Review of the Operating Licence for Hunter Water Corporation

Hunter Water Corporation submission to IPART May 2011

Review of the Operating Licence for Hunter Water Corporation Hunter Water Corporation submission to IPART

May 2011

All inquiries about this submission should be directed to the Manager, Business Strategy and Economics

02 4979 9530

02 4925 2078

price.review@hunterwater.com.au

Review of the Operating Licence for Hunter Water Corporation Hunter Water Corporation submission to IPART

HW2010-2072 May 2011 Hunter Water Corporation 36 Honeysuckle Drive Newcastle, NSW 2300 PO Box 5171 HRMC NSW 2310 www.hunterwater.com.au

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Contents

Contents ......................................................................................................................... i 

1  Introduction ............................................................................................................ 1 

1.1  About the operating licence .............................................................................. 1 1.2  Developments since 2007 licence review ........................................................ 2 1.3  Hunter Water’s performance under the current licence .................................... 5 1.4  Structure of this submission ............................................................................. 8 

2  Evaluation matters ................................................................................................ 9 

2.1  About evaluation matters .................................................................................. 9 2.2  Consultative forum ......................................................................................... 10 2.3  Integrated Water Resources Plan .................................................................. 10 

3  The structure of the next licence ....................................................................... 13 

3.1  Regulatory best practice ................................................................................. 14 3.2  IPART’s proposed changes to the structure ................................................... 14 3.3  Hunter Water’s proposals for quality management ........................................ 15 3.4  Other proposals for licence structure ............................................................. 16 3.5  Costs and benefits of changes to the structure to the licence ........................ 17 

4  Water quality ........................................................................................................ 18 

4.1  Australian Drinking Water Guidelines ............................................................. 18 4.2  Hunter Water’s application of the ADWG framework ..................................... 19 4.3  Water quality monitoring and reporting obligations ........................................ 21 4.4  Regulatory arrangement with NSW Health .................................................... 22 4.5  Hunter Water’s recommendations .................................................................. 23 

5  Environmental management .............................................................................. 25 

5.1  Current plans and systems ............................................................................. 25 5.2  Moving towards system accreditation ............................................................ 26 

6  Asset management .............................................................................................. 28 

6.1  Asset management at Hunter Water .............................................................. 29 6.2  Hunter Water’s Aquamark performance ......................................................... 30 6.3  Aquamark as an operating licence framework ............................................... 31 

7  Customer and consumer obligations ................................................................ 33 

7.1  Credit and hardship management .................................................................. 33 

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7.2  Complaint and dispute handling ..................................................................... 34 

8  Compliance audits of the licence ....................................................................... 36 

8.1  Legislative requirements ................................................................................ 36 8.2  Conduct of Audits ........................................................................................... 37 

References .................................................................................................................. 38 

Appendix A - Letter from IPART ................................................................................ 40 

Appendix B - Benefits from ISO compliance ........................................................... 42 

8.3  B.1 Benefits of ISO 9000 Quality Management System ................................ 42 8.4  B.2 Benefits of ISO 14000 Environmental Management System .................. 43 

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1 Introduction

Main Points

• The operating licence is Hunter Water’s overarching regulatory instrument and prescribes the outcomes that must be achieved for public health, infrastructure performance, environmental management and customer service.

• Since its issue, a number of amendments have been made to the current licence including changes to Hunter Water’s area of operations, system performance standards, customer contract and provisions for debt and disconnection.

• As these amendments have been addressed recently in detail, Hunter Water supports IPART’s position to not revisit these as part of this licence review process.

• Throughout the current licence period, and in previous licence periods, Hunter Water has consistently performed well and achieved predominantly full compliance with the terms of the licence.

1.1 About the operating licence Hunter Water supports the need to periodically review its operating licence and welcomes the opportunity to work with IPART, Hunter Water’s other regulating bodies and the community on the development of a new licence.

The operating licence is Hunter Water’s overarching regulatory instrument, giving practical effect to the objectives for the licence set out in the Hunter Water Act 1991. The operating licence prescribes the outcomes that Hunter Water must achieve for public health, infrastructure performance, environmental management and customer service.

The role of the operating licence is set out in the Hunter Water Act 1991. The licence should focus on:

• the core activities required to operate systems and deliver services for water, wastewater, recycled water and stormwater

• performance standards for systems and services

• interactions with customers and consumers

• environmental indicators and management, and

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• monitoring, reporting and auditing compliance with the requirements of the licence.

Hunter Water’s commitment to meeting the licence requirements is demonstrated by its consistently strong performance in IPART's annual licence compliance audits. The audits provide the means to monitor and report publicly on Hunter Water’s performance. Although operating licence standards have progressively tightened over time, Hunter Water has consistently achieved predominantly full licence compliance, both during its current licence period and throughout previous licence periods.

1.2 Developments since 2007 licence review

Changes to Hunter Water’s area of operations Following extensive discussion between Hunter Water and Dungog Shire Council and consultation with the Dungog Shire community, a resolution was made in October 2007 to transfer Dungog Shire Council’s water and sewer operations to Hunter Water.

On 1 July 2008, Hunter Water’s area of operations was officially extended to include the Shire of Dungog. This expanded Hunter Water’s area of operation to cover a total of 5,366square kilometres with a population of 533,874 in the local government areas of Cessnock, Dungog, Lake Macquarie, Maitland, Newcastle, Port Stephens and a small part of Singleton Shire. At 30 June 2010, there were 224,845 properties connected to Hunter Water’s water network and 213,023 to the wastewater network.

Figure 1.1 Hunter Water’s area of operations

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Introduction of new system performance standards In 2006, IPART engaged consultants, GHD, to advise it on appropriate new system performance standards for Hunter Water and Sydney Water for water continuity, water pressure and sewer overflows. IPART chose not to implement the new standards at the start of the current operating licence or, as proposed at the commencement of the current licence, as part of the 2009 price determination. However following further refinement and public exhibition in 2009, the new system performance standards were gazetted on 16 July 2010. These changes are shown in Table 1.1.

Table 1.1 Amendments to system performance standards

Area 2007 Operating Licence Standard and Target

July 2010 amended Standard and Target

Drinking Water Continuity No more than 14,000 properties shall experience cumulative water interruptions (whether planned or unplanned) of more than 5 hours in a financial year.

1. No more than 10,000 properties shall experience an unplanned interruption of more than 5 hours in a financial year, and

2. No more than 5,000 properties shall experience 3 or more unplanned interruptions in a financial year.

Drinking Water Pressure No more than 4,800 properties shall experience one or more pressure incidents (pressure less than 20 metres at the connection the main for more than 30 minutes) in a financial year.

No more than 4,800 properties shall experience a pressure failure in the financial year.

(N.B. Determined using an updated modelling approach compared with the current target. The standard is to apply on all days when system demand is less than 370 megalitres per day. Properties experiencing low pressure on days when demand exceeds 370 megalitres per day will not be included in the count. Typically, daily demand is around 200 megalitres per day.)

Sewer Overflows No more than 6,500 uncontrolled dry weather sewage overflow events in a financial year (other than on public land).

1. No more than 5,000 private properties shall experience a dry weather sewage overflow in a year, and

2. No more than 45 private properties shall experience a dry weather overflow three or more times in a year.

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As this extensive review was completed relatively recently, Hunter Water supports IPART’s view that it is unnecessary to revisit the setting of the system performance standards.

Review of the customer contract The customer contract forms schedule 2 of the current operating licence and sets out the rights and obligations of Hunter Water’s customers in relation to the services provided through Hunter Water’s systems.

At Hunter Water’s request, IPART carried out a review of Hunter Water’s customer contract during the term of the licence, in accordance with clause 5.1.5 of the operating licence, which states that ‘IPART may, unless required by the Minister, initiate a review of the customer contract during the term of the licence.’

The review process involved extensive consultation with key interest groups, Hunter Water’s customer panel and its consultative forum in 2010. The new customer contract was gazetted on 11 March 2011, and is to become effective from 1 July 2011.

Hunter Water requested this review be undertaken during the term of the licence, rather than waiting until this operating licence review because the existing contract had been in place since 2003 and had become dated in some aspects and did not cover a number of changes that had occurred in the operating environment over that time. As a result, Hunter Water anticipated that the review required would be extensive and both Hunter Water and IPART had resources available at that time to support the review.

The development of the new customer contract will benefit Hunter Water and its customers by bringing the contract in line with the new system performance standards, aligning it with new and changed processes that have emerged – for example, improving clarification for customers, and ensuring Hunter Water is adequately covered in areas that were either not included or were inconsistently or insufficiently covered, in the current contract.

As a comprehensive public review of the customer contract has just been completed, Hunter Water supports IPART’s view that it is unnecessary to revisit the contract as part of this review.

Amended provisions for debt and disconnection During the review of Hunter Water’s customer contract, it was IPART’s view that clause 5.3 - Code of practice and procedure on debt and disconnection of Hunter Water’s operating licence be amended concurrently. This was to ensure that the full suite of strengthened customer hardship provisions, both in the customer contract and operating licence, works together to protect customers.

