SYDNEY WATER CORPORATION HUNTER WATER CORPORATION … · Agency: Sydney Water Corporation Hunter...

SYDNEY WATER CORPORATIONHUNTER WATER CORPORATION

GOSFORD CITY COUNCILWYONG SHIRE COUNCIL

DEVELOPER CHARGES FROM 1 OCTOBER 2000

I N D E P E N D E N T P R I C I N G A N D R E G U L A T O R Y T R I B U N A LO F N E W S O U T H W A L E S


SYDNEY WATER CORPORATIONHUNTER WATER CORPORATION

GOSFORD CITY COUNCILWYONG SHIRE COUNCIL

DEVELOPER CHARGES FROM 1 OCTOBER 2000

Determination No 9, 2000 21 September 2000


REPORT TO THE PREMIER ON THE DETERMINATION OF MAXIMUM PRICES UNDERSECTION 11 (1) OF THE INDEPENDENT PRICING AND REGULATORY TRIBUNAL ACT,

1992

Reference No: 99/175, 99/176, 99/177, 99/178

Report: No 9, 2000

Agency: Sydney Water CorporationHunter Water CorporationGosford City CouncilWyong Shire Council

Declaration of government monopoly services under Section 4 of the Act:

The Government monopoly services were declared by the Independent Pricing andRegulatory Tribunal (Water, Sewerage and Drainage Services) Order 1997, made on 5February 1997 and published in Gazette No. 18 dated 14 February 1997 at page 558.

TABLE OF CONTENTS

1 INTRODUCTION 1

2 REVIEW PROCESS 32.1 What was the review process? 32.2 What pricing principles did the Tribunal follow? 32.3 What form does the price regulation take? 5

3 THE NPV METHODOLOGY 63.1 Problems with the current approach 6

4 THE TRIBUNAL’S DETERMINATION AND ITS IMPLICATIONS 84.1 A transparent approach for DSPs 84.2 Reviews of DSPs 114.3 Definition of assets 124.4 Valuation of pre 1996 assets 134.5 Valuation of post 1996 assets 144.6 Identification of assets 144.7 Applying the NPV approach 164.8 Calculation of operating revenues 174.9 Discount rates 184.10 Application of asset values and discount rates 20

ATTACHMENT 1 LIST OF SUBMISSIONS 21

ATTACHMENT 2 PRESENTERS AT PUBLIC HEARING 22

ATTACHMENT 3 SECTION 15 COMPLIANCE 23

ATTACHMENT 4 SECTION 14A COMPLIANCE 25

Independent Pricing and Regulatory Tribunal Report No 9, 2000

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1 INTRODUCTION

The Independent Pricing and Regulatory Tribunal (the Tribunal) regulates the maximumcharge that the four water agencies under its jurisdiction1 can levy for water, sewerage anddrainage services. This includes setting the maximum water and sewerage charges leviedon households and businesses, and also more specialised charges such as developer charges.

Developer charges are charges that water agencies levy developers for the provision, orupgrading, of water supply, sewerage and drainage facilities for new developments.2Developer charges are up-front charges paid by developers and are levied to recover part ofthe infrastructure costs incurred in servicing new developments.

The Tribunal determined developer charges for the four water agencies in 1995 and 1996.3Rather than setting individual charges, the Tribunal adopted a calculation methodologybased on net present value (NPV) principles,4 together with a set of guidelines to be used inapplying the methodology.5 The water agencies calculate charges for each developmentarea using the methodology.

Agencies and developers have accepted the NPV approach. However, developers haveexpressed concern about its implementation. A major criticism is that the methodology andguidelines have not been implemented consistently across agencies. The NPV methodologyand the developers’ criticisms are outlined in Section 3 of this report.

The Tribunal decided to review the methodology at the same time as periodic chargesbecause of:

• the concerns over the application of the methodology

• the methodology has been in place for four years.

The determination, which replaces the previous determinations, will take effect from thelater of the date of gazettal and 1 October 2000. The main changes in this determination are:

• the methodology now includes the parameters used in the model as well as what waspreviously referred to as guidelines

• agencies must advertise and exhibit a development servicing plan (DSP) for eachservice area

• agencies must provide additional information in the DSP to allow developers andother interested parties to conduct a thorough review of the plan

1 Sydney Water Corporation, Hunter Water Corporation, Gosford City Council and Wyong Shire Council.2 An organisation other than the water agency, eg a local council, may provide drainage facilities.3 The determinations were open-ended in that they were not made for a defined period of time.4 The key objective of any investment analysis (of which net present value is a type) is to bring all elements

of a business proposal to a common base by discounting all costs and income to a particular point in time.The standard approach to discounting reduces a time stream of costs and income to an equivalent amountof today’s dollars. That single amount is known as the present value of the future stream of costs andincome. Present value is calculated using the method of compound interest. The rate at which thepresent value is computed is known as the discount rate.

5 The developer charge is the capital charge less the agency contribution. The methodology is describedmore fully in Section 3 of this report. See also earlier IPART reports, for example - GPT, Sydney WaterCorporation Prices of Developer Charges for Water, Sewerage and Drainage Services, Determination No 9,December 1995.


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• assets already constructed must be valued on a Modern Engineering EquivalentReplacement Asset (MEERA) basis

• holding charges for assets commissioned prior to 1996 are to apply from 1996 and notthe date of commissioning.

The Tribunal believes that as a result of these changes there should be a more consistentapplication of the methodology. For Sydney there should be a reduction in the averagedeveloper charge. While Hunter Water’s developer charges will increase, Hunter Water hasbeen charging considerably less than the maximum charge permitted under the existingmethodology. There would be little change in the charges for either of the councils.

The Tribunal realises that applying a methodology can lead to different interpretations.Should differences of interpretation in applying the methodology arise, these differencesshould be resolved between the parties concerned. To assist in this, the Independent Pricingand Regulatory Tribunal Act, 1992 (the IPART Act), provides a mechanism for resolvingdisputes between an agency and a customer of an agency.6

This report describes the changes to the methodology. The report outlines the determinationand the basis for the Tribunal’s determination in more detail. It sets out:

• the review process undertaken by the Tribunal in making this determination

• the NPV methodology

• the changes made by the Tribunal to the Methodology and the impacts of thosechanges.

The complete determination follows this report.

6 Independent Pricing and Regulatory Tribunal Act, 1992, section 31.


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2 REVIEW PROCESS

2.1 What was the review process?The Tribunal reached its determination after an extensive review process which includedconsultation with key industry participants. Although the review process began in October1999, the Water Forum had been meeting prior to that time to discuss emerging issues indeveloper charges.7

The review has been conducted in conjunction with the review of water, sewerage anddrainage charges for each of the water agencies. At the beginning of the review the Tribunalreleased an issues paper8 seeking submissions from the water agencies and other interestedparties. Attachment 1 lists submissions received.

The Tribunal held a public hearing where interested parties presented their views.9 It alsoconsulted individually with the water agencies and representatives of developer groups.Finally, the Tribunal conducted its own analysis into the impacts of its intended changes toparameters and the methodology.

The Tribunal made its determination, taking into account all the information and analysisobtained through the process outlined above. The Tribunal members who considered thisdetermination were Dr Thomas Parry (Chairman), Mr James Cox (Full-time member), andMs Cristina Cifuentes (Member).

Copies of all submissions and a transcript of the public hearing can be viewed on theTribunal’s website at www.ipart.nsw.gov.au and are available for inspection at theTribunal’s office.

2.2 What pricing principles did the Tribunal follow?In determining prices under the IPART Act, the Tribunal must have regard for a range ofeconomic, social and environmental issues, listed in section 15 of the IPART Act. As well asthe criteria in section 15, the Tribunal aims to achieve the following objectives in settingprices:

• economic efficiency

• financial sustainability

• promoting competition

• equity

• environmental sustainability

• simplicity and transparency

• certainty and control of the costs of regulation.

7 The Water Forum was formed by the Tribunal in 1994 and consists of representatives of developer

groups, water agencies, government departments and environmental groups.8 IPART, Pricing of Water, Sewerage and Stormwater Services, Issues Paper, Discussion Paper DP-37, October

1999.9 Attachment 2 provides the list of presenters at the hearing.


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These pricing principles are consistent with the requirements in section 15 of the IPART Act.In making this determination, the Tribunal has had regard to the requirements of section 15of the IPART Act. The extent to which the Tribunal has had regard to these section 15requirements is outlined in Attachment 3.

As provided under section 13A of the IPART Act, the Tribunal has used a methodology forsetting the maximum price. In determining a methodology for fixing the maximum price,the Tribunal must indicate what regard it has had to a range of additional matters listed insection 14A of the IPART Act. The regard the Tribunal has had to each of these matters islisted is Attachment 4.

Developer charges can serve two related functions. Firstly, they provide a source of fundingfor the infrastructure required for new urban development. Secondly, and importantly,developer charges provide signals regarding the costs of urban development to encouragedevelopment where it is less costly. Charges for infrastructure for new developmentsshould signal the true relative costs of providing such infrastructure. This will ensure thatthe charges do not distort the form and sequence of urban development.

The Tribunal believes that, subject to the need to maintain housing affordability, newdevelopment (and redevelopment) should meet the full efficient cost of the infrastructureprovided for the development. The full cost can be recovered through a combination ofperiodic charges, which are paid by the eventual homeowner, and developer charges, whichare paid by the land developer. If recurring charges do not vary between different locationsto reflect the true costs of providing such services, the Tribunal believes that up-frontdeveloper charges need to:

• provide signals for resource allocation and usage

• provide signals to reflect the environmental effects of urban development

• ensure the financial viability of extensions of urban water infrastructure.

