SA WATER PRICING INQUIRYWELCOME

WORKSHOP 24TH MAY 2019

LEW OWENS – INDEPENDENT INQUIRER

ANN PATAKI – EXECUTIVE OFFICER

STATEMENT OF ACKNOWLEDGEMENT

WE ACKNOWLEDGE THIS LAND THAT WE MEET ON TODAY IS THE TRADITIONAL LANDS FOR

KAURNA PEOPLE AND THAT WE RESPECT THEIR SPIRITUAL RELATIONSHIP WITH THEIR COUNTRY.

WE ALSO ACKNOWLEDGE THE KAURNA PEOPLE AS THE CUSTODIANS OF THE ADELAIDE REGION

AND THAT THEIR CULTURAL AND HERITAGE BELIEFS ARE STILL AS IMPORTANT TO THE LIVING

KAURNA PEOPLE TODAY. WE ALSO PAY RESPECTS TO THE CULTURAL AUTHORITY OF ABORIGINAL

PEOPLE VISITING/ATTENDING FROM OTHER AREAS OF SOUTH AUSTRALIA/AUSTRALIA PRESENT

HERE.

1. WELCOME(DISCUSSION OF

‘A BALANCED BARGAIN’ REPORT)

WE ASK YOU TO

• RESPECT OTHER PEOPLE’S POINT OF VIEW

• DO NOT TALK ‘OVER’ OTHERS

• CHATHAM HOUSE RULES- NO ATTRIBUTION

• ASK QUESTIONS/CONTRIBUTE YOUR IDEAS

FYI

• HELP YOURSELF TO TEA/COFFEE/WATER FROM THE MAIN AREA

• HOUSEKEEPING (TOILETS ETC.)

• WE WILL PRESENT VARIOUS IDEAS AND INVITE FEEDBACK ON EACH

• THERE ARE A LOT OF TOPICS TO COVER, PLEASE KEEP COMMENTS SUCCINCT AND RELEVANT

• YOU WILL BE GIVEN A COPY OF THESE SLIDES AT THE END OF THE WORKSHOP IF YOU’D LIKE ONE

AGENDA• 9.00 TO 9.05 1. WELCOME AND EXPLANATION OF PROCESS/RULES

• 9.05 TO 10.05 2. CHALLENGES AND ISSUES (TOTAL TIME ALLOCATED, INCLUDING DISCUSSION)

• 2.1 ESCALATION RATES (ANN PATAKI)- 5 MINUTES

• 2.2 JUNE 2013 DE-ESCALATION TO DEC 2012 DOLLARS (ANN PATAKI)- 5 MINUTES

• 2.3 ‘BEST CAPEX’ FROM TRANSPARENCY/REGULATORY STATEMENTS (ANN PATAKI)- 10 MINUTES

• 2.4 COMMENCEMENT DATE (ANN PATAKI)- 5 MINUTES

• 2.5 CONTRIBUTED ASSETS (ANN PATAKI)- 10 MINUTES

• 2.6 VALUE OF LEGACY ASSETS (LEW OWENS) 5 MINUTES

• 2.7 OPENING VALUE (ANN PATAKI) -10 MINUTES

• 2.8 RETURN ON LEGACY ASSETS (LEW OWENS )- 10 MINUTES

• 2.9 REAL POST TAX VS REAL PRE-TAX OPTION (LEW OWENS)- 5 MINUTES

• 10.05 TO 10.30 3. LEGAL ADVICE AND THE 2013 VALUATION (LEW OWENS)- 10 MINUTES

4. COAG AND NWI PRINCIPLES: JULY 2006 LEGACY ASSETS, DEPRIVAL VALUE (LEW OWENS)- 10 MINUTES

• 10.30 TO 10.45 MORNING TEA_____________________________________________________________________

• 10.45 TO 11.15 5. REGULATORY STATEMENT (GOV) CASES: DORC AND EV VALUATIONS (LEW OWENS)- 10 MINUTES

6. INQUIRY CASES FOR RAB AND EV (ANN PATAKI)- 15 MINUTES

7. TREASURER’S PRICING ORDER FOR $7.77 BILLION- WHAT WAS THE BASIS ? (LEW OWENS)- 5 MINUTES

• 11.15 TO 11.45 8. SUMMARY OF OUTCOMES/RANGE OF VALUES (LEW OWENS AND ANN PATAKI)- 10 MINUTES

9. INQUIRY CONCLUSIONS

10. IMPLEMENTATION OPTIONS (LEW OWENS)- 20 MINUTES

• 11.45 TO 11.55 11. OTHER ISSUES ? (LEW OWENS)- 10 MINUTES

• 11.55 TO 12.05 12. NEXT STEPS /CLOSE (LEW OWENS)- 10 MINUTES

2. ISSUES/CHALLENGES

2.1- ESCALATION RATES OF THE RAB VALUES

2.1-ESCALATION(PAGE 61)