While Hunter Water’s initial position on this matter was that a review of clause 5.3 could form part of this review, it had no objections to IPART’s intention to proceed with the amendment ahead of the formal operating licence review. This resulted in clause 5.3 in the existing licence being replaced with a new clause - Practices and procedures relating to customer hardship, debt, water flow restriction and disconnection for non payment, which immediately provides more detailed and prescriptive requirements in this area.

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This amendment was gazetted with the new customer contract on 11 March 2011 and as such, it is Hunter Water’s view that this section of the licence does not need to be revisited as part of this review.

1.3 Hunter Water’s performance under the current licence Hunter Water’s performance under its operating licence is subjected to an annual licence compliance audit undertaken by external consultants engaged by IPART.

The audits assess Hunter Water’s performance against five sections of the operating licence; water quality, infrastructure performance, customer and consumer rights, environment management and indicators and management of supply and demand. Hunter Water’s commitment to meeting the requirements of the licence is demonstrated by its consistently strong performance across all sections of these audits, which are made available to the public. From these audit findings, the community can be assured that Hunter Water:

• treats drinking water to a high quality

• manages its systems well

• effectively implements its Integrated Water Resources Plan, and

• minimises its impact on the environment.

Figure 1.2 below summarises Hunter Water’s increasingly strong compliance performance during the first three years of the current licence.

Figure 1.2 Hunter Water’s current operating licence audit performance

Hunter Water has also performed strongly throughout the period against the system performance standards set out in the licence across the areas of water quality, water continuity, water pressure and wastewater overflows. These results are presented against the former system performance standards because the new standards were not effective until July 2010 and for the first full reporting year (2010-11) cannot yet be presented. Figure 1.7 appearing later gives a snapshot of forecast performance against the new standards.

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Figure 1.3 Water quality performance during current licence period

Hunter Water has consistently performed above the operating licence requirement to comply with the Australian Drinking Water Guidelines to achieve more than 98 per cent of samples with a zero e-coli count (measured on a rolling basis over 12 months) as well as meeting the physical and chemical water quality requirements against 12 key parameters.

Figure 1.4 Water continuity performance during current licence period

Throughout the current licence period, Hunter Water has performed strongly against the water continuity system performance standard of no more than 14,000 properties to experience cumulative water interruptions (whether planned or unplanned) of more than five hours in a financial year. As can be seen in Figure 1.4 above, its performance has been well below the licence limit each year.

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Figure 1.5 Water pressure performance during current licence period

Hunter Water also performed well throughout the licence period against the requirement for no more than 4,800 properties to experience one or more pressure incidents (pressure less than 20 metres at the connection the main for more than 30 minutes) in a financial year. Figure 1.5 shows that it performed well below the licence limit of 4800 properties affected by low pressure.

Figure 1.6 Sewer overflow performance during current licence period

Figure 1.6 above demonstrates that Hunter Water also performed strongly against the requirement for no more than 6,500 uncontrolled dry weather sewer overflow events in a financial year (other than on public land), with the total events each year falling well below the maximum set by the licence limit.

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Figure 1.7 Forecast 2010-11 performance against new system performance standards

As detailed in section 1.2, Hunter Water’s system performance standards were changed in July 2010. As can be seen in Figure 1.7, based on the year to date results for 2010-11, it is forecast that Hunter Water will meet the requirements of the licence across all five system performance standards.

1.4 Structure of this submission This first section of the submission has summarised Hunter Water’s operating environment to provide further detail to the background provided in section 2 of IPART’s issues paper. It also provides context for the discussion in the following sections of this submission.

The following sections cover:

Section 2 The evaluation issues raised in section 5 of IPART’s issues paper Section 3 The structure of the next licence in response to sections 3 and 4 of the

issues paper Section 4 Licence provisions in relation to water quality in response to section 3 of

the issues paper Section 5 Licence provisions in relation to environmental management in

response to section 3 of the issues paper Section 6 Licence provisions in relation to asset management in response to

section 3 of the issues paper Section 7 Customer and consumer obligations Section 8 Licence provisions in relation to operational audits of the licence and

IPART’s obligations.

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2 Evaluation matters

Main Points

• Hunter Water supports IPART’s proposal to exclude from the operating licence review consideration of new targets, standards, indicators or other proposals for the Integrated Water Resources Plan (IWRP) at this stage.

• Hunter Water’s has made significant progress towards the delivery of objectives set out in the 2008 IWRP and will continue working towards the targets of the plan until the LHWP is unveiled.

• The Lower Hunter Water Plan (LHWP) announced in November 2010 will fulfil the future IWRP requirements.

• The development of the LHWP is expected to take up to two years and therefore will be completed after the new operating licence commences on 1 July 2012.

• New IWRP licence conditions should be left until the Lower Hunter Water Plan is finalised at which time the conditions of the operating licence can be varied, unless other regulatory mechanisms emerge as part of the plan.

2.1 About evaluation matters The current operating licence issued to Hunter Water requires that certain aspects of the licence be reviewed as part of the end-of-term review. These aspects are:

• the effectiveness of the consultative forum and compliance with the consultative forum charter (clause 5.4.8)

• the outcomes achieved by the Integrated Water Resources Plan (IWRP) (clause 9.2.7), and

• proposed targets, standards and indicators and other proposals for the IWRP.

IPART proposes to limit the scope of the review of the IWRP following the Government’s 2010 decision to develop a Lower Hunter Water Plan after it refused planning approval for Hunter Water’s proposed Tillegra Dam. Responsibility for developing the plan rests with the NSW Office of Water, working collaboratively with Hunter Water.

While the Government refused planning approval for the Tillegra Dam proposal, it did acknowledge the existence of a supply and demand imbalance for the urban communities of the lower Hunter. In this light, there is a need to revise and update the

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IWRP to ensure it complies with the clause 9.2 of the operating licence. It is expected that the proposed Lower Hunter Water Plan announced in November 2010 will fulfil the IWRP requirements of a future licence.

The development of an updated plan is expected to take up to 2 years and therefore will be completed after the new operating licence commences on 1 July 2012. Accordingly, IPART intends to conduct a more comprehensive review of the IWRP once the Lower Hunter Water Plan is finalised.1

2.2 Consultative forum In late 2010, Hunter Water’s community consultative forum undertook a self assessment review of the effectiveness of the forum and compliance with its charter.

The assessment established that there was a high level of agreement as to the clarity of the role and responsibilities of the forum members. The assessment also found that meetings are of appropriate frequency and structure to enable forum members to effectively discharge their duties and participate in discussions for a two-way exchange of information.

The forum was seen to enable community involvement in issues relevant to Hunter Water’s performance. Forum members considered that the topics discussed and workshopped were appropriate for members’ organisations or constituencies.

The assessment process also discussed a range of mechanisms to assist forum members in facilitating communication about forum activities with their organisations or constituencies. One initiative under development is a secure dedicated area on the Hunter Water website that can be used by forum members to ask questions, receive information and engage in discussion between forum meetings.

In 2011, a series of workshops is planned with the forum seeking input from members into areas such as the new Lower Hunter Water Plan, proposed water efficiency initiatives and the planning for Hunter Water’s 2012 price submission to IPART.

Hunter Water is committed to engaging effectively with the forum and has implemented a number of incremental improvements over time.

The costs of the proposed initiatives outlined above are not considered to be sufficiently material to justify cost-benefit analysis of the type sought by the issues paper. Equally, the benefits of more effective engagement with the forum will be difficult to isolate from Hunter Water’s broader communications initiatives with the community and hence difficult to quantify for the purposes of economic analysis. Nevertheless, Hunter Water is happy to provide any relevant available information to IPART during the proposed analysis stage of the licence review.

2.3 Integrated Water Resources Plan

Background

In 2002-03, Hunter Water developed its first comprehensive Integrated Water Resources Plan (IWRP) in consultation with the community. An Integrated Water

1 IPART, 2011, Table 1.1, page 4

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Resources Plan is a blueprint for achieving an optimal mix of the available demand and supply options to meet water demands in the lower Hunter for today and tomorrow.

Due to a number of material changes to the demand and supply balance, and in accordance with the requirements of the 2007 operating licence, the IWRP was revised in 2008 and replaced by the H250 Plan, published in December 2008.2

As published, the H250 Plan outlined how Hunter Water would maintain the forecast water supply and demand balance over the next 50 years. The plan incorporated the key actions announced by the State Government in 2006 and a number of new water efficiency programs. The main actions outlined in the plan are:

• Supply – a proposal to build the 450,000 megalitre Tillegra Dam in the upper Williams River and install greater pumping capacity at Balickera pump station to transfer additional high flows from the Williams River into Grahamstown Dam

• Recycling – a major recycled water scheme for industrial customers in Kooragang/Mayfield West industrial precincts, development of reticulated recycled water schemes for large greenfield residential subdivisions and ongoing maintenance of existing recycled water programs

• Loss Minimisation – maintenance of existing programs and development of a new pressure reduction program to minimise losses from the water distribution system

• Water Efficiency – maintenance of existing programs and a large number of new programs aimed at improving water efficiency for residential and business customers. Implementation of the H250 Plan involved significant investment to maintain existing programs, continue to develop existing commitments and develop and implement new water efficiency programs.

