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  Price Review
 

Role of the QCA    

The QCA is an independent body that provides regulatory oversight of GAWB’s pricing practices at the direction of the QCA Ministers.

 Its primary role is to ensure that GAWB’s:

  • expenditure is appropriate and efficient

  • prices are competitive and reflective of national competition policy

  • customers are not disadvantaged through GAWB charging monopoly profits and

  • revenue is sufficient to provide for a sustainable business.

Regulatory Review Process

GAWB has an open and transparent relationship with its customers and the QCA – an important aspect of the price review process. This process involves:

  • GAWB makes submissions to the QCA

  • Stakeholders (e.g. customers, government and members of the public) provide comment on GAWB’s proposals

  • QCA issues a draft report for comment

  • QCA issues a final report

Submissions to the QCA

GAWB has made three submissions to the QCA for the 2010 price review comprising:

Submission 1 – Commercial Framework and Pricing Principles for the 2010 price review (September 2009). This submission contains GAWB’s proposals for changes to the current pricing principles and practices. It was available for public review and comment.

Submission 2 – Expenditure Proposals for the 2010 price review (December 2009). This submission contains details and justification of GAWB’s necessary operating expenditure levels, proposed capital expenditure, forecast customer demand and regulated asset base.

The Expenditure Proposals submission was also made available for public review and comment. Some reports were provided to the QCA confidentially as they contained commercially sensitive information such as individual customer demand forecasts.

Submission 3 – Pricing Model (December 2009). GAWB’s pricing model is used to generate customer prices based on the inputs and methodology contained in its earlier submissions.  This submission is confidential as it contains individual customer pricing and consumption details.

Stakeholder comments

Stakeholders have had the opportunity to comment on GAWB’s public submissions. GAWB has also provided a response to stakeholder comments on the Commercial Framework and Pricing Principles submission and Expenditure Proposals submission. These comments can be found on the QCA’s website.

Draft report

The QCA released its draft report on 12 April 2010. The draft report provides comments on GAWB’s proposals, stakeholder feedback and makes draft recommendations. All stakeholders, including GAWB, had the opportunity to comment and provide feedback on the draft report. The draft report and GAWB's response to the draft report can be found on the QCA’s website.

Final report

The QCA issued its final report by 2 July 2010 after considering feedback and comments received on the draft report. The final report recommendations will be provided to the QCA Ministers for review and approval or disapproval. If accepted, the recommendations will be given effect by GAWB in pricing practices from 1 July 2010.

Price Impacts

The QCA's final recommendations will result in an increase of the bulk water price.  To be sustainable, GAWB's prices must be raised to reflect the increase cost of supplying water, in line with the recommendations made by the QCA.  Based on average household consumption, the increase in the bulk water price would equate to approximately $174 per year.

The QCA in its final report has attributed the increase to the following factors:

There are many variables that will impact price however the following four factors will have the greatest influence.

Increase in cost of capital (or regulatory rate of return) – GAWB’s regulatory rate of return is factored into prices through the Weighted Average Cost of Capital (WACC). The WACC is used to measure the appropriate return on GAWB’s assets that an investor should expect.

The 2010 price review has come at a time when the cost of corporate debt is significantly higher than when previous reviews were conducted due to the impact of the global financial crisis. While this is only one component of the WACC, the significant increase in the cost of corporate debt has had an upward effect on the regulatory rate of return to be recovered in prices.

The following figure illustrates the significantly higher borrowing margin payable by GAWB at the 2010 price review, as a notional BBB rated entity, over the cost of Government debt. 

                Source - http://www.rba.gov.au/chart-pack/interest-rates-australia.pdf

Lower demand – Customers have enjoyed lower prices in  the 2005-2010 regulatory period due to the forecast demand determined at the 2005 price review being higher than what was actually achieved. Forecast demand from new projects including planned expansions did not eventuate. Demand forecasts are reset at the 2010 price review.

Increase in capital expenditure – During the 2005-2010 regulatory period GAWB incurred a significant amount of essential capital expenditure that is now included for pricing purposes.  The QCA has also approved $53M of capital expenditure for the 2010-2015 regulatory period.

Increase in operating and maintenance costs – As detailed in GAWB’s Expenditure Proposals submission, the allowance approved by the QCA at the 2005 price review was not sufficient to allow GAWB to meet all of its regulatory, customer and asset obligations.  However ,GAWB has undertaken all necessary work to ensure these obligations were met and customers were provided with a safe and secure water supply.  The QCA in its final report has allowed a significant increase in the forecast operating expenditure allowance after carefully scrutinising and considering the necessary expenditure required by GAWB to carry out its functions as a essential service provider.

The appropriateness of GAWB’s forecasts have been demonstrated by external benchmarking against other comparative bulk water organisations, expert analysis on the adequacy of GAWB’s resourcing requirements, and other specialist consultant reports. View a copy of the benchmarking report.

 How does GAWB’s water price compare with other regions?

While water is still a relatively inexpensive resource, there have been some significant price increases in recent years. An example of such an increase is the recent decision by the Essential Service Commission (ESC) of Victoria to approve an increase of 76% to 89% in bulk water charges by Melbourne Water to its retail water distribution customers. Read a copy of the report.

To assist GAWB in understanding prices for water in other regions in Australia, GAWB engaged Synergies Economic Consulting (Synergies) to prepare a report compiling water prices across Australia. Read a copy of the report.  

 

 

 
 
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