TRANSPARENCY/REGULATORY STATEMENTS

• ESCALATION/INDEXATION RATE EITHER 3.5% OR 2.5% FOR INFLATION /DEFLATION (VARIES IN THE TS/RS)

INQUIRY / REGULATORY PRACTICE

• ABS ACTUAL CPI MARCH TO MARCH – (I.E. JUNE 2013 CPI WILL BE MARCH 2012 TO MARCH 2013)

(CPI IS USED AS PER THE REGULATORY MODEL/FINANCIAL CAPITAL MAINTENANCE WHICH MEANS THAT “INVESTORS OF A REGULATED FIRM CAN EXPECT TO RECOVER THE

OPPORTUNITY COST OF THEIR CAPITAL AND THEN NOMINAL VALUE OF THEIR INITIAL INVESTMENT OVER TIME .OPERATING CAPITAL MAINTENANCE FOCUSES ON MAINTAINING

THE PRODUCTIVE CAPACITY OF PHYSICAL ASSETS OVER TIME , RATHER THAN THE FINANCIAL VALUE” *)

THE INQUIRY WILL USE THE TS/RS ESCALATION FIGURES FOR THE

GOVERNMENT CASE, AND THE REGULATORY PRACTICE FIGURES

FOR THE INQUIRY CASE*CEPA SUBMISSION TO THE INQUIRY NOVEMBER 2018 , PAGES 20-21

2.2 - DE-ESCALATION OF THE RAB VALUEJUNE 2013 TO DECEMBER 2012

(TO ALLOW COMPARISON TO THE TREASURER’S MAY 2013 PRICING ORDER- IN DEC 2012$)

• TRANSPARENCY/REGULATORY STATEMENTS

DEFLATING FROM JUNE 2013 TO DECEMBER 12 = 6 MONTHS=2.5%/2=1.25%

• INQUIRY / REGULATORY PRACTICE

DEFLATING FROM JUNE 2013 TO DECEMBER 12 = 6 MONTHS = 1.6%/2 = .8%

2.3 CAPITAL EXPENDITURE (‘CAPEX’)

2.3 - CAPITAL EXPENDITURE(PAGE 61)

• TRANSPARENCY/REGULATORY STATEMENTS CAPITAL EXPENDITURE

(ESTIMATE) DIFFERS FROM FIGURES PROVIDED TO THE REGULATOR

FROM SA WATER (ACTUAL)

• ‘BEST CAPEX’ USED FOR GOVERNMENT CASE (FROM THE LATEST

AVAILABLE TS/RS) (I.E. 06/07 AND 07/08 CAPEX FROM 09/10 TS, 08/09 CAPEX FROM 10/11 TS)

• CAPEX FIGURES PROVIDED TO ESCOSA FOR THE 2013

REGULATORY BUSINESS PROPOSAL BY SA WATER WILL BE USED

FOR THE INQUIRY CASE ROLL FORWARD

2.4 - COMMENCEMENT DATE AND ROLL FORWARD(PAGE 52)

• AS DISCUSSED IN EARLIER INQUIRY REPORTS AND WORKSHOP , CHOICES OF THE

FOLLOWING DATES :

THE INQUIRY HAS CHOSEN 1 JULY 2006 AS THE STARTING DATE FOR ITS ROLL-FORWARD PROCESS

(PAGE 52)

1. QUALITY AND CONSISTENCY OF THE DATA BETTER THAN THE START OF THE TRANSPARENCY

PROCESS

2. POST-CORPORATISATION ASSETS ISSUE RESOLVED

3. STABLE DATA BEFORE LARGE CAPITAL EXPENDITURES

4. LEGACY DATE- DIFFERENT RETURNS ON LEGACY/NON-LEGACY ASSETS

2.5. CONTRIBUTED ASSETS

(PRE-CORPORATISATION)

2.5 - CONTRIBUTED ASSETS(PAGE 53 )

INQUIRY ESTIMATION $441M*

• $328M* (A SINGLE FIGURE ONLY PROVIDED FOR THE PERIOD 1965/66 TO 1987/88)