In 1998, the Tribunal commissioned PriceWaterhouseCoopers to review the implementationof the developer charges methodology.10 In their report, PriceWaterhouseCooperssuggested that developer charges can signal the costs of a wide range of developmentoptions to developers preparing proposals, but will not impact on urban planning at abroader level.11 Further, developer charges need to be a significant amount, compared tohouse and land prices, to figure in decisions and thus be effective.

Water agencies could recover the costs of providing infrastructure for new development up-front through developer charges or over time through annual charges. Ultimately, it shouldmake little difference to the agency which approach is used. As long as there is a linkbetween developer charges and annual charges, the agency will recover its costs. Shiftingthe balance to developer charges would do no more than repaying the agency earlier.However, this may affect the rate at which land is developed or purchased.

Efficiency should also be viewed from the perspective of costs of supply. The costs includedin the calculation (including asset related costs) should be the minimum costs of

10 PriceWaterhouseCoopers and the Centre for International Economics, Review of Developer Charges. IPART

Research Paper No 16, October 1999.11 PriceWaterhouseCoopers and the Centre for International Economics, Review of Developer Charges. IPART

Research Paper No 16, October 1999, p 5.


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undertaking the activity. This implies that there should be a clear nexus between the assetsincluded and the area to which the DSP relates. Costs of assets should reflect the cheapestway of providing the quality of service that the community wants.

2.3 What form does the price regulation take?Under the IPART Act, the Tribunal may set maximum prices or may determine amethodology for setting maximum prices. The Tribunal has chosen to determine amethodology for fixing the maximum prices for developer charges.

Developer charges are levied to recover water infrastructure costs incurred in servicing alarge variety of developments. It is impractical and inefficient for the Tribunal to performthe great number of actual calculations and updates required in calculating the charges.Developers include developer charges in their planning and investment decisions, and theyneed a rapid response when applying for an assessment of charges. Unworkable delayswould occur if water agencies had to return to the Tribunal each time they received anapplication for an assessment of developer charges. By allowing the actual calculations to becompleted by water agencies in-house, delays will be minimised. Use of a net present valueapproach in the methodology will ensure agencies recover only the efficient costs of waterand sewerage works.

Water agencies are to prepare a DSP defining the area covered and assets used, anddescribing the basis on which the developer charge has been calculated. Once prepared, theagency is to exhibit the plan and invite public comment. The Tribunal will register a planonce it has been exhibited and adopted by the agency.12

A developer who is dissatisfied with how an agency has calculated a developer charge mayhave the dispute arbitrated under section 31 of the IPART Act. The Tribunal believes thatthe most suitable process to follow is:

• under section 31, the dissatisfied developer should first request the agency to reviewthe charge and the chief executive officer of the agency is to ensure the review occurs.

• the developer, if dissatisfied with the results of the review, may then approach theagency to have the matter put before a mediator. The results of mediation are notbinding on either party.

• under section 31, the developer, if still dissatisfied, may require the matter to bedecided by an arbitrator whose decision is binding.

The Water Industry Forum strongly supported having mediation available as an option forcustomers. Although mediation is not provided for under section 31, the Tribunal supportsthe Forum’s unanimous view that mediation should be available to the parties if they sowish.

12 The Tribunal registers DSPs as an administrative function only. Once DSPs are submitted for registering,

the Tribunal will list all DSPs on its website.


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3 THE NPV METHODOLOGY

In 1995 and 1996, the Tribunal made determinations that set out a common methodology forcalculating developer charges.13 The methodology is based on a net present value approachthat calculates the costs and revenues of infrastructure projects. Although the methodologyis common to the four agencies, the Tribunal set different values for some parameters toreflect circumstances specific to each agency. These differing parameters include discountrates, transition periods, asset valuation variables, and discounts on final charges.

Box 1 shows the existing formula for calculating the developer charges. This can be writtenas:

Developer contribution = capital charge less agency contribution

The capital charge is the net present value of all expenditure on assets (whether existing orfuture assets) used to service the development. The agency contribution is the net presentvalue of the difference between operating revenue and operating costs. It is often referred toas the revenue offset.

Box 1 The developer charges formula

The developer charge (DC) is calculated as:

DC = K – NPVr (Ri – Ci) for i = years 1,……n; n < 30

Where:K = a capital charge for the net present value of expenditure on existing and future

assets serving the areaRi = revenue expected to be received by servicing customers in the area in each year (i)Ci = operating, maintenance and administration costs expected to be spent in servicing

customers in the area in each year (i)r = the cost of capital or the discount rate for deriving the net present value of future

revenues and costsn = the forecast horizon for the assessment of future revenues and costs.

3.1 Problems with the current approachAgencies and developers have accepted the NPV approach. However, developers haveexpressed concern with its implementation. A major criticism is that the methodology hasnot been implemented consistently across agencies. Further, although the Tribunalpublished a pamphlet describing the DSP process in 1998, comments from a number of

13 GPT, Sydney Water Corporation Prices of Developer Charges for Water, Sewerage and Drainage Services,

Determination No 9, December 1995; IPART, Hunter Water Corporation Prices of Water Supply, Sewerage andDrainage Services, Determination No 5, June 1996; IPART, Gosford City Council Prices of Water Supply,Sewerage and Drainage Services, Determination No 3, June 1996; IPART, Wyong Shire Council Prices of WaterSupply, Sewerage and Drainage Services, Determination No 4, June 1996.


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developers suggest that the DSP process is not well known to developers outside theDeveloper Charges Water Forum.

In submissions to the Medium Term Price Path Review for the metropolitan water agencies,a number of developers14 have expressed concern with the way that the agencies calculateboth components of the developer charge calculation, that is the capital charge and theagency contribution. The developers are worried about:

• the way in which water agencies calculate the agency contribution

• the way in which the agencies calculate the capital charge

• the lack of clarity in the way in which DSP boundaries are defined.

While accepting the NPV approach, the development industry is particularly concernedwith the application of the net present value calculation for existing assets. That is, the wayin which a real discount rate of 3 per cent15 is applied to an asset value from the date ofcommissioning the asset to the date at which the NPV of assets is calculated. For the agencycontribution, the developers believe that there are inconsistencies in the application ofoperating revenues and expenditure.16

The developers argue that the DSPs and the process by which they were prepared lacktransparency. For example, they comment that often the charges are presented without theaccompanying data and calculations. Finally, the developers believe that the DSPs shouldbe reviewed on a regular basis.

14 See submissions from Don Fox Planning, Landcom, Lend Lease, Mirvac, UDIA, Winton Property Group

and Walker Corporation.15 Often this discount rate is referred to as the holding charge.16 See submissions from Don Fox Planning, Landcom, Lend Lease, Mirvac, UDIA, Winton Property Group

and Walker Corporation.


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4 THE TRIBUNAL’S DETERMINATION AND ITS IMPLICATIONS

The Tribunal has decided to continue with the approach it adopted in 1995 but has madeseveral changes. These changes will assist in the implementation of the methodology. Thechanges are outlined in sections 4.1 to 4.9.

The water agencies have analysed the impact of these changes. They expect that developercharges will, on average, be less than under the existing determination. The followingreductions in revenue are expected:

• a reduction of 27 per cent for Sydney Water

• a reduction of 11 per cent below the amount expected under the existingmethodology17 for Hunter Water

• a reduction of 4 per cent for Gosford City Council

• little change for Wyong Shire Council.

The remainder of this section discusses the changes that have been made and the basis forthe Tribunal’s determination. Each section contains a brief description of the currentsituation, the problems and the Tribunal’s determination.

4.1 A transparent approach for DSPs

4.1.1 Existing situationThe Tribunal intended that regulation of developer charges would be light-handed. Foreach development area, the agencies were required to prepare a DSP that included thecalculation of the developer charge. These DSPs were to contain sufficient information toallow developers to scrutinise the agency’s investment decisions and encourage agencies touse least cost methods.

Developers would like to see a transparent approach to setting developer charges. Thedevelopers believe that insufficient information has been made available to enable them toassess:

• the appropriateness of the assets used to service the development

• the basis on which the charge has been calculated.

4.1.2 DeterminationThe Tribunal has decided that water agencies are to prepare a DSP for each DSP area. Eachplan must:

• be exhibited for a minimum of 30 working days

• follow the format laid down in the determination

17 Unlike the other agencies, Hunter Water has not implemented the methodology the Tribunal determined

in 1996. As such Hunter Water has been charging less than the maximum charge permissible. HunterWater had proposed to implement the determination during the 2000/01 year and had projected increasesin its charges. As a result of this determination Hunter Water anticipates its average revenue fromdeveloper charges would be 11 per cent below the level it was forecasting for the period of the price path.


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• show the calculated developer charge for the services and the basis on which it hasbeen calculated

• clearly explain the basis on which boundaries have been established

• include charges on a per equivalent tenement (ET)18 basis

• compare the calculated developer charge with the existing charge.

The process for publishing a DSP

The Tribunal has decided an approach for preparing, exhibiting and registering DSPs. Thisapproach involves each agency:

• Exhibiting a draft DSP for at least 30 working days before adoption (‘exhibitionperiod’). This is to allow time for examination by interested parties and for interestedparties to make submissions to the relevant agency on that draft DSP. The agencymust consider any submissions made by interested parties.