As mentioned earlier in this submission, refusal of planning approval for the Tillegra Dam proposal has resulted in commencement of a new planning initiative, the Lower Hunter Water Plan. The role of this plan in the context of the operating licence requirements is outlined in the Future considerations section below.

Progress on 2008 Integrated Water Resources Plan

Since the development of the current IWRP in 2008, significant progress has been made on delivering actions to improve the water security of the lower Hunter.

Some major highlights since 2008 include:

• completion of the Balickera pump station upgrade, which has increased the pumping capacity to transfer additional high flows from the Williams River into Grahamstown Dam

• delivery of a range of successful water efficiency programs delivering an estimated annual water saving of around 600 megalitres. Programs have included the NSW rainwater tank rebate program, residential retrofit programs, school leakage reduction program and the toilet and shower-head replacement programs.

2 Hunter Water Corporation, 2008

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• receiving two Australian Government grants to provide funding support for new recycled water initiatives as part of the National Urban Water and Desalination Program and for the Energy Australia-led Smart Grid, Smart City project of which Hunter Water will be a partner3

• significant increases in the volume of recycled water supplied, including potable substitution supplies, and development and implementation of schemes to further increase the amount of recycled water supplied by Hunter Water, including the Kooragang Industrial Water Scheme

• progress in loss minimisation, including identification of potential pressure management zones, leak management surveys and replacement of infrastructure contributing to water loss.

Further details about progress on the H250 Plan initiatives can be found in the plan’s latest annual report, which is available on the Hunter Water website.4

Future considerations

The current operating licence requires Hunter Water to have in place an IWRP that identifies and evaluates all reasonably practical options to manage demand and supply in its area of operations. The IWRP must cover at least a 10-year horizon.

The refusal of planning approval for the Tillegra Dam proposal in the face of an acknowledged supply and demand imbalance triggers the need for a new IWRP. A new IWRP must also be consistent with the National Urban Water Planning Principles adopted by COAG at the November 2008 meeting.5

The Lower Hunter Water Plan announced in November 2010 will fulfil the future IWRP requirements and provides the scope to develop a new plan consistent with the national principles. Responsibility for developing the Lower Hunter Water Plan rests with the NSW Office of Water, working in collaboration with Hunter Water.

The development of the Lower Hunter Water Plan will include opportunities for community participation and input. This transparent consideration of all options and flexible portfolios of options will result in the most affordable water for Hunter Water’s customers and raise public confidence in regional water planning. This is the approach proposed for the Lower Hunter Water Plan.

The timeframe for this water planning process is up to two years, based on the Metropolitan Water Plan for Greater Sydney and similar water plans prepared in other jurisdictions.

In view of this timeframe, Hunter Water supports IPART’s proposal to exclude the operating licence review considering new targets, standards, indicators or other proposals for the IWRP at this stage. Consideration of these matters should be left until the Lower Hunter Water Plan is finalised at which time the conditions of the operating licence can be varied, unless other regulatory mechanisms emerge as part of the plan.

3 With the sale of Energy Australia’s retail business in March 2011 this project is now being led by Ausgrid. 4 http://www.hunterwater.com.au/Resources/Documents/Reports,-Forms-and-Publications/Reports/Regulatory-Reports/integrated-water-resources-plan-09-10.pdf 5 For details of the COAG agreed National Urban Water Planning Principles see http://www.environment.gov.au/water/policy-programs/urban-reform/nuw-planning-principles.html

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3 The structure of the next licence

Main Points

• Hunter Water strongly supports IPART’s proposals to replace prescriptive reporting and planning requirements in the current licence with quality management systems or framework approaches to critical or priority systems.

• This change would provide consistency with the current licensing of Sydney Water Corporation and new private-sector licences issued under the Water Industry Competition Act 2006.

• This approach is consistent with the recommendations of Hunter Water’s 2010 operating licence audit to develop a plan for the implementation of quality management systems over the next five years.

• Hunter Water has commenced work on a strategy to establish an integrated quality management system that will house the quality systems that exist and are being developed across the Corporation.

• Additional capital expenditure will be required to define and implement the new quality management framework. As the framework is implemented, there will be additional operating costs to keep information and systems current and for regular audit.

• There will be a clearer view of the capital and operating cost requirements once the implementation strategy is completed at the end of June 2011.

• It may not always be practical to remove all the procedural and process obligations on IPART from the licence. The Hunter Water Act 1991 refers to the operating licence for the detail of some of IPART’s functions in relation to the licence.

• Hunter Water considers the proposed reporting manual arrangements to be adequate and welcomes the opportunity to work with IPART on the development the manual.

There are a number of recent developments that indicate that a change to the structure of Hunter Water’s operating licence would be desirable. These factors include:

• the 2010 review of Sydney Water’s operating licence and the resultant changes from a plan-focussed licence to one that is more outcome oriented, with independent assessment or certification of compliance of critical systems

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• achieving regulatory consistency with the outcome focus of private water utility licences issued under the Water Industry Competition Act 2006, and

• Recommendation 1 of 2009-10 operational audit of Hunter Water’s operating licence, which requires development of a quality management strategy in accordance with ISO 9000 or equivalent.

3.1 Regulatory best practice Regulatory best practice provides the context for IPART’s proposed changes to the structure of the operating licence.

Hunter Water has always been an advocate for regulatory best practice. Its 2001 submission for the initial licence developed by IPART articulated six principles for best practice regulation.

It is interesting to see some of the principles from the 2001 submission reflected in IPART’s proposals for Hunter Water’s new licence. In particular, the principles listed in the 2001 submission included focussing on outputs and performance rather than inputs, not duplicating the requirements of other legislation or regulation and avoiding placing obligations on third parties that are outside the control of the regulated agency. The application of these principles addresses some of the issues raised in the current issues paper.

Hunter Water strongly supported the best practice principles advanced by IPART in 2006. It supports IPART’s application of the revised principles set out in the current issues paper as guidance to the review of the structure of the licence.

3.2 IPART’s proposed changes to the structure In addition to proposing changes to the structure of the licence in the issues paper, IPART’s recommendations as a result of the 2010 audit of Hunter Water’s operating licence are consistent with moving from a prescriptive requirement approach to one based more on the existence of quality-assured processes.

There are consistencies between the issues paper proposals and the 2010 audit recommendations and these are outlined below.

Issues paper proposals

The issues paper proposes changing the structure of the operating licence. The main elements of these changes are:

• replacing prescriptive reporting and planning requirements with certified quality assurance systems or framework approaches

• removing references to legislative requirements where they are not required and do not provide additional guidance or auditable benefit

• removing procedural and other obligations on IPART from the licence

• providing regulatory coverage of Hunter Water’s entire asset base only where it is not provided by other regulation, and

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• placing all reporting requirements and performance indicators in a subsidiary document, the reporting manual.

2010 licence audit recommendations

IPART audits Hunter Water’s performance against the operating licence in accordance with the provisions of the Hunter Water Act 1991 and the operating licence. Operational (performance) audits are carried out each year and, on the basis of these audits, IPART may make recommendations for action to both Hunter Water and the portfolio Minister.6

IPART made three recommendations as a result of the 2010 audit. One recommendation is that Hunter Water implements a continuous improvement and quality assurance strategy in accordance with, or equivalent to, ISO 9000.

Hunter Water is required to develop this strategy by 30 June 2011 and provide IPART with an implementation plan outlining the objectives, action plans, deliverables, responsibilities and resources required over the next five years. This latter condition thus sets a five-year time frame for implementation of the strategy.

Hunter Water is also required to report to IPART by 1 September each year on the progress on the strategy, with this progress cross-referenced to relevant parts of the operating licence for use by the licence auditor.

Implementation of such a strategy is consistent with the first element of IPART’s proposals to improve the structure of the licence as set out in the issues paper.

3.3 Hunter Water’s proposals for quality management Hunter Water strongly supports replacing prescriptive reporting and planning requirements in the current licence with certified quality assurance systems or framework approaches to critical or priority systems.

Hunter Water already has several quality management systems for different aspects of its business and operations. These include asset creation, environmental management and treatment operations. Some of these are in early stages of development but still serve to provide a level of quality management. While these systems follow the relevant standards, Hunter Water, to date, has not sought external certification, due to the stage of development of the systems and the costs involved with certification, particularly for annual audit processes where multiple systems are involved.

The 2010 operating licence audit recommendations have stimulated a fresh look at quality management across the whole organisation.

While it would be comparatively simple to implement separate quality management systems in the areas of concern to the operating licence auditors, Hunter Water believes this approach is not the most effective and leaves the organisation open to quality management issues in other areas in future. Hunter Water’s preference therefore is to implement an integrated quality management system that will progressively include all critical areas of the business.