• 30% CONFIDENCE IS $98M

• $113M* (YEARLY FIGURES PROVIDED IN THE EWS FINANCIAL REPORTS FROM 88/89

• 90% CONFIDENCE IS $102M

• TOTAL CONTRIBUTED ASSETS $200M*

$210M (JUNE 06$)

*(2004$) # JUNE 06$ -ESCALATION FACTOR OF 2.5% PA

2.6 VALUE OF LEGACY ASSETS

2.6 – PERCENTAGE OF LEGACY ASSETS IN THE RAB VALUE(PAGE 59)

• GO-FORWARD FULL COST RECOVERY (GFFCR) FIRST MENTIONED IN 08/09 TS :

PAGE 32 -08/09 TS

• 08/09 TS ALLOWS THE FIRST CALCULATION OF LEGACY ASSET VALUES

• LEGACY ASSETS 53.46% OF THE TOTAL RAB

• NON-LEGACY ASSETS 46.54% OF THE TOTAL RAB

2.6 - LEGACY ASSETS PRE-CORPORATISATION CONTRIBUTED ASSETS*

• NOT ALL CONTRIBUTED ASSETS ARE LEGACY ASSETS

• (THE INQUIRY ACCEPTS THAT COUNTRY ASSETS WERE NOT CLASSED AS LEGACY ASSETS AS

RECEIVING CSO RETURN)

• CLASSIFY PRE-CORPORATISATION ($210M) CONTRIBUTED ASSETS INTO LEGACY/NON LEGACY

•75% METRO = $158M (LEGACY)

•25% COUNTRY = $53M (NON-LEGACY)

• * ASSETS PURCHASED PRIOR TO 30 JUNE 2006 (LINE IN THE SAND)

2.7 - INITIAL RAB VALUE FOR ROLL-FORWARD

(PAGE 59)

OPENING VALUES 1 JULY 2006 FROM TRANSPARENCY STATEMENTS (TS)

1. 07/08 TS $4418* (TABLE 11)

2. 08/09 TS $4411* (TABLE 15)

3. 09/10 TS $4411* (TABLE 10)

OPENING RAB VALUE FROM 1 JULY 2006

$4411M* (BEFORE TAKING PRE-CORPORATISED CONTRIBUTED ASSETS INTO

ACCOUNT)

*JULY 2006$

2.7 (CONT’D) – CALCULATION OF OPENING RAB VALUE (TAKING PRE-CORP CONTRIBUTED ASSETS AND LEGACY ASSETS INTO

ACCOUNT)

• RAB OPENING VALUE FROM 1 JULY 2006 $4,411 M

• LEGACY ASSETS $2,358M (53.46%)

• NON-LEGACY ASSETS $2,053M

• PRE-CORPORATISATION CONTRIBUTED ASSETS

• LEGACY ASSETS $158M

• NON-LEGACY ASSETS $53M

RESULT

• LEGACY ASSETS ($2,358M-$158M)= $2,200M

• NON-LEGACY ASSETS ( $2,053M - $53M)= $2,000M

2.8 - RETURN ON LEGACY ASSETS

2.8 - LEGACY ASSETS (PAGE 54/73)

• 2009-10 TS REFERENCE TO 3.1%

• DERIVED FROM SA WATER FINANCIAL MODEL AROUND 2007 AS PREVIOUS YEARS’ RETURNS

• RETURNS ARE BASED ON THE REVENUE WHICH IS NOT LINKED TO ASSET VALUE (HISTORICALLY

COVERS THE COST OF DEBT AND PRICES RECOVER ACTUAL COSTS PLUS DEPRECIATION

• RETURN BASED ON THE THEN ASSET VALUE OF LEGACY ASSETS WHICH INCLUDES PRE-CORP

CONTRIBUTED ASSETS (PCCA)

• IF WE REDUCE THE ASSET VALUE TO REMOVE PCCA, THE RETURN INCREASES TO 3.32% (3.1X

2358/2200)

• DISCUSSION??

2.9 - PRE OR POST-TAX REAL WACC(PAGE 71)

• ALL OF THE TS/RS NUMBERS ARE BASED ON REAL PRE-TAX WACC

• THE 2012-13 RS TARGET REVENUES (AND ROA) ARE BASED ON REAL PRE-TAX

• TREASURER’S CORRESPONDENCE OF 17 MAY 2013 USED REAL PRE-TAX TO JUSTIFY THE

CHANGE IN RAB

• THEORETICALLY, THERE IS A DIRECT RELATIONSHIP BETWEEN PRE-TAX AND POST-TAX WACCS

SO THIS SHOULD NOT MATTER

• INQUIRY CONTINUED TO USE PRE-TAX WACC AS THE BASIS OF ITS INVESTIGATIONS (6.0, 5.42

AND 5.06%)

• DISCUSSION?