• Advertising the date when a DSP is to be made or reviewed and the start date of theexhibition period. Relevant information including the length of the exhibition periodis to be incorporated in the advertisement.

• Informing the Urban Development Institute of Australia (UDIA), the HousingIndustry of Australia (HIA), any relevant developers and landowners of the start dateof an exhibition period at least 10 working days before that start date.19

• Forwarding the DSP adopted by the agency to the Tribunal for registration. At thetime of forwarding the DSP, the agency is to inform the Tribunal of any submissionslodged during the exhibition period. The Tribunal will then register the DSP.

To ensure a transparent approach, the Tribunal has focussed on formalising thearrangements for the exhibition of DSPs and confirming the information requirements to becontained in DSPs.

Currently, there is no formal requirement for the exhibition of DSPs. However, wateragencies have generally implemented a 28 day exhibition process. The Tribunal seesbenefits in formalising this process within DSPs and considers that water agencies shouldfollow a process involving public exhibition for 30 working days preceded by advertising ofthe start date of the exhibition period. The exhibition period allows interested parties timeto examine the draft DSP and make representations to the water agency.

Including this process in this determination brings consistency across the agencies andimproves communication between water agencies and developers. This should lead to asmoother implementation of new charges and DSPs.

Format of DSPs

A DSP is to specify, among other things:

• a summary of the contents of the DSP

18 Equivalent tenement is a measure of the demand a development will place on the infrastructure in terms

of the water consumption and discharge for an average residential dwelling.19 Including, but not restricted to, any developers who had applied for planning approval within the six

months prior to exhibition.


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• relevant land use planning information

• the extent of the DSP area

• the extent of the services required to be staged over the anticipated developmentperiod

• estimates of future capital and operating costs

• standards of service to be provided to customers and design parameters of assets

• estimates of lot and dwelling production including demographic assumptions

• timing of works and expenditures related to anticipated development anddemographic assumptions

• the calculated developer charge and the basis on which it has been calculated

• a reference to other relevant DSPs.

DSPs are available to developers and the community generally to assist them in makinglocational and investment decisions. The content of each DSP is meant to reflect theinformation and methodological requirements of the determination. The underlyingrationale of the DSP concept is to provide developers with sufficient information to enablethem to understand how charges have been calculated.

DSP boundaries

In each DSP, water agencies will be required to publish the basis on which the DSPboundary has been established.

Successful implementation of the methodology relies on dividing a service area intogeographic areas that generate meaningful ‘signals’ for developers. Cost reflective chargeswithin each area should encourage development of an efficient urban form and, to this end,the size of the area covered by a DSP is of critical importance. If the area is too small, therecan be extreme variations in charges from place to place, and no clear signal results. If thearea is too large, there is no variation, and again no signal. A single DSP for a jurisdictionwould still serve the purpose of making the calculation transparent, but it would not signalrelative cost differences in different localities.

The appropriate DSP boundaries is a matter of judgement to be made by the agency relyingon engineering and other expert advice. The Tribunal has decided that the basis on which aDSP boundary has been chosen must be published in DSPs. The Tribunal considers this tobe the most practical approach to clarifying DSP boundary questions.

Charges are to be calculated on a per equivalent tenement basis

The Tribunal has decided that developer charges should be shown on a per ET basis inDSPs.

Currently there are various views the basis on which developer charges should beexpressed. Sydney Water Corporation currently shows charges on a pure net hectare basis,which is confusing for both developers and the public. All parties now agree that showingdeveloper charges on a per ET basis will help make DSPs more transparent.


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Impacts of charges

The Tribunal has decided that water agencies must publish the latest developer charge, ascalculated under this methodology, and the most recent previous developer charge, or rangeof developer charges, in DSPs. This will enable developers and other interested parties toexamine the impact of any changes.

The Tribunal believes that there are benefits in requiring water agencies to show thecomparison of new developer charges to previous charges in their DSPs. This approach willprovide a quick way of deciding whether DSPs need closer analysis, especially in theexhibition period.

4.2 Reviews of DSPs

4.2.1 Existing situationOther than through the dispute resolution process, the current determinations do notprovide for a review of DSPs once registered. In making the original determination, theTribunal’s intention was that there would be no review of charges, except for annualindexing. The Tribunal was concerned that automatic reviews may lead to automatic priceincreases. However, all participants in the Water Forum have expressed a view that wateragencies should review their DSPs, and hence their developer charges, every five years.

4.2.2 DeterminationThe Tribunal has decided that water agencies should review DSPs, and hence developercharges, every five years or as required by the Tribunal as part of a periodic review ofcharges.20 Agencies have until 30 June 2001 to review their DSPs following thisdetermination. The Tribunal considers that between reviews the developer charges shouldbe maintained in real terms.

In undertaking a five yearly review, an agency should review all the elements in the DSP,not just the charge. This would will allow for any significant changes in servicerequirements to be included in the DSPs. It should also ensure that the appropriate netoperating revenues are included.

A DSP would not necessarily be reviewed following a determination of periodic charges. Aspart of the periodic charge determination, the Tribunal may consider that a review ofDeveloper Charges may be necessary, in light of the change in periodic charges. In this case,the Tribunal may require either a review of the DSP or a review of the developer chargealone.

The Tribunal is of the view that there are some advantages in conducting periodic reviews ofdeveloper charges.1. Developer charges are linked to periodic charges. If the Tribunal makes a determination

for periodic charges, there could be a flow on to developer charges. Without reviews ofdeveloper charges, the amended periodic charges would not be reflected in developercharges and therefore there is a risk of over or under-statement of revenue.

20 Agencies may review all DSPs at the same time every 5 years or on a rolling 5 year cycle. However,

except when required by a Tribunal determination, each DSP is to reviewed once, and only once, every 5years.


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2. Regular reviews of developer charges will allow water agencies to review the inclusionof future assets in developer charges calculations. In the absence of regular reviews,water agencies must estimate the growth in their asset base in establishing their revenuerequirements. Accordingly, there may be an incentive for the agency to overestimatecapital expenditure needs in the interest of a larger regulatory asset base on which toearn a return. With regular reviews, there would be less motivation to include assetsforecast well into the future. As well, regular reviews would provide some valuablecertainty to the development industry when they need to make investment decisions.

3. In addition to periodic reviews, the Tribunal acknowledges that annual indexation ofcharges will still be required. The existing determinations prescribe indexing by thedetermined increase or decrease in annual periodic charges. However, the Tribunal is ofthe view that, between reviews, charges should be indexed by the consumer priceindex.21 This reflects the method currently adopted by water agencies and is proposedon the basis of simplicity of application.

4.3 Definition of assets

4.3.1 Existing situationThe existing determinations refer to assets as being either ‘existing assets’ or ‘future assets’.However, these are not defined.

In drafting the original determinations, the Tribunal did not intend that DSPs would bereviewed once registered. Definitions of existing and future assets were not needed.However, reviews will be permitted under this determination and precise definitions ofexisting and future assets are needed. This is because in 1996 an asset that was to becommissioned in 1999 was regarded as a future asset. If no change is made to thedetermination, this asset would be regarded as an existing asset once the DSP is reviewed in2000 and the lower rate of return is applied to it This was not the Tribunal’s intention.

4.3.2 DeterminationThe Tribunal has decided to define assets on the basis of whether they were commissionedbefore or after the commencement of this methodology, that is 1996. The Tribunal hasdecided that pre 1996 assets are those assets which were commissioned prior to 1 January1996. Post 1996 assets are those assets which were commissioned on or after 1 January 1996or which are yet to be commissioned.

The Tribunal must adopt an approach that is consistent with the original determination.One option is to retain the current terms (existing and future) based around the date the DSPis prepared or reviewed. However, this creates difficulties when a DSP is reviewed. Forexample, when a DSP is originally prepared, an asset may be classified as a future asset. Ata subsequent review, the asset would be treated as an existing asset. Applying differentdiscount rates for existing and future assets would result in an asset achieving a lowerreturn following a review.

21 That is the consumer price index exclusive of GST. The way in which the consumer price index is to be

used for indexing the charge is described in the determination.


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Another option is to define assets as either ‘pre 1996 assets’ or ‘post 1996 assets’. Pre 1996assets are those assets which were commissioned prior to 1 January 1996. Post 1996 assetsare those which were commissioned on or after 1 January 1996 or which are yet to becommissioned. This approach would be consistent with the original application of existingand future assets.

The Tribunal has decided to define assets on the basis of whether they are ‘pre 1996 assets’or ‘post 1996 assets’.

4.4 Valuation of pre 1996 assets

4.4.1 Existing situationIn the existing determination existing assets are be valued on the basis of replacement, ormodern equivalent asset (MEA) costs where possible.22 However, flexibility exists to useother methodologies, providing that there is Tribunal endorsement of that methodology.

A number of different approaches have been adopted in DSPs at present.

1. Indexed historical cost data has been used by Sydney Water Corporation as the basis ofasset valuation. Sydney Water Corporation has indicated in the past, that MEA valuesmay be available for some existing assets. However, historical cost information wasmore readily available and can be applied consistently across the system whereas MEAcannot. In its existing determinations, the Tribunal has decided that a reduction factor of40 per cent is to be applied by Sydney Water Corporation to current asset values tobetter reflect replacement costs. Sydney Water Corporation was of the view that thecombination of the 40 per cent reduction amount and indexation will produce a valueapproximating MEA.

2. As Hunter Water Corporation has not implemented the existing determination, it hasnot valued assets under this methodology.

