1. July 2008 Brett Mathieson Manager Regulation & Planning Yarra Valley Water, Melbourne, Australia The Australian Water Industry

2. 17 June 200822Yarra Valley Water Ltd Australian Urban Water Industry A Diverse Range of Utility Structures Western Australia Water Corporation - State Owned Company Covers whole State South Australia SA Water - State Owned Company Covers Whole State Victoria State Owned Retail Companies: Yarra Valley Water South East Water City West Water State Owned Authorities: Melbourne Water (wholesale) Rest: 15 Utilities Queensland Wholesalers State Owned Brisbane Water is fully Owned Business Unit of Brisbane City Council Rest: Local Government NT - PAWA Power/Water Canberra ACTEW Power/Water New South Wales State Owned Sydney Catchment Authority (wholesale) Sydney Water & Hunter Water - Rest: Local Government

3. 17 June 20083 Common Structural & Institutional Themes  Separation of Service Delivery, Regulation, Policy setting (and usually ownership)  Amalgamation of small rural and regional water authorities (not universal)  Progressive establishment of independent regulatory framework  Corporatisation of water utilities  Retention in public ownership  Pricing Reforms –cost reflective/consumption based  Strong role for private sector in the market  National 3 rd Party Access regime for essential infrastructure

4. DRY WET Total River Murray System Inflows (including Darling River) Planning for Long Drys

5. 17 June 20085 Industry responses  Prolonged and severe restrictions  Water conservation  Integrated planning  Major augmentations – desalination  Recycling  Water sensitive urban design  Interconnected water systems and multiple sources of supply

6. 17 June 20086 Victorian Water Grid

7. 17 June 20087 State Water Grid - Benefits  Will accelerate state wide urban-urban water trading  Accelerate the introduction of third party access  Lower the cost of Wholesale water  Expand the scope of rural to rural trading  Will beak down city-country barriers  Will lead to uniform standards of water security and drought management across the state  Ensure water restrictions are spread more evenly across the State  Need a State based Water Grid Manager to exploit the potential of the Grid

8. 17 June 20088 Yarra Valley Water’s Smart Account Need to make water bills more informative & effective……

9. 17 June 20089 Conclusions  Demand/Supply balance has driven institutional reforms  Integrated networks being established with multiple sources of supply and customers  Water grid manager has critical role to optimise the supply demand balance  How far a full market-oriented approach could be pursued requires more analysis : A competitive urban water market does not exist anywhere  No ‘off the shelf’ solutions. How is water special? Monopoly, variable supply, competing environmental uses Safe drinking water & ‘essential for life’

10. 17 June 200810 Make Up of the ESC Building Block  Revenue Requirement for any year is the sum of:- Operating Expenditure Controllable Bulk Charges Return on Assets (RAV times WACC) Existing Assets (constructed prior to start of regulatory period) New Assets (constructed during regulatory period) Return on Assets (Asset value times depreciation rate) Existing Assets (constructed prior to start of regulatory period) New Assets (constructed during regulatory period) Benchmark Tax Liability Adjustments from previous regulatory period

11. 17 June 200811 Calculating Price Increase  Quantities for products are forecast for the regulatory period  Prices for year 1 are input (or previous years prices increased by X factor if tariffs not changed)  Prices for following years are the previous year increased by X factor  Forecast revenue for each year is the sum of the product of quantities and prices  The X factor is set so that the NPV of the forecast revenue = NPV of the revenue requirement

12. 17 June 200812 Breakdown of Costs Regulatory vs Accounting Views

13. 17 June 200813 Building Block -> Pricing

14. 17 June 200814 Additionally (or consequently) we observe  Increased public awareness and scrutiny  Many new private sector participants including strong international interest (construction of pipelines & plants esp. desalination, interest in new instruments e.g. water trading)  Political interest (be seen to be responding)  Desire for ongoing efficiency and service improvements  Pressure to innovate  Structural reform

15. 17 June 200815 New South Wales  Sydney Water vigorously defended a third party access claim by Services Sydney Pty Ltd  Led to the 1995 IPART review into the Industry structure for Water and Wastewater services in the Greater Sydney Metropolitan area  Private sector involvement in water recycling and new developments  Water Industry Competition Act passed in 2006 with draft Regulations to support legislation released in 2008

16. 17 June 200816 Western Australia  In July 2007 the Western Australia Treasurer announced an inquiry into competition in the water and wastewater sector focusing on: Greater efficiency in developing and delivering new water sources and other services requiring significant capital investment Opportunities for enhanced competition including the introduction of third party access to existing water and wastewater related infrastructure Other reforms to the water and wastewater market which may enhance competition  The Economic Regulation Authority (ERA) was commissioned to undertake the inquiry  A Further consultation report on the establishment of an independent procurement entity was released in April 2008 which examines procurement models. Noted introduction of competition via bulk supply water market would provide benefits but problematic to introduce in the short term  ERA’s final report is due by Government 31 July 2008

17. 17 June 200817 Proposed Structure - South East Queensland

18. 17 June 200818 Benefits of Vertical Separation  Increasing geographic diversity through inter-regional transfers  Reduced system losses  Increasing water efficiency and demand management  Planning reforms based on total water cycle  Improved accountability  Improved Regulatory effectiveness through transparency of costs & internal cross-subsidies  Scope for ‘grid bypass’ below materiality threshold will facilitate small- scale competitive wholesale sourcing  Potential for wholesale trading

19. 17 June 200819 Structure has potential for competition  Difficult to make competition ‘in the market’ work in a VI model Ring-fencing and TPA regimes unlikely to be enough to support new entry Incumbent has strong incentives to frustrate access  Platform for further competition where feasible Competition provides improved scope for product innovation, retailer efficiency, promoting localised solutions Provision for development of market rules, licensing regime and customer protection framework New entrants require certainty of explicit policy / regulation Separate network providers motivated to provide services to all customers  New entrants known to be interested in SEQ water sector Wholesale Opportunities in localised sourcing, grid bypass mechanism Retail opportunities in service bundling and differentiation  But competition has to pay its way Challenges in pricing, minimising transaction costs

20. 17 June 200820 Water Grid Manager  Assess scope for external trading (e.g. Urban/Rural trading)  Statement of opportunities (Electricity and Gas Model)  Technology and Interconnection require changes to cost transparency Financial performance and operational efficiency will require more activity than “set and forget” Must be able to explicitly price the trade offs in system cost/security