3. LEGAL ADVICE

3. CSO ADVICE(PAGE 49)

• INQUIRY SOUGHT LEGAL OPINION AS TO WHETHER THE GOVERNMENT WAS ABLE TO SET A NEW RAB VALUE IN MAY

2013 HAVING SET A LEGACY DATE OF 30 JUNE 2006

• ADVICE WAS THAT COAG AND NWI AGREEMENTS WERE NOT LEGALLY BINDING, BUT WAS EXPECTATION THAT

SIGNATORIES WOULD CONTINUE TO COMPLY

• GOVERNMENT FREE TO SET A NEW RAB VALUE IN 2013: NO RESTRICTIONS.

• INQUIRY VIEW THAT THERE WAS AT LEAST A MORAL OBLIGATION (POSSIBLY CONTRACTUAL?) TO COMPLY WITH

GUIDELINES AND PRINCIPLES.

• NATIONAL COMPETITION AGREEMENT AND ADP PAYMENTS REQUIRED COMPLIANCE

• SAG 2018 PRICING ORDER REQUIRES ESCOSA TO COMPLY WITH NWI

• THE INQUIRY VIEW IS THAT TARGET REVENUES SET IN 2012-13 RS HAD TO COMPLY

• DISCUSSION?

4. COAG AND NWI PRINCIPLES(PAGE 31)

• COAG REQUIRED DEPRIVAL VALUE AND ACCEPTABLE ASSET VALUATION

• DEPRIVAL VALUE (LOWER OF DORC AND EV) REMAINS A VEXED ISSUE – BOTH ARE UNRELIABLE AND

SENSITIVE TO ASSUMPTIONS

• NWI REQUIRED LEGACY DATE AND LEGACY ASSET RETURN; NEW ASSETS TO EARN FULL WACC. NO

LATER THAN 1 JAN 2007.

• SA APPROACH (GFFCR) DIFFERENT THAN EVERY OTHER JURISDICTION BUT COMPLIANT.

• 2012-13 RS TARGET REVENUES (OR AT LEAST THE ROA) WERE COMPLIANT WITH THE NWI

PRINCIPLES

• LEGACY DATE AND VALUES DIDN’T STOP A REVALUATION IN MAY 2013 (NWI CLAUSE 21, PRINCIPLE 5)

• DISCUSSION?

MORNING TEA

5. CALCULATE THE RAB FROM THE PERSPECTIVE OF THE GOVERNMENT

CASE (GOVERNMENT OF THE DAY)

THE INQUIRY USED FIGURES TAKEN DIRECTLY FROM THE 2012/13 REGULATORY STATEMENT

5. RS (GOV) CASES (CHAPTER 4)

• THE DORC CASE (TABLE 9) SIMPLY USES THE FULL DORC ASSET VALUES FROM 2012-13 RS FOR

LEGACY AND NON-LEGACY ASSETS: CLEARLY A HIGH VALUE AS IT DISREGARDS PRE-

CORPORATIZATION CA AND THE LOWER RETURNS ON LEGACY ASSETS.

• THE EV CASE (SECURING THE REVENUES SET BY GFFCR) USES THE ABOVE ASSET VALUES AND

ALLOWS THE FULL IMPACT OF REDUCING WACC TO BE RETAINED BY GOVERNMENT.

• BUT DESPITE THESE FAVORABLE ASSUMPTIONS FOR GOVERNMENT, THE NUMBERS ARE STILL

WELL BELOW THE INITIAL RAB VALUE.

• INTERESTING OFFSETS OF NON-LEGACY RETURNS DROPPING FROM 6.0 TO 5.06%, WHILE

LEGACY ASSETS INCREASE FROM 3.1 (OR 3.32)% TO 5.06%.

• DISCUSSION?