3. Gosford and Wyong have based their valuations on contract rates. In the case of Wyongthis has been in reference to costs listed by the Department of Public Works and Services.

4.4.2 DeterminationThe Tribunal considers that water agencies should now value pre 1996 assets on a commonbasis. The Tribunal has decided that agencies must use Modern Engineering EquivalentReplacement Asset (MEERA) as a basis for valuation.23 This will bring consistency tocalculations and improve the transparency of DSPs.

Using MEERA will mean that cost estimates:

• are based on the provision of the same quality of service

• are based on an optimised design

22 In GPT, Developer Charges in the NSW Water Industry, Discussion Paper No 8, September 1994, p 49, MEA

is defined as the value of an asset based on the assumption that the asset would have been built at thepresent time using currently available technology.

23 MEERA is defined as the value of the asset (or assets) calculated on the basis that the asset is constructedat the time of valuation in accordance with modern engineering practice and the most economically viabletechnology, which provides similar utility functions to the existing asset in service.


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• will ensure that developer charges reflect efficient costs.24

The Tribunal notes that the developers have proposed retention of MEA. However, such anapproach would be difficult to implement as it requires an agency to ignore infrastructureand assume that the development was a greenfield site.

Sydney Water Corporation’s revenue for developer charges would reduce by 18 per centand the Councils’ developer charges revenue would remain relatively unchanged if MEERAasset values are used.

4.5 Valuation of post 1996 assetsPost 1996 assets fall into two categories – assets commissioned on or after 1 January 1996,but prior to the time at which the DSP is prepared, and assets yet to be commissioned.

4.5.1 Existing situationIn the existing determination, the basis on which assets yet to be commissioned are to bevalued is not clear. As post 1996 assets fall into two categories, the method for valuing theseassets must be clarified.

4.5.2 DeterminationThe Tribunal has decided that where post 1996 assets are already commissioned, the assetvalue must be based on a MEERA valuation. Assets yet to be commissioned must be basedon an estimate of actual efficient cost at the time of commissioning. Once those assets arecommissioned, their value will be based on a MEERA valuation at the next review.

The Tribunal considers that valuing all assets (both pre and post 1996 assets) that have beencommissioned using MEERA provides a consistent approach. For most post 1996 assets,there should be little difference between MEERA and actual efficient costs. For yet to becommissioned assets, estimates of efficient actual cost are a reasonable and practicalapproach.

Before including assets yet to be commissioned, the agency should first consider the basis onwhich they are included. In some cases the development may temporarily use the capacityof an existing asset before construction of a new asset has been completed. If so, inclusion ofthe costs of both existing and new assets would result in double counting. Only the costs ofthe new assets should be included.

4.6 Identification of assetsIn identifying assets included in the DSP, the water agency must, at a minimum, considerthe following three factors – nexus, assets to be excluded and treatment of headworks.

24 Part of an asset may have been, in the light of the relevant demographic statistics available for the DSP

area at the time it was commissioned, significantly and unreasonably oversized in respect of system andcapacity requirements. Under MEERA the asset value would be reduced accordingly.


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4.6.1 Existing situationNexus

In assessing the costs of assets to be included in the developer charge, water authoritiesmust demonstrate that there is a nexus (that is, close connection) between the developmentand the assets which are to serve that development. These assets should be clearlyidentified in each DSP. The efficient cost of these assets should be taken from an assetregister or other source acceptable to the Tribunal.

The development industry argues that often in DSPs the relationship of an asset to adevelopment area is not clear.

Assets to be excluded

The original determinations envisage that each development be charged for that part of theservice capacity of existing and future assets that it uses or will use. The determinationsspecify that an asset is to be excluded from the calculation if:

• its capacity is unlikely to be fully utilised over the planning horizon relevant for thatasset, or

• the required service capacity was created before 1970, or

• the service capacity was made available by changes in land use.

Treatment of headworks

In the original developer charges determinations all headworks were included in thecalculation. Since the preparation of the current determination Sydney Water Corporationhas been restructured. In particular, Sydney Water Corporation’s water headworks havebeen transferred to the Sydney Catchment Authority. It is therefore appropriate to reviewwhether water headworks should be included in assets for the calculation of the developercharges.

4.6.2 DeterminationNexus

The Tribunal has decided that, as in the original determination, there must be a nexusbetween the development and the assets serving the development. Each agency is to includesufficient information in the DSP to enable nexus to be verified.

Agencies are required to exhibit a new or revised DSP for thirty working days beforeadopting the DSP. Consultation during that period is the best way to resolve questions ofnexus between a development and the assets that are to serve the development. If questionscannot be resolved by consultation, the developer has the option of proceeding through theprocess of review, mediation and arbitration set out in section 31 of the IPART Act.25

Assets to be excluded

The Tribunal has decided that an asset commissioned before 1970 must be excluded fromthe calculation of developer charges. However, the cost of amplifying a pre 1970 asset can

25 See Section 12 of the Determination.


16

be included (but not the whole asset). In addition, the Tribunal has decided that all assetsmust be included when calculating developer charges with the exception of when:

• the capacity of the asset was made available by changes in land use patterns,

• an asset was funded by developers and transferred free of charge to the agency.

In the following cases only that part of the asset provided for the reason stated is to beexcluded:

• part of an asset was provided for a reason other than to service growth, such as toaccommodate amendments to environmental legislation,

• part of an asset was, in the light of the relevant demographic statistics available for theDSP area at the time it was commissioned, significantly and unreasonably oversized inrespect of system and capacity requirements.

Treatment of headworks

The Tribunal has decided that all headworks infrastructure should be included in thecalculation of the developer charge.

Within an agency’s service area, water headworks are common to all customers regardlessof their location. Therefore, there is no signalling effect within an area from including waterheadworks. However, headworks were included in the original determination to providesome signalling effect between agencies. In general, the objective of effective signallingbetween different catchments and even different jurisdictions, requires the inclusion ofheadworks. Cost reflective charges can play a role in encouraging efficient developmentdecisions on an inter-urban as well as intra-urban scale.

Exclusion of Sydney Catchment Authority assets from Sydney Water’s charges woulddistort Sydney Water’s charges in relation to other agencies. The Tribunal has decided thatall headworks should be included in the DSP regardless of whether they are owned by theagency. This is because Hunter Water Corporation and the Councils currently include thecosts of headworks. In doing so, the Tribunal has taken the view that it can take intoaccount the costs of headworks borne by Sydney Water Corporation regardless of whetherthe headwork assets are owned by Sydney Water Corporation or Sydney CatchmentAuthority.

4.7 Applying the NPV approach

4.7.1 Existing situationThe current determinations require that an NPV approach be used to calculate developercharges. Each DSP should contain an NPV calculation of the cost of total service capacity inan area less the expected net operating profits (or losses) from providing services to thatarea. The resultant net cost is then expressed per hectare or ET. A developer is charged onthe basis of the number of hectares or ETs in the development.

Subsequent to the release of the existing determination, the Tribunal issued a clarificationnote in 1997 regarding the calculation of developer charges. The note clarifies the NPVcalculation in respect to the release of lots on an annual basis.


17

4.7.2 DeterminationThe Tribunal has decided that the calculation is to include discounting of the lots as per theclarification note.26

An independent actuary’s analysis concluded that simply dividing the NPV of cumulativeoperating profits (losses) by the total number of lots within the development gives adistorted result.27 However, dividing by the total number of discounted lots results in thedesired result of an operating offset amount that is consistent with the number of lotsreleased in the specific year.

All parties have accepted this approach. Water agencies are now using it in their NPVanalysis. Although ‘discounting of lots’ is not an easily explained concept, it is an acceptablemethod and was confirmed by the independent actuary to be mathematically accurate.

4.8 Calculation of operating revenues

4.8.1 Existing situationThe existing determinations require that agencies calculate the agency contribution (revenueoffset) by reference to operating revenue and expenditure for that particular part of thesystem. The agencies tend to use average revenue from customers and average costs for thesystem as a whole. The developers suggest that the analysis should be based on reportedfinancial statements for the agency.

4.8.2 DeterminationThe Tribunal has decided that, for the purpose of calculating the operating surplus, wateragencies are to calculate operating revenues by using the relevant price applied to theconsumption of an average customer in the relevant customer class.

The annual consumption that must be used in calculations for an average residentialcustomer is:

• for Sydney Water, 240 kilolitres

• for Hunter Water, 210 kilolitres

• for Gosford Council, 207 kilolitres

• for Wyong Council, 205 kilolitres.

The methodology requires the calculation of the future periodic revenues expected to bereceived from customers in the development area in each year. The Tribunal determines thewater price for each specific customer class when it makes a periodic price determination.The Tribunal determines the periodic price after extensive analysis to ensure that onlyefficient costs are included.

Use of a determined price with an average consumption provides a transparent andunderstandable way of calculating future periodic revenues. The current determinations donot specify a method. 26 IPART, Clarification Note, July 1997.27 William M Mercer, Developer Charges, May 1997, p 5.


18

Water agencies can accurately calculate average consumption. Although actualconsumption of specific customers may vary, it would be impractical for water agencies tomake calculations for customers on an individual basis. The Tribunal has decided on anaverage residential consumption for use in the calculations.

4.9 Discount ratesThe discount rate (or interest rate) used in the calculation of developer charges should reflectthe opportunity cost to the agency of funding infrastructure works. In providinginfrastructure prior to development, agencies may face a number of risks. These risksinclude the rate of connection, the cost of construction, and possible changes in interest rates.