6 At the time of the 2009/10 audit, the portfolio Minister was the Minister for Water. The current portfolio Minister is the Minister for Finance and Services.

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Hunter Water has commenced work on a strategy for an integrated approach to quality management to be submitted to IPART as required by recommendations from the 2010 operating licence audit. Because this strategy is still being developed by consultants and an internal working group, it is not possible to provide further details in this submission. However, the detailed strategy will be provided to IPART by 30 June 2011 (as required by the audit recommendation) and then should be considered as an addendum to this submission.

The main elements of the strategy include:

• establishing a coordinated and integrated quality management system with a generic framework that will benefit all areas of the business, not just existing quality systems and areas identified for improvement through operating licence audits in recent years. This high-level framework will house the quality systems that exist and are being developed across the Corporation.

• outlining a plan to progressively implement quality management systems over five years - the timeframe proposed by the 2010 audit recommendation

• allocating highest priority for early implementation to existing systems and areas identified for improvement by operating licence audits 7

• having all components of the integrated system compliant with the relevant ISO standard, but not necessarily externally certified

• setting criteria for prioritising the need for external certification of component systems based on risks, benefits and costs. In some cases, more than one component system may be covered under a single certification.

• initial certification of priority component systems to be completed within the period of the next operating licence (2012 to 2017)

• Identifying indicative costs and benefits from adopting quality management systems. Appendix B of this submission reports on the types of benefits often cited in the literature as being attributable to quality management systems.

• Reporting progress on implementation of the strategy to IPART by 1 September each year to 2016.

Hunter Water is happy to engage in further consultation with IPART on the quality management strategy when it is completed at the end of June.

3.4 Other proposals for licence structure Hunter Water supports the other proposals outlined in the issues paper, and summarised in 3.2 above, for changes to the structure of the operating licence.

However, while desirable, it may not always be practical to remove all the procedural and process obligations on IPART from the licence. While the Hunter Water Act 1991 confers certain functions on the Tribunal in relation to the operating licence, it does rely to a large degree on the detail of these functions being set out in the operating licence

7 Further discussion of quality processes can be found in other sections of this submission - drinking water quality management in section 4, environmental management systems in section 5 and asset management in section 6.

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itself. This matter is discussed further in section 8 of this submission, particularly in relation to the IPART’s audit functions.

Reporting obligations and implementation of a reporting manual

In its issues paper, IPART proposes to develop a subsidiary document, the reporting manual. This proposal is consistent with what was proposed and subsequently adopted as part of Sydney Water’s most recent operating licence review. The reporting manual would include all reporting requirements and performance indicators and include a consolidated list of operating licence obligations. The manual would be made publicly available on IPART’s website.

The expected benefits of the manual include greater flexibility to change any reporting requirements or performance indicators as necessary and access to a single consolidated reference document covering Hunter Water’s licence and reporting obligations. Hunter Water has been actively involved in IPART’s current review of performance indicators and anticipates the reporting manual to incorporate the findings of this review if it chooses to adopt the proposed manual.

Hunter Water considers the proposed reporting manual arrangements to be adequate in consolidating and coordinating reporting requirements under the licence, and welcomes the opportunity to work with IPART on the development the manual.

3.5 Costs and benefits of changes to the structure to the licence As reported in section 3.3, Hunter Water has commenced work on a strategy for an integrated approach to quality management to be submitted to IPART by 30 June 2011. This strategy will identify the resourcing needs over the next five years and some indicative benefits to the organisation. Until the strategy work is complete, it is not possible to provide the cost and benefit data sought in the issues paper.

Since the issues paper was released, IPART has acknowledged that detailed cost and benefit information is not expected as part of this submission but as part of a specific report to be provided in June. IPART’s advice to this effect can be found at Appendix A.

As outlined in section 3.3, Hunter Water has initiated a project to develop a strategy and implementation plan adopting knowledge management, quality assurance and continuous improvement across the business. The strategy and implementation plans will address the resourcing requirements that will be needed to create the framework, implement the various quality management systems and setup internal structures to ensure they are maintained, audited and certified where needed.

At this early stage of the process, it is already clear that additional capital expenditure will be required to define and implement the quality systems that are needed across the organisation. As the systems are implemented, there will be operating costs to provide resources to ensure that information remains current and is audited on a regular basis. At the operational level, it is expected that a minimum of three additional full-time positions would be needed to manage these processes.

There will be a clearer view of the capital and operating cost requirements once the strategy is completed at the end of June 2011.

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4 Water quality

Main Points

• Hunter Water has in place a five-year Water Quality Management Plan which is based on ADWG framework. It applies this framework as its risk-based drinking water quality management system.

• Hunter Water has a cooperative and open relationship with NSW Health, which is Hunter Water’s principal water quality regulator.

• Hunter Water currently undertakes comprehensive drinking water quality planning and reporting, as well as internal annual audits of its system using the Aquality assessment tool.

• Hunter Water sees merit in commissioning an external audit of its water quality management system at least once within the operating licence period.

• Hunter Water supports IPART’s proposal to relocate water quality reporting requirements and performance indicators to a separate reporting manual.

4.1 Australian Drinking Water Guidelines As required in Hunter Water’s existing licence, Hunter Water has a five-year Water Quality Management Plan which is based on the framework outlined in the Australian Drinking Water Guidelines (ADWG). The framework emphasises a preventative approach for all steps in water supply from catchment to tap and acts to ensure that there are robust preventive measures to protect drinking water quality and public health.

Hunter Water manages its drinking water to meet these robust standards and as demonstrated in section 1.3 of section 1 of this submission, it consistently exceeds the minimum compliance requirements as set out in the ADWG. These guidelines satisfy NSW Health’s expectations for water quality standards for the community.

In addition to following the ADWG for drinking water, Hunter Water follows the Australian Guidelines for Water Recycling (AGWR) for the supply of other grades of water.

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4.2 Hunter Water’s application of the ADWG framework Hunter Water implements the ADWG framework as a risk-based drinking water quality management system. The framework consists of 12 elements which serve as a structured guide to ensure that adequate preventative measures are in place to maintain the highest of drinking water quality standards. Hunter Water’s application of each of these 12 elements is outlined in Table 4.1.

Table 4.1 Hunter Water’s application of the ADWG framework

Element Hunter Water’s application of the ADWG framework

1. Commitment to Drinking Water Quality

A drinking water quality policy is in place and is available to staff and customers on the internet. Roles and responsibilities for drinking water quality have been defined. Communication and notification protocols have been established with NSW Health.

2. Assessment of Drinking Water Supply System

Flow diagrams, background information and key characteristics of all supply systems have been compiled as part of risk assessments. Long-term historical trending of source water quality data is undertaken on a biennial basis. Risk assessments by expert panels, which have included representatives from NSW Health, have been undertaken to assess the levels of risk to water quality for each part of the systems (source, treatment, and distribution).

3. Preventative Measures for Drinking Water Quality Management

Each water supply system has preventive measures and multiple barriers in place to protect drinking water quality. Critical control points (CCP) are in place for all supply systems. Quality criteria limits and corrective actions are documented for the CCPs.

4. Operational Procedures and Process Control

Procedures for management of water quality (from catchment to consumers’ taps) have been developed and implemented. Operational monitoring and control includes comprehensive monitoring from catchment to consumer, as well as event-based monitoring. System Control And Data Acquisition system and the communication dispatch centre are used to monitor and control systems 24hours a day, 7 days a week. Only approved chemicals (approved by the Australian Drinking Water Guidelines) are used for water treatment. Usage for each system is documented and recorded by water treatment operations staff.

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Element Hunter Water’s application of the ADWG framework

5. Verification of Drinking Water Quality

Drinking water quality monitoring is documented in the Hunter Water’s Water Quality Monitoring Plan. Reviews of sampling plans, monitoring characteristics, and reporting mechanisms are conducted. A complaint management system is in place. This system is updated on an ongoing basis. A daily review of water quality supplied to the customer is undertaken by water treatment operators for all supply systems. Water quality exception reporting procedures are currently in place. Staff are trained in the correct procedures and liaise with laboratory services until problem resolution.

6. Management of Incidents and Emergencies

A public and media communications strategy forms an important component of Hunter Water’s Emergency Procedures. Mock incidents are undertaken periodically to improve employee training and awareness. Post-incident reports are also undertaken following emergencies and incidents. External agencies, including NSW Health, participate in these exercises.

7. Employee Awareness and Training

Hunter Water’s water quality awareness sessions are used as training for field and other operational staff on water quality issues. Water quality awareness sessions are periodically undertaken by relevant staff. All other training requirements are managed and kept up to date on a centralised register.

8. Community Involvement and Awareness

Hunter Water engages its consultative forum as representatives of the community to interact with the community. Hunter Water’s website also reports water quality results each month and provides opportunity for customer feedback.

9. Research and Development

Hunter Water has a targeted research and development (R&D) program. Examples of recent projects include an algal growth limiting nutrients and a sediment nutrient sources study and a macrophyte survey for Grahamstown Dam. Hunter Water also partly funded projects through its R&D program including:

• a water treatment study on biological filtration for removal of algal contaminants

• preliminary research into tracers of human faecal pollution, and

• a water treatment study on optimisation of conventional treatment for the removal of cyanobacteria and their toxins.

