The Australian Water Industry

Infrastructure: A Reform Agenda

Slides from address by Steve AllbeeThe Association of Metropolitan Sewerage AgenciesWashington, D.C. , May 21, 2001

The agenda for today’s session

Quick update on the “Gap Analysis” peer review process

Brief background on Australia

Overview of water reform policy

Examples of innovation

Potential for transfer

Where is Australia ?

About the same size as the U.S.

And only 20 Million People

Fast Facts:Six States & one Territory

A Federation

Climate is temperate to hot

Most the population lives in urban areas

Water is very important

Basic Policy

Water reform is a vital national priority that has implication for the future wellbeing of all Australians

Water is critical to all economic activities and its management and use is inextricably linked to the protection of water quality and environmental process

The water reform initiatives have been formulated with a recognition that an important part of the solution lay in significant policy and institutional change

The Council of Australian Governments (COAG) directed inter-linking changes

Price water for full cost recovery

Establish secure access to water separate from land and provide for permanent trading in water entitlements

Water service providers are to operate on the basis of commercial principles

Improve the institutional arrangements

Engage in public consultation

Foster public education

What are the similarities?

Three levels of government

The same technologies

Pursuing equivalent environmental outcomes

Similar association sectors (AWA) & (WSAA)

Very similar current challenges

Renewal of aging systems

Higher levels of treatment

Wet weather

Continuing water quality degradation in key inland waters

How is the industry different?

Urban water from the point of source acquisition through initial treatment, distribution, collection, treatment and reuse or discharge is managed as a government owned vertically integrated businessServices are typically delivered under large regional area service arrangements The services are well on there way to being commercially based & sustainableOver the last decade asset management has become a fundamental driver in the water industryRisk management plays a larger roll in decision makingWater reform has been a big deal for the better part of the last twenty years

The structure of the corporate businesses

They are created by State law & government ownedThe businesses are managed the same as any private corporation, they earn profits, pay dividends and have tax equivalent charges, they are licensed to operated by an environmental regulator and their have their price overseen by an economic regulator (they are by definition monopolies) There is a Board of Directors selected the same way as a corporate board is selectedThe corporation has three equal drivers; strong commercial performance, meet license (environmental) requirements and fulfill community service obligationsThey prepare annual financial reports and their finances are externally audited and reported against corporate standards

Large State in land area

Around 7 million people

4 million in Sydney Region

Both government owned corporation type models and rural community utilities

New South Wales

Hunter Water - Serves 500,000 Hunter Water - Serves 500,000

Charter “ To be commercially successful while delivering value-for-money water, wastewater and associated services in an environmentally responsible manner”

Objectives (From Annual Financial Reports)

Meet the requirements of its Operating License

Operate at least as efficiently as any comparable business

Maximize the net worth of the State’s investment in the corporation

Be a socially responsible member of the community it serves, and

Protect the environment by conducting operations in compliance with the requirements of the State’s environmental legislation and the principles of ecologically sustainable development.

Hunter Water - Statement of Corporate Intent

“To maintain and operate, at minimum overall cost a system of assets which provides the operating capability to deliver water, wastewater and stormwater drainage services of the specified quantity, quality and reliability

To acquire, as necessary and at minimum cost, new assets to provide essential improvements or financially viable expansion of the corporation’s operating capability”

Hunter Water - Statement of Corporate Intent (Assets)

Asset management drives the system. They start by placing a heavy emphasis on identifying the assets.

This is generally when we installed our pipe network.

In broad terms, using the histogram of original installation and the asset elapsed life tools to yield renewal and replacement curves for assets. The “Nessie” curve would be a starting point

A major focus is placed on understanding the

deterioration rate of the assets and an initial

classification of the likely condition of common

components of the system

  Growth in the lower classification

Table4

Poor Very Poor

Life Elapse

% of system

2000 12276 9229 24667 7.8%

2020 149627 126892 46172 54.8%

If you apply their approach to the aging of our pipe

network, this is the picture

an upcoming challenge that continues to ramp upward

over a long period

The aging process of the network, as a whole, sheds

light on the relative patterns of growth in maintenance,

repair, renewal and replacement budgets

The bottom line is that Hunter Water clearly believes the management of the systems assets is the primary job and manages information and decision making processes across maintenance, renewal and replacement strategies to drive toward least life cycle cost scenarios.

In less than a decade, changes in financial reporting (GASB 34) will bring us toward the same optimization models in our water industry

Hunter Water -

Hunter Water went from 1500 employees to 450 in a decade

In addition, about 100 of their employees work for a subsidiary, that provides serves to Hunter Water and earns external income from other utilities by providing a range of operating / consulting type service to other smaller utilities

They formed another subsidiary company for telemetry service and then sold that company for revenue for reinvestment in the base system

Since 1990, their audited average operating costs per service have fallen by over 40% in real terms

Over the last decade average charges per customer were reduced by about 30% in real terms.