There has been much debate about the application of the discount rate. This issue isparticularly relevant because existing assets can contribute as much as 90 per cent of thecapital charge component of developer charges calculations.

Costs of infrastructure already provided to service a development should take into accountthe finance costs incurred or the interest foregone. In this case, the discount rate can bereferred to as a holding charge. Holding charges apply between the time the investment ismade and when the capacity can be used. There is no fundamental difference betweenholding charges and the required rate of return on assets.

4.9.1 Existing situationThe existing determinations provide a discount rate for existing assets, future assets and therevenue offset. In the case of Sydney Water and Hunter Water, the discount rate for existingassets is 3 per cent real and for Gosford and Wyong Council, 0 per cent real. For futureassets and the revenue offset the discount rate is 9 per cent real.

There can be a long period between the time of investment by an agency in an asset and thetime when the asset is fully utilised. In the original determinations, the Tribunal consideredthat the costs of infrastructure already provided to service a development should take intoaccount the finance costs incurred or the interest foregone between the time ofcommissioning of the relevant asset and the date at which the NPV of assets is calculated.Hence, for Sydney Water Corporation and Hunter Water Corporation, the Tribunaldetermined that a 3 per cent real rate of return should be applied to existing assets. Thislower rate reflects the ‘sunk’ nature of these investments.28

In the existing determinations the Tribunal had decided not to discount existing assets (ie 0per cent real discount rate) for Gosford and Wyong Councils on affordability grounds. TheTribunal was concerned that the adverse effect of higher charges might reduce uptake anddevelopment.

As part of the consultation process the Tribunal reviewed the discount rates underpinningthe original determinations. In addition, the developers have expressed concern aboutapplying a holding charge to existing assets from the date of commissioning.

28 The rate of return applied to existing assets is sometimes known as a holding charge.


19

4.9.2 DeterminationPre 1996 assets

The Tribunal has decided a 3 per cent real discount rate for pre 1996 assets for Sydney Waterand Hunter Water. However, the Tribunal considers that this should be applied only from1996 onwards. That is, agencies must calculate the holding charge from 1 January 1996onwards, not the date of commissioning.

A key issue that has been reviewed by the Tribunal is the holding costs for assetsconstructed prior to 1996. Currently, in the case of Sydney Water Corporation and HunterWater Corporation, a holding charge of 3 per cent is applied to assets constructed prior to1996.

However, developers claim that they thought that the discount rate for pre-1996 assetswould not apply to calculations for the period before 1996. Sydney Water Corporation hasindicated they are in favour of not applying holding costs prior to 1996 and Hunter WaterCorporation has adopted this principle in the way that it calculates developer charges.Sydney Water Corporation advises that the impact on Sydney Water Corporation developercharges revenue is a 2 per cent reduction.

As well, this reflects the view that at the time of construction, the agency did not anticipateobtaining a ‘commercial return’ on those assets. However, in looking forward, the Tribunalconsiders it is appropriate that the agency should be able to redeem the opportunity costs.

In determining a 3 per cent (0 per cent for Gosford and Wyong) discount rate for pre 1996assets, the Tribunal has been guided by the impacts of higher rates on charges. The Tribunalnotes, however, that a lower rate for pre-1996 assets will not affect incentives for investmentas the investments have already been made.

The Tribunal has decided that the discount rate for pre 1996 assets for Gosford and Wyongwill be 0 per cent real. The Tribunal considered also whether to apply a 3 per cent holdingcharge to Gosford and Wyong for pre 1996 assets. While this would provide a consistentapproach, it would lead to large increases in charges.

Post 1996 assets

The Tribunal has decided that the discount rate for future assets should be reduced from 9per cent real to 7 per cent real.

In its recent determinations for water agencies, the Tribunal has used 7 per cent real pre taxas a benchmark rate of return. Therefore, the Tribunal considers that the discount rate forfuture assets should be reduced from nine per cent to seven per cent. This figure reflects theweighted average cost of capital of the relevant agencies and has been adopted because itwill align the discount rate with target pricing rates of return. The original 9 per centreflected parameters such as the real interest rates at the time. The reduction to 7 per centprimarily reflects the shift in the economic parameters used in the weighted average cost ofcapital model.

The reduction in discount rate to 7 per cent does not have a large impact on revenues. Thisis because the lots are also discounted at 7 per cent and not 9 per cent.


20

The revenue offset amount

The Tribunal has decided that the discount rate for the revenue offset amount should bereduced from 9 per cent real to 7 per cent real.

The Tribunal considers that the discount rate for the revenue offset should be consistentwith that for post 1996 assets and the weighted average cost of capital.

4.10 Application of asset values and discount rates

Table 4.1 summarises the application of asset valuation and discount rates for each class ofassets.

Table 4.1 Basis of valuation and discount rate for each asset

Asset Basis of valuation Discount rateSydney and Hunter

Discount rateGosford and Wyong

Pre 1970 Excluded Not applicable Not applicable

Pre 1996 (post 1970) MEERA 3%1 0%

Post 1996

Commissioned

Yet to be commissioned

MEERA

Estimate of efficientcosts

7%

7%

7%

7%

Note: 1. Applied from 1 January 1996 only.


21

ATTACHMENT 1 LIST OF SUBMISSIONS

Don Fox Planning

Gosford City Council

Hunter Water Corporation

Landcom

Lend Lease

Mirvac

Sydney Water Corporation

Urban Development Institute of Australia

Walker Corporation

Winten Property Group

Wyong Shire Council


22

ATTACHMENT 2 PRESENTERS AT PUBLIC HEARING

The list of presenters at the public hearing on 3 March 2000 are listed below. Those markedwith an asterisk (*) addressed the issue of developer charges.

Mr Alex Walker, Sydney Water Corporation*Dr Judi Hansen, Sydney Water Corporation*Mr Matt Cooper, Sydney Water Corporation*

Mr Drew Collins, Environment Protection Authority of NSWMr Joe Woodward, Environment Protection Authority of NSW

Mr Wayne Brailey, Department of HousingMr Richard Hunt, Department of HousingMr Donald Proctor, Department of Housing

Mr Bob Wilson

Mr Peter Price, Urban Development Institute of Australia*Mr Chris Taylor, Landcom*Mr Ravi Ravindra, Landcom*

Mr Jeff Angel, Peak Environment Non-Government OrganisationsMr Leigh Martin, Peak Environment Non-Government OrganisationsMs Kathy Ridge, Peak Environment Non-Government Organisations

Mr Jim Wellsmore, Public Interest Advocacy CentreMs Pat Ranald, Public Interest Advocacy Centre


23

ATTACHMENT 3 SECTION 15 COMPLIANCE

Section Reference to report

s15(1)(a) the cost of providing the servicesconcerned

Agencies are required to include efficient costsonly. Existing assets are to be valued on aMEERA basis. Yet to be constructed assets areto be valued on the basis of expected actualcosts. The cost of providing services to landdevelopments is discussed in sections 4.4, 4.5,4.6 and 4.7.

s15(1)(b) the protection of consumers fromthe abuses of monopoly power in terms ofprices, pricing policies and standard ofservices

Section 3 and section 4.9 discuss how theTribunal has managed the impacts of newcharges. The Tribunal has applied a lowerdiscount rate for pre 1996 assets to assist inkeeping charges at an affordable level. ForWyong Shire Council, the Tribunal has cappedthe charge at 85% of the calculated charge.

Section 4 generally discusses the use of an NPVmethodology that calculates charges in a fair andtransparent manner.

s15(1)(c) the appropriate rate of return onpublic sector assets, including appropriatepayment of dividends to the Government forthe benefit of the people of New South Wales

Section 4 discusses the appropriate discountrates for the four water agencies. For post 1996assets the Tribunal has considered the impact ofdeveloper charges revenue in its modelling forperiodic prices.

s15(1)(d) the effect on general price inflationover the medium term

The determination should result in a lowering ofcharges for developers. To the extent that thesavings are passed onto home buyers, this couldreduce the cost of housing and could lead to avery small reduction in general price inflation.

s15(1)(e) the need for greater efficiency in thesupply of service so as to reduce the cost forthe benefit of consumers and tax payers

The requirement that developer charges reflectefficient costs is discussed in section 4.4.

s15(1)f the need to maintain ecologicallysustainable development (within the meaningof section 6 of the Protection of theEnvironment Administration Act 1991) byappropriate pricing policies that take accountof all the feasible options available to protectthe environment

Appropriate charging through developer chargesshould signal better resource and encouragebetter urban planning.

S15(1)(g) the impact on pricing policies ofborrowing, capital and dividend requirementsof the government agency concerned and, inparticular, the impact of any need to renew orincrease relevant assets

The impacts on pricing policies of borrowing,capital and dividend requirements wereconsidered as part of the recently releaseddeterminations for periodic pricing for each of theagencies.

s15(1)(h) the impact on pricing policies of anyarrangements that the government agencyconcerned has entered into for the exercise ofits functions by some other person or body

Sydney Water purchases bulk water form theCatchment Authority. Filtration is provided underBuild Own and Operate contracts. Thedetermination includes all headworks constructedafter 1970, including those transferred to theSydney Catchment Authority.


24

Section Reference to report

s15(1)(I) the need to promote competition inthe supply of the services concerned

The Government has not created a formal accessregime that would separate contestable andmonopoly parts of the business. A commercialapproach to service provision and economicregulation should give the agencies incentives toexplore least cost options including contractingout. As well, developers may choose to providesome infrastructure themselves.

s15(1)(j) consideration of demandmanagement (including levels of demand) andleast cost planning

Demand management is considered in therecently released reports on periodic pricing foreach of the agencies.

s15(1)(k) the social impact of thedeterminations and recommendations

The social impact of developer charges isconsidered in section 4.

s15(1)(l) standards of quality, reliability andsafety of the services concerned (whetherthose standards are specified by legislation,agreement or otherwise).