Scientific and technical information is used to validate processes to ensure they are effective at controlling hazards. Investigations are undertaken, as required, to validate system-specific processes.

10. Documentation and Reporting

Information relevant to the framework is compiled on an intranet portal and a secure document management system. Various water quality reports are available to the public. These include: Annual Water Quality Report, Annual Water Quality Monitoring Plan, Typical Composition Table and monthly reporting of water quality results. These reports are available on the Hunter Water

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Element Hunter Water’s application of the ADWG framework website.

11. Evaluation and Audit

Evaluation of long-term data is ongoing at Hunter Water as part of the management of water quality. Internal auditing is undertaken using an industry-based assessment tool known as Aquality8 to measure Hunter Water’s alignment to the framework.

12. Review and Continual Improvement

Drinking water quality management systems reviews are held with NSW Health on an annual basis. Improvements are reported in the Annual Report on the implementation of the Five-Year Plan.

Hunter Water believes that by applying the ADWG framework as a drinking water quality management system, together with cooperative engagement with NSW Health, provides a risk-based management approach that focuses on preventative measures. This ensures that Hunter Water’s drinking water supply consistently meets the stringent drinking water quality standards demanded by its customers and authorities.

4.3 Water quality monitoring and reporting obligations Hunter Water currently has a number of monitoring and reporting mechanisms in place, both to satisfy the requirements of the operating licence and NSW Health, as well as internal reporting commitments.

In addition to the five-year Water Quality Management Plan, Hunter Water annually prepares a water quality monitoring plan, and maintains an incident management plan. Each of these plans must be to the satisfaction of NSW Health.

As Hunter Water is a “catchment-to-tap” provider, it routinely samples, analyses and reports on the quality of water at multiple locations within each of the following:

• raw water sources (untreated water from the “catchment” entering treatment plants)

• treated clear water tanks (water leaving treatment plants), and

• distribution system (samples taken at customer property boundaries – representative of water supplied to customers at the “tap”).

Verification (compliance) monitoring is based on results of water quality representative of water supplied to customers’ taps.

To support the comprehensive water quality planning measures in place, Hunter Water reports on water quality at regular intervals and in various forums. This includes:

8 Aquality was developed by the Water Services Association of Australia to provide guidance to the Australian water industry on how to implement the framework and how individual utilities can assess their level of implementation compared with other water authorities. It comprises a set of nearly 200 measures that can be used to assess the level of implementation of the framework elements and provide a structured and weighted score.

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• monthly system performance reports, which include drinking water quality monitoring test results and are available on Hunter Water’s website

• quarterly operating licence reports, which include Hunter Water’s performance against its drinking water quality requirements and are provided to IPART and the Minister

• annual report on the implementation of the five-year water quality plan9, which includes a report on the current Aquality audit, any proposed amendments to the five-year plan, details of improvements to water quality management and an annual water quality report. This report is provided to IPART, NSW Health and the annual water quality report is also made publicly available on Hunter Water’s website.

• other internal monitoring reports including monthly reports to Hunter Water’s Board.

In following the ADWG framework, Hunter Water also undertakes an internal audit using the Aquality assessment tool for drinking water quality. As will be discussed in detail later, while Hunter Water believes that its current water quality management system adequately meets its requirements, it sees merit it engaging in periodic external audits to further safeguard its systems and further reduce the risk of any deviation from its current record of full compliance.

4.4 Regulatory arrangement with NSW Health The current operating licence requires Hunter Water to use its best endeavours to maintain a memorandum of understanding (MOU) with NSW Health for the term of the licence.10

Hunter Water and NSW Health have established a cooperative working arrangements and consultation processes over many years. The MOU required by the current operating licence serves to establish the minimum requirements of such arrangements.

IPART’s issues paper identifies several issues with the structure of the current operating licence.11 Among these issues is IPART’s concern that it is not “appropriate for an operating licence to place obligations on a party other than the regulated utility”.

Hunter Water agrees with IPART’s concern and has conveyed this view at every licence review since 2001. Hunter Water has consistently pointed out that requirements to establish agreements with third parties are inconsistent with good regulatory practice. This is because a requirement to establish an MOU, de facto, places obligations on the other party to the memorandum. It is not appropriate, nor necessarily practical, for the regulated utility to be accountable for the other party’s adherence to the requirement to establish an MOU or to the terms of an MOU.

Hunter Water considers that, to date, the MOU with NSW Health has served the parties well. However, if Hunter Water’s next licence follows the framework approach taken in the clause 2 of the Sydney Water operating licence, it is questionable whether a 9 Required by the current operating licence. See Hunter Water Corporation, 2007, clause 3.4.2 10 Hunter Water Corporation, 2007, clause 2.3 11 IPART, 20011(b), section 4.2

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requirement for an MOU with NSW Health is necessary. Clause 2 of the Sydney Water licence sets out a comprehensive approach to managing water quality without any reference to a role for an MOU with NSW Health.

In the Sydney Water licence, memoranda of understanding are outlined separately in clause 11 and the requirements to maintain these memoranda are derived from section 35 of the Sydney Water Act 1994. This section of the Act simply requires Sydney Water to enter into memoranda with all regulatory agencies and was framed before the operating licence and other regulatory instruments provided the detailed regulatory coverage that exists today. The Hunter Water Act 1991 does not have the same requirements to establish memoranda of understanding.

Hunter Water considers that regulation of water quality can be achieved by operating licence conditions similar to those in clause 2 of the recent Sydney Water licence, without the need for the licence to require an MOU with NSW Health.

Hunter Water welcomes the views of NSW Health on the need to maintain the MOU requirement in the licence and IPART’s consideration of those views, along with those of other stakeholders.

4.5 Hunter Water’s recommendations In its issues paper, IPART expressed the intention to reduce or eliminate duplication of requirements in the licence that were also set out in the ADWG. Additionally, IPART proposed that the structure of the licence be amended to place all reporting requirements and performance indicators in a subsidiary reporting manual document, including those relating to water quality. Hunter Water supports both these proposals.

It is Hunter Water’s view that the structure adopted by IPART for Sydney Water’s 2010-2015 operating licence in the area of water quality sets out the appropriate licence conditions. Hunter Water considers that, therefore, it would be desirable for IPART to adopt a similar structure for Hunter Water’s licence. In addition to helping to achieve IPART’s preferred approach of setting a “less prescriptive” licence12, this structure would provide consistency in the regulation of water quality across the two major utilities.

While this approach is less prescriptive in terms of licence conditions, it is no less demanding in terms compliance requirements with the ADWG framework and associated monitoring and reporting.

It is also important to understand that the ADWG on its own is not a compliance or quality management accreditation tool. Thus, in addition to Hunter Water’s current application of the ADWG framework as a drinking water quality management system, Hunter Water sees merit it extending this system to include periodic external audits in addition to the internal Aquality audits undertaken annually.

Hunter Water proposes that an external audit would be commissioned at least once within the licence period, and this would most likely occur in 12 to 18 months before the start of a price path. This timing would enable contemporary costs of adopting

12 IPART, 2011(b), section 3.2

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proposed actions from the external audit to be included in the price submission with a high degree of confidence.

As with the internal annual audit, it is proposed that the external audit would also follow the Aquality audit process. Following receipt of the external auditor’s report, an action plan would be developed in consultation with NSW Health, with resulting actions being incorporated into future operating and capital budgets and implemented as required. Here again, it is important to appreciate that replacing the current licence conditions with “less prescriptive” conditions does equate to a less demanding water quality regime for Hunter Water and that, in reality, the process of external audit and implementing its recommendations may require additional resources.

Hunter Water notes that indicator number H5 of the National Water Initiative (NWI) indicators reports whether or not a risk-based drinking water management plan is externally assessed. This is considered to be a necessary indicator by the NWI, as undergoing an external assessment gives an indication of the robustness of the system. Hunter Water also believes that periodic external audits would provide insights into further improvements that could be made to its water quality management plan.

As stated in IPART’s issues paper, the development of a reporting manual that consolidates all licence obligations and outlines reporting arrangements and performance indicators would allow for greater flexibility to vary reporting requirements and indicators during the licence period as necessary. As such, Hunter Water supports this proposal to replace its current Monitoring and Reporting Protocol with the manual and looks forward to the opportunity to work with IPART on the development of the document, should this proposal be adopted in the final operating licence.

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5 Environmental management

Main Points

• Hunter Water’s environmental management system (EMS) has been in place since 1995.

• The EMS provides a framework for developing, implementing, monitoring and reviewing Hunter Water’s objectives, actions and targets in relation to its commitment to the community and environment.

• It is recognised that certified environmental management systems have been adopted in most of the large Australian water utilities.

• Whilst not certified, Hunter Water’s EMS is in line with the principles of the Australian and New Zealand Standard for Environmental Management Systems (ISO 14000 series).