The price reductions occurred during the same period when improved service standards were adopted and customer satisfaction surveys document improved customer satisfaction with service levels

12 of 21 wastewater treatment plants achieved full compliance with all license conditions. The remaining 9 plants achieved 99.6% compliance

Hunter WaterHow well are they doing?

Sydney Water has around 4,000 employees

800 employees are engaged in Asset Management activities

All of the operating, maintenance and capital cost come from fees from users & developers

In addition, Sydney pays $200 million a year to NSW as dividends, $28 million in Load Based Fees and $5 million in administrative fees

Their user fees are comparable to ours

They receive around $60 million for community service obligations from NSW for service to pensioners

Sydney Water

Sydney WaterSydney Water

Competition drives the industry

Whenever possible work is competed

Bench marking is huge

The IPART (economic regulator) is responsible for assuring that your price structure reflects economic reward for best practice

New South Wales

Best practice & benchmarking are importantBest practice & benchmarking are important

Department of Land and Water ConservationDepartment of Land and Water Conservation

124 Rural Utilities

About the same size as Utah

4.4 million people - - 3.1 in Melbourne

In 1982 about 450 utilities

Today 18 water and wastewater utilitiesCriteria must have about $10 million in Revenues

Scale and size adequate to provide service in a professional manner

Amazing FactsWithin five years there will be no discharges from facilities

Even some rural utilities have ISO 14000 certifications

Victoria

VictoriaVictoria

Victoria - Service to a rural Area

About twice the size of Texas

Around 3 million people - - 1.3 in Brisbane

Utilities are managed at local level, about 225 providers

Used a very different approach to comply with the COAG

The local governments own the utilities, but they are setting them up just like the State owned corporations and plan on receiving dividends the same as NSW or Victoria

The next slide provides a quick glance at the decade long timeline leading to implementation of the COAG reforms

The two slides that follow give a sense of the role of planning and the integration of the process and system tools

The Queensland approach is a local government reform model

Queensland

The next three slides are taken from a presentation by:

•Asset Management Guidelines developed -1989/91

•TMP Planning Guidelines developed 1990-1993

•TMP Manual published - 1994

•DCILGPS Subsidy to develop TMPs - 1994/95

•Approved TMPs for full subsidy since 1996/7

•TMP Guidelines are now being revised & updated

•TMP Guidelines complement Water Act 2000.

Service Standards

Financial Feasibility

Ecological Sustainability

Risk Management

Performance Assessment

Organizational Management

& Development

ManagementPlan

BusinessManagement

PlanStrategic Direction

ASSETMANAGEMENT

BUSINESS MANAGEMENT PLAN

ServiceStandards

FinancialSustainability

AssetManagement

EcologicalSustainability

RiskManagement

PerformanceManagement

OrganisationManagement &Development

KEYRESULTAREAS

Service StandardsPlan

Service StandardsPlan

Drinking WaterQualityManagement Plan

Drinking WaterQualityManagement Plan

FinancialManagementPlan

FinancialManagementPlan

Water DemandManagementPlan

Water DemandManagementPlan

Water LossManagementPlan

Water LossManagementPlan

InfrastructurePlanningOverview

InfrastructurePlanningOverview

AssetProcurementPlan

AssetProcurementPlan

AssetEvaluation andRenewal Plan

AssetEvaluation andRenewal Plan

OperationsManagementPlan

OperationsManagementPlan

MaintenanceManagementPlan

MaintenanceManagementPlan

Sewer I/IManagementPlan

Sewer I/IManagementPlan

Water SourceManagementPlan

Water SourceManagementPlan

EnergyManagementPlan

EnergyManagementPlan

EnvironmentalManagementPlan

EnvironmentalManagementPlan

RiskManagementPlan

RiskManagementPlan

EffluentManagementPlan

EffluentManagementPlan

BiosolidsManagementPlan

BiosolidsManagementPlan

Trade WasteManagementPlan

Trade WasteManagementPlan

PerformanceAssessmentPlan

PerformanceAssessmentPlan

QualityManagementPlan

QualityManagementPlan

InformationManagementPlan

InformationManagementPlan

Human ResourcesManagement Plan

Human ResourcesManagement Plan

Community Consultation

Marketing Plan

Customer Service Policy

Service Level Agreements

Water Supply Agreementswith Major Customers

Long-term FinancialModel

Financial ManagementPractice Manual

Developer ContributionsPolicy

Infrastructure ChargesPlan

Pricing Policy

Full Cost Pricing Strategy

Metering Policy

Water Conservation Strategy

Strategic Infrastructure Plan

Detailed Planning Studies

Capital Works Program

Project Evaluation Manual

Infrastructure Planning/Design Guidelines

Asset Registers

Asset Valuation Reports

Water Source Entitlements

Water Allocations

Outsourcing Strategy

O&M Manuals

Telemetry Strategy

Environmental Plansunder EPP (Water)