Standards are considered in section 4.


25

ATTACHMENT 4 SECTION 14A COMPLIANCE

In determining a methodology for fixing the maximum price for a monopoly service, theTribunal must indicate what regard it has had to the matters set out in section 14A(2) of theIPART Act. The regard that the Tribunal has had to each of these matters is listed below.

Section Reference14A(2)(a) the government agency's economiccost of production,

The cost of providing services to landdevelopments is discussed in sections 4.4, 4.5,4.6 and 4.7. The requirement that developercharges reflect efficient costs is discussed insection 4.4.

14A(2)(b) past, current or future expendituresin relation to the government monopolyservice,

The calculation of the charge requires the agencyto include past and future assets and future netrevenues and costs.

14A(2)(c) charges for other monopolyservices provided by the government agency

The Tribunal has considered the impact ofdeveloper charges revenue in its modelling ofperiodic charges for water, sewerage anddrainage services. The methodology involves anoffset for future net revenues and costs fromperiodic charges arising from each developmentarea.

14A(2)(d) economic parameters, such as:(i) discount rates, or(ii) movements in a general price

index (such as the ConsumerPrice Index), whether past orforecast

Section 4 discusses the appropriate discountrates for the four water agencies. The calculationof the charge is to be made in real terms andadjusted by the inflation rate.

14A(2)(e) a rate of return on the assets of thegovernment agency

The discount rate for future assets has beendetermined with reference to the target rate ofreturn considered in the review of periodiccharges for each agency.

14A(2)(f) a valuation of the assets of thegovernment agency

Agencies are required to include efficient costsonly. Existing assets are to be valued on aMEERA basis. Yet to be constructed assets areto be valued on the basis of expected actualcosts and on a MEERA basis at the next review.

14A(2)(g) the need to maintain ecologicallysustainable development (within the meaningof section 6 of the Protection of theEnvironment Administration Act 1991) byappropriate pricing policies that take accountof all the feasible options available to protectthe environment

Appropriate charging through developer chargesshould signal better resource and encouragebetter urban planning.

14A(2)(h) the need to promote competition inthe supply of the service concerned

The Government has not created a formal accessregime that would separate contestable andmonopoly parts of the business. A commercialapproach to service provision and economicregulation should give the agencies incentives toexplore least cost options including contractingout. As well, developers may choose to providesome infrastructure themselves.


26

Section Reference

14A(2)(i) considerations of demandmanagement (including levels of demand) andleast cost planning

Demand management is considered in therecently released reports on periodic pricing foreach of the agencies.


DeterminationUnder the Independent Pricing and Regulatory Tribunal Act, 1992

DEVELOPER CHARGES

Determination No 9, 2000Reference 99/175, 99/176, 99/177, 99/178

1 Application of this Determination1.1 The Services supplied by the Agencies have been declared to be government

monopoly services under the IPART Act.

1.2 This Determination is made by the Tribunal under the IPART Act and applies to theServices.

1.3 The Tribunal’s reasons for employing a methodology for fixing a maximum price inthis Determination, and the principles of that methodology, are set out in Schedule 1.

1.4 Subject to Schedule 2, this Determination replaces all existing determinations forDeveloper Charges including all guidelines incorporated or referred to in thosedeterminations from the Commencement Date.

1.5 Subject to Schedule 2, the maximum prices that the Agencies can levy for the Servicesfrom the Commencement Date are to be calculated in accordance with thisDetermination.

1.6 This Determination uses a Net Present Value model to calculate Developer Charges.The parameters for the Net Present Value model for each of the Agencies are given inthis determination.

2 Information to be included in DSPInformation that must be included in all Development Servicing Plans prepared by Agenciesis set out in Schedule 3.

3 Reviews of development servicing plans and developercharges

3.1 Agencies must commence a review of all their existing Development Servicing Plansfrom the Commencement Date and conclude their review by no later than 30 June2001. Development Servicing Plans registered with the Tribunal prior to theCommencement Date will continue to apply for all new Developments or stages ofDevelopment until such time as a revised Development Servicing Plan is adopted byan Agency.

3.2 Agencies must thereafter:

(a) review their Development Servicing Plans and Developer Charges once, and nomore than once, in each five year period from 1 July 2001; and

(b) review their Developer Charges when and to the extent required by adetermination of the Tribunal.

3.3 If there is no review of Developer Charges under paragraph 3.2 during any given year,the Developer Charges then prevailing must be multiplied on 1 July in each of suchyears by the number derived from the application of the following formula.

GSTyearMar

GSTyearDec

GSTyearSep

GSTyearJun

GSTyearMar

GSTyearDec

GSTyearSep

GSTyearJunGST

yearCPICPICPICPI

CPICPICPICPIQCPI

−−

−−

−−

−−

−−−

−−

−−−

+++

+++=

1222

111

where:

QCPIyear-GST means the number derived from the application of the formula.

CPI-GST is as defined and the corresponding subtext (for example Jun year-1) means the quarterindicated (in the example, the June quarter) and for the year corresponding to the year inwhich the calculation is made less the number of years indicated by the number in thesubtext, if any. For example, if the calculation was to be made in the year 2001, year-1would be the year 2000.

4 Calculation of developer charges using net present valueThe calculation that must be used by Agencies to determine the Developer Charges is set outin Schedule 4.

5 Assessment of asset costs

5.1 Identification of relevant assets(a) The Assets must be assets that:

• were commissioned prior to the Commencement Date;

• were commissioned after the Commencement Date but before a Developmentcommenced; or

• are commissioned, or are to be commissioned, after a Development commences.

(b) An asset (or part of that asset) commissioned prior to 1 January 1970 is taken to beexcluded from the definition of “Asset” in this Determination.

(c) In determining which assets are to be included in the definition of “Assets” under thisDetermination an Agency must demonstrate a nexus between the Development andthe assets that will serve the Development.

(d) An Agency must clearly identify Assets in the relevant Development Servicing Plansin accordance with Schedule 3 of this Determination.

(e) The efficient cost of all Assets included in a Development Servicing Plan must be takenfrom an asset register or other source acceptable to the Tribunal.

5.2 Valuation of assetsThe valuation method below must be applied to the assets indicated.

Commissioning Date Valuation Method

Pre 1996 Asset MEERA

Post 1996 Asset already commissioned MEERA

Post 1996 Asset yet to be commissioned Estimated efficient costs

5.3 Apportionment of assetsIf an Asset services a DSP Area (“Single DSP Area”) and other DSP Areas (“Other DSPAreas”) the value attributable to those Assets that service the Single DSP Area is the valuecalculated by applying the following formula:

Assets the for charge CapitalAreas DSP Other the and Area DSP Singlethe for Assets the of nutilisatio expected Total

Area DSP Singlethe servicingAssets the ofnutilisatioExpected ×

5.4 Calculation of capital charge(a) All Assets must be included when calculating Developer Charges with the exception

of:

• that Asset (or part of an Asset) that is capable of servicing a DSP Area becausecapacity has been made available as a result of that Asset no longer servicing theland use function for which it was originally commissioned, or

• an Asset that was funded by a Developer and transferred free of charge to theAgency, or

• that part of an Asset that was commissioned for a reason other than to servicegrowth, such as to accommodate amendments to environmental protectionlegislation, or

• that part of an Asset that was significantly and unreasonably oversized inrespect of system and capacity requirements in light of the relevant demographicstatistics available for the DSP Area at the time that part of the Asset wascommissioned.

(b) Agencies must calculate a Capital Charge for Pre 1996 Assets as follows:

• estimate the value of the relevant Assets, in accordance with paragraph 5.2 ofthis Determination, as at 1 January 1996;

• convert the value to Real Terms; and

• the expenditure on those Assets in Real Terms must then be converted by thereal Discount Rate set out in Schedule 5 of this Determination, to Present Values,from 1 January 1996 only.

(c) Agencies must calculate a Capital Charge for Post 1996 Assets commissioned on orafter 1 January 1996 as follows:

• estimate the value of the relevant Assets in accordance with paragraph 5.2;

• convert the value to Real Terms;

• the expenditure on those Assets in Real Terms must then be converted by thereal Discount Rate set out in Schedule 5 of this Determination, to Present Values.

(d) Agencies must calculate a Capital Charge for Post 1996 Assets yet to be commissionedas follows:

• estimate the value of the relevant Assets in accordance with paragraph 5.2;

• convert the value to Real Terms; and

• the expenditure of those Assets in Real Terms must then be coverted by the realDiscount Rate set out in Schedule 5 of this Determination, to Present Values.

(e) Once an Asset is commissioned it becomes a Post 1996 Asset whereupon Agenciesmust calculate the Capital Charge for that Asset in accordance with paragraph 5.4(c) atthe next review provided for in paragraph 3.2.

(f) When estimating the capital costs of Assets yet to be commissioned, Agencies mustexamine all available options and choose the option that is the most efficient.

(g) Where:

• an Agency temporarily supplies Services to a Development from an existingAsset, and

• the Agency transfers the supply of Services to the Development from the existingAsset to the new Asset that has just been commissioned,

then only the costs of the new Asset must be included in calculating DeveloperCharges.