• Hunter Water is working towards achieving certification of its EMS against AS/NZS ISO14001 by December 2013 as part its the coordinated and integrated strategy for quality management.

IPART has proposed an amended licence condition to replace the environmental management plan clauses in the existing licence13 to require the development and independent certification of an environmental management system in accordance with AS/NZS ISO14001:2004 (Environmental Management Systems – Requirements with guidance for use) within a specified timeframe.

5.1 Current plans and systems Hunter Water’s Environmental Management System (EMS) was first developed and implemented in 1995. The EMS provides a framework for developing, implementing, monitoring and reviewing Hunter Water’s objectives, actions and targets in relation to its commitment to the community and environment.

Hunter Water’s EMS was created to manage the potential environmental impacts that may be derived from all aspects of operational- and development-related activities. The system focuses on major aspects of the business that can be controlled and/or influenced by the organisation.

13 Hunter Water Corporation Operating Licence 2007-2012, clause 7.2

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The following key concepts form the framework of the EMS:

• Environmental Policy from which all environmental objectives and activities are derived

• Environmental Management Plan that documents all environmental objectives, targets, action plans and responsibilities associated with the Environmental Policy

• Implementation by each core business unit in accordance with the environmental plan, and

• Measurement, evaluation and improvement to ensure the EMS remains relevant and the Corporation’s environmental management is continually improving.

The EMS includes the 2008 to 2013 Environmental Management Plan and Environmental Performance Indicators, which are both requirements of the current operating licence.14

Continual improvement forms an integral part of Hunter Water’s business systems, including the EMS. As part of Hunter Water’s 2008-2013 Environmental Management Plan, there is a commitment to undertake at least two environmental audits per year as well as an independent system audit of Hunter Water’s EMS at least every 5 years.

An independent audit of the EMS was undertaken in 2009-10 and another is scheduled for 2011-12.

5.2 Moving towards system accreditation It is recognised that certified environmental management systems have been adopted in most of the large Australian water utilities.

Whilst not certified, Hunter Water’s EMS has been developed and structured in line with the principles of the Australian and New Zealand Standard for Environmental Management Systems (ISO 14000 series).

As outlined in section 3 of this submission, Hunter Water is preparing a strategy to implement a coordinated and integrated quality management system over the next five years that will benefit all areas of its business and operations. This strategy will give priority to accreditation of existing component quality management systems, including the EMS.

Hunter Water is working towards achieving certification of its EMS against AS/NZS ISO14001 by December 2013 as part of the coordinated and integrated strategy for quality management discussed in section 3 of this submission.

Costs and benefits of accreditation

To date, Hunter Water’s EMS has not been certified. As a minimum, Hunter Water expects that certification would involve allocating an additional staff resource to managing the EMS, although this resource may be involved in other environmental management activities. It is expected that at least $30,000 to $40,000 would be 14 Hunter Water Corporation Operating Licence 2007-2012, clauses 7.1 and 7.2

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required for accreditation and initial audit costs in 2012-13 and $15,000 to $20,000 per year annum in audit costs thereafter.

It is difficult at this point to identify quantifiable benefits. The principal benefits will be seen initially as increased rigour applied to maintaining information systems and procedures and the outcomes that arise from these improvements, but the detail is difficult to specify at this time. Typical benefits that might be derived from quality management systems are discussed in Appendix B to this submission.

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6 Asset management

Main Points

• The issues paper says that the infrastructure performance conditions in the current licence make compliance auditing and regulation difficult should aspects of Hunter Water’s asset management be considered insufficient.

• IPART proposes a new condition based on an asset management framework in accordance with recognised industry practice.

• IPART has outlined 2 possible options – the British PAS 55 asset management standard and use of Australian Aquamark benchmarking tool.

• While an Australian ISO 55000 standard is being developed, it is not clear when such a new standard will be available, how it would integrate with Hunter Water’s overall quality management strategy and whether adopting this standard will be of value to Hunter Water and its customers.

• Hunter Water’s preference is for the operating licence condition to be based on the Aquamark process benchmarking framework, integrated with Hunter Water’s quality management system.

• It is important to recognise that Aquamark is not a quality assurance program with accreditation or certification components.

• In the absence of certification, the licence condition could require Hunter Water to undertake a full Aquamark process benchmark at least once during the licence period and develop action plans from the outcomes.

• As Hunter Water is committed to the Aquamark process, no materially additional costs would involved in changing this condition. The principal benefits are identification of areas for improvement as a result of comparison against like utilities, nationally and internationally.

IPART’s issues paper says that the infrastructure performance conditions in the current licence include a detailed list of reporting requirements relating to the asset management plan, but no requirement for the content of the plan. However, the minimum content of the plan can be determined from the detailed reporting requirements for the plan.15 IPART considers that this approach “makes compliance

15 See Hunter Water Corporation Operating Licence 2007-2012, clause 4.9 for reporting requirements.

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auditing and regulation difficult should aspects of the asset management be deemed to be insufficient”.

In response to these concerns, IPART proposes a new condition requiring the development of an asset management framework in accordance with recognised industry practice within a specified timeframe.

As examples of proposed frameworks, IPART has suggested the British PAS 55 asset management standard. This standard sets out best practice in asset management systems.

Another option suggested by IPART is the asset management benchmarking tool, Aquamark, developed by the Water Services Association of Australia (WSAA). IPART has pointed out that Hunter Water already employs the Aquamark tool and completed a full Aquamark process audit in 2008.

Before discussing the IPART proposals, this submission provides a brief overview of asset management at Hunter Water.

6.1 Asset management at Hunter Water Hunter Water already has a large and mature infrastructure base when compared to utilities of similar size in Australia and overseas. In such capital intensive organisations, the size and value of the asset base is a major influence on the utility’s financial performance. In this context, asset management is critical in determining the level of service actually delivered to customers and the cost structure of the organisation and therefore the price of its services.

Historically, the urban water industry developed to improve public health and environmental outcomes, through the provision of safe drinking water and the effective transport and discharge or reuse of wastewater. In recent decades, there has emerged also an imperative to provide these services efficiently so that they are affordable to customers.

Today, the objective of asset management is to balance the community’s service expectations with the operational risks of delivering the agreed and sustainable services at an optimal cost. Challenges that impact on this objective include factors such as the progressively higher community’s expectations on all aspects of utility performance, the increasing climate variability that impacts secure water supply and asset operating performance and future resource availability to meet population growth.

With increasing size and complexity, increasing stakeholder expectations, more industry competition and wider regulatory engagement, there is an imperative to have sound asset management systems that optimally manage the life cycle of a utility’s assets to achieve the agreed outcomes for customers, the environment and the community generally.

Through continuous improvement, previous leading asset management practices are becoming industry norms or standards and this requires continual reassessment to ensure that these practices are value to both Hunter Water and the customers and that the most appropriate practices are implemented.

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To achieve this, Hunter Water manages and monitors its asset management through:

• A comprehensive asset management framework that provides the overarching architecture of its approach to asset management, which has been developed over many years. This framework has three core functions to ensure the required services are delivered at optimal cost and minimum risk, that best practice activities are in place to manage the whole life cycle of assets and that business processes to support the management of the assets are in place, and

• Sound internal asset management governance, performance benchmarking and a focus on continuous improvement. Hunter Water has long-recognised the value of benchmarking as an essential element for informing governance and continuous improvement. Because of this recognition, Hunter Water has played a leading role in the development of the WSAA Aquamark benchmarking tool.

The second point is relevant to IPART’s proposal to require Hunter Water to have in place an asset management framework in accordance with accepted industry practices, such as Aquamark.

6.2 Hunter Water’s Aquamark performance Hunter Water participates in the Aquamark water industry benchmarking process, which is undertaken by both the International Water Association and Water Services Association of Australia. The latest benchmarking exercise was conducted in 2008. The benchmark incorporated 42 utilities within Australia, New Zealand, United States of America, Canada, Hong Kong and the Middle East with varying services, sizes and functions.

The assessed asset management functions included corporate policy and business planning, asset capability forward planning, asset acquisition, asset operation, asset maintenance, asset replacement and rehabilitation and business support systems. The assessment incorporated detailed review for each major asset class within each function (ie water resources and treatment, water networks, wastewater networks, wastewater treatment).

Hunter Water’s individual audited performance and benchmarked performance with other utilities is presented in Hunter Water’s Utility Report, with the major observations being:

• overall participant group comparison indicated that “…Hunter Water compared to the overall participant group scored very well. Hunter Water is well above the median of the participant group and nearing or at the highest score in all of the functions…”

• regional comparison (Australia) indicated that “…Hunter Water’s best comparative scores are in the functions of asset capability forward planning and asset maintenance. …”

• peer utility comparison (size) indicated that “When compared to this group Hunter Water scored close to the best utility in each of the functions. This indicates that based on size, Hunter Water is maximizing its available resources when compared to similar-size utilities. …”

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Overall, the 2008 asset management benchmark performance indicates that Hunter Water performs well within the national and international comparison, while Hunter Water is an asset management leader within similar medium-size utilities. Hunter Water’s activities identified as leading practices include:

• regulator interface

• watermain risk modelling

• asset class based management strategies

• maintenance response modelling, and

• emergency response procedures.

