SA WATER PRICING INQUIRY WELCOME WORKSHOP 24 TH MAY 2019 LEW OWENS - PowerPoint PPT Presentation

SA WATER PRICING INQUIRY WELCOME WORKSHOP 24 TH MAY 2019 LEW OWENS – INDEPENDENT INQUIRER ANN PATAKI – EXECUTIVE OFFICER

STATEMENT OF ACKNOWLEDGEMENT WE ACKNOWLEDGE THIS LAND THAT WE MEET ON TODAY IS THE TRADITIONAL LANDS FOR KAURNA PEOPLE AND THAT WE RESPECT THEIR SPIRITUAL RELATIONSHIP WITH THEIR COUNTRY. WE ALSO ACKNOWLEDGE THE KAURNA PEOPLE AS THE CUSTODIANS OF THE ADELAIDE REGION AND THAT THEIR CULTURAL AND HERITAGE BELIEFS ARE STILL AS IMPORTANT TO THE LIVING KAURNA PEOPLE TODAY. WE ALSO PAY RESPECTS TO THE CULTURAL AUTHORITY OF ABORIGINAL PEOPLE VISITING/ATTENDING FROM OTHER AREAS OF SOUTH AUSTRALIA/AUSTRALIA PRESENT HERE.

1. WELCOME (DISCUSSION OF ‘A BALANCED BARGAIN’ REPORT) WE ASK YOU TO • RESPECT OTHER PEOPLE’S POINT OF VIEW • DO NOT TALK ‘OVER’ OTHERS • CHATHAM HOUSE RULES- NO ATTRIBUTION • ASK QUESTIONS/CONTRIBUTE YOUR IDEAS FYI • HELP YOURSELF TO TEA/COFFEE/WATER FROM THE MAIN AREA • HOUSEKEEPING (TOILETS ETC.) • WE WILL PRESENT VARIOUS IDEAS AND INVITE FEEDBACK ON EACH • THERE ARE A LOT OF TOPICS TO COVER, PLEASE KEEP COMMENTS SUCCINCT AND RELEVANT • YOU WILL BE GIVEN A COPY OF THESE SLIDES AT THE END OF THE WORKS HOP IF YOU’D LIKE ONE

AGENDA • 9.00 TO 9.05 1. WELCOME AND EXPLANATION OF PROCESS/RULES • 9.05 TO 10.05 2. CHALLENGES AND ISSUES (TOTAL TIME ALLOCATED, INCLUDING DISCUSSION) • 2.1 ESCALATION RATES (ANN PATAKI)- 5 MINUTES • 2.2 JUNE 2013 DE-ESCALATION TO DEC 2012 DOLLARS (ANN PATAKI)- 5 MINUTES • 2.3 ‘BEST CAPEX’ FROM TRANSPARENCY/REGULATORY STATEMENTS (ANN PATAKI)- 10 MINUTES • 2.4 COMMENCEMENT DATE (ANN PATAKI)- 5 MINUTES • 2.5 CONTRIBUTED ASSETS (ANN PATAKI)- 10 MINUTES • 2.6 VALUE OF LEGACY ASSETS (LEW OWENS) 5 MINUTES • 2.7 OPENING VALUE (ANN PATAKI) -10 MINUTES • 2.8 RETURN ON LEGACY ASSETS (LEW OWENS )- 10 MINUTES • 2.9 REAL POST TAX VS REAL PRE-TAX OPTION (LEW OWENS)- 5 MINUTES 3 . • 10.05 TO 10.30 LEGAL ADVICE AND THE 2013 VALUATION (LEW OWENS)- 10 MINUTES 4. COAG AND NWI PRINCIPLES: JULY 2006 LEGACY ASSETS, DEPRIVAL VALUE (LEW OWENS)- 10 MINUTES MORNING TEA_____________________________________________________________________ • 10.30 TO 10.45 • 10.45 TO 11.15 5. REGULATORY STATEMENT (GOV) CASES: DORC AND EV VALUATIONS (LEW OWENS)- 10 MINUTES 6. INQUIRY CASES FOR RAB AND EV (ANN PATAKI)- 15 MINUTES 7. TREASURER’S PRICING ORDER FOR $7.77 BILLION- WHAT WAS THE BASIS ? (LEW OWENS)- 5 MINUTES • 11.15 TO 11.45 8. SUMMARY OF OUTCOMES/RANGE OF VALUES (LEW OWENS AND ANN PATAKI)- 10 MINUTES 9 . INQUIRY CONCLUSIONS 10. IMPLEMENTATION OPTIONS (LEW OWENS)- 20 MINUTES • 11.45 TO 11.55 11 . OTHER ISSUES ? (LEW OWENS)- 10 MINUTES • 11.55 TO 12.05 12. NEXT STEPS /CLOSE (LEW OWENS)- 10 MINUTES