(h) Where a proposed Development influences the timing of an Agency’s anticipatedexpenditure on an Asset (“anticipated expenditure”), that anticipated expendituremust be included in the calculation of Developer Charges by:

• estimating the extent to which the proposed Development would bring forwardthe timing of the anticipated expenditure, as compared with the timing of theanticipated expenditure if that Development did not proceed;

• calculating the difference in the Net Present Value between the anticipatedexpenditure that may arise due to that change in timing (“calculated cost”); and

• including the calculated cost as a cost to the Development only if that calculatedcost exceeds the cost of any comparable existing Assets used by theDevelopment – the cost of the comparable existing Assets not being included inthe calculation.

6 Projection of operating costs6.1 The operating, maintenance and administration costs (excluding depreciation and

interest) to Agencies of providing Services to a DSP Area must:(a) be based on the most efficient and lowest cost means of providing the Services;

(b) assume the continuation of the service standards set out in the DevelopmentServicing Plan; and

(c) reflect costs associated with the specific Services provided.6.2 System-wide averages must not be used if the costs of providing Services to the DSP

Area vary significantly from the system-wide operating, maintenance andadministration costs.

7 Projection of operating revenues7.1 Agencies must project the operating revenues arising from a DSP Area on the basis of

the efficient operation of the Assets used to provide services in that DSP Area.

7.2 An Agency’s projection of operating revenues arising from DSP Area must beformulated to best meet the needs of its users, including Developers, based on theservice standards set out in the relevant Development Servicing Plan.

7.3 Agencies must assume that residential charges are uniform across the Agency Areaunless the Tribunal, by determination, has approved differential Periodic Charges.

7.4 Agencies must calculate estimates of future revenues using the relevant periodiccharge applied to the consumption of an average customer in the relevant customerclass. In calculating this revenue, the Agency must use the periodic price path asdetermined by the Tribunal from time to time.

8 Parameters including discount ratesThe relevant parameters including Discount Rates that must be used by an Agency incalculating Developer Charges are set out in Schedule 5.

9 Period of analysis for operating revenues and costsFuture operating costs and revenues must be projected over a 30 year period from the dateof each review of the Developer Charges under paragraph 3.

10 Demographic assumptionsDemand for the Services arises from, in part, population growth and changes in urbandensity. Forecasts by Agencies of population and densities must have regard to the latestdemographic statistics published by the NSW Department of Urban Affairs and Planning forthe Agency Area or a comparable area. For local works, the demographic statistics usedmust be locality specific, that is, at the local government level. For system wide works, suchas Headworks, the demographic statistics used must be for the relevant Agency Area.

11 Impacts of chargesAgencies must publish any revised Developer Charge and the previous Developer Charge,or range of Developer Charges, in their Development Servicing Plans.

12 Dispute resolutionA Developer who is dissatisfied with how an Agency has calculated its Developer Chargesmay have the dispute arbitrated under section 31 of the IPART Act.

13 Definitions and interpretation

13.1 DefinitionsAgencies means the Sydney Water Corporation, Hunter Water Corporation, Gosford CityCouncil and the Wyong Shire Council and Agency means any one of those Agencies.

Agency Area means in relation to an Agency that Agency’s area of operations or localgovernment area as the case may be.

Assets means those assets that provide, or will provide, the Services to Developments within

a DSP Area for which a Developer Charge is payable.

Capital Charge means the Net Present Value of all expenditure on Assets used to service theDevelopment.

Commencement Date means the date that this Determination commences, being the later of:(a) the date that this determination is published in the NSW Government Gazette underSection 17(1) of the IPART Act; and(b) 1 October 2000.

CPI means the consumer price index, All Groups index number for the weighted average ofeight capital cities as published by the Australian Bureau of Statistics, or if the AustralianBureau of Statistics does not or ceases to publish the index, then CPI will mean an indexdetermined by the Tribunal that is its best estimate of the index.

CPIr-GST means the CPI exclusive of the net impact of:(a) the GST; and

(b) changes to any other Commonwealth, State or Territory taxes or charges, consequentupon the introduction of the GST,

as calculated and published by the Australian Bureau of Statistics from time to time. If theAustralian Bureau of Statistics does not, or ceases to, calculate and publish it then CPI-GST willmean:c) an index published by Commonwealth Treasury which is its best estimate of the CPI-GST;

or

d) if Commonwealth Treasury does not, or ceases to, publish an index then an indexpublished by the Reserve Bank of Australia which is its best estimate of CPI-GST; or

e) if the Reserve Bank of Australia does not, or ceases to, publish an index, then at theTribunal’s discretion, either:

(A) an index published by a person appointed by the Tribunal which is that person’sbest estimate of CPI-GST; or

(B) an index published by the Tribunal that is its best estimate of CPI-GST.

Determination means this determination, including all schedules.

Developer means a person that develops land.

Developer Charges means the charges paid by Developers to Agencies for Services suppliedby the Agencies to a Development.

Development means a land development proposed and/or established in an Agency Area.

Development Servicing Plan or DSP means a document which contains the information thatis used to calculate the Developer Charges for Developments in the relevant DSP Area.

DSP Area means that part of the Agency Area covered by a Development Servicing Plan.

Discount Rate means the rate used to calculate the present value of money arising in thefuture and, in the case of calculating Developer Charges under this Determination, theDiscount Rates in Schedule 5.

Equivalent Tenement is a measure of the demand a Development will place on theinfrastructure in terms of the water consumption and discharge for an average residentialdwelling.

GST means the Goods and Services Tax as defined in A New Tax System (Goods and ServicesTax) Act, 1999.

Gosford City Council means the Gosford City Council as constituted under the LocalGovernment Act, 1993 (NSW).

Headworks means significant assets at the end of water, sewerage and drainage systems thatprovide services to two or more DSP Areas. For example, in Development Servicing Plansadopted by Sydney Water Corporation, water headworks are comprised of a system of dams,major storage reservoirs, water treatment works and major supply conduits.

Hunter Water Corporation means the Hunter Water Corporation as constituted under theHunter Water Act, 1991.

IPART Act means the Independent Pricing and Regulatory Tribunal Act, 1992.

Modern Engineering Equivalent Replacement Asset or MEERA means an asset valuecalculated on the basis that the asset is constructed at the time of valuation in accordance withmodern engineering practice and the most economically viable technologies, which providessimilar utility functions to the existing asset in service.

Net Present Value or NPV means the difference between the Present Value of revenue andthe Present Value of costs.

Periodic Charges means charges levied by the Agencies in accordance with a determinationby the Tribunal on properties for access to or use of water, sewerage and drainage services.

Post 1996 Asset means an Asset that was commissioned by an Agency on or after 1 January1996 or that is yet to be commissioned.

Pre 1996 Asset means an Asset that was commissioned by an Agency before 1 January 1996.

Present Value is the value now of money in the future. The Present Value can be the presentvalue of a stream of incomes and expenditures. The Present Value is derived from theformula:

PV = FV (1 + r)-n

Where:

PV = present value;

FV = future value;

r = Discount Rate;

n = number of periods to apply Discount Rate.

Real Terms means that the value of a variable has been adjusted for changes in thepurchasing power of money by a CPI adjustment.

Services means those services supplied in connection with the provision or upgrading ofwater supply and sewerage facilities for new developments and, if required, drainagefacilities for such developments, such services having been declared to be governmentmonopoly services by the Independent Pricing and Regulatory Tribunal (Water, Sewerageand Drainage Services) Order 1997, 5 February 1997, published in Gazette No. 18 dated14 February 1997 at page 558.

Sydney Water Corporation means the Sydney Water Corporation as constituted under theSydney Water Corporation Act, 1994.

Tribunal means the Independent Pricing and Regulatory Tribunal of New South Walesestablished under the IPART Act.

Wyong Shire Council means the Wyong Shire Council as constituted under the LocalGovernment Act, 1993 (NSW).

Year means a period commencing on 1 July and ending on 30 June in the ensuing calendaryear.

13.2 Interpretation

(a) If there is any inconsistency between this Determination of the Tribunal and aprevious determination of the Tribunal, this Determination will prevail to the extent ofthe inconsistency.

(b) In the interpretation of this Determination a construction that would promote thepurpose or object underlying the IPART Act (whether or not that purpose or object isexpressly stated in the IPART Act) is to be preferred to a construction that would notpromote that purpose or object.

(c) A reference to a person includes an individual, a corporation and a body corporate.

(d) Except where expressly indicated or the context requires, the singular includes theplural and vice versa.

Schedule 1 Reasons for, and principles employed in, thisDetermination (paragraph 1.3)

A. Under the IPART Act the Tribunal may set maximum prices or may determine amethodology for setting maximum prices. In this Determination, the Tribunal hasemployed a methodology for fixing the maximum prices that Agencies can charge forServices supplied by them.

The Tribunal has determined a methodology for fixing maximum prices because itwould not be possible for the Tribunal to cover the required diversity of DeveloperCharges by individual price determinations. This is because Developer Charges arelevied to recover water infrastructure costs incurred to service a large variety ofdevelopments.

Developers include Developer Charges in their planning and investment decisions andrequire a rapid response when applying for an assessment of charges. If Agencies hadto return to the Tribunal each time they received an application for an assessment ofDeveloper Charges unworkable delays could result as the Tribunal would have todevote considerable time and resources to mechanically calculating such charges. TheTribunal considers it is preferable that this work be completed by the Agencies.