These practices have enabled Hunter Water to be at the forefront of many asset management activities and provide excellent value to its customers, through best-practice service provision.

The 2008 benchmarking also identified initiatives that will further improve Hunter Water’s asset management practices and business efficiency. These include:

• asset management plan refinement (further development of the overarching asset management framework outlined earlier in section 6.1)

• developing an asset management support systems strategy

• quality management system refinement

• knowledge management of asset renewal options, and

• development of a triple bottom line framework.

6.3 Aquamark as an operating licence framework Hunter Water is actively involved in, and committed to, the Aquamark benchmarking process. It therefore supports IPART’s proposal to change the asset management planning requirements in the current operating licence to a requirement to develop an Aquamark framework as a licence condition for the next licence.

An ISO 55000 series asset management system, similar to PAS 55, is being developed for Australia by the Asset Management Council. At this stage, it is not clear when such a new standard will be available, how this standard would integrate with Hunter Water’s overall quality management strategy (as outlined in section 3 of this submission) and whether adopting this standard will be of value to Hunter Water and its customers.

Section 3 of this submission discussed how Hunter Water is currently developing a strategy to implement an integrated approach to quality management by 2016. Hunter Water’s preference, therefore, is for the operating licence condition to be based on the Aquamark process benchmarking framework integrated with Hunter Water’s quality management system outlined in section 3. This would see continuation of the Aquamark framework sitting within a high-level quality management system and associated processes for the next licence period.

It is important to recognise that, as a benchmarking framework, Aquamark is not a quality assurance program with accreditation or certification components.

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In the absence of certification, the proposed licence condition could require Hunter Water to undertake a full Aquamark process benchmark at least once during the licence period and develop action plans from the outcomes of this benchmarking. This would be consistent with Hunter Water’s current repose to Aquamark benchmarking.

Hunter Water understands that the WSAA and IWA will conduct Aquamark benchmarking every four years. However, these exercises are resource intensive for the agencies involved and the actual interval between full Aquamark processes may vary from Hunter Water’s understanding if other potential participants see value in changing the interval. Accordingly, it would be appropriate for the licence to specify only that full benchmarking must be undertaken during the term of the licence, allowing some flexibility for the fact that the timing may be dependent on the decisions of the organisers and other participants.

Costs and benefits

As Hunter Water is committed to the Aquamark process, no material additional costs would be involved in changing this condition, other than any that may arise from additional reporting requirements that IPART may include in the licence or reporting manual.

Equally, the benefits are difficult to quantify at this point other than identifying the generic nature of those gained through previous benchmarking processes. As outlined in section 6.1, the principal benefits are identification of areas for improvement as a result of comparison against like utilities, nationally and internationally.

As highlighted earlier, the ever-changing operating environment makes it essential for utilities to continuously improve asset management and, for Hunter Water, benchmarking has proved to be an efficient vehicle for identifying areas for improvement. However, the diversity of such benefits arising from future benchmarking is impossible to quantify at this point, although the generic quality management benefits discussed in Appendix B of this submission are relevant.

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7 Customer and consumer obligations

Main Points

• A new Customer Contract for Hunter Water’s customers will come into effect from 1 July 2011. This new contract enhances hardship protection for Hunter Water’s customers.

• Complementary amendments will be made to Hunter Water’s current operating licence at the same time. These will bring the credit and hardship protections of Hunter Water’s operating licence and customer contract into line with those introduced for Sydney Water in 2010.

• Hunter Water supports carrying these changes forward to the new operating licence.

• In addition, Hunter Water has developed and commenced implementation of a sustainable credit and hardship strategy.

• Hunter Water supports IPART’s approach and the changes that were made to the complaint and dispute handling section of Sydney Water’s operating licence.

• Hunter Water considers that similar amendments would be appropriate for Hunter Water’s licence.

7.1 Credit and hardship management

Recent changes to operating licence

In March 2011, the NSW Government approved a new customer contract for Hunter Water Corporation after public review by IPART.16 The new contract will be effective from 1 July 2011. The customer contract forms a schedule to the operating licence and could have been reviewed as part of this end of term review of the licence.

However, at Hunter Water’s request, IPART reviewed the customer contract ahead of this review of the operating licence. The current contract had been in place for six years and Hunter Water considered that the early review would provide benefits to both customers and to Hunter Water’s customer administration.

16 See IPART 2011(a) for report on IPART’s review of customer contract and copy of final contract. A copy of the final contract to apply from 1 July 2011 is also available on Hunter Water’s website at http://www.hunterwater.com.au/Resources/Documents/Governance--Board-Charters/customer-contract-1-july-2011.pdf

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Hunter Water proposed more detail be included in the contract on assistance available to customers experiencing financial hardship and on the protections to customers having difficulty paying their bills.

In the light of these changes, IPART also proposed that the customer protection measures in Hunter Water’s operating licence should be strengthened for residential customers who experience financial difficulty.

This recommendation followed IPART’s 2010 review of Sydney Water’s operating licence and customer contract where hardship protection is provided by a suite of complementary measures in the Sydney Water operating licence and customer contract working together.

IPART therefore recommended to the Government that Hunter Water’s current (2007 to 2012) operating licence should be amended on 1 July 2011 with the introduction of the new customer contract.

From 1 July 2011, clause 5.3 of the operating licence will be changed to provide a full suite of customer hardship protections. This change will bring consistency to the hardship protections offered by the operating licence and customer contracts of both Sydney Water and Hunter Water.

Hunter Water considers that these measures strengthen its suite of hardship protections and align them with those of Sydney Water and should be carried forward to the new operating licence. These measures also support the new debt recovery and hardship strategy being developed by Hunter Water as outlined in the following sections. The provisions of the new customer contract, the amended licence and the strategy will significantly enhance Hunter Water’s credit and hardship protection capability.

Hunter Water’s credit and hardship strategy

Further to the amendments made to the current operating licence and new customer contract, Hunter Water has recently developed a new debt recovery and hardship strategy. Roll out of the strategy has commenced and it is proposed that implementation will continue over a five year period. This strategy aligns with industry best practice in debt prevention, debt recovery and financial hardship assistance.

Hunter Water’s hardship strategies will include the establishment of a dedicated hardship team, further work in the areas of case management, process development and training, development of additional payment options and further assistance with water consumption reduction.

With the credit and hardship strategy in place together with the additional provisions in the operating licence, Hunter Water considers that it will be well placed to ensure it adequately supports customers who experience short- and long-term financial hardship.

7.2 Complaint and dispute handling The IPART issues paper highlights that, consistent with the evolution of good regulatory practice, IPART’s approach to the review is to develop and adopt licence conditions that achieve the desired performance and customer protection outcomes

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without imposing unnecessary compliance and administration costs and that result in a net benefit to society. IPART followed the same approach in reviewing Sydney Water’s operating licence in 2009 and 2010.

One proposal to streamline the licence involves consolidating all reporting obligations in a reporting manual. As mentioned earlier in this submission, the proposal would remove reporting obligations from the licence. IPART considers that this would provide it with greater flexibility to follow an adaptive approach to setting reporting requirements and, where desirable, amend these during the term of the licence. This approach will also assist in applying consistent compliance and reporting across public and private water utilities.

Hunter Water supports IPART’s approach and the changes that were made to the complaint and dispute handling section of Sydney Water’s operating licence. Hunter Water considers that similar amendments would be appropriate for Hunter Water’s licence.

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8 Compliance audits of the licence

Main Points

• Hunter Water supports removing procedural obligations on IPART from the compliance auditing section of the licence.

• Removing the procedural obligations will allow this section to be streamlined and be consistent with the compliance auditing obligations applying to Sydney Water.

• However, there is value in retaining some procedural information in the licence relating to the timing of audit commencement, reporting the audit findings to the Government and ensuring that the audit does not review compliance against the requirements of other regulatory agencies.

• This information could be included as licence clauses or explanatory notes.

With the introduction of the reporting manual proposed in section 4.3 of the issues paper, Hunter Water considers that it is appropriate to review and streamline the clauses relating to the annual audit of the licence.

In previous operating licence reviews, Hunter Water has argued that, in keeping with good regulatory practice, operating licences should only contain obligations on the regulated agency. In this context, it is not appropriate to include obligations on the regulator or third parties, through requirements to enter into agreements or memoranda of understanding.

8.1 Legislative requirements The Independent Pricing and Regulatory Tribunal Act 1992 takes much of is utility regulation powers from the Hunter Water Act 1991.17 While the Hunter Water Act 1991 establishes certain functions for the Tribunal in relation to the operating licence, it does rely to a large degree on the detail of these functions being set out in the operating licence itself.