2. ISSUES/CHALLENGES

2.1- ESCALATION RATES OF THE RAB VALUES

2.1-ESCALATION (PAGE 61) TRANSPARENCY/REGULATORY STATEMENTS • ESCALATION/INDEXATION RATE EITHER 3.5% OR 2.5% FOR INFLATION /DEFLATION (VARIES IN THE TS/RS) INQUIRY / REGULATORY PRACTICE • ABS ACTUAL CPI MARCH TO MARCH – (I.E. JUNE 2013 CPI WILL BE MARCH 2012 TO MARCH 2013) (CPI IS USED AS PER THE REGULATORY MODEL/FINANCIAL CAPITAL MAINT ENANCE WHICH MEANS THAT “INVESTORS OF A REGULATED FIRM CAN EXPEC T TO RECOVER THE OPPORTUNITY COST OF THEIR CAPITAL AND THEN NOMINAL VALUE OF THEIR INITIAL INVESTMENT OVER TIME .OPERATING CAPITAL MAINTENANCE FOCUSES ON MAINTAINING THE PRODUCTIVE CAPACITY OF PHYSICAL ASSETS OVER TIME , RATHER TH AN THE FINANCIAL VALUE” *) THE INQUIRY WILL USE THE TS/RS ESCALATION FIGURES FOR THE GOVERNMENT CASE, AND THE REGULATORY PRACTICE FIGURES FOR THE INQUIRY CASE *CEPA SUBMISSION TO THE INQUIRY NOVEMBER 2018 , PAGES 20-21

2.2 - DE-ESCALATION OF THE RAB VALUE JUNE 2013 TO DECEMBER 2012 (TO ALLOW COMPARISON TO THE TREASURER’S MAY 2013 PRICING ORDER - IN DEC 2012$) • TRANSPARENCY/REGULATORY STATEMENTS DEFLATING FROM JUNE 2013 TO DECEMBER 12 = 6 MONTHS=2.5%/2=1.25% • INQUIRY / REGULATORY PRACTICE DEFLATING FROM JUNE 2013 TO DECEMBER 12 = 6 MONTHS = 1.6%/2 = .8%

2.3 CAPITAL EXPENDITURE (‘CAPEX’)

2.3 - CAPITAL EXPENDITURE (PAGE 61) • TRANSPARENCY/REGULATORY STATEMENTS CAPITAL EXPENDITURE (ESTIMATE) DIFFERS FROM FIGURES PROVIDED TO THE REGULATOR FROM SA WATER (ACTUAL) • ‘BEST CAPEX’ USED FOR GOVERNMENT CASE (FROM THE LATEST AVAILABLE TS/RS) (I.E. 06/07 AND 07/08 CAPEX FROM 09/10 TS, 08/09 CAPEX FROM 10/11 TS) • CAPEX FIGURES PROVIDED TO ESCOSA FOR THE 2013 REGULATORY BUSINESS PROPOSAL BY SA WATER WILL BE USED FOR THE INQUIRY CASE ROLL FORWARD

2.4 - COMMENCEMENT DATE AND ROLL FORWARD (PAGE 52) • AS DISCUSSED IN EARLIER INQUIRY REPORTS AND WORKSHOP , CHOICES OF THE FOLLOWING DATES :