The Tribunal has stressed that Developer Charges must be calculated by a consistentand transparent methodology, and recover efficient costs. This Determination willensure Agencies regulated by the Tribunal recover only the efficient costs of theServices. This Determination will be applied in a transparent manner, will be testedby Developers and monitored by the Tribunal.

B. The basic principles underlying the methodology in this Determination are thatDeveloper Charges should:

• involve full recovery of relevant costs;

• reflect variations in the costs of servicing different development areas;

• result in new development areas meeting the costs of the services providedthrough developer charges and/or annual charges; and

• cover only infrastructure expenditures on water, sewerage and drainage assetsthat can be clearly linked to the development.

Schedule 2 Coverage of Determination (Paragraphs 1.4 and 1.5)A. This Determination applies to all Agencies for all new Developments or stages of

Development from the Commencement Date except as follows:(a) for Sydney Water Corporation, where a compliance certificate has been issued

by it pursuant to Section 73 of the Sydney Water Act, 1994 for a Development orstage of Development.

(b) for Hunter Water Corporation where:

(i) a compliance certificate has been issued by it pursuant to Section 50 of theHunter Water Act, 1991 for a Development or stage of Development, or

(ii) Hunter Water Corporation has served a notice pursuant to Section 50 ofthe Hunter Water Act, 1991 in respect of a development in which case theassessment stands for the period specified in the notice.

(c) for Gosford City Council where it has given a written “notice of requirements”pursuant to Section 26 of the Water Supply Authorities Act, 1987 in respect of aDevelopment or stage of Development in which case the assessment stands forthe period specified in the notice of requirements.

(d) For Wyong Shire Council where:

(i) a development consent has been issued by Wyong Shire Council pursuantto Section 91 of the Environmental Planning and Assessment Act, 1979 inrespect of a Development or stage of Development and such consentincorporates relevant water and sewerage charges and/or conditions inaccordance with Section 27 of the Water Supply Authorities Act, 1987; or

(ii) Wyong Shire Council has advised charge and/or conditions to theDevelopers in accordance with Section 26 of the Water Supply AuthoritiesAct, 1987.

B. This Determination applies to the calculation of Developer Charges for all newDevelopments and re-developments within an existing or new Development ServicingPlan. Agencies are required to review and re-exhibit all existing DevelopmentServicing Plans in accordance with Part B of Schedule 3 by 30 June 2001.

C. In implementing the Determination, Agencies must use a calculation spreadsheet thathas been approved by the Tribunal.

Schedule 3 Information to be included in DSP (paragraph 2)A. Each Agency must develop a Development Servicing Plan that covers each DSP Area.

A Development Servicing Plan must provide, as a minimum, the following for eachDSP Area:1. a summary of the contents of the DSP.

2. the extent of the DSP Area including:

• its size;

• the basis for defining its boundaries; and

• reference to other DSPs where there is an overlap or co-usage of Assets.

3. demographic and land use planning information including:

• the current resident population;

• the estimated Equivalent Tenements as at 1996;

• the projected population over the planning horizon of the DSP; and

• the projected Equivalent Tenements over the planning horizon of the DSP.

4. timing of works including:

• completed capital works; and

• proposed capital works.

5. the standards of service to be provided to customers in the DSP Area and designparameters of Assets.

6. the calculated Developer Charge, and the information used to calculate theDeveloper Charge, including:

• the future periodic revenues expected to be received from new customersin the DSP Area each year

• Periodic Charges used for that calculation

• average water usage figures used for that calculation

• the future expected annual operating, maintenance and administrationcosts of providing Services to new customers in the DSP Area in each year;and

• indexation principles and parameters used for that calculation.

7. a description, or reference to a background document containing the description,of Pre 1996 Assets and Post 1996 Assets including:

• the date (or forecast date) of the commissioning of the Asset

• the size/length of the Asset

• the actual efficient cost of the Asset ( where applicable)

• the unit cost of the Asset (if applicable)

• the MEERA valuation of the Asset (if applicable)

• the total Asset capacity in Equivalent Tenements (if applicable); and

• the details of the Equivalent Tenements served by an Asset in each DSPwhere such Asset serves more than one DSP.

B. Following preparation of a draft Development Servicing Plan, an Agency must:1. publicly exhibit the draft Development Servicing Plan at least 30 working days

prior to the Agency adopting that Development Servicing Plan (“exhibitionperiod”);

2. prepare and make available upon request by interested parties a backgrounddocument which includes all of the critical data behind the draft DevelopmentServicing Plan, including the models used to calculate the Developer Charges, sothat interested parties can assess the draft Development Servicing Plan and makeinformed written submissions on that draft Development Servicing Plan to theAgency;

3. advertise in a local newspaper with a circulation covering the Agency Area, thestart date of the exhibition period, the length of the exhibition period and thatwritten submissions on the draft Development Servicing Plan can be made to theAgency during the exhibition period.

4. at least 10 working days before the start date of the exhibition period, inform theUrban Development Institute of Australia, the Housing Industry Association,any association representing Developers active in the DSP Area and anyDevelopers who had applied for planning approval any time in the 6 monthsprior to the commencement of the exhibition period.

“planning approval” in this Schedule means:

a) a compliance certificate issued by Sydney Water Corporation pursuant tosection 73 of the Sydney Water Act, 1994;

b) a compliance certificate or notice issued by Hunter Water Corporationpursuant to section 50 of the Hunter Water Act, 1991;

c) a notice of requirements issued by Gosford City Council pursuant tosection 26 of the Water Supply Authorities Act, 1987; or

d) a development consent issued by Wyong Shire Council pursuant tosection 91 of the Environment Planning and Assessment Act, 1979 where thatdevelopment consent incorporates relevant water and sewerage chargesand conditions in accordance with section 27 of the Water Supply AuthoritiesAct, 1987; or

e) a charge and/or condition as advised by Wyong Shire Council inaccordance with section 26 of the Water Supply Authorities Act, 1987.

C. In finalising a Development Servicing Plan the Agency must consider all submissionsmade to it by interested parties on the draft Development Servicing Plan.

D. Once the Agency has adopted the Development Servicing Plan, the Agency mustforward the Development Servicing Plan to the Tribunal for registration. At the timeof forwarding the DSP, the Agency is to inform the Tribunal of any submissionslodged during the exhibition period and the Agency’s responses to the submissions.

Schedule 4 Calculation of developer charges using net presentvalue (paragraph 4)

A. Agencies must show Developer Charges in Development Servicing Plans on a perEquivalent Tenement basis. Agencies may also show Developer Charges on otherbases in addition to per Equivalent Tenement.

B. The Net Present Value approach calculates the Developer Charge per EquivalentTenement as:

• the Net Present Value of the cost of the assets used to service the DSP Area;

• less the Net Present Value of the future net operating profits (or losses) expectedto be derived from providing the Services to the DSP Area, and

• divided by the Net Present Value of the number of Equivalent Tenements in theDSP Area.

C. The Developer Charge per Equivalent Tenement is calculated as follows:

nyearsiforL

CRNPVLK

LK

DC ii ,,1)(

32

2

1

1�=

−−+=

Where:

DC – Developer Charges per Equivalent Tenement

K1 – the Capital Charge for the Pre 1996 Assets which will serve the DSP Area calculated onan NPV basis discounted at rate r1 discounted from 1 January 1996

K2 – the Capital Charge for the Post 1996 Assets which serve the DSP Area calculated on anNPV basis discounted at rate r2

L1, L2, L3 – the Present Value of the number of Equivalent Tenements in the DSP Area, or tobe developed in the DSP Area, calculated at Discount Rate r1, r2, r3 respectively

Ri - the future periodic revenues expected to be received from new customers in the DSPArea in each year (i)

Ci - the future expected annual operating, maintenance and administration costs ofproviding services to new customers in the DSP Area in each year (i)

r1 - the Discount Rate to be used in the calculation of the Net Present Value of Pre 1996 assetsunder Schedule 5

r2 - the Discount Rate to be used in the calculation of the Net Present Value of Post 1996assets under Schedule 5

r3 - the Discount Rate to be used in the calculation of the Net Present Value of expectedrevenues and costs under Schedule 5

n – is 30 years from the date of review of the Developer Charge as required by thisDetermination. It is the forecast period for the assessment of expected revenues and costs.

Schedule 5 Parameters including discount rates (Paragraph 5)

The following parameters apply:

1. The parameters for the NPV calculation for the Sydney Water Corporation are:

a) A three per cent (3%) real Discount Rate for Pre 1996 Assets (r1).

b) A seven per cent (7%) real Discount Rate for Post 1996 Assets (r2).

c) A seven percent (7%) real Discount Rate for the expected net revenues and costs(r3)

d) Consumption of 240 kilolitres per annum for an average residential customer.

e) A forecast horizon for expected net revenues and costs of 30 years.

2. The parameters for the NPV calculation for the Hunter Water Corporation are:

a) A three per cent (3%) real Discount Rate for Pre 1996 Assets (r1).


c) A seven percent (7%) real Discount Rate for the expected net revenues and costs(r3).



3. The parameters for the NPV calculation for Gosford City Council are:

a) A zero per cent (0%) real Discount Rate for Pre 1996 Assets (r1).


c) A seven percent (7%) real discount rate for the expected net revenues and costs(r3).



4. The parameters of the NPV calculation for Wyong Shire Council are:

a) A zero per cent (0%) real Discount Rate for Pre 1996 Assets (r1).


c) A seven percent (7%) real discount rate for the expected net revenues and costs(r3).



f) Developer Charges are to be capped at 85% of the charge calculated under theformula in Schedule 4.

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