In particular, section 18B of the Hunter Water Act 1991 states “The Tribunal has such functions as may be conferred or imposed on it by the operating licence in connection with operational audits of the Corporation”. In this context, the operating licence also serves as a vehicle for establishing IPART’s regulatory roles in connection with licence

17 See IPART Act, 1992, sections 24F and 24FC

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audits. This may mean that the licence should continue to contain details of the functions conferred on IPART in relation to audits.

8.2 Conduct of Audits Section 12 of the present licence contains extensive detail in relation to commissioning of audits and what the audit is to report on. These are not obligations on Hunter Water but rather details about processes to be followed by IPART. Hunter Water agrees in principle with IPART’s views in section 4.2 of the issues paper that it is not appropriate for these matters to be covered in the operating licence, which should include only obligations on Hunter Water.

Hunter Water considers that the compliance auditing and provision of information requirements of the current licence could be streamlined by following the provisions of sections 8 and 9 of the Sydney Water licence.

However, Hunter Water believes that, consistent with the section 18B of the Act, there is value in retaining the existing clauses dealing with frequency and timing of the audit and ensuring there is no duplication of compliance monitoring between regulatory bodies. Hunter Water considers that this latter detail is important to ensure that audit recommendations do not result in operational objectives that conflict with the compliance requirements of other regulators. Similar clauses are not contained in Sydney Water’s licence.

In this context, the additional clauses (to those in the Sydney Water licence) for inclusion in the licence would be similar in intent to existing licence clauses:

• 12.1.1 - specifying the frequency of audits and timing of the audit’s commencement. Part 5, Division 1 of the Hunter Water Act 1991 does not legislate the frequency and timing of audits and relies on these details being specified in the operating licence itself. While removal of this clauses may satisfy the objective of removing obligations on IPART from the licence, this change may also result an erosion of the legal basis for auditing performance on an annual basis.

• 12.2.2 – specifically excluding audit coverage of matters falling under the jurisdiction of other regulatory bodies such as the NSW Office of Environment and Heritage, NSW Health and the NSW Office of Water; and

• 12.3.1 - the date by which the audit is to be reported to the Minister. Hunter Water considers that the current 30 November deadline could be extended to mid December.

In keeping with IPART’s intent to remove obligations on IPART from the licence, IPART could consider including the content of these clauses as explanatory notes in the compliance audit section of the licence rather than as specific licence clauses, if legally practical.

These requirements could also be supported by more detailed information in the proposed reporting manual, as is currently the case with the Monitoring and Reporting Protocol.

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References

Asset Management Council Ltd, 2011, AMBoK Standards, viewed 29 April 2011, <http://www.amcouncil.com.au/> Department of Environment, Water, Heritage and the Arts (Aust), 2009. National Urban Water Planning Principles. October, viewed 18 April 2011, <http://www.environment.gov.au/water/policy-programs/urban-reform/nuw-planning-principles.html> Hunter Water Corporation, 2001, Hunter Water Corporation Submission to the Review of the Operating Licence for Hunter Water Corporation by the Independent Pricing and Regulatory Tribunal, Newcastle, August Hunter Water Corporation, 2007, Operating Licence. 2007-2012 (with amendments), Newcastle, July Hunter Water Corporation, 2008, H250 Plan. Securing Our Water Future, Newcastle, December, viewed 27 April 2011, <http://www.hunterwater.com.au/Resources/Documents/Plans--Strategies/Water-Quality-Monitoring-Plan-2011_12.pdf> Hunter Water Corporation, 2010, Integrated Water Resources (H250) Plan Report. 2009-10, Newcastle, September, viewed 27 April 2011, <http://www.hunterwater.com.au/Resources/Documents/Reports,-Forms-and-Publications/Reports/Regulatory-Reports/integrated-water-resources-plan-09-10.pdf> Independent Pricing and Regulatory Tribunal (IPART), 2010, Hunter Water Corporation Operational Audit 2009/10: Report to the Minister. Water – Compliance Report, Sydney, November Independent Pricing and Regulatory Tribunal (IPART), 2011 (a), Review of the Customer Contract for Hunter Water Corporation; Report to Minister. Water – Final Report, Sydney, February Independent Pricing and Regulatory Tribunal (IPART), 2011 (b), Review of the Operating Licence for Hunter Water Corporation; Water – Issues Paper, Sydney, March International Water Association and Water Services Association of Australia, 2008, 2008 Asset Management Process Benchmarking Project. Industry Report, December Sydney Water Corporation, 2010, Operating Licence 2010-2015, Parramatta, June.

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Water Services Association of Australia, the National Water Commission and the National Water Initiative Parties, 2010, National Performance Framework. 2009-10 Urban Water Performance Report Indicators and Definitions Handbook, Canberra, May

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Appendix A - Letter from IPART

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Appendix B - Benefits from ISO compliance

As reported in section 3.3, Hunter Water has commenced work on a strategy for an integrated approach to quality management to be submitted to IPART by 30 June 2011. This strategy will identify the resourcing needs over the next five years and some indicative benefits to the organisation. Until the strategy work is complete, it is not possible to provide the cost and benefit data sought by IPART in the issues paper.

Work on developing the strategy, including reviews of relevant literature, have identified the nature the benefits that might be expected from implementing quality management systems. This appendix summarises the findings of this initial work. Not all these benefits will be directly relevant to Hunter Water so this appendix serves as a checklist to assist in identifying possible benefits.

Hunter Water’s strategy for an integrated quality management system will seek to have all aspects of the integrated systems compliant with the relevant ISO standards, but not necessarily certified. Decisions to move to certification will be based on the perceived risks associated with not being certified and the costs and perceived benefits of full certification. Hunter Water believes that ISO compliance will support its strategic business plan, which is based on a mission to provide superior customer service and enhance the environment through operational excellence and a high performance culture achieved by developing its people.

8.3 B.1 Benefits of ISO 9000 Quality Management System The literature lists the following generic benefits from ISO 9000 quality management systems.

• ISO 9000 forces an organisation to focus on "how they do business". Each procedure and work instruction must be documented and thus, becomes the springboard for continuous improvement

• documented processes are the basis for repetition and help eliminate variation within the processes. As variation is eliminated, efficiency improves. As efficiency improves, the cost of quality is reduced.

• with the development of solid corrective and preventative measures, permanent, business-wide solutions to quality problems can be identified

• the morale of employees is increased as they are asked to take control of their processes and document their work processes

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• customer satisfaction, and more importantly customer loyalty, grows. As a utility transforms from a reactive organisation to a pro-active, preventative organisation, it becomes a utility of choice for customers. This is important to meet the objectives of Hunter Water’s 2010-2015 strategic business plan, which has as its cornerstone being a leader in providing sustainable customer services and solutions through superior customer services. It is also relevant in the context of potential competition emerging as a result of the Water Industry Competition Act 2006.

• reduced problems resulting from increased employee participation, involvement, awareness and systematic employee training

• better products and services result from continuous improvement processes, consistent with Hunter Water’s 2010-2015 strategic business plan objective of delivering a stronger performance culture through continuous improvement and a results-oriented mindset

• fosters the understanding that quality, in and of itself, is everyone's responsibility

• improved profit levels result as productivity improves and rework costs are reduced

• improved communications both internally and externally, which improve quality, efficiency, on time delivery and customer and supplier relations.

8.4 B.2 Benefits of ISO 14000 Environmental Management System The systematic ISO 14001:2004 approach requires the organisation to examine all areas where its activities have an environmental impact. A properly-designed ISO 14001:2004 Environmental Management System (EMS) allows efficient identification of opportunities for cost savings. It can trigger procedural and/or technological changes that reduce the total cost of a product or improve its value.

Some of the benefits of implementing an ISO 14000 Environmental Management System (EMS) in accordance with the ISO 14000 standards are listed in the following sections.

Operational Benefits

Benefits espoused in this area include:

• improved efficiency through integration with ISO 9000 processes

• motivation of the workforce through greater involvement in business operations

• facilitating the acquisition of operational permits and authorisations

• assistance in developing and transferring technology within the company

• lower operating costs

• savings from safer workplace conditions

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• reduction of costs associated with emissions, discharges, waste handling, transport and disposal

• improvements in the product as a result of process changes, and

• safer products

Environmental Benefits

The environmental benefits from the adoption of ISO 14000 arise from the focus on minimising hazardous and non-hazardous waste and conserving natural resources through optimising electricity, gas, and chemical usage.

Marketing Benefits

A range of marketing benefits can potentially result from the adoption of the ISO 14000 standard such as:

• improved customer satisfaction resulting from the demonstration that the Corporation has met standards of environmental husbandry beyond that required by regulation

• supporting the Corporation’s procurement strategy

• supporting the Corporation’s strategic business plan objectives, especially those initiatives under the commitments to the environment, and

• supporting the development of the Hunter Water brand and the public sector service provision model.

Financial Benefits

Potential financial benefits from adoption of the standards include:

• process cost savings by reduction of material and energy input

• potential improvements to the organisation’s relationship with insurance companies

• assisting in meeting shareholder expectations

• Helping reduce liability and risk, and

• potentially improving access to capital or reducing the cost of acquiring capital.