THE INQUIRY HAS CHOSEN 1 JULY 2006 AS THE STARTING DATE FOR ITS ROLL-FORWARD PROCESS (PAGE 52) 1. QUALITY AND CONSISTENCY OF THE DATA BETTER THAN THE START OF THE TRANSPARENCY PROCESS 2. POST-CORPORATISATION ASSETS ISSUE RESOLVED 3. STABLE DATA BEFORE LARGE CAPITAL EXPENDITURES 4. LEGACY DATE- DIFFERENT RETURNS ON LEGACY/NON-LEGACY ASSETS

2.5. CONTRIBUTED ASSETS (PRE-CORPORATISATION)

2.5 - CONTRIBUTED ASSETS (PAGE 53 ) INQUIRY ESTIMATION $441M* • $328M* (A SINGLE FIGURE ONLY PROVIDED FOR THE PERIOD 1965/66 TO 1987/88) • 30% CONFIDENCE IS $98M • $113M* (YEARLY FIGURES PROVIDED IN THE EWS FINANCIAL REPORTS FROM 88/89 • 90% CONFIDENCE IS $102M • TOTAL CONTRIBUTED ASSETS $200M* $210M (JUNE 06$) *(2004$) # JUNE 06$ -ESCALATION FACTOR OF 2.5% PA

2.6 VALUE OF LEGACY ASSETS

2.6 – PERCENTAGE OF LEGACY ASSETS IN THE RAB VALUE (PAGE 59) • GO-FORWARD FULL COST RECOVERY (GFFCR) FIRST MENTIONED IN 08/09 TS : PAGE 32 -08/09 TS • 08/09 TS ALLOWS THE FIRST CALCULATION OF LEGACY ASSET VALUES • LEGACY ASSETS 53.46% OF THE TOTAL RAB • NON-LEGACY ASSETS 46.54% OF THE TOTAL RAB

2.6 - LEGACY ASSETS PRE-CORPORATISATION CONTRIBUTED ASSETS * • NOT ALL CONTRIBUTED ASSETS ARE LEGACY ASSETS • (THE INQUIRY ACCEPTS THAT COUNTRY ASSETS WERE NOT CLASSED AS LEGACY ASSETS AS RECEIVING CSO RETURN) • CLASSIFY PRE-CORPORATISATION ($210M) CONTRIBUTED ASSETS INTO LEGACY/NON LEGACY • 75% METRO = $158M (LEGACY) • 25% COUNTRY = $53M (NON-LEGACY) • * ASSETS PURCHASED PRIOR TO 30 JUNE 2006 (LINE IN THE SAND)

2.7 - INITIAL RAB VALUE FOR ROLL- FORWARD (PAGE 59) OPENING VALUES 1 JULY 2006 FROM TRANSPARENCY STATEMENTS (TS) 1. 07/08 TS $4418* (TABLE 11) 2. 08/09 TS $4411* (TABLE 15) 3. 09/10 TS $4411* (TABLE 10) OPENING RAB VALUE FROM 1 JULY 2006 $4411M* (BEFORE TAKING PRE-CORPORATISED CONTRIBUTED ASSETS INTO ACCOUNT) *JULY 2006$

2.7 (CONT’D) – CALCULATION OF OPENING RAB VALUE (TAKING PRE-CORP CONTRIBUTED ASSETS AND LEGACY ASSETS INTO ACCOUNT) • RAB OPENING VALUE FROM 1 JULY 2006 $4,411 M • LEGACY ASSETS $2,358M (53.46%) • NON-LEGACY ASSETS $2,053M • PRE-CORPORATISATION CONTRIBUTED ASSETS • LEGACY ASSETS $158M • NON-LEGACY ASSETS $53M RESULT • LEGACY ASSETS ($2,358M-$158M)= $2,200M • NON-LEGACY ASSETS ( $2,053M - $53M)= $2,000M

