.9
Infrastructure leakage index (real losses / unavoidable real
losses)
0.3
1.7
Percentage of water recycled
0.1%
8.2%
Number of water quality complaints per 1,000 properties
13.4
4.5
Average connect time to operator
n/a
27.6
Water quality standard
ADWG 2004
See below
Notes: 1. Weighted average of Australian organisations appearing in WSAAfacts 2005.
The number of main breaks in the Gosford-Wyong region is close to the Australian average.
In contrast, Gosford-Wyong’s leakage performance was significantly lower than the
Australian average.
In 2004/05 Gosford-Wyong recycled only 0.1 per cent of wastewater compared with the
Australian average of 8.2 per cent.
Gosford-Wyong has almost three times the rate of water quality complaints as the Australian
average. The Authority provides water in accordance with the Australian Drinking Water
Guidelines 2004, focussing on a multiple barrier approach to managing water quality.
Gosford-Wyong met both its microbiological and physical-chemical water quality
compliance requirements.
58
IPART determination, p. 88.
40
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
1.4.4. Key issues
The analysis highlights the following key issues with regard to water management in the
Gosford-Wyong region.

Current water storage levels are critically low. Several proposals are being considered
by the councils to rectify water shortages.

The councils have planned significant expenditure to ensure supply is sufficient to meet
demand, including extending transfers from the Hunter catchment.

Substantial price increases are required to fund capacity and meet future demand.

Water (and wastewater) services represent a substantial element of the councils’
activities and revenues.

The level of water recycling is minimal.

Although the volumetric charge in this region is low, water consumption is also one of
the lowest in Australia.
41
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
2. VICTORIA
2.1. Institutional and governance arrangements
Victoria’s water businesses provide water and wastewater services to customers within 21
geographic regions. Three retail businesses (City West Water, South East Water and Yarra
Valley Water) and one bulk water company (Melbourne Water) service the Melbourne area.
These three retail businesses provide water and wastewater services to households and
businesses within their region and undertake some sewage collection and treatment.
Melbourne Water provides bulk water and sewerage services to the three retailers and a
number of regional businesses and provides drainage services throughout Melbourne.
Fifteen regional urban water businesses provide services throughout regional Victoria.
These businesses serve a number of towns or cities within their region and many are
vertically integrated, being responsible for water storage, treatment and delivery, and
wastewater treatment and disposal. In addition, three rural water businesses overlap the
regional urban areas, providing farm supply, irrigation, stock and domestic supply, and the
wholesale supply of water to regional urban distributors.
The urban water delivery arrangements are summarised in Table 15.
Table 15: Bulk Water and Water Service Providers in Victoria
Area
Name
Services
Institutional
Structure
Melbourne
City West Water
South East Water
Yarra Valley Water
Distribution and retail
State-owned
company
Melbourne Water
Bulkwater, catchment
management, treatment
Statutory
state-owned
Corporation
Regional water authorities
(e.g. Central Highlands Water,
Western Water, Coliban Water)
Bulkwater, treatment,
distribution and retail
Statutory
Authority
Rural water providers (e.g.
Goulburn Murray Water,
Southern Rural Water)
Bulkwater, irrigation,
domestic and stock
supplies
Statutory
Authority
Rural and
regional areas
The Victorian Department of Sustainability and Environment acts as the administrator and
regulator of water licences and water planning in the State. The Essential Services
Commission (ESC) regulates the prices and service standards of water businesses throughout
the State.
42
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
In Victoria, the Our Water Our Future White Paper (released in 2004) sets out a series of
wide ranging initiatives to “enable smarter water use and management across the State.”59
The paper outlines 110 initiatives including repairs to rivers and groundwater systems, water
pricing and other initiatives to encourage water conservation, and improvements to water
allocation and trading systems. The Water (Resource Management) Act 2005 implements
proposals contained in the White Paper, including:

creating an “Environmental Water Reserve” to set aside an explicit share of water for
the environment;

unbundling water entitlements into three components – a water share, a water-use
licence and a delivery share;

turning ‘sales’ water into a separate and tradeable lower reliability water share;

establishing a new water resource management and planning system – featuring
Sustainable Water Strategies, long-term water resource assessments and reviews, and a
clear and certain process for any permanent qualification of water shares;

providing for a single, web-based public water register to be set up and a water registrar
appointed; and

providing for a clear and transparent process for reconfiguring water supply
infrastructure, which embodies community participation.
The White Paper also recognises the important role of Catchment Management Authorities
(CMAs) in the management and delivery of environmental water. CMAs will become the
managers of specific environmental water entitlements that form part of the Environmental
Water Reserve.
Private Sector Participation
The private sector does not provide water services in Victoria. However, the Partnerships
Victoria policy and its predecessor have provided a framework for a whole-of-government
approach to the provision of public infrastructure and related ancillary services through
public-private partnerships. Many public-private partnerships have been conducted in the
water industry, including:

Ballarat North Water Reclamation Plant;

Enviro Altona Wastewater Treatment Plant;

Campaspe Water Reclamation Scheme;

Wodonga Wastewater Treatment Plant;

Ballarat Water Treatment Plant;

Grampians Water Treatment Plant;

Aqua 2000 Water Treatment for the Coliban system;

Coliban Castlemaine Wastewater Project;

Yan Yean Water Treatment Plant;

CHW Small Towns Water Treatment; and
59
Victorian Government (2004), Our Water Our Future White Paper, p. 1.
43
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

Barwon Water Biosolids Management Project (currently at the evaluation stage).
The use of private sector contracts to design and build water infrastructure is common
throughout Victoria. The Melbourne retail businesses retain the management function and
ownership of assets, but contract out most other functions. South East Water, for example,
contracts out operating and maintenance; civil, mechanical and electrical engineering; some
design and project management; and meter reading. Customer service functions, including
billing, have been retained internally by the State authority, however, bill production is also
outsourced to the private sector.
2.2.
Case study: Melbourne
In Melbourne, responsibility for water services is divided between a wholesaler, Melbourne
Water, and three retail water businesses – City West Water (serving approximately 700,000
people), South East Water (approximately 1.4 million people) and Yarra Valley Water
(approximately 1.5 million people).
The three retail businesses are state-owned companies that operate under the Corporations
Act 2001. Melbourne Water operates under the Melbourne Water Corporation Act 1992
which stipulates that Melbourne Water must, as far as practicable, perform its functions in a
manner consistent with sound commercial practice.
2.2.1. Water availability
Water Supply
Sources of water
The majority of water used in Melbourne today comes from rivers and reservoirs (see Table
16). 60
Table 16: Melbourne’s Water Sources
Water source
Volume used
Rivers and reservoirs
435 GL in 2004/2005
474 GL (average from 1990 – 2005)
60
Recycled water
46 GL (most recycled at sewage treatment plants)
Groundwater
up to 33 GL
Rainwater and stormwater
less than 1 GL
The following analysis of water availability is drawn from the Victorian Government publication, Water
Supply-Demand
Strategy
for
Melbourne
2006
–
2055,
Draft
Strategy
and
www.drought.melbournewater.com.au .
44
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Melbourne Water has nine major reservoirs that currently supply Melbourne (not including
Tarago). Water is stored and then delivered to the metropolitan retail water companies,
Western Water and Gippsland Water. Water is also released from the Thomson Dam for
Southern Rural Water's irrigators.
Melbourne Water’s major reservoirs are Thomson Reservoir in Gippsland, and the Upper
Yarra, Maroondah and O’Shannassy Reservoirs in the Yarra catchment. Most of
Melbourne’s water is from uninhabited catchments and requires minimal treatment to meet
drinking water standards. Water is also extracted from the mid Yarra River near Yarra Glen
and transferred into Sugarloaf Reservoir. Water is also sourced from the Wallaby and Silver
Creeks which are part of the Goulburn River catchment.
The Yarra and Thomson Rivers and Wallaby Creek provide an average, reliable supply of
555 gigalitres per year for Melbourne (subject to climate change over time). This will
increase to around 576 gigalitres in 2011 when the Tarago Reservoir is reintroduced to the
Melbourne supply system.
The storage capacity of each of the major water storages is shown in Figure 11.
Figure 11: Melbourne’s Main Water Storages
CAPACITY
(Total usable capacity
1,773 GL)
GL
Source: www.drought.melbournewater.com.au
As part of the Central Region Sustainable Water Strategy, the Government has established a
total average annual cap of 555 GL for urban consumption in Melbourne from the Yarra and
Thomson Rivers and the Silvan and Wallaby Creeks. This includes the granting of bulk
entitlements for an average annual cap of 400 GL per year for urban use from the Yarra
River.
Up to 33 gigalitres per year of groundwater is licensed for use in the greater Melbourne area,
primarily for watering market gardens and golf courses. A deep, saline groundwater storage
has been identified in the Werribee area, but little is currently known about this groundwater
source and further investigation would be required to determine if there are sustainable
volumes available for extraction. This water would also require a level of desalination
before being pumped to the water supply distribution system.
45
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Current Conditions
Melbourne has more wet days than other cities, such as Sydney, but its average annual
rainfall (655 millimetres) is about 40 per cent less than Sydney's (1107 millimetres). Like
other parts of Australia, Melbourne is also affected by El Niño weather patterns and year to
year fluctuations in rainfall, creating droughts that may last a few months or many years.
The capacity of Melbourne’s water supply has increased significantly since the construction
of the Thompson Dam and these dams are currently 45.8 per cent full (as at 3/10/2006),
compared with levels of 80 per cent – 100 per cent in the early to mid 1990s (as shown in
Figure 12).61
Figure 12: Total System Storage Growth since 1960
Source: www.drought.melbournewater.com.au
In response to the low storage levels, the Victorian Government introduced Stage 1
restrictions in 2002. The restrictions were upgraded to Stage 2 in the following year, but all
restrictions were eventually lifted in March 2005. Temporary water restrictions were
replaced in 2005 with five Permanent Water Saving Rules. The Victorian Government
announced on 31 July 2006 that tighter restrictions would not be applied at the current time,
but would be considered for 1 September 2006 if required storage targets were not met by
the end of August 2006.
Supply / Demand Balance
Prior to the introduction of water restrictions in 2002, Melbourne used around 369 litres per
person per day, of which 223 litres per person per day was used for residential purposes
(around 14 per cent below the Australian average at the time). In 2004/05, while Stage 2
restrictions were still in place, residential water use per capita fell by 10 per cent and
commercial and industrial water use fell by nine per cent.62
61
Dam levels available at www.melbournewater.com.au
62
For the years 2001/02 and 2004/05. Source: WSAAfacts 2005
46
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Future Demand
Melbourne’s population is expected to grow to around 4.7 million by 2055, 63 an increase of
approximately 31 per cent. If water consumption per capita returns to the level that occurred
prior to the introduction of restrictions, water demand could be as high as 602 gigalitres per
annum by 2055 - up from approximately 430 gigalitres in 2004/05.
The Victorian Government has released a series of papers outlining the water plans for
Victoria’s Central Region. The final Central Region Sustainable Water Strategy was released
in October 2006 and sets targets to reduce per capita water use across the Central region by
at least 25 per cent by 2015 (compared to the average 1990s use), increasing to 30 per cent
by 2020. The Government’s long term vision is for the residential sector to use about 70 per
cent less water by 2055 than it does today.
To assist in meeting these targets, a new clause of the Victoria Planning provisions (Clause
56) requires developers to undertake water sensitive design for residential subdivisions. This
clause also provides water authorities with the power to mandate dual pipe (water recycling)
systems for areas where they are identified as the best solution for balancing overall supply
and demand.
The Central Region Strategy outlines the potential water shortfalls under a number of climate
scenarios, focussing on two in particular – what the Strategy terms a “medium impact”
climate change scenario and the more extreme scenario in which streamflows continue at the
low levels that have been experienced over the last ten years. Figure 13 shows that inflows
into Thomson Reservoir over the period 1997 to 2004 have fallen by around 34% compared
with preceding years (the reservoir began operation in 1984).
Figure 13 : Inflows into Thomson Reservoir
350,000
1984-1997 Ave 254,000 ML
300,000
1997-2004 Ave 167,000 ML
250,000
200,000
150,000
100,000
50,000
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
19
84
0
Source: www.melbournewater.com.au and MJA analysis
63
Victorian Government (2004). Beyond 5 Million– the Victorian Government’s Population Policy.
47
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Under a medium climate change scenario, the combined supply and demand forecast shows
that, if no further action were taken, Melbourne’s water demand could begin to exceed
reliable supply by 2021. Under the ’10-year’ scenario, water supplies are already below
reliable supply – as demonstrated by current watering bans that are in force.
The Victorian Government’s strategy to address the shortfall in Melbourne prior to 2015
includes:

accelerated conservation and efficiency programs for homes, businesses and within the
distribution system, including maintaining existing water savings – to start immediately
(79,000 ML by 2015);

additional local reuse and recycling initiatives (at least 6,200 ML by 2015);

investment in irrigation system efficiencies in the Yarra basin by 2010 (1,500 ML);

the existing infrastructure which connects Tarago Reservoir to the Melbourne water
supply system will be reintroduced in 2010. This infrastructure was taken out of the
system in 1994 due to water quality issues. Before reintroducing Tarago Reservoir, a
water treatment plant will be built to improve water quality (up to 21,000 ML);

upgrade the Eastern Treatment Plant to Class A standard by 2012;

business cases for Eastern Water Recycling Proposal, desalination and stormwater
options to enable decision and construction by 2015. The Eastern Water Recycling
Proposal involves Class A recycled water from Melbourne’s Eastern Treatment Plant
being piped to the Latrobe Valley for use in power generation. In addition to providing
secure water for industry to grow in the Latrobe Valley, this proposal would free up
139,000 ML of entitlements to water that could be used for environmental flows and
urban use across Gippsland and Melbourne. (80,000 ML initially);
The potential shortfall between water supply and demand is shown graphically in Figure 14.
Figure 14: Melbourne’s Potential Supply/Demand Shortfall
Source: Central Region Sustainable water Strategy
48
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Further large scale water supply opportunities include desalination and potential
interconnection between water supply schemes.
The Central Region Strategy notes that there are few ideal locations for desalination around
Melbourne, however the Strategy states (p. 66) “While the Government will not immediately
implement large scale seawater desalination projects, it has not been ruled out as a supply
option to meet future water needs for Melbourne.”
The Central Region Strategy does not countenance the possibility that large scale water
supplies for Melbourne could be sourced from rural areas, however a number of supplies
from Melbourne to other areas are foreshadowed in the report. The interconnections that
have been considered are shown in Figure 15 below.
Figure 15: Existing and possible interconnections in the Central Region Sustainable Water
Strategy
Source: Central Region Sustainable Water Strategy
A Melbourne–Geelong interconnection will be investigated immediately as a contingency
option to provide additional water to Geelong. Furthermore, it is possible that Westernport
will also need to connect to Melbourne in order to supplement its supplies.
Cost Of Options
Financial considerations are one element of a complete economic, social and environmental
analysis of proposed options for water management. Table 17 provides the cost of various
options examined in the Draft Water Supply-Demand Strategy for Melbourne. It is
important to clarify that the cost of water supply-demand options presented in the Victorian
Government’s draft Central Region Sustainable Water Strategy seems to have been
calculated using a different levelised cost methodology than other Australian States (see
note 2 to Table 17). Therefore, unit cost results are unlikely to be comparable with similar
options proposed by other jurisdictions which are presented elsewhere in this report.
49
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 17: Cost of Water Supply / Demand Options
Option
Total Water Supplied /
Saved
by 2055 (GL pa)1
Cost / Kilolitre
($/kL)2
Water efficient showerheads
18
<$0.05/kL
Large commercial water users
9
<$0.05/kL
1.2+
$0.05-$0.15/kL
2
$0.15-$0.25/kL
Water efficient evaporative air conditioners
4.5
$0.15-$0.25/kL
Blue Rock Lake Interconnection
20
$0.25-$0.35/kL
Water efficient washing machines
16
$0.25-$0.35/kL
Local water sources (i.e., capture of
rainwater, stormwater and recycled water)
5+
>$0.95/kL
100
$0.25-$0.35/kL
15-45
$0.35/kL-$0.45/kL
Unlimited
$0.55/kL-$0.65/kL
50
$0.55/kL-$0.65/kL
Unknown
Unknown
Investing in irrigation efficiencies around
Melbourne
Reduce water leaks and wastage
Potential long term supplies
Recycled water (for drinking)
Stormwater (for drinking)
Desalination
Eastern Water Recycling Proposal
Groundwater
Notes:
1.
Victorian Government, Water Supply-Demand Strategy for Melbourne 2006 – 2055, Draft Strategy.
2.
Victorian Government, Central Region Sustainable Water Strategy – Draft for Community Comment.
Costs have been calculated based on the Net Present Cost (NPC) for capital expenditure + NPC for option
operation divided by the 50-year cumulative volume of water from the option. It does not appear that the
volume of water has been discounted, which is the more common method of calculating levelised costs and
may render these results incomparable with the results from other States.
Water efficiencies related to demand management play a central role in the Melbourne water
strategy. Unlike other cities, such as Sydney and Perth, Melbourne appears to have a
significant existing buffer between water supply and demand and even without planned
demand management measures, it is anticipated that intervention would only be required
after 2021 (assuming a medium climate change scenario). The proposed demand
management and water efficiency measures would extend this timing until 2030.
Selected demand management options appear significantly less costly than many other
options examined in the Water Plan. It is unclear which costs have been included in the
calculation of demand management costs. In some cases, regulatory requirements for new
water efficiency standards may avoid the cost of augmenting water sources, but increase the
cost burden to developers, appliance manufacturers or customers. To analyse options from
the standpoint of all stakeholders, demand management costs should include the incremental
costs to business and the community in addition to the costs to the utility, e.g. the additional
compliance costs for appliance manufacturers.
50
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
A comprehensive review of options should examine the risks associated with each project
(such as yield uncertainty, impact of climate scenarios and construction risk) in addition to
the economic, social and environmental consequences.
2.2.2. Financial analysis of water utilities
Revenue And Cost Recovery
In 2004/05, South East Water and Yarra Valley Water charged the lowest average residential
water price of any Australian capital city ($241 and $255 respectively for 250 kilolitres).64
City West Water’s residential charges were marginally above average ($292 for 250
kilolitres). All three organisations charged residents less for wastewater than other capital
cities, with City West Water charging the least (South East Water $303, Yarra Valley $286,
City West Water $245).
The revenue from the two larger retailers (South East and Yarra Valley) is dominated by
residential revenue (71 per cent and 75 per cent respectively). City West Water still has a
substantial residential revenue base (60 per cent), but also services a large number of
commercial and industrial customers in Melbourne’s Central Business District and inner and
western suburbs. A breakdown of revenue sources is shown in Figure 16.
Figure 16: Melbourne Retail Companies - 2004/05 Revenue By Customer Group
100%
80%
Wastew ater non-residential
60%
Water non-residential
Wastew ater residential
40%
Water residential
20%
0%
City West
Water
South East
Water
Yarra Valley
Water
Combined, the revenue from Melbourne’s water businesses over the past five years has
almost been sufficient to recover all cash costs (including operating, capital investment,
taxation, interest and dividend payments), as demonstrated by the only marginal increase in
combined net debt from $2.2 billion to $2.4 billion over the period.65 Over the period, the
64
WSAAfacts 2005
65
WSAAfacts 2005
51
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
debt levels of the retail companies rose between 19 per cent and 28 per cent, while
Melbourne Water’s debt fell by around five per cent.
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating costs, depreciation and a standard industry return
on the written down replacement cost of assets.66 In 2004/05, Melbourne Water recovered
only half of full annualised costs, however, the three retail companies recorded the highest
full cost recovery of any capital city in Australia, ranging between 89 per cent and 92 per
cent. Table 18 shows the full cost recovery from Melbourne customers compared with the
average of other Australian cities.
Table 18: 2004/05 Melbourne Cost Recovery (Water Only)
Revenue/
property1
Full annualised
cost/property2
Annualised Full
Cost Recovery
(%)
Average
Australian Cost
Recovery3
Melbourne Water
107
210
51%
80%
City West Water
371
419
89%
80%
South East Water
252
273
92%
80%
Yarra Valley Water
265
290
91%
80%
Consolidated4
281
412
68%
80%
Notes: 1.
Revenue per property represents total annual revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
2.
Full annualised cost represents the total annual cost of supply, including operating cost, depreciation
and a 6 per cent return on assets. See footnote 17 for further information. Differs from the
Productivity Commission’s measure of cost recovery, which does not include a return on assets.
3.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported).
4.
Consolidated revenue represents weighted average retail revenue (Melbourne Water revenue
excluded to avoid double counting). Consolidated cost/property equals weighted average retail cost
plus the average loss per property (cost/property minus revenue/property) to represent additional cost
not captured in bulkwater charges to retailers.
Melbourne is one of the lowest cost water providers in Australia, with an average cost per
property of $412 compared with the Australian weighted average of $495 per property (of
the organisations listed in WSAAfacts 2005 only Hobart was less expensive at $312 per
property).
66
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
52
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Expenditure
Over the past five years, cash outflows from the three Melbourne retail companies have
averaged $1 billion per annum (including payments to Melbourne Water). Just over 57 per
cent of these outflows were expenditure for operations, while 15 per cent of outflow was
used for property, plant and equipment (capital investment). Treating Melbourne Water
capital expenditure as a capital rather than as an operating expense for the Melbourne
retailers would increase capital investment to 28 per cent of total outflows.67 On average, a
net $275 million was returned to the State Government each year in the form of:

an average $160 million of dividend payments to the State Government from the three
retail companies and $91 million from Melbourne Water (representing a reported 74 per
cent of combined net profit after tax);68

an average $49 million of tax payments to the State Government 69 from the three
retailers and $20 million from Melbourne Water; and

the retail businesses are reimbursed for the value of concessions provided to pensioners
and others, and for the administration of the concession schemes. These figures were
not reported separately in some prior years, but total around $45 million per year.70
Table 19 shows the three retail companies’ total cash outlays over the past five years and
Table 20, those of Melbourne Water.
Table 19: Melbourne’s Three Retail Companies Combined - Cash Outflows 2000/01 to 2004/05
2000/01 2001/02 2002/03 2003/04 2004/05
Total
5 Years
%
Operations
Property, plant and equipment
Borrowing costs paid
Tax equivalent payments
Dividends payments
Other
522
115
64
34
172
11
540
114
63
47
157
0
569
129
64
58
204
-
588
174
67
63
144
0
633
234
74
44
121
-
2,852
766
331
246
798
11
57%
15%
7%
5%
16%
0%
TOTAL
918
921
1,024
1,036
1,105
5,004
100%
Note: Discrepancies may occur due to rounding
67
Purchases of water from Melbourne Water are regarded as operating expenditure. Melbourne Water
invested an average of $128 million per year over the period (compared with average cash operating
expenditure of $311 million per year).
68
Based on dividend payout ratios for 2000/01 to 20045/05 reported in WSAAfacts 2005.
69
Melbourne Water and the retail companies make “tax equivalent payments” to the State Government. Tax
equivalent payments are similar to the tax payments made by the private sector, but are paid to the State
rather than the Commonwealth Government.
70
Productivity Commission (2005) Financial Performance of Government Trading Enterprises 1999-00 to
2003-04 and water business Annual Reports.
53
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 20: Melbourne Water Cash Outflows 2000/01 to 2004/05
2000/01 2001/02 2002/03 2003/04 2004/05
Total
5 Years
%
Operations
Property, plant and equipment
Borrowing costs paid
Tax equivalent payments
Dividends payments
Other
138
113
78
7
120
21
181
84
74
8
99
49
186
115
72
24
99
23
203
158
76
39
96
-
225
166
78
23
41
13
933
638
378
100
455
106
36%
24%
14%
4%
17%
4%
TOTAL
478
494
520
571
546
2,609
100%
Note: Discrepancies may occur due to rounding.
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and

the financial capacity of the State Government.
Each is examined in turn below.
Ability to recover costs: Melbourne water businesses are regulated by the Essential
Services Commission (ESC), which uses a building block methodology (i.e., operating,
maintenance and administration costs, depreciation, return on assets and adjustments for tax)
for calculating total revenue requirements for the business. Through this mechanism
Melbourne water businesses are able to pass on the efficient cost of constructing new water
sources or managing demand. The current price determination by ESC will see customer
charges for water, wastewater and stormwater increase between 1.8 per cent and 2.2 per cent
above inflation (on average) over the period 2005/06 to 2007/08. A tiered pricing system for
domestic water customers was also introduced by the Victorian Government on 1 October
2004 to encourage water conservation.
Financial constraints: Melbourne water businesses have strong balance sheets and steady
income streams. Interest cover and other indicators of financial capacity indicate no signs of
financial distress.71 Based on advice provided to the Minister by the ESC, the prices outlined
in the current determination should ensure that Melbourne Water and the three retail
companies are able to meet operating, capital and borrowing repayments and still have cash
flows consistent with maintaining a BBB or better credit rating until at least 2007/08. 72 (The
ESC regards it as desirable to ensure that businesses are financially viable and that cash
flows are consistent with at least a BBB credit rating.)
Over the past five years, Melbourne Water and the retail businesses have taken on relatively
little additional debt between them (only $0.2 billion combined). Despite this, $1.6 billion
71
In 2003/04, the organisations had debt to total assets ratios between 28.1 – 39.3 per cent, interest cover
between 3.3 – 9.5 times (EBIT/gross interest expense) and current ratio between 12 – 44 per cent.
Productivity Commission (2005) Financial Performance of Government Trading Enterprises 1999-00 to
2003-04.
72
IPART determination, p. 133.
54
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
has been returned to the State Government (i.e., dividends plus tax payments). Debt levels
remain low at 25 per cent to 40 per cent of the total regulatory asset value, 73 compared with
the international industry ‘benchmark’ rate of 60 per cent.74 Melbourne Water and the three
retail businesses could afford to borrow a further $2.4 billion between them before reaching
the ‘benchmark’ gearing level of 60 per cent.
The financial capacity of the State Government: The dividend and tax payments from
Melbourne Water and the three retail companies are included as revenue in the State budget
and therefore impact on the State Government’s financial policy and credit rating. The
Victorian Government has maintained a ‘triple A’ domestic credit rating with Standard &
Poor’s and Moody’s since 1998.75 The net dividend and tax payments from the Melbourne
water businesses accounted for only 0.6 per cent of total State revenues in 2004/05.76
By contrast with State revenues, the net debt positions of the water businesses have a
significantly greater impact on the State Government’s overall net debt level. The water
businesses had net debt totalling $2.4 billion in 2004/05. This compares with total State
Government borrowings of $21.4 billion, however owing to significant offsetting assets
(investments, loans or placements) the State Government’s net debt was a negative $11.7
billion in 2004/05.77 Melbourne water businesses are expected to spend an additional $1.25
billion in capital expenditure over the period 2005/06 and 2007/08. The impact of water
expenditure on the State’s credit rating has not been determined at this stage, but is not
expected to be significant.
Performance
Table 21 shows several key indicators of performance for the Melbourne water businesses in
2004/05.
73
IPART determination, p. 146 and p. 133. 2005/06 regulatory asset base $8,311m and $1,040m respectively
(p. 70).
74
Sixty per cent gearing has been adopted for the calculation of the Weighted Average Cost of Capital by
IPART, ESC and ERA.
75
Standard and Poor’s (2004) Victoria (State of), RatingsDirect Australia and New Zealand, 9 August, p. 3
and Standard and Poor’s (2006) Victoria’s ‘AAA’ Rating: A Comparative Study of Financial and Economic
Performance.
76
2004/05 Victorian State Government revenue $35,548 million. ABS Catalogue 5512.0, 2004-05
Government Finance Statistics.
77
ABS Catalogue 5512.0, 2004-05 Government Finance Statistics.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 21: Melbourne Performance Indicators
Performance Indicator
Number of water main breaks per 100
km of water main
City West
Water
South East Yarra Valley Melbourne Australian
Water
Water
Water
Average1
65.9
22.7
41.4
9.3
29.9
Infrastructure leakage index (real losses
/ unavoidable real losses)
1.2
1.0
1.4
n.a
1.7
Percentage of water recycled
n.a.
17.9%
Number of water quality complaints per
1,000 properties
1.3
1.8
Average connect time to operator
(seconds)
Water quality standard
15
25
2.2%
11.3%
8.2%
6.5
n.a.
4.5
29.8
n.a.
27.6
 Safe Drinking Water Act (2003) 
See below
Notes: 1. Weighted average of Australian organisations appearing in WSAAfacts 2005.
The number of main breaks appears high for two of the three retail organisations, however,
when combined with Melbourne Water, the consolidated result is below the Australian
average at 15.6 breaks per 100 km.
Melbourne’s leakage performance was better than the Australian average. While City
West’s average time to respond to telephone enquiries was well below the Australian
average, the other two retailers were little better and slightly worse.
In 2004/05 Melbourne Water (which collects 92 per cent of Melbourne’s wastewater)
recycled 11.3 per cent of wastewater, considerably higher than the Australian average of
8.2 per cent. Consolidated across the retailers and Melbourne Water, 11.6% is recycled.
This would be significantly increased by the Eastern Water Recycling Proposal, which is
currently being examined by the State Government, which would supply up to 115 gigalitres
per year. The State Government has set a water recycling target of 20 per cent for
Melbourne by 2010.78
Melbourne has comparatively few water quality complaints and utilities provide water in
accordance with the Victorian Safe Drinking Water Act (2003). All Melbourne providers met
their microbiological and physical-chemical water quality compliance requirements.
2.2.3. Key issues
The analysis highlights the following key issues with regard to water management in
Melbourne.

The recently released Central Region Sustainable Water Strategy outlines the potential
water shortfalls under a number of climate scenarios, focussing on two in particular –
what the Strategy terms a “medium impact” climate change scenario and the more
extreme scenario in which streamflows continue at the low levels that have been
experienced over the last ten years.
78
Victorian Government, Central Region Sustainable Water Strategy— Draft for Community Comment, p. 55.
56
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

The Victorian Government’s water supply–demand strategy for Melbourne estimates
that, under a ’10 year scenario’, Melbourne will face a shortfall of 109 GL by 2015.

A number of initiatives have been proposed to be implemented immediately to improve
water supplies including accelerated conservation and efficiency programs, local
recycling initiatives, reconnection of the Tarago Reservoir and preparation for the
Eastern Water Recycling initiative.

Melbourne water businesses have no immediate cash constraints. Dividends and tax paid
to the State Government amounted to $1.6 billion over the past five years (more than
double the return from the Sydney water businesses); however, the organisations remain
in a strong financial position and could effectively borrow up to an additional $2.4
billion before reaching the international ‘benchmark’ level of 60 per cent debt to total
assets.

Melbourne is one of the lowest cost water providers in Australia, potentially due to
factors such as the density of development, access to significant surface water sources,
and the excellent condition of its catchments (implying a low cost for water treatment).
Due to the low prices charged to customers, the Melbourne water businesses also have
the lowest full cost recovery rate of any Australian capital city.

The dividend and tax payments made by the Melbourne water businesses accounted for
only 0.6 per cent of State revenue in 2004/05. The net debt of the four organisations
totalled $2.4 billion compared with the negative State net debt position of $11.7 billion.

The cost of water supply–demand options for the future, presented in the Victorian
Government’s water strategy (demand management, recycling, desalination), appear to
be calculated using a different levelised cost methodology than other Australian state or
territory. Therefore, results cannot be compared with similar options elsewhere.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
3.
3.1.
QUEENSLAND
Institutional and governance arrangements
In Queensland, bulk water supply is provided in a number of regions by corporatised entities
of the State Government. These major bulk water suppliers include:

the South East Queensland Water Corporation Limited (SEQWater);

SunWater;

Gold Coast Water (GCW);

Redlands Water & Waste (RWW);

Gladstone Area Water Board (GAWB); and

Fitzroy River Water (FRW).
SEQWater is the major supplier of untreated water in bulk to local governments and
industries in the South East Queensland (SEQ) region, through ownership of Wivenhoe,
Somerset and North Pine dams. SEQWater is a public company owned by the Queensland
Government (20 per cent), Brisbane City Council (BCC) (45 per cent), and eleven other
local governments in SEQ (35 per cent). SEQWater services 18 Local Government Areas
(LGAs), including Beaudesert, Boonah, Brisbane, Caboolture, Caloundra, Esk, Gatton, Gold
Coast, Ipswich, Kilcoy, Laidley, Logan, Maroochy, Noosa, Pine Rivers, Redcliffe, Redland
and Toowoomba.
SunWater is a Queensland government-owned corporation. It owns and operates a regional
network of water supply infrastructure throughout regional Queensland which supports
irrigated agriculture, mining, power generation, industrial and urban development.
SunWater's water storage and distribution infrastructure includes 26 major dams, 81 weirs
and barrages, 72 major pumping stations and more than 2,500 kilometres of pipelines and
open channels. SunWater supplies approximately 40 per cent of the water used
commercially in Queensland.
Gladstone Area Water Board operates as a commercialised statutory authority with
responsibility for water management and bulk supplies. It owns and operates Awoonga Dam
on the Boyne River in Calliope Shire along with a network of delivery pipelines, water
treatment plants and other bulk water distribution infrastructure in Gladstone City and
Calliope Shire in Central Queensland.
Fitzroy River Water supplies bulk water to Livingstone and Fitzroy Shires and water and
wastewater services to 60,000 Rockhampton residents. It is a commercialised business unit
of the Rockhampton City Council.
In towns and cities, water is supplied to households and businesses by 125 local
governments. Some councils operate standalone water supply systems, while others purchase
water from one of the bulk water service providers. Councils typically operate the delivery
network and, in many cases, water treatment infrastructure. Some of the larger council
operations include:
58
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

Brisbane Water, a commercialised business unit of the Brisbane City Council (BCC),
provides infrastructure to treat and deliver water purchased from SEQWater;

Gold Coast Water is a Directorate of the Gold Coast City Council (GCCC). The
northern part of the Gold Coast is supplied by SEQWater while the remainder of the
Gold Coast mainly relies on supplies from Hinze Dam and Little Nerang Dam, which
are owned by Gold Coast City Council;