6. CALCULATE THE RAB FROM THE PERSPECTIVE OF THE INQUIRY

6. INQUIRY CASES FOR CALCULATION OF THE RAB(PAGE 77)

INQ 1CASE

(DORC)• ROLL FORWARD FROM 1 JULY 2006 TO 30 JUNE 2013

• OPENING BALANCE OF $4.2 BN

• PRE-CORPORATISATION CONTRIBUTED ASSETS OF

$210M REMOVED FROM OPENING BALANCE

• CAPITAL EXPENDITURES PROVIDED TO ESCOSA FROM SA

WATER

• ACTUAL CPI- 3 MONTH LAG –MARCH TO MARCH

• DEPRECIATION 2%

• DEFLATOR FROM JUNE 2013 DOLLARS TO DECEMBER 12

OF .8%

RESULT $7,151M (DEC 12$)

INQ 2 CASE

(EV)

• SAME ASSUMPTIONS AS INQ 1 CASE

• SEPARATE ROLL FORWARD FOR LEGACY/NON-LEGACY ASSETS

• CALCULATE RETURN ON RAB VALUE AT JUNE 2013 (3.32% AND 6%)

• TO ACHIEVE THE SAME RETURN AT A LOWER WACC RATE (5.06%) , DIVIDE BY 5.06%

RESULT $7,254 M (DEC 12$)

INQ 3 CASE

• ROLL FORWARD FROM 1 JULY 2006 AFTER

REDUCING OPENING BALANCE BY ADJUSTED

LEGACY ASSET VALUE

• SAME ASSUMPTIONS AS INQ 1 CASE

DORC RESULT $6,117M (DEC 12$)/ EV RESULT $7,251M (DEC 12$)

7. THE $7,770 MILLION NUMBER (PAGE 44)

• NOT CLEAR HOW THIS WAS DERIVED

• REPORTS SUGGEST THERE WAS A RANGE OF POSSIBLE NUMBERS AND THE TREASURER’S OFFICE CHOSE A

VALUE

• INQUIRY SUGGESTS IT MIGHT HAVE BEEN BASED ON TREASURER’S LETTER ON 17 MAY WHICH REFERS TO A RAB

OF $7.5B IN 12/13 RS, AND THE DECLINE FROM 5.42 TO 5.06% WACC

• CALCULATION OF 7.5X5.42/5.06 GIVES 8.033. MID-POINT IS $7.77B WHICH SUGGESTS A 50/50 SHARING

OF THE RAB GAIN??

• BUT $7.5B DOES NOT EXIST, IS A FULL ASSET VALUE WITHOUT PCCA AND LEGACY, AND EXAGGERATES THE

TRUE IMPACT OF THE FALLING WACC ON REVENUE.

• DISCUSSION?

8. SUMMARY OF OUTCOMES(PAGES 82-83)

9. INQUIRY CONCLUSIONS(PAGE 84)

• NOT APPROPRIATE FOR THE INQUIRY TO SET A RAB VALUE (NO ‘CORRECT’ NUMBER)

• DIFFICULT TO SUPPORT THE GOVERNMENT’S FIGURE OF $7,770M

• GOVERNMENT’S OWN CALCULATIONS SHOW MAXIMUM OF $7,400M (12/13 RS)

• THE MOST CREDIBLE RAB VALUE IS BETWEEN $7,150M (DORC) AND $7,250M (EV)

10. YOUR IMPLEMENTATION VIEWS ?

10. IMPLEMENTATION OPTIONS

• INQUIRY VIEW THAT IT IS APPROPRIATE TO ADDRESS THE FINDINGS IN FULL FROM 1 JULY

2020; OVER-RECOVERY FOR 7 YEARS.

• RECOGNISES THAT SOME STAKEHOLDERS ARE SUPPORTIVE OF A TRANSITION TO THE NEW

RAB TO AVOID MAJOR BUDGET IMPACT SHOCK AND POTENTIAL IMPACTS ON SOCIAL AND

BUSINESS PROGRAMS

• STAKEHOLDERS MIGHT ACCEPT A GRADUAL MOVE IF THE GOVERNMENT ACCEPTED THE

INQUIRY’S FULL FINDINGS?

• POSSIBLY IMPLEMENTED OVER THE NEXT REGULATORY PERIOD 2020/21 TO 2023/24?

• DISCUSSION?

11.OTHER ISSUES?

12

12. NEXT STEPS/CLOSE

•RESPONSES TO THE BALANCED BARGAIN

REPORT BY 31ST MAY PLEASE

•THE INQUIRY WILL SUBMIT THE FINAL REPORT

TO THE TREASURER BY JUNE 28

YOU CAN CONTACT US:

ANN PATAKI- EXECUTIVE OFFICERSA INQUIRY INTO WATER PRICING

GPO BOX 1045ADELAIDE SA 5000

PH. 84290634EMAIL: WATERPRICINGINQUIRY@SA.GOV.AU