2.8 - RETURN ON LEGACY ASSETS

2.8 - LEGACY ASSETS (PAGE 54/73) • 2009-10 TS REFERENCE TO 3.1% • DERIVED FROM SA WATER FINANCIAL MODEL AROUND 2007 AS PREVIOUS YE ARS’ RETURNS • RETURNS ARE BASED ON THE REVENUE WHICH IS NOT LINKED TO ASSET VALUE (HISTORICALLY COVERS THE COST OF DEBT AND PRICES RECOVER ACTUAL COSTS PLUS DEPRECIATION • RETURN BASED ON THE THEN ASSET VALUE OF LEGACY ASSETS WHICH INCLUDES PRE-CORP CONTRIBUTED ASSETS (PCCA) • IF WE REDUCE THE ASSET VALUE TO REMOVE PCCA, THE RETURN INCREASES TO 3.32% (3.1X 2358/2200) • DISCUSSION??

2.9 - PRE OR POST-TAX REAL WACC (PAGE 71) • ALL OF THE TS/RS NUMBERS ARE BASED ON REAL PRE-TAX WACC • THE 2012-13 RS TARGET REVENUES (AND ROA) ARE BASED ON REAL PRE-TAX • TREASURER’S CORRESPONDENCE OF 17 MAY 2013 USED REAL PRE -TAX TO JUSTIFY THE CHANGE IN RAB • THEORETICALLY, THERE IS A DIRECT RELATIONSHIP BETWEEN PRE-TAX AND POST-TAX WACCS SO THIS SHOULD NOT MATTER • INQUIRY CONTINUED TO USE PRE-TAX WACC AS THE BASIS OF ITS INVESTIGATIONS (6.0, 5.42 AND 5.06%) • DISCUSSION?

3. LEGAL ADVICE

3. CSO ADVICE (PAGE 49) • INQUIRY SOUGHT LEGAL OPINION AS TO WHETHER THE GOVERNMENT WAS ABLE TO SET A NEW RAB VALUE IN MAY 2013 HAVING SET A LEGACY DATE OF 30 JUNE 2006 • ADVICE WAS THAT COAG AND NWI AGREEMENTS WERE NOT LEGALLY BINDING, BUT WAS EXPECTATION THAT SIGNATORIES WOULD CONTINUE TO COMPLY • GOVERNMENT FREE TO SET A NEW RAB VALUE IN 2013: NO RESTRICTIONS. • INQUIRY VIEW THAT THERE WAS AT LEAST A MORAL OBLIGATION (POSSIBLY CONTRACTUAL?) TO COMPLY WITH GUIDELINES AND PRINCIPLES. • NATIONAL COMPETITION AGREEMENT AND ADP PAYMENTS REQUIRED COMPLIANCE • SAG 2018 PRICING ORDER REQUIRES ESCOSA TO COMPLY WITH NWI • THE INQUIRY VIEW IS THAT TARGET REVENUES SET IN 2012-13 RS HAD TO COMPLY • DISCUSSION?

4. COAG AND NWI PRINCIPLES (PAGE 31) • COAG REQUIRED DEPRIVAL VALUE AND ACCEPTABLE ASSET VALUATION • DEPRIVAL VALUE (LOWER OF DORC AND EV) REMAINS A VEXED ISSUE – BOTH ARE UNRELIABLE AND SENSITIVE TO ASSUMPTIONS • NWI REQUIRED LEGACY DATE AND LEGACY ASSET RETURN; NEW ASSETS TO EARN FULL WACC. NO LATER THAN 1 JAN 2007. • SA APPROACH (GFFCR) DIFFERENT THAN EVERY OTHER JURISDICTION BUT COMPLIANT. • 2012-13 RS TARGET REVENUES (OR AT LEAST THE ROA) WERE COMPLIANT WITH THE NWI PRINCIPLES • LEGACY DATE AND VALUES DIDN’T STOP A REVALUATION IN MAY 2013 (NWI CLAUSE 21, PRINCIPLE 5) • DISCUSSION?

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