Redland Water and Waste is a commercial business unit of Redland Shire Council. In
Redland, water is sourced from Leslie Harrison Dam on Tingalpa Creek and North
Stradbroke Island.
The Queensland Government oversees a planning system that is designed to facilitate
sufficient supply – through catchment planning, providing allocations of water to
consumptive use and environmental requirements.
While a number of State agencies share a variety of roles for water policy, planning
regulation and management is the responsibility of the Natural Resources, Mines and Water
(NRMW). NRMW has the responsibility for establishing Water Resource Plans (WRPs)
under the Water Act that broadly allocate water between environmental and consumptive
uses. NRMW also has responsibility for the broad regulatory oversight of water service
providers in terms of system performance, dam safety, water quality and maintenance of
minimum environmental flows.
The Environment Protection Agency (EPA) has responsibility for water recycling as well as
setting the legislative framework and licensing businesses for water quality. The Department
of Local Government and Planning assists councils with their water and sewerage
infrastructure, as well as through planning and building requirements, such as water
efficiency standards for new housing.
While the State Government has broad responsibilities for water resources planning,
responsibility for much of the infrastructure planning lies with the actual service providers
(e.g. SunWater, SEQWater and Brisbane Water). Storage and major water distribution
infrastructure is owned by a mix of SEQWater and local government service providers,
while reticulation infrastructure is generally owned by local government infrastructure
providers.
With regard to water pricing, the Queensland Competition Authority (QCA) oversees the
pricing practices of declared government monopolies or simply monitors the prices charged
by them when directed by the Ministers. To date, only three investigations have been
referred to the QCA: the Burdekin Haughton Water Supply Scheme and two on the
Gladstone Area Water Board. The QCA also has responsibility for assessing whether local
governments are implementing competition reforms effectively and appropriately and, based
on that assessment, providing recommendations on payments to local governments.
3.2. Case study : SEQWater
In South East Queensland (SEQ), there has traditionally been a degree of separation of
responsibilities for water supply planning, managing bulkwater infrastructure and managing
59
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
the reticulation of services to customers. An overview of this situation is provided in Table
22.
Table 22: Overview of operation and ownership in Brisbane and the Gold Coast
Brisbane
Gold Coast
Infrastructure
Operators
Owners
Operators
Owners
Storage (dams)
SEQWater
Queensland
Government and
Local
Governments
(incl. BCC and
GCCC)
SEQWater and
GCW
Queensland
Government and
Local
Governments
(incl. BCC and
GCCC)
Treatment/
transport
BW
BCC
GCW
GCCC
Reticulation
BW
BCC
GCW
GCCC
The current drought has exacerbated and highlighted the apparent failings in the coordination
of resource and infrastructure planning and the investment in water supply infrastructure in
SEQ in the past 12-18 months. In response to this problem, the State Government, in
conjunction with local governments is developing a strategy to improve the coordination of
water management across the region. This includes the SEQ Regional Water Supply
Strategy and the establishment of the Queensland Water Commission.
The purpose of the Water Commission is to provide advice to government on achieving
water security through supply options and demand management measures; preparing and
enforcing operating rules for the water supply system; and facilitating new water
infrastructure as directed. Fundamental actions in response to the water shortages in SEQ
include the potential establishment of new dams on the Logan/Albert River (42 gigalitres per
annum by 2011) and Mary River (up to 150 gigalitres per annum in the longer term). In
addition, approximately $330 million has been provided for the Western Corridor Recycling
Scheme (WCRS) designed to supply recycled water to industry in the expanding western
corridor.
Regional institutional and coordination arrangements are rapidly evolving, and changes are
occurring on almost a weekly basis.
Supply / Demand Balance
SEQ is currently experiencing its worst drought in over 100 years. The combined
capacity of the dams in the region has fallen below 30 per cent and without
significant rainfall is expected to fall even further. Most SEQ local governments are
now on level three water restrictions, which ban garden watering with hose pipes or sprinkler
systems, with more stringent restrictions likely in coming months.
The figure below illustrates current and forecast water levels in the Wivenhoe, and North
Pine Dams up to June 2010. The forecast is based on a scenario where inflow into the dams
continues at the levels experienced between April 2004 and March 2005.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
The prominent numbers on the chart indicate the implementation of different drought
contingency options, some of which we discuss below. If no drought contingency measures
are developed and use levels remain constant (blue line), then the Wivenhoe, Somerset and
North Pine dams will be almost empty by September 2008. The yellow line depicts the
situation with all 13 proposed options implemented (timing shown in Figure 17). The green
line is without (number 10) the Western Corridor Recycling Water Scheme.
To put further strain on water supplies, SEQ (Brisbane and Gold Coast areas in particular) is
also Australia’s fastest growing metropolitan region and this area is predicted to continue to
grow strongly from its 2006 population of 2.8 million to a 2026 population of 3.7 million.79
This growth has placed additional strain on existing water supplies and resulted in the
adoption of an extensive ‘drought response strategy’ (DRS) in the region.
The drought response strategy includes a three-tier approach to reducing water usage
including:

implementation of water restrictions (i.e., from May 2005);

a widespread marketing campaign targeting water savings; and

fast tracking, or bringing forward, the implementation of a number of long-term demand
management and water saving programs (i.e., subsidy schemes for retro-fit of water
efficient appliances, rainwater tanks, home water efficiency audits, leakage reduction
programs).
The drought response strategy includes the development of additional supplies, including:

the Western Corridor Recycling Scheme;

Tugun desalinisation plant; and

bore water schemes.
79
Department of Local Government, Planning, Sport and Recreation, Planning Information and Forecasting
Unit (2003) Queensland's Future Population 2003 Edition,
61
RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 17: Forecast of Dam levels
Source: http://mp3.news.com.au/bcm/water/water.html
Notes: the options are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Recommission Lake Manchester (30 ML/d) and Enoggera Reservoir (5 MU/d)
Tarong Power Station redirected to Bundooma Dem (volume incl. in 9 below)
Regional system pressure reduction end leakage management (3 Stages, each 20 ML/d)
WCRWS, recycled water to Swanbank Power Station (20 ML/d)
Indoor and non-residential water efficiency (2 Stages, each 10 ML/d)
Brisbane Aquifer Project (20 ML/d)
Cedar Grove Weir (10 ML/d)
Major Source Addition - Gold Coast regional desalination plant (including Southern Regional Water
Pipeline) (110 ML/d)
WCRWS, recycled water to Tarong and Tarong North Power Stations (75 ML/d)
Major Source Addition (treated sewerage from WCRWS, water harvesting or other source opportunity) (110
ML/d)
System interconnect on opportunities - Redlands to Brisbane and Sunshine Coast to Caboolture (30 ML/d)
Recycled water substitution to industries - Brisbane CC to Trade Coast, Pine Rivers SC, Caboolture SC
opportunities (20 ML/d)
Major Source Addition (2nd desalination plan, water harvesting or other source opportunity) (120 ML/d)
The first stage of the Western Corridor Recycled Water Scheme will provide recycled water
to Tarong and Swanbank power stations and local industry. The second stage of the project
aims to deliver remaining water supplies to industry and the potential to deliver farmers in
the Lockyer Valley. The scheme has the potential to use recycled water as a replacement for
up to 110 megalitres per day, or more than 40 gigalitres per annum, of fresh water from the
region’s dams.
For the areas supplied by SEQWater including Brisbane and the Gold Coast, Level 1
restrictions (which relate to voluntary reduction outdoor use) were introduced in May 2005.
Following continuing poor rainfall, level three restrictions are currently in place and if these
conditions continue, level four restrictions may be introduced in coming months.80
80
See Q&A on http://www.waterforever.com.au/home/inner.asp?ID=131&pnav=68&onav=68
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
3.3. Case study : Brisbane Water
Brisbane Water is a commercialised business unit of the BCC providing water and
wastewater services to almost one million consumers. It manages:

49 water reservoirs, three water treatment plants, 93 water pumping stations, 11
wastewater treatment plants and 199 wastewater pumping stations

treatment and supply of over 170,000 megalitres per year (ML/yr) of drinking water to
Brisbane;

treatment of over 115,000 ML/yr of wastewater (including trade waste).
Water Use
In 2005, Brisbane used on average 417 litres of water per person per day.81 The introduction
of Level 3 restrictions in June 2006 resulted in a 27 per cent decline in use82 relative to the
pre-drought period.
Revenue And Cost Recovery
In 2004/05, Brisbane residents were charged $317.50 for 250 kilolitres of water.83
The charge for managing residential wastewater in Brisbane was only marginally higher than
the Australian average (Brisbane Water charged a flat annual fee of $347.80).
Residential revenue from water services represented 67 per cent of Brisbane Water’s total
customer revenue, which is slightly higher than the proportion of water used by residential
customers compared with total consumption (commercial, industrial and other nonresidential customers represented 57 per cent of Brisbane’s total water use). A breakdown of
revenue sources is shown in Figure 18.
81
Based on ABS Regional Population Growth Cat. No. 3218.0 (population statistics) and SEQWater.
82
Water savings targets (expressed as a percentage of water-use under the BAU scenario) have been set for
each water-restriction level. However, these targets (and the actual reductions in water use reported by water
suppliers and Governments) relate to the overall reduction in water use. That is, the reductions in water use
arising from the combined effect of each of the three main water savings measures outlined above.
83
WSAAfacts 2005.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 18: Brisbane Water - 2004/05 Revenue By Customer Group
Brisbane Water
Wastew ater nonresidential
18%
Water nonresidential
15%
Water residential
33%
Wastew ater
residential
34%
Source: Extrapolated from WSAAfacts 2005
Over the past five years, BW’s revenue has been sufficient to recover all cash costs
(including operating, capital investment, taxation, interest and dividend payments), as
demonstrated by the organisation’s decrease in net debt from $0.47 billion to $0.38 billion
over the period.84
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating costs, depreciation and a standard industry return
on assets. Brisbane Water had the highest annualised cost recovery for water (84 per cent) of
any capital city. Annualised cost recovery for all capital cities falls between 68 per cent and
84 per cent. Table 23 shows the cost recovery from Brisbane.
Table 23: 2004/05 Brisbane Cost Recovery (Water Only)
Brisbane Water
Total annual
revenue/property1
Total annual
cost/property2
Annualised
Cost Recovery
Average Cost
Recovery3
437
522
84%
80%
Source: WSAAfacts 2005
Notes: 1.
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
2.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a 6%
return on assets. Differs from the Productivity Commission’s measure of cost recovery, which does
not include a return on assets.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported). Excludes SCA and Melbourne Water to avoid double counting.
3.
84
WSAAfacts 2005.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Expenditure
Over the past two years, Brisbane Water’s total expenditure has been around $0.5 billion.85
The organisation has consistently generated a positive result leading to positive tax
contributions and dividend payments.
Table 24 shows Brisbane Water’s outlays in the form of dividend and taxes over the past five
years.
Table 24: Brisbane Water Dividends and Taxes 2000/01 to 2004/05 ($ ‘000)
2000/01
2001/02
2002/03
2003/04 2004/05
Brisbane Water
Tax equivalent payments
26,148
22,306
17,754
14,312
16,443
Dividends payments
43,455
41,600
33,139
26,712
30,706
Source: WSAAfacts 2005
Constraints To Investment
Investment in the water industry can be constrained by the ability to recover costs and
financial capacity. In the following, we examine these issues for Brisbane.
Brisbane Water is unlike many other Australian water utilities as the prices it charges are not
regulated using a building block methodology (i.e., operating cost, depreciation and a return
on assets) for calculating total revenue requirements for the business. It is therefore not clear
how Brisbane Water will pass on the cost of constructing new water sources or managing
demand. There is, however, a range of methods that the cost of the Western Corridor
Recycling Water Scheme (WCRWS) could be allocated. For example:

apportioning the total costs of the WCRWS across all customers utilising bulk water
from the Wivenhoe Somerset North Pine Dams system;

apportioning the total costs of the WCRWS across all bulk water supplied in SEQ; or

other variations such as the fixed costs of the WCRWS are allocated across all bulk
water supplies with only the incremental costs (largely energy, chemicals and membrane
replacement) borne by the customers sourcing recycled water from the WCRWS.
In terms of financial capacity, Brisbane Water would not appear to be facing any severe
financial constraints in its operation. It has a strong balance sheet and steady income stream
and hence should be able to meet operating, capital and borrowing repayments in the near
future.
Further, BCC’s financial capacity during the year of 2005 (and historically) has been sound.
In 2005, the value of BCC assets increased by more than $2,400 million. This was the result
of the purchase and construction of new assets, and the increase in value of existing assets.
BCC had a current asset to current liability ratio of 0.94 in 2005. This is below their target
of one, which creates a balance between funds needed and funds available to run the
business. BCC also has immediate access to funds of $165 million held in a repay and
85
BCC Annual Report 2004–05, p.128.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
redraw facility. Current assets plus this facility, compared to current liabilities, provides an
above target result of 1.51 for 2005. In terms of total assets to total liabilities, BCC had a
ratio of 11 in 2005.
BCC’s debt servicing and redemption cost measured against total revenue was 8.80% in
2005. This means that less than ten per cent of the amounts raised during the year were used
to meet loan repayments required during the year. More than 90 per cent of revenue was
available, if needed, to deliver services to the community.
Standard and Poor’s has assigned an ‘AA+’ credit rating to BCC. This means BCC’s
capacity to meet its financial commitments is sound.
Performance
Table 25 below shows several key indicators of performance for Brisbane Water in 2004/05.
Table 25: Brisbane Water Performance Indicators
Performance Indicator
Brisbane
Number of water main breaks per 100 km of water main
Australian
Average1
40.0
29.9
Infrastructure leakage index (real losses / unavoidable real
losses)
2.5
1.7
Percentage of water recycled
5%
8.2%
Number of water quality complaints per 1,000 properties
3.7
4.5
15.6
27.6
Average connect time to operator (seconds)
Water quality standard
ADWG 1996
See below
Source: WSAAfacts 2005
Note: Weighted average of Australian organisations appearing in WSAAfacts 2005.
The number of main breaks in Brisbane is higher than the Australian average. In fact, with
40 breaks per 100 kilometres, BW’s performance is better than only 4 of the 18 Australian
water utilities reported in WSAAfacts.
Brisbane Water’s leakage performance was worse than the Australian average.
In 2004/05 Brisbane recycled only five per cent of wastewater compared with the Australian
average of 8.2 per cent. This figure should be expected to rise with the implementation of
the Wester Corridor Water Recycling Scheme.
The average time to respond to telephone enquiries for BW was better than the Australian
average.
Brisbane Water seeks to meet the 1996 Australian Drinking Water Guidelines.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
3.4. Case study : Gold Coast Water
Gold Coast Water (GCW) is a Directorate of the Gold Coast City Council (GCCC). It
provides water and wastewater services through the management of the council's water and
wastewater assets. GCW also manages the Hinze Dam and Little Nerang Dam. As noted
above, the northern part of the Gold Coast is supplied by SEQWater while the remainder of
the Gold Coast mainly relies on supplies from Hinze Dam. Most of the Gold Coast’s water
is sourced from the Hinze Dam. As such, we will not repeat the observations made above
concerning supply through SEQWater.
GCW's services are provided through 2,835 kilometres of water mains, 2,774 kilometres of
wastewater infrastructure, two water treatment plants and four wastewater treatment
facilities.
Preliminary investigations into the Tugun desalination plant on the Gold Coast has recently
been approved between the State Government and the GCCC. The program is designed to
allow construction and commissioning of the desalination plant to be completed by the end
of November 2008, as per local and regional requirements. The plant is expected provide
125 ML/d. Initial investigation suggests the design will cost $100 million.86
In addition to this investigation, the State Government through the Regional Water Supply
Strategy, is undertaking an extensive $2 million investigation into desalination as a longer
term option for the region. Aside from the Gold Coast proposal, no other regional locations
for desalination facilities have been investigated in detail at present. Detailed investigations
would be required to confirm the suitability or otherwise of providing desalination facilities
and would need to address key issues such as location, environmental impact (power use and
brine release), project costs, water pricing and power supply issues.
Water Use
In 2005, the Gold Coast used around 531 litres on average per person per day. 87 The
introduction of level 3 restrictions in June 2006 resulted in a 27% decline in use88 relative to
the business as usual case (i.e., average water-use in the pre-drought period).
As noted above, in addition to implementing general water restrictions, each Council has
pursued other avenues to ensure water savings. In June 2005, the GCCC for example
mandated the introduction of rainwater tanks in all new developments throughout the city.
These tanks can provide water for toilet flushing, the cold water washing machine tap and
for outdoor use. In addition, GCW has progressed with many demand management
initiatives. Examples of these include:

Waterwise Schools Program;

Waterwise Community Program;
86
A final decision regarding the implementation of desalination as an emergency water source will be made at
the end of November 2006 to allow for additional investigations to be completed.
87
Based on ABS Regional Population Growth Cat. No. 3218.0 (population statistics) and SEQWater.
88
Water savings targets (expressed as a percentage of water-use under the BAU scenario) have been set for
each water-restriction level. However, these targets (and the actual reductions in water use reported by water
suppliers and Governments) relate to the overall reduction in water use. That is, the reductions in water use
arising from the combined effect of each of the three main water savings measures outlined above.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

Gold Coast Home Watersaver Rebate Scheme; and

Garden Professionals Water Conservation Training Program.
GCW has also implemented a Water Pressure and Leakage Management Program
throughout the city.
3.4.1. Financial analysis of water utilities
Revenue And Cost Recovery
In 2004/05, Gold Coast residents were charged $366.50 for 250 kilolitres of water.89
The charge for managing residential wastewater was 24 per cent higher than the Australian
average for the Gold Coast (Gold Coast charged a flat annual fee of $413.20).
Residential revenue from water represented 74 per cent of GCW’s total customer revenue,
which is slightly higher than the proportion of water used by residential customers compared
with total consumption (commercial, industrial and other non-residential customers
represented 68 per cent of the Gold Coast’s total water use). A breakdown of revenue
sources is shown in Figure 19.
Figure 19: Gold Coast Water - 2004/05 Revenue By Customer Group
Gold Coast Water
Wastew ater nonresidential
15%
Water nonresidential
11%
Water residential
36%
Wastew ater
residential
38%
Source: Extrapolated from WSAAfacts 2005
Over the past five years, GCW’s revenue has not been sufficient to recover all cash costs
(including operating, capital investment, taxation, interest and dividend payments), as
demonstrated by the organisation’s slight increase in net debt from $122 million to $140
million over the period.90 Increasing debt is not uncommon in industries with a growing
customer base and significant capital expenditure, where investors expect new customers to
provide sufficient revenue to service both debt and shareholder requirements over time.
89
WSAAfacts 2005.
90
WSAAfacts 2005.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating costs, depreciation and a standard industry return
on assets. While Brisbane Water had the highest annualised cost recovery for water of any
capital city, the figure for the Gold Coast was higher still at 95%. Annualised cost recovery
for all capital cities falls between 68% and 84%.
Table 26 shows the cost recovery from Gold Cost.
Table 26: 2004/05 Gold Coast Cost Recovery (Water Only)
Total annual
revenue/property1
Total annual
cost/property2
Annualised Cost
Recovery
Average Cost
Recovery3
451
476
95%
80%
Gold Coast Water
Source: WSAAfacts 2005
Notes: 1.
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
2.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a
6 per cent return on assets. Differs from the Productivity Commission’s measure of cost recovery,
which does not include a return on assets.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported). Excludes SCA and Melbourne Water to avoid double counting.
3.
Expenditure
GCW had expenses of $200 million in 2004/05.91 It has consistently generated a positive
result leading to positive tax contributions and dividend payments.
Table 27 shows GCW’s outlays in the form of dividend and taxes over the past five years.
Table 27: Gold Coast Water Dividends and Taxes 2000/01 to 2004/05 ($ ‘000)
2000/01 2001/02 2002/03 2003/04 2004/05
Gold Coast Water
Tax equivalent payments
Dividends payments
62,358
27,872
15,068
21,337 24,076
57,893
63,521
40,993 43,606
Source: WSAAfacts 2005
Constraints To Investment
Investment in the water industry can be constrained by the ability to recover costs and
financial capacity. In the following, we examine these issues for the Gold Coast.
Like Brisbane Water, GCW is not regulated using a using a building block methodology. It
is therefore not clear how GCW would pass on the cost of constructing new water sources or
managing demand.
91
Gold Coast City Council, Our Annual Report 2004-05, p. 113.
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As noted previously, the Tugun desalination plant on the Gold Coast has recently been
approved after the signing of a deal between the State Government and the GCCC. The
plant is expected to be completed by the end of November 2008 and provide 125 ML/d. The
total cost of this project has been quoted at $580 million.
For the year ending June 2005, GCW had accumulated assets worth $1.98 billion and a net
result of $76 million.92 Key financial indicators for 2004/05 were:

a current assets to current liabilities of 3.6, which measures the ability to meet current
liabilities commitments. This indicates that the ability of GCW to meet immediate
commitments is very good;

a debt ratio (total asset to total liabilities) of ten per cent. This is high very and indicates
that reliance on debt is minimal; and

debt servicing ratio (interest and redemption measured relative to revenue) of 11 per
cent indicating that GCCC’s ability to service its outstanding debt is good.
All in all these indicators confirm Standard & Poor’s observations that GCCC: 93
…has a record of solid financial performance, manageable debt burden and a
demonstrated ability to adequately deal with the challenges afforded by strong
population growth.
Accordingly the GCCC has received an ‘AA’ long-term credit rating.
Performance
Table 28 shows several key indicators of performance for GCW in 2004/05.
Table 28: Gold Coast Water Performance Indicators
Performance Indicator
Gold Coast
Australian
Average1
18.5
29.9
1.5
1.7
Number of water main breaks per 100 km of
water main
Infrastructure leakage index (real losses /
unavoidable real losses)
Percentage of water recycled
14%
Number of water quality complaints per 1,000
properties
6.1
Average connect time to operator (seconds)
Water quality standard
8.2%
4.5
123
ADWG 1996
27.6
See below
Source: WSAAfacts 2005
Note: Weighted average of Australian organisations appearing in WSAAfacts 2005.
The number of main breaks in Gold Coast is significantly lower than the Australian average.
92
Gold Coast City Council, Our Annual Report 2004-05, p. 113.
93
Gold Coast City Council, Our Annual Report 2004-05, p. 99.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
GCW’s leakage performance was slightly better than the Australian average.
In 2004/05, the Gold Coast recycled 14 per cent of wastewater, well above the Australian
average of 8.2 per cent.
The average time to respond to telephone enquiries for the Gold Coast suggests there is
significant room for improvement with a connection time that is more than four times the
average.
Gold Coast Water seeks to meet the 1996 Australian Drinking Water Guidelines.
3.5. Key issues
The analysis highlights the following key issues with regard to water management in
Brisbane and the Gold Coast.

With the severe drought conditions facing South-East Queensland, investment in
alternative supply infrastructure is inevitable. The Tugun desalination plant and the
WCRWS are two options that are being actively pursued in the region and will shape
supply and demand management conditions in the future. Nevertheless, even with these
additions to supply, it is unlikely that water restrictions will be removed in the short
term (even with favourable rainfall).

Brisbane Water had the highest annualised cost recovery for water (84 per cent) of any
capital city. Annualised cost recovery for all capital cities falls between 68 per cent and
84 per cent. However, annualised cost recovery for the Gold Coast was even higher at
95 per cent.

Neither Brisbane Water nor Gold Coast Water appear to be facing any immediate
financial constraints. As business units in their respective councils, both organisations
remain in a strong financial position. Nevertheless, successful implementation of water
restrictions imply a lower water consumption and hence losses in revenue to both
Brisbane Water and Gold Coast Water. In addition, there are increased costs of
subsidising alternative water collection mechanisms and support programs. Budgetary
pressures cannot, therefore, be ruled out.

How increased costs in water supply options will be passed on to consumers is unclear.
The cost of the WCRWS and Tugun desalination plant indicate that prices paid for water
in the Brisbane and Gold Coast region will need to increase substantially in the short- to
medium-term in order to recover costs.

The proportion of wastewater recycled by Brisbane Water is fairly low compared with
other capital cities; however recycling is expected to increase with the implementation
of the WCRWS.

It is interesting to note that water resource plans for South-East Queensland are yet to be
completed given the economic and social importance of this region to the State. This
could be due to a number of factors, including growing population and the complex
nature of the institutional arrangements and the numerous State and local entities
responsible for managing water in the region.
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Securing Australia’s Urban Water Supply: Selected case studies
4. SOUTH AUSTRALIA
4.1. Institutional and governance arrangements
The South Australian Water Corporation (SA Water) is responsible for providing water,
wastewater and related services across the State and is a wholly owned business enterprise of
the South Australian Government.
In 1996, the SA Government awarded a consortium, United Water a 15-year contract to
operate and manage the water and wastewater systems in metropolitan Adelaide on behalf of
SA Water. SA Water remains the owner of all metropolitan water and wastewater assets.
SA Water’s contract with United Water sets strict performance targets for customer service
based on response times to water mains bursts and other problems. (See Box 2 for further
details.)
The Essential Services Commission, at the direction of the Treasurer, may undertake
inquiries into government processes for setting SA Water's water and wastewater (sewerage)
charges. The results of the most recent first inquiry were released in November 2005.
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Box 1: Examples of Existing Private Participation – SA Water
United Water International (UWI)
In 1994, the South Australian Commission of Audit recommended that the Engineering & Water Supply
Department be corporatised and that its Metropolitan Adelaide water and wastewater operations should be
contracted out.
In 1995, the operation and maintenance of water and wastewater services in the Adelaide metropolitan area
(including the delivery of capital works for rehabilitation and augmentation) were outsourced to United Water, a
consortium between Vivendi Water, Thames Water and Kinhill under a 15.5 year contract (to end 30 June
2010).
The concept of private sector involvement in the provision of water and wastewater services was relatively new
to Australia in 1996. The contract is still the largest water outsourcing contract in Australia and remains unique
in its current form. The key focus is on the provision of services rather than the development of infrastructure –
the aim is to realise significant efficiency gains, performance improvements and risk transfer while retaining
ownership and investment control.
The cost reduction objective has been met with an estimated 20 per cent saving when compared to SA Water’s
historical costs, a saving in excess of $160 million over the life of the contract.
As the asset owner, SA Water maintains control of all asset investment decisions for rehabilitation, renewal and
infrastructure augmentation.
SA Water continues to provide services in rural areas and responsibility for bulk water supply. SA Water
remains an informed purchaser and is able to benchmark its country operations.
SA Water retains all customer billing services and customer service standards decisions.
The contract contains a broad range of 180 discrete performance standards. Financial penalties apply for failure
to meet any of these performance standards. All standards are higher than those achieved by SA Water prior to
the commencement of the contract. United Water has consistently delivered these performance targets with
greater than 99 per cent compliance.
United Water has a contracted obligation to develop the South Australian Water Industry. As a result SA Water
and United Water played a vital role in establishing the Water Industry Alliance, a collaborative initiative based
on 'clustering' as expounded by Doug Henton of the Stanford Research Institute. More than 160 companies are
now part of the Alliance. Effectively, the partnership created by the contract is not just with UWI but with all
SA Water industry participants.
In spite of the intervening Asian economic crisis, export orders for South Australian services and goods have
increased from some $20m in 1995 to more than $329m in 2001, $100m in excess of United Water’s contractual
target.
A major feature of the Adelaide contract has been its ability to provide not only a step change in performance
but also continuous improvement. The contract is outcome focused with operational performance being the key
criterion upon which success is based. A large proportion of United Water’s remuneration (reimbursables)
includes an incentive mechanism whereby additional efficiencies are shared equally between United Water and
SA Water.
Also, the contract partnership has provided a platform to transfer parent company expertise, in particular in realtime monitoring, to biological nutrient removal pilot plants in the Environment Improvement Program.
The contract enables SA Water to focus on the strategic and critical issues of running a business – moving to
steering the boat rather than rowing the boat.
Source: SA Water
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
4.2. Case study : Adelaide
SA Water is a statutory state-owned corporation that provides water, wastewater and
stormwater services to a population of around 1.4 million people across the State.
4.2.1. Water availability
Water Supply
Water for Adelaide is part of an overall water balance for the lower Murray, as illustrated in
Figure 20.
Figure 20: Illustrative Water Cycle – Adelaide
Source: Water Proofing Adelaide (2004), p. 13.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
In contrast to the approach of other Australian major cities that have built storages capable of
meeting three to four years’ demand, SA Water does not have large storage reservoirs with
the total capacity of the storages in the Mt Lofty Ranges equal to less than a year’s demand.
The level of storage is equivalent to that required to reliably service a population of around
30 per cent the size of Adelaide. The water supply security is promoted through extensive
pipelines from the River Murray that provides a second water source.
Figure 21 highlights the importance of alternative sources between ‘normal’ and drought
years. In drought years, Adelaide will draw more from the Murray, but not at the expense of
other identified communities.
Figure 21: Changing Sources in Drought
250
Annual volume (GL)
200
150
37%
79%
100
56%
65%
56%
50
14%
0
Adelaide
Rural
Normal year
Adelaide
Rural
Drought year
Adelaide Hills catchments
River Murray
Stormwater / recycled water
Groundwater (metro)
Groundwater (rural)
Rainwater tanks
The Murray Darling Basin (MDB) Cap for metropolitan Adelaide and associated country
areas is measured on a five-year rolling basis of 650 gigalitres (or an average of 130
gigalitres per annum). Diversions for this area have averaged around 100 gigalitres per
annum since 2000/01. The reported usage for the five years to 2004/0594 was:
2004/05
2003/04
2002/03
2001/02
2000/01
94
72 GL
82 GL
165 GL
82 GL
104 GL
Murray-Darling Basin Commission (2006)2004/05 Water Audit Monitoring Report , June, p. 32.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Water Supply / Demand Balance
While access to two water sources (Mt Lofty Ranges and the Murray) reduces the likelihood
of a drought affecting Adelaide, the Water Proofing Adelaide Strategy noted:
In 2003 residents faced the first compulsory water restrictions imposed since
the construction of the Mannum to Adelaide pipeline in 1955. This came about
as a result of reduced rainfall across the Adelaide Hills in 2002, combined with
several years of low rainfall across the Murray-Darling Basin, and showed that
Adelaide needed to do more to manage its water supplies in a sustainable
manner. (p. 14.)
Figure 22 illustrates the range of supply levels available for Adelaide across drought and
‘normal’ years against projected demand based on the State’s preferred population growth
series.95 Note that the supply figures refer solely to the mains supply. By 2025, this implies
a 40 gigalitres shortfall for drought years. Planning in the Water Proofing Adelaide Strategy
included a projected 20 gigalitres decline in available water due to climate change.
Figure 22: Mains Water Supply and Demand – pre Water Proofing Strategy
Source: Water Proofing Adelaide (2004), p. 16.
To address the shortfall identified above, South Australia has produced the Water Proofing
Adelaide Strategy 2005 – 2025. The strategy has three components:

efficient use of existing resources;

responsible water use; and

developing additional supplies.
Table 29 summarises the anticipated gains from the strategy. Across the Adelaide region
(including country towns), extra water available for consumptive purposes of 70 gigalitres
95
This includes stronger growth than projected by the ABS preferred series.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
are anticipated in the future. This compares with demand of over 300 gigalitres overall (and
over 200 gigalitres for metropolitan Adelaide).
Table 29: Anticipated Water Savings
Mains
water
Measures relating to:
Responsible water use
• Permanent water conservation measures
• Reduce indoor household water use
• Reduce outdoor household water use
(additional to permanent water
conservation measures)
• Reduce community purposes water use
(additional to permanent water
conservation measures)
• Reduce commercial and industrial water
use
• Reduce losses from mains water system
• Prescription of Western Mount Lofty
Ranges – see Environmental flows
Sub-total:
Additional water supplies and fostering
innovation
• Large scale stormwater use projects
• Rainwater tanks in new homes
• Water sensitive urban development in
new land divisions
• Recycled water
Sub total:
Totals:
Environmental flows
• River Murray
• Western Mount Lofty Ranges
Totals:
Annual impacts (ML)
UnGroundEnvironallocated
water
ment
water1
0
0
Totals
(ML)
11,500
12,000
500
6,500
500
7,000
2,000
1,000
3,000
1,500
500
2,000
1,000
12,000
12,000
1,000
37,000
6,000
4,000
2,500
2,500
11,000
4,000
2,000
2,000
500
7,000
8,500
16,000
33,000
47,000
12,000
11,000
70,000
See note 2
See note 3
10,0004
0
10,000
10,000
Source: Water Proofing Adelaide (2004) pp. 8-9.
Notes: 1. Additional water that may become available for as yet unallocated purposes.
2. Additional environmental flow increases for the River Murray do not have a direct bearing on
environmental flows within the Adelaide geographic area, and is therefore excluded from the table.
3. Greater regulation of surface water capture by farm dams and groundwater use in the Adelaide Hills
will maintain status quo, and is not additional water. Nevertheless, in the absence of greater
regulation it is estimated that farm dam capture will reduce surface runoff by a further 7 gigalitres
per year by 2025.
4. Prescription of the Western Mount Lofty Ranges is expected to lead to a requirement for
environmental flow releases to waterways downstream of reservoirs. An additional 10 gigalitres in
‘average years’ is assumed. The amount ultimately allocated and the timing of releases would be
established in a water allocation plan if prescription proceeds.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
These measures will have the effect of removing much of the risk associated with drought
through to 2025, as illustrated in Figure 26. There is expected to be only a five gigalitres
shortfall between projected drought year supply and projected ‘high’ demand.
Figure 26: Demand /Supply Balance Outlook Post Water Proofing Adelaide Strategy
Cost Of Options
Financial considerations are one element of a complete economic, social and environmental
analysis of proposed options for water management. The Water Proofing Adelaide strategy
report notes that evaluation of options was based on a multi-criteria analysis. In addition, it
anticipates that further work, including cost effectiveness, will be undertaken over time. At
the time of the analysis, the costs of alternative options were evaluated. These are
aggregated in Table 30.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 30 : Cost of Water Supply / Demand Options
Option
Total Water Supplied
/ Saved
(GL pa)
Levelised Cost /
Kilolitre
($/kL)
up to 25 GL
up to 25
$1.10
25 – 40 GL
25 – 40
$1.20
40 – 80 GL
40 – 80
Purchasing water from River Murray
Grey water recycling (theoretically up to 50 GL)
Large-scale water re-use (possibly
stormwater option for customers)
competing
with
$1.30
0.7
$5.00 - $6.00
10
$1.00 - $1.75
Large-scale water supply scheme
from Bradfield Qld
10
$6.00
from Clarence R NSW
65
$1.30
from Ord R WA
150
$9.30
from Great Artesian Basin SA
30
$6.60
Management of Adelaide Hills resources
better allocations
$13m capital +
$2m pa
New reservoirs in Adelaide Hills
Finniss R
9.2
North Para R
3.5
Localised wastewater recycling
60
$1.55
not costed
$5.10 – $5.30
Rainwater use for households and industry
reflects take-up (if all houses and average 100m2 roof
and 4.5 kL storage and use 350 in toilet etc.)
18
$5.60
3
$1.40
7
$5.00
3.5
$2.60
Reducing losses in bulk water supply
covering reservoirs (chemical)
covering reservoirs (floating cover)
replace aqueducts with pipelines
Reduce water use in home
18
not shown
Saving water outside home
4.6
not shown
additional savings
restrictions
with
increased
Seawater desalination
Stormwater reuse
Sustainable water use by agriculture
permanent
4
50
10
not shown
$2.20
$0.10 – $1.50
not shown
Sources: Water Proofing Adelaide – Options Assessed, located at:
http://www.waterproofingadelaide.sa.gov.au/main/options.htm , assessed 11 August 2006
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
4.2.2. Financial analysis of water utilities
Revenue And Cost Recovery
In 2004/05, an Adelaide resident using 250 kilolitres would be charged close to the highest
average water price of any Australian capital city ($324.75).96 In addition, the charge for
residential wastewater was also well above average at a flat rate of $390.77 – some 17 per
cent higher than the Australian average.
Non-residential revenue represented 27 per cent of total customer revenue in Adelaide,
closely matching the proportion of water used by non-residential customers compared with
total consumption (commercial and industrial non-residential customers represented 24 per
cent of Adelaide’s total water use). A breakdown of revenue sources is shown in Figure 23.
Figure 23 : SA Water for Adelaide - 2004/05 Revenue By Customer Group
Wastewater
non-residential
14%
Wastewater
residential
39%
Water
non-residential
15%
Water
residential
32%
Source: Extrapolated from WSAAfacts 2005.
SA Water Corporation (the entire entity) has generated sufficient revenue over the past five
years to broadly recover all cash costs (including operating, capital investment, taxation,
interest and dividend payments), as demonstrated by the organisation’s relatively stable level
of net debt ranging between $1.2b and $1.3b over the period.97
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating costs, administration costs, depreciation and a
standard industry return on the written down replacement cost of assets.98 SA Water has an
96
WSAAfacts 2005
97
WSAAfacts 2005
98
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
annualised full cost recovery for water of 82 per cent, around the average of all capital cities.
Annualised cost recovery for all capital cities falls between 68 per cent and 92 per cent.
Table 31 shows the cost recovery from Adelaide customers compared with other Australian
cities.
Table 31: 2004/05 SA Water Cost Recovery (Water Only)
SA Water
Total annual
revenue/property1
Total annual
cost/property2
Annualised Cost
Recovery
Average Cost
Recovery3
424
517
82%
80%
Source: Adapted from WSAfacts 2005
Notes: 1.
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
2.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a
6 per cent return on assets. See footnote 17 for further information. Differs from the Productivity
Commission’s measure of cost recovery, which does not include a return on assets.
3.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported). Excludes SCA and Melbourne Water to avoid double counting.
Expenditure
Over the past five years, cash outflows from the entity SA Water have averaged $1.7 billion
per annum. Just over 37 per cent of these outflows were expenditure for operations, while
17 per cent of outflow was used for property, plant and equipment (capital investment). On
average, a net $125 million was returned to the State Government each year in the form of:

an average $153 million of dividend payments to the State Government (87% of net
profit after tax);

an average $67 million of tax payments to the State Government; and

SA Water received an average of $95 million from the State Government in the form of
community service obligation payments (for lower than commercial pricing in the
country and for pensioner rebates and other concessions).
Table 32 shows SA Water’s total cash outlays over the past five years.
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 32: SA Water Cash Outflows 2000/01 to 2004/05
2000/01 2001/02 2002/03 2003/04 2004/05
Total
5 Years
Operations
241.4
283.4
302.0
315.3
241.4 1,361.4
37%
Property, plant and
equipment
107.4
123.8
174.0
105.1
107.4
611.9
17%
Borrowing costs paid
99.0
94.4
88.7
89.0
99.0
469.0
13%
Tax equivalent payments
58.0
62.6
72.1
82.6
58.0
335.4
9%
137.2
164.8
164.1
165.2
137.2
766.8
21%
26.0
16.0
13.2
10.9
26.0
95.8
3%
Dividends payments
Other
TOTAL
1,162.3 1,219.8 1,343.9 1,427.0 1,400.3 3,640.3 100%
Notes: ‘Other’ includes all recorded gross outflows where proceeds/repayments of loans are treated
as one item.
Discrepancies may occur due to rounding.
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and

the financial capacity of the State Government.
Each is examined in turn below.
Ability to recover costs: SA Water’s charges are not directly set by the independent
economic regulator in South Australia (the Essential Services Commission of South
Australia – ESCoSA) but by the Minister for Administrative Services. In examining whether
the SA Government has appropriately applied CoAG pricing principles to water and
wastewater pricing, ESCoSA has reviewed99 the Treasury’s “Transparency Statement” which
sets out the Government’s methodology. It has not undertaken a review of the prices
themselves. The Government’s approach seeks to move to “upper bound” prices for
metropolitan users by 2008, continue to at least achieve lower bound prices for
non-metropolitan but with an intention to move to upper bound where practicable.
The prices set in the Treasury’s Transparency Statement, which was approved by ESCoSA,
promote economic efficiency and “other matters that contribute to the public benefit, such as
equity, social justice, environmental issues and regional development”.100
Financial constraints: SA Water has a strong balance sheet and steady income stream.
Interest cover and other indicators of financial capacity indicate no signs of financial
distress.101
99
ESCoSA were directed by the Treasurer to undertake the review.
100
Department of Treasury (2005) Transparency Statement Water and Wastewater Prices in Metropolitan and
Regional South Australia 2006-07, August, p. 4
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
The financial capacity of the State Government: SA Water’s dividend and tax payments
are included as revenue in the State budget and therefore impact on State Government
financial policy and credit rating. The SA Government achieved a ‘triple A’ domestic credit
rating with Standard & Poor’s and Moody’s in 2004.102 Dividends and tax payments from
SA Water represent accounted for only 1.4 per cent of total State revenues in 2004/05.103
By contrast, the net debt position of SA Water has a significantly greater impact on the State
Government’s net debt level. The organisation had net debt totalling $1.3 billion in 2004/05,
compared with the SA State Government net debt of negative $0.6 billion.104 The impact on
the State’s credit rating of the proposed capital works to “Water Proof Adelaide” has not
been determined at this stage.
Performance
Table 33 shows several key indicators of performance for SA Water in 2004/05.
Table 33: SA Water Performance Indicators
Performance Indicator
SA Water
Aust Average1
Number of water main breaks per 100 km of water main
24.6
29.9
Infrastructure leakage index (real losses / unavoidable real
losses)
1.2
1.7
Percentage of water recycled
20.7%
8.2%
Number of water quality complaints per 1,000 properties
1.2
4.5
Average connect time to operator (seconds)
20
27.6
Water quality standard
ADWG 1996
See below
Notes: 1. Weighted average of Australian organisations appearing in WSAAfacts 2005.
The number of main breaks in Adelaide is slightly lower than the Australian average.
SA Water’s leakage performance is significantly better than the Australian average, as was
the number of complaints and the average time to respond to telephone enquiries.
In 2004/05 Adelaide recycled 20.7 per cent of wastewater compared with the Australian
average of 8.2 per cent. Adelaide’s large-scale water recycling program began in 1999 with
the provision of recycled water from Adelaide's Bolivar STP for vegetable growing on the
Northern Adelaide Plains. Since that time, two additional stages of the Bolivar plant have
been constructed, in addition to recycling works at Port Adelaide, Glenelg and Christies
Beach.
101
In 2003/04, debt to equity was 24.4 per cent, interest cover 4.4 times (EBIT/gross interest expense) and
current ratio 76.1 per cent. Productivity Commission (2005) Financial Performance of Government Trading
Enterprises 1999-00 to 2003-04.
102
SA was upgraded from AA to AA+ in December 1999.
103
2004/05 SA State Government revenue $13,730 million. ABS Catalogue 5512.0, 2004-05 Government
Finance Statistics
104
Total public sector net debt: ABS Catalogue 5512.0, 2004-05 Government Finance Statistics.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
As noted, Adelaide has comparatively few water quality complaints and provides water in
accordance with the 1996 Australian Drinking Water Guidelines. Most water businesses are
still under transition from the 1996 guidelines to the more recent 2004 Australian Drinking
Water Guidelines, which focus on a multiple barrier approach to managing water quality.
4.2.3. Key issues
The analysis highlights the following key issues with regard to water management in
Adelaide.

SA Water has substantial drought security owing to the availability of increased
extraction from the River Murray in times of drought. Nevertheless, recent drought
conditions demonstrate the need for improved water security. The SA Government plans
to achieve this through a mixture of demand management, water sensitive urban design,
and water recycling (wastewater and stormwater).

Adelaide’s water recycling program is the most substantial in Australia, representing
almost 21 per cent of total wastewater collected in 2004/05. Importantly, recycled water
in Adelaide is mainly used for irrigation rather than substitution of potable water and
therefore does not typically improve the supply of water to the city itself. The Water
Proofing Adelaide strategy outlines plans to increase water recycling by 16 gigalitres per
annum (16 per cent of current wastewater collected105) and develop large-scale
stormwater reuse for a further 11 gigalitres per annum by 2025.
105
Proportion will be lower in 2025, based on larger volume collected.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
5. WESTERN AUSTRALIA
5.1. Institutional and governance arrangements
The Water Corporation provides wholesale and retail water services to all Western
Australian cities and towns except Bunbury and Busselton. The Water Corporation also
provides wastewater collection and disposal, and stormwater services across the entire State.
Water services for Bunbury and Busselton are provided by the Aqwest-Bunbury Water
Board and the Busselton Water Board respectively. Wastewater services in a number of
rural and regional towns are provided by local government.
The urban water supply arrangements in Western Australia are summarised in Table 34.
Table 34 : Water Service Providers in WA
Area
Name
Services
Institutional
Structure
Western Australia
(other than Bunbury
and Busselton)
Water Corporation
Bulkwater, catchment
management, treatment,
distribution and retail
Statutory
State owned
corporation
Bunbury
Aqwest-Bunbury Water
Board
Bulkwater, treatment,
distribution and retail
Statutory
Authority
Busselton
Busselton Water Board
Bulkwater, treatment,
distribution and retail
Statutory
Authority
The Department of Water is charged with gathering water resources information, issuing
licences, regulating water use, protecting water quality, and preparing water resource
policies and plans for Western Australia. The Economic Regulation Authority oversees
regulation and licensing and investigates matters referred to it by the State Government (such
as the recent review of urban water and wastewater prices).
The private sector does not provide water services in WA, but public-private partnerships
have been developed for a number of major infrastructure projects, including the Perth
Seawater Desalination Plant and the Woodman Point Wastewater Treatment Plant. The
Water Corporation also utilises the private sector through alliance contracts for operations
and maintenance in Perth.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
5.2. Case study : Perth
In 1996, the Water Authority was reconstituted as the Water Corporation, a state-owned
statutory corporation. It was established to provide water, wastewater and stormwater
services to a population of around 1.5 million people across the State. The Water
Corporation Act (1995) stipulates that the functions of the Water Corporation include:

the acquisition, treatment and distribution of water;

the collection and disposal of wastewater;

the use of the organisation’s expertise and resources to provide consultative, advisory or
other services for profit; and

the use or exploitation of fixed assets for profit so long as the proper performance of
other functions is not affected.
5.2.1. Water availability
Water Supply
Perth’s potable water is supplied from the Water Corporation’s Integrated Water Supply
Scheme (IWSS), which also supplies water to the Goldfields and Agricultural region to the
east and to many towns in the South West and Great Southern regions in the south.
Under this scheme, water is drawn from a series of interconnected surface water sources
(including Canning Dam, Mundaring Weir, Serpentine Dam, North and South Dandalup
Dam and Stirling Dam) and ground water sources.106 In fact Perth relies on groundwater to a
greater degree than any other capital city. The IWSS draws around 60 per cent of its water
from groundwater sources, including the Gnangara and Jandakot mounds. The Water
Corporation and the State Government are currently examining the viability and
sustainability of drawing water from the vast groundwater resources held in the South West
Yarragadee aquifer.
Precipitation in Perth is highly seasonal and the majority of rain falls in the winter months
with very little during summer. Annual inflows into Perth dams averaged 338 gigalitres
from 1911 to 1974. Streamflow levels have reduced substantially since 1975, when flows
fell by almost 50 per cent. Since 1997, average annual streamflows have fallen again by a
further 30 per cent, reducing inflows to only 114 gigalitres per year.
The marked changes in stream inflows that have occurred since 1911 are demonstrated in
Figure 24.
106
The following summary of the water supply situation is drawn from Water Corporation publications,
Planning for Perth’s water needs and Integrated Water Supply Scheme – Source Development Plan, in
addition to information sourced from the Water Corporation website at www.watercorporation.com.au.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 24 : Yearly Streamflows for Major IWSS Surface Water Sources
Source: www.watercorporation.com.au
It is currently uncertain whether the streamflow sequence of the past eight years represents a
long-term reduction in average streamflow, or a short-term departure from the streamflow
regime of the last 30 years. It is estimated that long-term continuation of the drier 8-year
climate and streamflow regime would reduce the yield of the IWSS by 74 gigalitres per year.
Global warming also suggest a trend towards reduced rainfall in South West Australia.107
In recognition of the reduced streamflows, source yields were de-rated in 1996. Between
1993 and 2002, the Water Corporation invested $523 million in source development works
to provide for demand growth and the loss in supply capacity, including the construction of
the Harvey Dam and connection of Stirling Dam to the IWSS. The winter of 2001 saw the
lowest inflow to the metropolitan dams on record, and over the following two years the
Water Corporation invested a further $142 million in a rapid response program aimed at
further augmenting the supply capacity of the scheme.
The IWSS dam levels are currently at 28.5 per cent of their total storage capacity of 678 GL.
The Western Australian Government has imposed water restrictions on the metropolitan area
since 2001, however the restrictions have been relatively mild (i.e. two day per week)
compared with the total sprinkler bans imposed by many other cities.
Supply / Demand Balance
Perth experiences long periods with little or no rainfall over summer months and therefore
water is typically used in the garden at a higher rate than in the eastern States. Water use
outside the house has been estimated at 50 per cent of total residential water use in Perth.108
Prior to the introduction of water restrictions in 2001, Perth residents used around 519 litres
per person per day, of which 352 litres per person per day was used for residential purposes
107
Indian Ocean Climate Initiative No 2, June 2004.
108
Water Corporation (2003), Domestic Water Use Study, p. 9.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
– around 30 per cent higher than the Australian average. In 2004/05, the fourth year after the
introduction of two day per watering week restrictions, residential water use per capita had
fallen by 16 per cent to 294 litres per person per day. Other uses for water, including
commercial, industrial, municipal and fire fighting, fell by 27 per cent per capita over the
same period.109
Perth’s population is expected to grow from 1.5 million people to just over 2 million in
2031.110 For planning purposes, the Water Corporation distinguishes between two future
demand scenarios – the ‘155’ demand scenario (demand of 155 kilolitres/person/year), and
the ‘170’ demand scenario (i.e., demand of 170 kilolitres/person/year). The ‘155’ scenario
assumes that proposed State Water Strategy per capita water-use targets are achieved by
2012. The ‘170’ scenario assumes a demand level that should be achievable with a moderate
level of community care and continued media campaigns. Under the 155 demand scenario,
with moderate population growth, total water use would rise from 263 gigalitres in 2005 to
360 gigalitres in 2025. Under the 170 demand scenario, water requirements would increase
to 390 gigalitres by 2025.
Due to the significant uncertainties involved, the Water Corporation has deliberately adopted
the eight year climate scenario and the 170 demand scenario as the basis for long-term
planning. Based on these assumptions, unconstrained demand for water would already be
greater than the current yield of the IWSS. The Water Corporation therefore plans to
develop a suite of sources, with the intention of adding 107 gigalitres to the IWSS over the
next five years through:

the establishment of a seawater desalination plant at Kwinana that will provide 45
gigalitres. This plant – known as the Perth Seawater Desalination Plant (or Desalination
No. 1) – is planned for completion in October 2006;

purchasing 17 gigalitres from Harvey Water – the result of efficiencies gained from
piping irrigation water in the region. This water is expected to be available by October
2007; and

the development of the South West Yarragadee Groundwater Aquifer to provide 45
gigalitres of water for use in the Scheme by December 2009.
If the demand management targets identified in the State Water Strategy are successful,
further water sources will not be required until at least 2017/18 (as shown in Figure 25). The
Water Corporation is also pursuing catchment management operations at Wungong Dam
(i.e., thinning of catchment vegetation to allow increased run-off) and is investigating a
potentially major Aquifer Storage and Recovery project.
109
For the years 2000/01 and 2004/05. Source: WSAAfacts 2005. Other water use also includes mains flushing,
water taken by contractors and meter errors.
110
Western Australian Planning Commission (2005) Western Australia Tomorrow.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 25: Water Supply / Demand Balance over time
IWSS Demand and Supply (GL/year)
If the Corporation is successful in
securing a 17 GL water trade, and the
45 GL South West Yarragadee (or
Desalination No 2) source, this will
restore the IWSS supply/demand
balance until 2017/18
Additional 137 GL of
source capacity required
to restore
supply/demand balance
out to 2049/50
Year ending June
Source: Water Corporation Integrated Water Supply Scheme Source Development Plan 2005.
After 2017/18 the most likely source development options include:

a second desalination plant (if it has not already been constructed in lieu of the South
West Yarragadee groundwater source);

increased catchment management (i.e., thinning of vegetation to improve run-off);

the development of a major groundwater scheme at Eglinton (north of Perth);

the development of a pump-back scheme at Wellington Dam in the South West;

further water trading; and

increased water recycling.
The Water Corporation has planned on the basis of needing a total sprinkler ban in only
0.5 per cent of years (or 1 in 200 years), which is significantly less frequent than planning for
other Australian cities.
Cost Of Options
Financial considerations are one element of a complete economic, social and environmental
analysis of proposed options for water management. Table 35 provides information on the
costs of various options examined in the Waster Corporation’s Source Development Plan.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 35 : Cost of Water Supply / Demand Options
Total Water Supplied (GL Levelised Cost / Kilolitre
pa)
($/kL)
30 yr1
8 yr1
Low2
High2
High level of confidence
Irrigation Efficiency - Stage 1: Waroona and Harvey
18
17
0.50
0.75
South West Yarragadee groundwater
Seawater Desalination No 2
45
45
45
45
0.73
1.05+ 3
0.89
1.25+ 3
Catchment thinning: Wungong Trial
Yanchep groundwater
6
11
5
9
0.25
0.55
0.25
0.70
Eglinton groundwater
Wellington Dam: Pump-back
Irrigation Efficiency - Stage 2: Collie
17
15
19
15
12
16
0.56
0.70
1.06
0.69
0.92
1.50
Catchment thinning: Other catchments
Gnangara groundwater
34
20
31
15
0.22
0.20
0.22
0.20
Wellington Dam: Desalination
Brunswick River
Gingin groundwater
45
30
30
45
25
20
0.60
0.67
1.16
0.60
0.98
2.00
Medium Level of Confidence
Low level of confidence
Very Low Confidence
Water from the Kimberley
2004
6.704
Source: Water Corporation, Integrated Water Supply Scheme Source Development Plan 2005
Notes:
1. Water supply from many water sources will be higher under the “30 year” inflow scenario (i.e.,
assuming the average inflows over the last 30 years continue) compared with the “8 year
scenario” (assuming the relatively drier period of the last eight years continues).
2. Based on capital and operating costs provided in Integrated Water Supply Scheme Source
Development Plan 2005. Low estimate assumes 30-year inflow scenario and asset life of 100
years. High estimate assumes 8-year inflow scenario and asset life of 25 years.
3. Does not include the cost of bulk water transfer into the IWSS.
4. Department of the Premier and Cabinet WA (2006), Options for bringing water to Perth from the
Kimberley
The Water Corporation has plans to implement the South West Yarragadee groundwater
scheme / Desalination No. 2, water trading from irrigation efficiencies, catchment
management and Aquifer Storage and Recovery (costs for ASR are still under investigation).
Table 35 indicates that several other projects, including Eglinton groundwater, Yanchep
groundwater, and Wellington Dam desalination may be significantly less expensive than the
South West Yarragadee groundwater or Desalination No. 2. In addition, Gnangara
groundwater appears the least expensive of any of the other available options. The Water
Corporation has rated these alternative options as ‘Medium’ or ‘Low’ levels of confidence
and has indicated that Eglinton groundwater is a likely source that will be developed from
20017/18 onward.
A comprehensive review of options should examine the risk associated with each project in
addition to the economic, social and environmental consequences. The Water Corporation
has indicated that certain water sources have a high, medium, low or very low confidence of
proceeding. It is unclear on what basis the Corporation has made these distinctions.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
5.2.2. Financial analysis of water utilities
Revenue and Cost Recovery
In 2004/05, the average residential water price (for 250 kilolitres) in Perth was 5 per cent
below the average for all Australian capital cities ($279 for 250 kilolitres).111 In contrast, the
residential wastewater charge was 24 per cent above the Australian average ($443 on
average, actual charge based on property value). Non-residential revenue represented 36 per
cent of Water Corporation’s total customer revenue. A breakdown of revenue sources is
shown in Figure 30.
Figure 30: Water Corporation - 2004/05 Revenue By Customer Group
Wastew ater nonresidential
21%
Water nonresidential
15%
Water residential
27%
Wastew ater
residential
37%
Source: Extrapolated from WSAAfacts 2005
Water Corporation’s revenue over the last five years has been insufficient to recover all cash
costs (including operating, capital investment, taxation, interest and dividend payments), as
demonstrated by the increase in net debt from $0.6 billion to $1.1 billion over the period.112
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating costs, depreciation and a standard industry return
on the written down replacement cost of assets.113 In 2004/05, Water Corporation recovered
74 per cent of full annualised costs. Table 36 shows the full cost recovery from Perth
customers compared with the average of other Australian cities.
111
WSAAfacts 2005.
112
WSAAfacts 2005.
113
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 36: 2004/05 Perth (Water Corporation) Cost Recovery - Water Only
Perth
(Water
Corporation)
Total annual
revenue/property1
Total annual
cost/property2
Annualised Full
Cost Recovery3
Ave Australian
Cost Recovery4
410
554
74%
80%
Source: Adapted from WSAAfacts 2005
Notes: 1.
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
2.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a
6 per cent return on assets. See footnote 17 for further information. Differs from the Productivity
Commission’s measure of cost recovery, which does not include a return on assets.
3.
Prior to water restrictions the Water Corporation’s cost recovery was 85 per cent (2000/01).
4.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported).
Expenditure
Over the past five years, cash outflows from the Water Corporation have averaged $1.2
billion per annum. The Water Corporation’s capital expenditure has been particularly high.
Water Corporation’s capital expenditure averaged $393 million per year over the last five
years – 40 per cent more than the four Melbourne businesses combined and only 19 per cent
less than Sydney Water and Sydney Catchment Authority combined. Annual capital
expenditure is expected to grow even further over the next ten years to an average of $620
million per year, predominantly due to the increasing expenditure required to maintain the
water and wastewater supply-demand balance.114
On average, a net $167 million was returned to the State Government each year since
2000/01 in the form of:

an average $287 million of dividend payments to the State Government (representing a
reported dividend payout ratio of 78 per cent of net profit after tax115);

an average $137 million of tax payments to the State Government116; and

the Water Corporation received an average of $256 million from the State Government
for Community Service Obligations. Water Corporation’s Community Service
Obligation payments are the highest in the country, reflecting the large payment from
the State Government to compensate the Water Corporation for the operation of noncommercial country schemes. The CSO payment for country losses is unique to
Western Australia and represents the difference between actual revenue received and the
revenue required to generate a specified rate of return.117
114
Economic Regulation Authority (2005), Final Report on the Inquiry on Urban Water and Wastewater
Pricing
115
Based on dividend payout ratios for 2000/01 to 20045/05 reported in WSAAfacts 2005.
116
Water Corporation makes “tax equivalent payments” to the State Government. Tax equivalent payments are
similar to the tax payments made by the private sector, but are paid to the State rather than the
Commonwealth Government.
117
The specified rate of return is 4 per cent for all assets constructed prior to 1996 and 6 per cent for all assets
constructed thereafter.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 37 shows Water Corporation’s total cash outlays over the past five years.
Table 37 : Water Corporation Cash Outflows 2000/01 to 2004/05
2000/01 2001/02 2002/03 2003/04 2004/05
Operations
Total
5 Years
322
326
375
369
412
1,803
29%
486
343
353
446
337
1,965
32%
50
66
69
56
61
301
5%
Tax equivalent payments
108
134
144
141
157
685
11%
Dividends payments
327
264
249
286
307
1,433
23%
-
-
-
-
9
9
0%
1,293
1,132
1,190
1,299
1,282
6,196
100%
Property,
equipment
plant
and
Borrowing costs paid
Other
TOTAL
Note: Discrepancies may occur due to rounding
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and

the financial capacity of the State or Territory Governments.
Each is examined in turn below.
Ability to recover costs: Prices for water are determined by the State Government. The
Economic Regulation Authority (ERA) may review water prices at the State Government’s
discretion. For the recent review of urban water prices, the ERA recommended a building
block methodology (i.e., operating, maintenance and administration costs, depreciation,
return on assets and adjustments for tax) for calculating the total revenue requirements for
the business. The State Government is not bound by the ERA’s recommendations, however,
if they are applied then Water Corporation will be able to pass on the efficient cost of
constructing new water sources or managing demand.
The current price review by the ERA recommends increasing prices by 0.7 per cent above
inflation per year until 2014/15 for water and 0.8 per cent below inflation per year until
2009/10 for wastewater. These price increases include an allowance for the cost of new
water sources scheduled over the next ten years. The Water Corporation has estimated the
cost of the Perth Seawater Desalination Plant (Desalination No 1) will add approximately
13.5 per cent to the average water bill.118
Financial constraints: Water Corporation has a strong balance sheet and steady income
stream. Interest cover and other indicators of financial capacity indicate no signs of financial
118
Economic Regulation Authority (2005), Final Report on the Inquiry on Urban Water and Wastewater
Pricing, p. 93. The price path proposed by the ERA smooths the increase required for the desalination plant
over time.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
distress.119 The Economic Regulation Authority assessment states that it considers the
overall financial viability of the water businesses when reviewing prices, however the ERA’s
final report does not include a review of the Water Corporation’s financial indicators.
Over the past five years, Water Corporation has taken on an additional $500 million in debt.
Over the period, $837 million has been required to meet net returns to the State Government
(i.e., dividends plus tax payments less community service obligation payments). The Water
Corporation’s large capital program (over $6 billion between 2005/06 and 2014/15) is
expected to significantly increase borrowing levels – high-level estimates suggest that
around half of the program may need to be funded through borrowing if the current dividend
payout ratio is maintained.120 Some of the program will be funded through annual revenue.
However, net debt levels are currently very low at only 10 per cent of the total regulatory
asset value. The business could afford to borrow a further $5.3 billion before reaching the
“benchmark” gearing level of 60 per cent.121
State Government’s financial capacity: Water Corporation’s dividend and tax payments
are included as revenue in the budget and therefore impact State Government financial
policy and credit rating. The WA Government currently holds a ‘triple A’ domestic credit
rating with Standard & Poor’s rating agency.122 The net dividend and tax payments from
Water Corporation accounted for only 3.2 per cent of general State Government revenue in
2004/05.123
By contrast, the net debt position of the Water Corporation has a significantly greater impact
on the State Government’s net debt level. The Water Corporation had net debt totalling $1.1
billion in 2004/05, which represented 26 per cent of the net debt reported by the WA State
Government ($4.0 billion).124 With more than $600 million per year of capital expenditure,
Water Corporation’s net debt is likely to continue to increase in coming years. The impact
on the State’s credit rating has not been determined at this stage.
Performance
Table 38 shows several key indicators of performance for Water Corporation in 2004/05.
119
In 2003/04, debt to total assets was 13 per cent interest cover 11.8 times (EBIT/gross interest expense) and
current ratio 29.8 per cent. Productivity Commission (2005) Financial Performance of Government Trading
Enterprises 1999-00 to 2003-04.
120
Over the past five years, net debt has increased by $0.5 billion, while the capital program was around $2
billion, suggesting a capacity for existing revenues to fund $1.5 billion over 5 years or $3 billion over ten
years. Price increases over time will reduce the need for borrowing to some extent.
121
60 per cent gearing has been adopted for the calculation of the Weighted Average Cost of Capital by
IPART, ESC and ERA.
122
www.standardandpoors.com
123
2004/05 WA State Government revenue $14,224 million. Table 19, ABS Catalogue 5512.0, 2004-05
Government Finance Statistics.
124
Table 27, ABS Catalogue 5512.0, 2004-05 Government Finance Statistics.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 38 : Water Corporation Performance Indicators
Performance Indicator
Value
Aust Average1
Number of water main breaks per 100 km of water main
13.8
29.9
Infrastructure leakage index (real losses / unavoidable real
losses)
1.6
1.7
Percentage of water recycled
3.6%
8.2%
Number of water quality complaints per 1,000 properties
17.3
4.5
21
27.6
ADWG 1996
See below
Average connect time to operator (seconds)
Water quality standard
Note: 1. Weighted average of Australian organisations appearing in WSAAfacts 2005
The number of main breaks in Perth in 2004/05 was significantly lower than the Australian
average, as was the average time to respond to telephone enquiries. The leakage
performance was around the Australian average.
In 2004/05 Perth recycled only 3.6 per cent of wastewater compared with the Australian
average of 8.2 per cent. The Water Corporation is examining a number of wastewater reuse
options including industrial reuse and aquifer storage and recovery in order to achieve the
State Water Strategy target of 20 per cent reuse state-wide by 2012.125
Water Corporation has a very high number of water quality complaints – almost three times
higher than Yarra Valley Water, the second highest of the capital cities. It has been
suggested that the blending of water sources (and therefore the difference in water quality
from suburb to suburb) might contribute to the high number of complaints. In a recent
submission to the ERA, the Water Corporation noted:
While every opportunity is sought to provide affordable improvements in
aesthetic water quality, other critical programs such as dam safety, water
source development and compliance with health guidelines have taken priority
in the Corporation’s budgeting process for the next five years.126
The Water Corporation also submitted that customer surveys indicated that willingness to
pay for improvements to aesthetic water quality was low compared with the cost. ERA
considered that additional work, using more reliable valuation methods, should be carried
out to assess customers' willingness to pay for improvements in service standards such as
aesthetic water quality.
The Water Corporation provides water in accordance with the 1996 Australian Drinking
Water Guidelines. More recent drinking water guidelines were released in 2004, focusing on
a multiple barrier approach to managing water quality. Most Australian water businesses are
still under transition from the 1996 guidelines to these new arrangements.
Water Corporation met its microbiological water quality compliance requirements, however
in 2004/05 it did not have a quality approved system in place.
125
Water Corporation, Integrated Water Supply Scheme Source Development Plan 2005.
126
Quote from Water Corporation submission. Economic Regulation Authority (2005), Final Report on the
Inquiry on Urban Water and Wastewater Pricing, p. 57.
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5.2.3. Key issues
The analysis highlights the following key issues with regard to water management in Perth.

Annual inflows into Perth dams have fallen dramatically over the past 30 years. In 1975,
stream flows underwent a major step change and fell to almost half their previous level.
Since 1997, average stream inflows have fallen by a further 30 per cent.

Water Corporation has deliberately adopted conservative planning assumptions for longterm planning, including stream flows based on the average of the last eight years
(rather than the conventional approach of planning based on the last 30–100 years) and
170 kilolitre per person per day demand (i.e. the upper bound of per capita demand
assumptions).

The Water Corporation’s Integrated Water Supply Scheme does not have sufficient
sustainable yield to meet current demand if water restrictions were lifted. The Water
Corporation intends to redress the supply–demand imbalance through a series of
measures under its ‘Security Through Diversity’ approach, including the construction of
the Perth Seawater Desalination (due for completion in October 2006), capture of
irrigation efficiencies through water trading, and the investigation and development of
the South West Yarragadee groundwater source. The Water Corporation is also pursuing
other options such as recycling, demand management, and catchment management.

In recent years, the Water Corporation’s capital program has cost more than the program
of all four Melbourne businesses combined. Between 2005/06 and 2014/15 the annual
capital program is expected to rise even more, increasing from an average of $393
million per year to around $620 million per year.

Water Corporation has no immediate cash constraints; however the large capital
program over coming years is expected to increase debt levels significantly. Dividends
and tax paid to the State Government amounted to $2.1 billion over the past five years;
however, the organisation remains in a strong financial position and could effectively
borrow up to $5.3 billion before reaching the international ‘benchmark’ level of 60 per
cent debt to total assets.

The dividend and tax payments made by Water Corporation to the WA Government
accounted for 3.2 per cent of general State revenue in 2004/05. However, the net debt of
the organisation accounted for almost 26 per cent of the State’s net debt. Over coming
years, net debt is projected to grow significantly with the Water Corporation’s large
capital program.

The proportion of wastewater recycled in Perth is very low (only 3.6 per cent) compared
with other capital cities in Australia. A number of wastewater reuse options are being
examined in order to achieve the State Water Strategy target of 20 per cent reuse statewide by 2012.

Water Corporation has a very high number of water quality complaints compared with
other capital cities. Complaints are almost three times higher than Yarra Valley Water,
the organisation with the second highest rating. Water Corporation has noted that other
programs, such as dam safety, water source development, and compliance with health
guidelines, have taken priority in the Corporation’s budgeting process for the next five
years. Water Corporation has also indicated that customers’ willingness to pay for
aesthetic water improvements is low compared with the cost of implementing the
required changes.
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
Prior to water restrictions in 2001, the Water Corporation had a full cost recovery rate of
approximately 85 per cent. Due to increasing costs and lower water sales, cost recovery
fell to 74 per cent in 2004/05.
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6. TASMANIA
6.1. Institutional and governance arrangements
Under the Water Management Act 1999 (“WM Act”) the Minister has responsibility for
managing water resources and allocations from waterways. Water plans are prepared at the
Minister’s discretion and are drafted by the Department of Primary Industries, Water and the
Environment (DPIWE). Plans are binding on regional entities, councils and government
agencies.
Water entities are appointed to administer water districts under the rules and conditions set
out in the water management plan. They are empowered to manage works to provide
services to landowners as required. Water supply districts, irrigation districts, hydro-electric
districts, river works districts and drainage districts are established under the Act. Water is
primarily delivered by major irrigation schemes, Hydro Tasmania (which manages an
extensive network of modified lakes, rivers, streams and canals) and three regional water
authorities: Esk, Cradle Coast and Hobart, which have responsibility for delivering bulk
water to participating councils. These councils are responsible for delivering water to their
constituents. In addition, smaller councils are responsible for water and, of these, almost all
are also responsible for wastewater services.
6.2. Case study: Hobart
In 1997, eight local Hobart Councils jointly established Hobart Water. Hobart Water127
services Hobart and all the councils in the greater region and its first objective is to provide
bulk water to its district at a reasonable price and minimum quality.
Its other objectives are to:

operate efficiently in accordance with sound commercial practice;

maximise the net worth of the authority’s assets; and

produce sustainable returns to members.”
Hobart Water primarily provides water to the councils but may also supply premises directly
where they lie close to its infrastructure and to off-peak irrigation and commercial
customers.
6.2.1. Water availability
Water Supply
Hobart Water’s water supply system comprises water treatment, eight storage dams,
pumping stations and pipelines holding a capacity of 11 gigalitres. Hobart Water has a target
127
This summary derives primarily from Government Prices Oversight Commission (2004) Investigation into
the Pricing Policies Hobart Regional Water Authority, Esk Water Authority Cradle Coast Water – Final
Report, July.
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of mountain/river sourced water of 40:60 to promote security of supply. Water is primarily
sourced from the River Derwent catchment (approximately 60 per cent of annual supply),
Mount Wellington catchment (20 per cent) and Mount Field National Park (20 per cent) (see
Table 39). The Water Development Plan for Tasmania (DPIWE 2001) states that Hobart
Water’s total water allocation from all sources is 78 gigalitres. 128
Table 39 : Sources of Supply for Hobart, 2003-04 to 2004-05 (ML)
2003-04
2004-05
22,836
21,378
7,342
8,593
484
448
Lake Fenton
7,416
6,174
Southern Regional Supply
3,313
4,086
41,394
40,679
Derwent Water Supply
Mount Wellington (Hobart)
Mount Wellington (Glenorchy)
Total
Source: Hobart Water (2005) Annual Report 2004/05, p. 8.
In contrast to the approach of most other Australian capital cities, Hobart Water does not
have large storage reservoirs with the total capacity of the storages less than one-third of
annual demand.
Supply / Demand Balance
Hobart primarily supplies bulk water to its owner councils and it has also developed an
off-peak market for irrigation and commercial users (off peak users would typically receive
water during winter only).
Hobart has not been subject to as severe restrictions as other cities on the mainland. Prior to
2003, it was noted by the Infrastructure and Resource Information Service that the regional
water supplier had excess capacity. Despite this, individual councils imposed restrictions but
these were not extended in later years.
Although it has been discontinued in other capital cities, the Hobart Councils continue to
charge for residential water use on the basis of property value. Metering for water use is
therefore not required and is virtually non-existent. As residents are not metered, many
demand management options will be unavailable to Hobart Councils, including signalling
the cost of water usage through volumetric charges or providing residents with information
about their water use relative to other households.
128
DPIWE (2001) Water Development Plan for Tasmania, p. 53.
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6.2.2. Financial analysis of water utilities
Revenue And Cost Recovery
Hobart Water supplies bulk water to councils and does not supply water directly to residents.
In Hobart City, water charges are collected by the local council and based on property value
with an excess usage charge.
Hobart Water Corporation (the entire entity) has generated more than sufficient revenue over
the past five years to recover all cash costs (including operating, capital investment, taxation,
interest and dividend payments), as demonstrated by the organisation’s reduction in its net
debt level.129
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating and maintenance costs, administration costs,
depreciation and a standard industry return on the written down replacement cost of assets.130
Hobart Water has an annualised full cost recovery for water of 89 per cent, which is above
the average for Australian capital cities. Annualised cost recovery for all capital cities falls
between 68 per cent and 92 per cent. Table 40 shows the cost recovery from Hobart
customers.
Table 40: 2004/05 Hobart Water Cost Recovery (Water Only)
Hobart Water
Notes: 1.
2.
3.
Total annual
revenue/property1
Total annual
cost/property2
Annualised Cost
Recovery
Average Cost
Recovery3
278
312
89%
80%
Total revenue per property represents total revenue raised by the organisation (including
customer revenue and Community Service Obligation payments from government)
divided by the total number of properties.
Total cost represents the total annual cost of supply, including operating cost,
depreciation and a 6 per cent return on assets. See footnote 17 for further information.
Differs from the Productivity Commission’s measure of cost recovery, which does not
include a return on assets.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per
property not reported). Excludes SCA and Melbourne Water to avoid double counting.
Expenditure
Over the past five years, cash outflows from Hobart Water have averaged $22.5 million per
annum. Around 57 per cent of these outflows were expenditure for operations, including
payments to the State Government which are likely to represent slightly fewer than
129
WSAAfacts 2005
130
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
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5 per cent, while 21 per cent of outflow was used for property, plant and equipment (capital
investment). Member councils received average dividends of $2.5 million per year.
Table 41 shows Hobart Water’s total cash outlays over the past five years.
Table 41 : Hobart Water Cash Outflows 2000/01 to 2004/05
2000/01 2001/02 2002/03 2003/04 2004/05
Operations
Total
5 Years
10.63
10.42
11.98
12.18
12.18
57.39
51%
Property, plant and
equipment
4.79
3.99
6.26
2.91
3.03
20.98
19%
Borrowing costs paid
2.58
4.00
4.84
4.64
4.10
20.15
18%
Tax equivalent payments
0.00
0.00
0.00
0.00
0.00
0.00
0%
Dividends payments
2.50
2.40
2.10
3.00
2.80
12.80
11%
Other
1.10
0.00
0.00
12.18
12.18
1.10
1%
TOTAL
21.61
20.81
25.18
22.73
22.10 112.42
100%
Notes: ‘Other’ includes all recorded gross outflows where proceeds/repayments of loans are treated
as one item.
For most recent years, there is no indication of taxation payments. For all years Hobart
Water made payments of just over $1 million per annum to State Government in the form of
‘Water Commission Rights’. These are included in ‘Payments to Suppliers and Employees’.
Note, discrepancies may occur due to rounding.
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and

the financial capacity of the State Government.
Each is examined in turn below.
Ability to recover costs: Hobart Water’s charges are set by the Minister assisting the
Premier on Local Government who sets maximum bulk prices. Hobart Water notes that its
charges are below these maximums. Real prices have increased by 3 per cent each year from
2002/03 to 2004/05, but in 2005/06, there was no real increase. In reviewing charges for the
three regional water authorities, the Government Prices Oversight Commission (GPOC)
provides minimum and maximum revenue targets to meet the principles set by CoAG. The
Commission observed that the recorded revenues for 2001/02 to 2003/04 fell below its
Minimum Target Revenue.131 It stated:
This reflects the acceptance by the authorities of a rate of return not only lower
than the commercial risk adjusted rate but also below the recommended target
rate of 4.5 per cent. It should be noted that the actual WACC [Weighted
131
GPOC (2004), p. 59.
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Average Cost of Capital] used for the minimum target revenue was a combined
rate of 4.5 per cent on pre-1998 assets and 7 per cent on post-1998 assets, the
values of which are relatively small.
Financial constraints: Hobart Water has a strong balance sheet and steady income stream.
One of its objectives is to maintain a commercial capital structure consistent with a Standard
and Poor’s credit rating of BBB+ to A–. It seeks to maintain an interest coverage ratio (one
of the key indicators of financial viability) of 1.8 to 2.2. Over the past three years, this
coverage has increased from 2.6 to 3.0.132
The financial capacity of the State Government: Hobart Water pays a “Water
Commission Rights” charge to the State Government, however, the payments represented
only around $1m each year, accounting for only 0.02 per cent of total State revenues in
2004/05.133 The average dividend payment of $2.56 million from Hobart Water in
2004/05134 represented 1 per cent or less of the total revenue to the council owners of Hobart
Water.
Performance
As Hobart Water is a bulk water supplier, it does not report similar performance statistics to
most other members of WSAA. Nor does it recycle wastewater. It operates in accordance
with the most recent 2004 Australian Drinking Water Guidelines, which focus on a multiple
barrier approach to managing water quality.
6.2.3. Key issues
The analysis highlights the following key issues with regard to water management in Hobart.

Hobart has not been subjected to severe restrictions such as those imposed on mainland
cities. Prior to 2003, it was noted by the Infrastructure and Resource Information
Service that the regional water supplier had excess capacity. Despite this, individual
councils imposed restrictions in 2003, but these were not extended in later years.

Hobart Councils continue to charge for residential water use on the basis of property
value. Metering for water use is therefore virtually non-existent.

Hobart Water does not appear to be contemplating any major water source upgrades.

In contrast to the approach of most other capital cities with storages capable of meeting
three to four years’ demand, Hobart Water does not have large storage reservoirs—the
total capacity of the storages is less than one-third of annual demand.

The dividends paid by Hobart Water represent one per cent or less of total revenue for
the council’s that jointly own Hobart Water.
132
Using the Productivity Commission’s measures for consistency, in 2003–04, debt to equity was 24.4 per
cent, interest cover 1.8 times (EBIT/gross interest expense) and current ratio 80.2 per cent. Productivity
Commission, Financial Performance of Government Trading Enterprises 1999–00 to 2003–04.
133
2004–05 Tasmanian State Government revenue $5,288 million. ABS Catalogue 5512.0, 2004-05
Government Finance Statistics
134
Total revenue across all local governments in Tasmania was $593m in 2004–05, ABS Catalogue 5512.0,
2004–05 Government Finance Statistics
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7. AUSTRALIAN CAPITAL TERRITORY
7.1. Institutional and governance arrangements
ACTEW is wholly owned by the Australian Capital Territory Government and acts as a
holding company that directly and indirectly supplies water and wastewater services to the
Australian Capital Territory and partly to the region. As a holding company ACTEW has
limited resources and requires external parties to deliver gas, electricity and water and
wastewater services.
In 2000 a joint venture was developed between ACTEW and a private business Australian
Gas Light (AGL) to form ActewAGL. This joint venture is an equal partnership between
both partners and provides a range of services in the energy sector and also includes the
provision of water and wastewater services to the Australian Capital Territory and the
region.
The joint venture for operating and maintaining the water supply and wastewater network
was previously arranged under a Contactor Alliance Agreement with ACTEW. This
agreement placed the majority of risk for the water business and funding on ACTEW. A
new Utilities Management Agreement (UMA) replaced this previous agreement,
redistributing the risk and rewards between both parties. The contract term for the UMA,
effective from 1 July 2004, is for four regulatory periods, i.e., between 16 to 20 years.
Under this new agreement ACTEW remains the regulated entity and continues to own and
invest in the network and hold key operating licences. ACTEW also continues to own the
water and wastewater customer relationship and receive regulated revenue from the business.
ActewAGL manages, operates and maintains the water and wastewater business according to
a schedule of services which include capital works and major maintenance programs.
The water business managed by this joint venture consists of two separate operations, water
and wastewater services. These operations involve:

water - retailing and distribution of water including billing, sales, planning, design and
maintenance of the network which reticulates water from water treatment plants to
customers, and the collection and treatment of bulk water supplies; and.

wastewater - management of billing, sales, planning, design and maintenance of the
network which reticulates sewage from customer installations to sewage treatment
plants and treatment of sewage, grease and oil disposals, to the required environmental
standards.
Incorporated into the UMA for the initial regulatory period of four years is an incentive for
ActewAGL to operate efficiently and generate earnings. Furthermore, the payments include
a margin amount, which is subject to a number of key performance indicators.
ACTEW is charged with complying with obligations set out in the Utility Services Licence
issued by the Independent Competition and Regulatory Commission (ICRC) under the
Utilities Act 2000. ACTEW provides an annual report to the ICRC on its obligations under
the licence and other reporting requirements of the Act. ACTEW is also subject to
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environmental regulations in respect of its operations of the Lower Molonglo Water Quality
Control Centre and to discharges from Googong Water Treatment Plant.
7.2. Case study: Australian Capital Territory
7.2.1. Water availability
Water Supply
The ACT draws its water supply from two separate catchment systems.

the Cotter River catchment. Wholly within the ACT, the Cotter River catchment was
the first to be developed and is part of the Namadgi National Park; and

the Googong system, which was developed on the Queanbeyan River in NSW.
Canberra’s water supply system is illustrated in Figure 26.
Figure 26: Canberra’s Water Supply System
Source:
ACTEW (2005) Future Water Options for the ACT Region- Implementation Plan: A
Recommended Strategy to Increase the ACT's Water Supply, April.
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Figure 27 shows the combined volume of water (as a percentage of the full volumes) stored
in the Bendora, Corin and Googong dams.
Figure 27: Combined Dam Volumes in 2005/2006
Source: http://www.actewagl.com.au/default.aspx?loc=/water/damCapacity.htm
[accessed 16 August 2006]
Supply / Demand Balance
The ACT is currently experiencing prolonged drought conditions and dam levels continue to
fall. Mandatory water restrictions have been in place in the ACT since December 2002.
Following an improved water situation during 2005 Stage 2 water restrictions were no longer
warranted and ACTEW introduced interim Permanent Water Conservation Measures
(PWCM) over the 2005-06 summer period. Support for this interim measure from the
Canberra community was favourable and it was introduced as a permanent measure in the
ACT in March 2006. The scheme is set out in Table 42.
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Table 42 : Water Conservation Measures
Limitation on use
Private gardens and lawns (other
than at commercial nurseries,
market gardens or by turf-growing
businesses)
Sprinkler and other irrigation systems can be used to water
lawns and plants only between 6pm and 9am on any day
from 1 September to 31 May (inclusive).
A hand-held hose fitted with a trigger nozzle, a bucket or a
watering can may be used at any time.
At all times gardens and lawns may only be watered
without causing pooling or runoff.
Lawns and plants at parks, sports
amenities, golf courses and public
gardens
Sprinkler and other irrigation systems can be used only
between 6pm and 9am on any day from 1 September to 31
May (inclusive).
A hand-held hose fitted with a trigger nozzle, a bucket or a
watering can may be used at any time.
At all times lawns and plants may only be watered without
causing pooling or runoff.
Paved areas
A bucket and mop or high-pressure low-volume cleaner can
be used to clean paved areas at any time.
Otherwise, water must not be used to clean paved areas
unless cleaning is necessary as a result of accident, fire,
health hazard or other emergency.
Vehicles
If not washed at a commercial car wash, any vehicle should
be washed on a lawn or other porous surface wherever
practicable and then may only be washed by using:
(i) a bucket or watering can;
(ii) a high-pressure low-volume cleaner; or
(iii) a hand-held hose fitted with a trigger nozzle.
Boat motors may be flushed or rinsed after use.
Windows and buildings
Windows may be washed or gutters cleaned at any time.
Other parts of a building may be washed at any time by
using a bucket and mop/brush or a high-pressure lowvolume cleaner, unless cleaning is necessary as a result of
accident, fire, health hazard or other emergency.
Construction and related activities
Water can only be used for dust or other pollutant
suppression by means of a hose fitted with a flow cut-off
device or a vehicle fitted with sprinklers.
Unless impractical, water may only otherwise be used by
means of a hose fitted with a flow cut-off device.
Wherever practicable non-potable water should be used.
Source: Permanent Water Conservation Measures scheme
PWCM falls within a range of programs intended to improve water efficiency in the ACT.
In April 2004, the ACT Government released: Think water, act water - a strategy for
sustainable water resources management. The strategy defined actions to achieve
sustainability objectives for water use in the ACT out to 2050, including to:

increase the efficiency of water use (including a target for a reduction in per capita
consumption of mains water of 12 per cent by 2013 and 25 per cent by 2023); and

provide a long-term reliable source of water for the ACT and region.
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Cost Of Options
As part of the development of the Think water, act water strategy, ACTEW produced an
evaluation report in April 2004: Options for the next ACT water source, which identified
nearly 30 possible options for a long-term reliable water source for the ACT. It concluded
that three options were suitable for more detailed assessment:
1.
building a new dam on the Cotter River, just downstream of, and thus effectively
enlarging, the existing Cotter Dam;
2.
building a new dam on the Gudgenby River near Mount Tennent, south of Tharwa;
and
3.
transferring water from Tantangara Dam in New South Wales to the ACT.
For each of the future water options, alternatives have been assessed on environmental,
social and economical aspects to determine the optimum proposal. The alternatives have
involved different sizes of storages, and different ways of treating and transferring water.
The report also included the Angle Crossing Option (formerly known as the Virtual Tennent
Option), whereby water allocated from the Gudgenby River is pumped from the
Murrumbidgee River to the existing Googong Reservoir instead of building a new storage,
and allowing Tantangara water to flow to the ACT along the Murrumbidgee River.
The cost of the three options where analysed in the report, Future Water Options for the ACT
Region- Implementation Plan: A Recommended Strategy to Increase the ACT's Water Supply
and are summarised in Table 43.
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Table 43: Future Water Options for the ACT Region- Implementation Plan
Cost for enlarged Cotter reservoir to 45 GL are:
 $98 million for the dam;
 $3.5 million for land clearing/site preparation;
 $1.5 million for pipelines;
 $14.9 million for the pump station; and
 $0.8 million for other infrastructure.
Cost for enlarged Cotter reservoir to 78 GL are $120 million.
Catchment remediation will be in addition to these costs.
Cotter
Assuming that treatment is at Tennent, costs for the three dam sizes
are estimated to be as follows, exclusive of operating costs:
 small 43 GL $185 million
 medium 76 GL $204 million
 large 159 GL $250 million
A decision to pipe the water to Stromlo water treatment plant would
result in a saving of $12 million for each of the above alternatives.
The preferred Virtual Dam alternative involving a weir near Angle
Crossing with water being pumped to Burra Creek and thence to
Googong Dam has been costed at $35 to $40 million, exclusive of
operating costs.
Tennant
Tantangara
Angle Crossing
Source:
Water rights purchase, storage fees, and hydro generation opportunity
costs apply to the Tantangara Option. These costs include the
following:
 Water purchase – a one-off capital cost of approximately $20M-30
million for 20 GL (high security entitlements) that pays for the
“right” to use this water; and
 Hydro electricity compensation paid to Snowy Hydro – an annual
operating cost of $4.6 -$5.9 million.
Transfer system capital costs between $35 million and $ 120 million.
Capital cost $35 - $40 million
ACTEW (2005) Future Water Options for the ACT Region- Implementation Plan: A
Recommended Strategy to Increase the ACT's Water Supply, April.
The report, Future Water Options for the ACT Region- Implementation Plan: A
Recommended Strategy to Increase the ACT's Water Supply, outlines the strengths and
weaknesses of the various options for additional water storage. Six key assumptions
underpin ACTEW's report: climate change and variability, bushfire impacts, population
growth, required environmental flows, the frequency of water restrictions and achieving the
Government's water efficiency targets.
The report recommended the implementation of the option to pump water from the
Murrumbidgee River near Angle Crossing to Googong Reservoir (the Angle Crossing
option) commence immediately. Based on the original assumptions in the report, the Angle
Crossing Option would have meant that the ACT would have a reliable water supply until
around 2023, without the need for long periods of water restrictions.
However, in a press statement issued in February 2006, the ACT’s Chief Minister,
announced that Angle Crossing option was no longer required immediately because the
recent Cotter-Googong Bulk Transfer program was “poised to play a bigger-than-anticipated
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part in securing Canberra’s water supply”. The bulk transfer scheme pumps water from the
Cotter reservoirs, which tend to overflow in the wetter seasons into the Googong reservoir.
Conservative estimates indicate that the bulk transfer scheme could transfer up to 12
gigalitres a year to Googong (about 20 per cent of the ACT’s average annual consumption).
ACTEW has indicated that it may be able to extract Murrumbidgee water at the Cotter
pumping station, using existing infrastructure, without the need to build new infrastructure to
pump water from Angle Crossing in the short to medium term.
In the longer term, the Future Water Options for the ACT Region- Implementation Plan: A
Recommended Strategy to Increase the ACT's Water Supply recommended that the
remaining options of an enlarged Cotter Dam to 78 gigalitres, a small 43 gigalitres or a large
159 gigalitres Tennent Dam and transferring water from Tantangara Dam down the
Murrumbidgee River into the ACT be retained as future viable options.
ACTEW conducts annual reviews of the Territory’s water supply planning. In a recent
report from June 2006 ACTEW concluded that no significant changes had taken place to
impact on ACTEW’s recommendations on future water supply.
7.2.2. Financial analysis of water utilities
Revenue And Cost Recovery
In 2004/05, Canberra residents were charged $276.50 for 250 kilolitres of water, which is
below the average price paid Australian capital cities.135 The charge for managing
residential wastewater was 5 per cent higher than the Australian average (ACTEW charged a
flat annual fee of $375.32).
Residential revenue represented 76 per cent of ACTEW’s total water revenue, significantly
more than the proportion of water used by residential customers (residential use represented
around 59 per cent of the total water use136). A breakdown of revenue sources is shown in
Figure 28.
135
WSAAfacts 2005
136
WSAAfacts 2005
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Figure 28: ACTEW - 2004/05 Revenue By Customer Group
Wastew ater nonresidential
15%
Wastew ater
residential
36%
Water nonresidential
19%
Water residential
30%
Source: Extrapolated from WSAAfacts 2005.
ACTEW has generated sufficient revenue over the past five years to broadly recover all cash
costs (including operating, capital investment, taxation, interest and dividend payments), as
demonstrated by the organisation’s relatively stable level of net debt ranging between $1.2
billion and $1.3 billion over the period.137
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing water services.
The full annualised cost includes operating and maintenance costs, administration costs,
depreciation and a standard industry return on the written down replacement cost of assets.138
ACTEW has an annualised full cost recovery for water of 80 per cent, exactly equal to the
average of all capital cities. Annualised cost recovery for all capital cities falls between
68 per cent and 92 per cent. Table 44 shows the cost recovery from ACTEW customers
compared with other Australian cities.
137
WSAAfacts 2005
138
This method of cost annualisation is often referred to as the Building Block approach and underpins the
economic regulation of prices in the water sector. However, price regulation will typically not reflect “full”
cost recovery and will use a Regulatory Asset Value rather than the Written Down Replacement Cost of
assets. The Building Block method ensures that operating costs are represented in the year they occur and
capital investment is represented over time through depreciation and a return on assets. Depreciation and
return on assets act in a similar manner to a debt repayment schedule, where the depreciation corresponds to
an annual principal repayment and the return on assets corresponds to the annual interest payments,
however the return on assets reflects a weighted average cost of debt and equity.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 44 : 2004/05 ACTEW Cost Recovery (Water Only)
ACTEW
Total annual
revenue/property1
Total annual
cost/property2
Annualised Cost
Recovery
Average Cost
Recovery3
482
601
80%
80%
Source: Adapted from WSAAfacts 2005
Notes: 1.
2.
3.
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a
6 per cent return on assets. See footnote 17 for further information. Differs from the Productivity
Commission’s measure of cost recovery, which does not include a return on assets.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported). Excludes SCA and Melbourne Water to avoid double counting.
Expenditure
Over the past two years,139 cash outflows from ACTEW have averaged $214 million per
annum. 36 per cent of these outflows were expenditure for operations, while 21 per cent of
outflow was used for property, plant and equipment. During the past two years dividends
and tax equivalent payments returned to the ACT Government have amounted to around
$108 million.
Table 45 shows ACTEW’s total cash outlays over the past two years.
Table 45 : ACTEW Cash Outflows 2000/01 to 2004/05
Total
2 Years
2003/04
2004/05
Operations
74.6
80.9
155.50
36%
Property, plant and equipment
37.1
53.8
90.90
21%
Borrowing costs paid (1)
32.3
32.3
64.60
15%
Tax equivalent payments
12.6
14
26.60
6%
Dividends payments (2)
9.7
71.5
81.20
19%
Other (3)
5.7
3.2
8.90
2%
TOTAL
172
255.7
427.7
100%
Source: ACTEW Annual Accounts 2004/05
Notes: 1.
2.
3.
139
Includes repayment of borrowings.
ACTEW Corporation’s 2004/05 dividend policy is an 80 per cent interim and 20 per cent
final dividend payment of profit from ordinary activities after income tax expense. The
80 per cent interim dividend payment is based on estimated profit since this is not
confirmed until after 30 June 2005. This payment is made to ACT Treasury at the end of
June of the current financial year and the interim payment in October of the following
financial year. The interim and final dividends for 2003–04 were postponed to 2004–05
to assist the financing of the new Stromlo and expanded Googong water treatment plants.
Payment for investments.
Longer time series was not available.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Following the joint venture arrangement forming ActewAGL, a $119 million capital
repatriation was made by ACTEW to the ACT Government. This was in addition to a total
of $400 million repatriated in 1998 and 2000 collectively.
Over the past few years, ACTEW has increased expenditure as a result of catchment
remediation, fire damage recovery and other major projects in response to the 2003
bushfires.140 In addition, expenditure related to the management of water restrictions has
increased.
ACTEW has generally maintained and increased the level of dividend seen in the years
before the joint venture.
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

the ability to recover costs;

the organisation’s financial capacity; and

the financial capacity of the Territory Government.
Each is examined in turn below.
Ability to recover costs: The Independent Competition and Regulatory Commission are
responsible for determining the tariffs that ACTEW applies for the provision of water and
wastewater services in the ACT. In order to determine these charges, ICRC undertakes an
inquiry into ACTEW’s water and wastewater business on a regular basis, typically once
every four or five years.
In simple terms, the ICRC regulates the pricing of the services provided by ACTEW by
determining the efficient and prudent cost of providing the services and calculating water
and wastewater tariffs to cover these costs.141
Each inquiry results in the determination of a price path to apply for the length of the
subsequent review period. The most recent review determined a price path to apply for the
four years from 1 July 2004 to 30 June 2008. Built into these price paths are annual price
resets which adjust tariffs annually to allow for inflation, efficiency gains, and changes in
other aspects of the operation of the network that have been foreshadowed in the price path
determination. These annual price resets also allow the opportunity to adjust tariffs to take
account of unforeseen events, such as droughts or unexpected capital construction activity.
The current price path allows average revenue per customer to grow annually by the increase
in the Consumer Price Index (CPI) plus 2.5 per cent for water customers and CPI plus 1 per
cent for wastewater customers.
140
A bushfire, which started in the summer of 2002–03 in the water supply catchment was unable to be
contained and reached the ACT urban areas on 18 January 2003, destroying more than 500 homes and
damaging water infrastructure. The bushfire burnt most of the water catchment of the Cotter River. With
the ground denuded of vegetation, the runoff from the Cotter catchment was compromised and vulnerable to
long-term (50 to 80 years) water quality problems after storm events.
141
That is, the building-block methodology, where tariffs are calculated to recover the efficient costs incurred
in operating and maintaining the water and wastewater network as well as granting a return on the value of
capital stock and depreciation of this capital stock.
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Financial constraints: Despite some challenging financial years as a result of costs
associated with the 2003 Canberra bushfires, drought and a return of capital to the ACT
Government, ACTEW’s financial position has remained strong since the beginning of the
joint venture and has continued to make contributions to the Territory’s revenue.
The financial capacity of the Territory Government: The ACT Government has a ‘triple
A’ credit rating with Standard & Poor’s, signalling an extremely strong capacity to meet its
financial commitments.
Performance
Table 46 shows several key indicators of performance for ACTEW in 2004/05.
Table 46 : ACTEW Performance Indicators
Performance Indicator
Value
Australian
Average1
Number of water main breaks per 100 km of water main
18.5
29.9
Infrastructure leakage index
(real losses / unavoidable real losses)
1.5
1.7
Percent of water recycled
14%
8.2%
Number of water quality complaints per 1,000 properties
6.1
4.5
Average connect time to operator (seconds)
123
27.6
ADWG 1996
See below
Water quality standard
Notes: 1. Simple average of Australian organisations appearing in WSAAfacts 2005.
ACTEW performs above average on number of main breaks, leakage and water recycling,
while performance is below average for average time to respond to telephone enquiries and
complaints. ACTEW provides water in accordance with the 1996 Australian Drinking
Water Guidelines.
7.2.3. Key issues
The analysis highlights the following key issues with regard to water management in ACT:

Significant effort is devoted to understanding and forecasting water supply requirements
in the ACT region. This is illustrated by ACTEW’s annual review of the Territory’s
water supply planning.

Major augmentation of water supply is not on the immediate horizon. The recently
constructed Cotter–Googong Bulk Transfer program and ACTEW’s ability to extract
Murrumbidgee water at the Cotter pumping station, using existing infrastructure, may
reduce the need for new infrastructure in the short- to medium-term. If the Angle
Crossing Option is constructed, the ACT should have a reliable water supply until at
least 2023.

ACTEW has no immediate cash constraints even with the extra expenditure needed to
deal with the impact of fires on water catchments and water quality and the ACT
Government remains in a strong financial position.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
8. NORTHERN TERRITORY142
8.1. Institutional and governance arrangements
Water services in the Northern Territory are provided by the Power and Water Corporation
(PAWC), a government-owned corporation. PAWC was corporatised in 2002 and operates
under the Power and Water Corporation Act 2002.
PAWC is an integrated utility company providing with major services including:

electricity generation, distribution and retail;

water storage provision, potable water distribution and reticulation; and

electricity, water and sewerage service provision in 80 remote Aboriginal communities
under a CSO arrangement.
Under its Act, the functions of PAWC in relation to water and sewerage are:

to acquire, store, treat, distribute, market and otherwise supply water for any purpose;

to collect, store, treat, market and dispose of wastewater; and

to undertake, maintain and operate any works, system, facilities, apparatus or equipment
required to meet service requirements.
In the NT, most towns rely on groundwater. Darwin and Katherine are the exceptions and
use a combination of groundwater and surface water supplies. Limited water treatment is
required and in most cases supplies are only disinfected prior to use.
In the NT an independent industry regulator, the Utilities Commission oversees the provision
of water services by the PAWC. The Commission is responsible for the promotion and
safeguard of competition and fair and efficient market conduct or, in the absence of a
competitive market, the simulation of competitive market conduct and the prevention of the
misuse of monopoly power.
On 1 January 2001, the Commission was assigned a regulatory role in the water and
sewerage industries with the passage of the Water Supply and Sewerage Services Act 2000.
8.2. Case study : Darwin
8.2.1. Water availability
Water Supply
The Darwin River Dam, provides up to 90 per cent of Darwin's water supply. Other water
supplies come from Manton Dam, about 65 kilometres south of the city, and bores in the
142
Analysis of the current situation in the Northern Territory is largely based on information sourced from the
NT government website and Power and Water Corporation Annual Reports.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
McMinns area, about 30.5 kilometres south of the city. A map of the water supply system is
provided in Figure 29.
Figure 29: Darwin Water Supply Map
Source: http://www.nt.gov.au/powerwater/aboutus/darwin_river_dam.htm
PAWC has a closed catchment and reservoir policy for Darwin River Dam and recreational
access to the catchment area and the Dam is prohibited. The prevention approach rather than
treatment approach is adopted for managing this system and this has enabled PAWC to avoid
the capital cost of around $40 million for a conventional water treatment plant for Darwin
River Dam and lower operating costs.
The Darwin River Dam has a capacity of 265 GL. Storage levels rarely drop below
50 per cent during the dry season and typically increase to around 100 per cent over the wet
season (Figure 30). The dam is situated so that water flows by gravity to the pumping
station and is pumped to storage tanks in the Darwin area.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Figure 30: Darwin River Dam Storage
Source: http://www.nt.gov.au/powerwater/aboutus/darwin_river_dam.htm
Although the capacity of the Darwin River Dam would appear to meet medium population
growth projections143, PAWC has indicated that they are investigating raising the Darwin
River Dam to cater for future population growth.144 Darwin residents use twice as much
water on average as other Australian capital cities, however, the greatest demand for
additional water comes from new developments, such as a gas and fertiliser plant. Provision
of these services is critical to attracting major investments and it is proposed to provide these
services under fully commercial arrangements (including infrastructure augmentations).
Water Use Efficiency And Reuse Initiatives
Despite the fact storage levels remain high and are replenished regularly in the wet season in
the north of the Territory, PAWC has an active water use efficiency education program.
This is particularly the case for the southern parts of the Territory where town water is
supplied from bores. In some areas, such as Alice Springs, the use of these bores is limited
by recharge. In 2003, PAWC commenced a $9.4 million water reuse project in Alice
Springs. The project will use dry weather overflows from the Alice Springs waste
stabilisation ponds, and recycle the effluent water for reuse. There are also wastewater and
aquifer recharge projects being trialled at Uluru, partly funded by the Australian Government
Water Fund.145
143
According to NT Treasury, population growth in the Territory gained momentum in 2005, with Northern.
Further out, population growth is expected to remain strong at 1.5 per cent in the year to December 2006.
For the remainder of the decade, population growth is forecast to average around 1.2 per cent. Beyond 2007,
prediction is difficult due to uncertainty surrounding the likelihood of future major employment-creating
projects, which will be the major determinant of net migration to the Territory.
144
PAWC press release, Darwin River Dam Hits Full Capacity, 6 April, 2006. Available at:
http://www.nt.gov.au/powerwater/news/media_releases/2006/0704_darwin_river_dam_hits_full_capacity.ht
m
145
Information on this and other projects in the NT are available at: http://www.nwc.gov.au/
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Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
8.2.2. Financial analysis of water utilities
Revenue And Cost Recovery
In 2004/05, Darwin residents were charged close to the lowest average water price of any
Australian capital city ($272.24 for 250 kilolitres).146 In addition, the charge for residential
wastewater was also below average at a flat rate of $322.06.
Residential revenue represented 50 per cent of PAWC’s total water revenue, significantly
more than the proportion of water used by residential customers (residential use represented
30 per cent of the total water supplied by Power Water147). A breakdown of revenue sources
is shown in Figure 31.
Figure 31: PAWC - 2004/05 Revenue By Customer Group
Wastew ater nonresidential
11%
Water nonresidential
32%
Wastew ater
residential
25%
Water residential
32%
Source: Extrapolated from WSAAfacts 2005.
PAWC’s (the entire entity’s) revenue over the last three years has been insufficient to
recover all cash costs (including operating, capital investment, taxation, interest and dividend
payments), as demonstrated by the organisation’s increase in net debt from $56 million to
$89 million over the period.148
An alternative, and more meaningful, measure of cost recovery is the degree to which the
organisation’s annual revenue recovers the full annualised cost of providing services. The
full annualised cost includes operating and maintenance costs, administration costs,
depreciation and a standard industry return on the written down replacement cost of assets.
PAWC has an annualised full cost recovery for water of 80 per cent, the average of all
capital cities. Annualised cost recovery for all capital cities falls between 68 per cent and
92 per cent. Table 47 shows the cost recovery from PAWC customers. Total annual
revenue per property and total annual cost per property is the highest in Australia.
146
WSAAfacts 2005
147
WSAAfacts 2005
148
WSAAfacts 2005
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
Table 47: 2004/05 PAWC Cost Recovery (Water Only)
Total annual
revenue/property1
Total annual
cost/property2
Annualised Cost
Recovery
Average Cost
Recovery3
689
863
80%
80%
PAWC
Source: Adapted from WSAAfacts 2005
Notes: 1.
2.
3.
Total revenue per property represents total revenue raised by the organisation (including customer
revenue and Community Service Obligation payments from government) divided by the total number
of properties.
Total cost represents the total annual cost of supply, including operating cost, depreciation and a
6 per cent return on assets. See footnote 17 for further information. Differs from the Productivity
Commission’s measure of cost recovery, which does not include a return on assets.
Average for all Australian capital cities reported in WSAAfacts 2005 (Hobart cost per property not
reported). Excludes SCA and Melbourne Water to avoid double counting.
Expenditure
Over the past five years, cash outflows from the entity PAWC have averaged $476 million
per annum. Just less than 70 per cent of these outflows was expenditure for operations,
while 14 per cent of outflow was used for property, plant and equipment. During the past
two years dividends of around $20 million have been returned to the NT Government.
Table 48 shows PAWC’s total cash outlays over the past five years.
Table 48: PAWC Water Cash Outflows 2000/01 to 2004/05
2000/01
2001/02
2002/03
2003/04
2004/05
Total
5 Years
Operations
343.5
318.5
351.0
363.8
375.7
1,409.0
69%
Property, plant and
equipment
40.2
48.4
50.0
75.0
79.0
292.6
14%
Borrowing costs paid1
35.7
36.8
45.2
46.1
47.6
211.4
10%
Tax equivalent
payments
-
0.5
-
-
27.0
27.5
1%
Dividends payments
23.8
8.6
9.2
20.0
20.0
81.6
4%
Other2
-
2.0
4.1
7.1
1.3
14.5
1%
TOTAL
443.2
414.8
459.5
512.0
550.6
2,036.6
100%
Source: Various Annual Accounts of PAWC
Notes: 1. Includes repayment of borrowings.
2. Payments for development expenditure.
Constraints To Investment
Investment in the water industry can be constrained in three primary ways:

ability to recover costs;

organisation’s financial capacity; and
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies

the financial capacity of the NT Government.
Each is examined in turn below.
Ability to recover costs: PAWC tariffs are determined annually by the NT Government,
with regulatory oversight by the Utilities Commission.
PAWC’s most recent annual accounts show unaudited costs and revenue for water supply
and sewerage services based on guidelines from CoAG Strategic Framework for Water
Reform. These show that the revenue generated by providing services (in all regions of
service) cover the expenses related to Operations, Maintenance, Administration, Debt
Servicing and Asset Consumption.
Financial constraints: PAWC has a strong balance sheet and steady income stream.
Financial indicators of financial capacity indicate no signs of financial distress.149
The financial capacity of the NT Government: PAWC’s dividend and tax payments are
included as revenue in the NT Government Budget and therefore impact Territory financial
policy. As at 30 June 2005, NT Treasury Corporation’s total outstanding debt was $1,947
million. The Corporation is rated Aa2 by Moody's Investors Service. The Corporation's
credit rating has a 'stable' rating outlook based on the ongoing support by the Australian
Government policies designed to improve the Territory's fiscal and debt position.
Performance
Table 49 shows several key indicators of performance for PAWC in 2004/05.
Table 49: PAWC Performance Indicators
Performance Indicator
Number of water main breaks per 100 km of water main
Value
Australian
Average1
44.3
29.9
Infrastructure leakage index (real losses / unavoidable real
losses)
5.8
1.7
Percentage of water recycled
4.1%
8.2%
Number of water quality complaints per 1,000 properties
2.7
4.5
Average connect time to operator (seconds)
n.a.
27.6
Water quality standard
ADWG 1996
See below
Notes: 1. Weighted average of Australian organisations appearing in WSAAfacts 2005.
In terms of number of main breaks, leakage performance and water recycling, PAWC
underperforms compared with the Australian average, however, with regard to the number of
quality complaints PAWC performs above average.
149
In 2003/04, debt to equity was 52.1 per cent, interest cover 2.6 times (EBIT/gross interest expense) and
current ratio 133.1 per cent. Productivity Commission, Financial Performance of Government Trading
Enterprises 1999-00 to 2003-04.
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RESEARCH NOTES, 20 November 2006
Department of the Prime Minister and Cabinet
Securing Australia’s Urban Water Supply: Selected case studies
8.2.3. Key issues
The analysis highlights the following key issues with regard to water management in the
Northern Territory.

Contrary to many other capital cities, there are no immediate water supply problems in
the Darwin region. Climate conditions appear to be favourable, allowing dams to be
filled. Storage levels in the Darwin River Dam reached 100 per cent in April 2006.
Nevertheless, PAWC indicated they are investigating raising the Darwin River Dam to
cater for future population growth and industrial demand.

Despite high storage levels, PAWC has an active water efficiency education program.
This is necessary because of the less water-rich southern parts of the Northern Territory,
where town water is supplied from bores. In some of these areas, such as Alice Springs,
the bores have a limited recharge.

There do not appear to be any financial constraints to investment.

There would appear to the room for improvements in water infrastructure to improve
operational performance and minimise water main breaks and leakage.
— || —
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RESEARCH NOTES, 20 November 2006