Water Reuse Agreements

Trade Waste Policy

ERA Licenses

Catchment ManagementPlans

WAMPs

Environmental FlowManagement Plan

On-site Treatment

Risk/HazardAssessment

Critical InfrastructureManagement Plan

Dam Safety

Counter Disaster Plans

DocumentedContingency Plans

Insurance Policies

Performance Reports

Performance Monitoring

Benchmarking

TMP Coordinator’sManual

Quality ManagementSystems

Organisational Structure

Staffing Plan

Training andDevelopment Program

WH&S Policy

CommercialisationPolicies

TYPICALSUB-PLANS

Tools

Developer FeesDeveloper Fees

1. Can you provide service to a site at

oak hill for 200 homes

2. Yes we can, it will cost you $___ and another $___ for

existing head worksinvestments

3. As soon as we get your check we will

proceed and service willbe available by ___

4. City Council, I have a commitment from the

water board to serve the site. I would like

zoning approval.

Load based fees are a new innovation in NSW

To give a sense of the framework

( the next five slides are pulled from a NSW EPA presentation)

The , Load Based Fee structure is very interesting for a multitude of reasons. There is quite a lot of additional detail available on the NSW EPA web site. I encourage you to look at:www.epa.nsw.gov.au/licensing

Load based feesLoad based fees

Multi - Media across air, land & water emissions

Equally applied across all industry segments

You pay the same for discharging a pound of a regulated pollutant across all industries

A very user friendly on-line system is available to help you understand your fee obligations and your options

Load based feesLoad based fees

Concentrating on mass

Measuring overall & daily performance

Annual

load limit

Months

Quantity ofemissions

LICENSEE A

Annual

load limit

Months

Quantity ofemissions

LICENSEE B

Exceedence

12 12

LBL fee structure

Annual PollutionloadLoad

limit

Fee RateThreshold

Adminfee

Pollutionload fee

Fee ($)

ExceedenceLevel -

Prosecutable

Incorporates incentives for ongoing pollution reduction:

•Targets (assessable) pollutants typically present atsignificant levels - assessable load (AL)

Load fee calculation formula

•Pollutant weighting (PW) - reflects pollutants’ harmfulness

•Critical zone weightings (CZ) - assigned to somepollutants discharged to sensitive or stressed environments

•Pollutant fee units (PFU) - Amount of money owing per unit of pollution, to increase of 3-year phase-in period

Portion of load attracting rebates

Load Reduction Agreements

Actual/weighted load

Loa

d (

fee)

Year 1 Year 2 Year 3 Year 4

Agreed load

Time

Load limit

Offsets & emissions trading schemes•Minimises compliance costs by channelling resources

to cheapest abatement opportunities

Totalemissions

compatiblewith ambient

goals

Emissions

Number of

industries

OOrriiggiinnaalliinndduussttrryy

NNeewweessttiinndduussttrryy

Totalemissions

compatiblewith ambient

goals

Emissions

Number ofindustries

OOrriiggiinnaall

iinndduussttrryy

NNeewweessttiinndduussttrryy

Lower compliance costs distributed equally amongst industries

Without ETS With ETS

•Ensures attainment of environmental goals

Set the policy direction toward major changes in the industry

Brought resources to bear in support of the reform agenda

Provided financial incentives in the form of transfer payments to the State and local providers that proceeded with the changes

Established financial incentives, frequently in the form of debt for equity swaps, where the State took over existing debt service payments to give the new organizations a clean balance sheet on which to build their water business

The government arranged for Community Service Obligation payments (CSO) to address affordability issues of pensioners

The government supported a more aggressive R&D investment

The government played a The government played a significant role in bring about significant role in bring about

water reformswater reforms

This is quite a different paradigm from our current vision of how to best get the job done. Some of the ideas have transfer application, some may not

The set of ideas have an inter-locking character, which is important to framing a comprehensive vision of integrated changes

The Australian reforms prove that you can achieve substantial productivity gains, even in a well run industry, if you are willing to make structural changes and support the investments necessary to capture the productivity gain

Change of this magnitude requires that all the interest are party to the reforms, so the regulators would need to be party to the changing paradigm and new regulatory arrangements, such as an economic regulator, would need to evolve.

Could we do the same thing?Could we do the same thing?

I was impressed. I like the business-like model. I like the framework.

We are a much larger industry with a lot more players and for that reason more complexity. Comparable change would be very difficult.

Their arrangements are a very rational models of water services

Right now, their fees for service are very similar to ours

My view is that in the out years their approach offers a competitive advantage. They are better structured then we are to meet the upcoming challenges of renewing an aging systems and meeting new performance demands.

It was clear that we share similar evolving challenges, but I think their ability to go forward looks like a better situation.

I think the growing demands, the competition for resources and the upcoming changes in how we keep our financial books, will lead us in a similar direction. It is a different paradigm, but an understandable vision.

I still have more homework to do, but I have quickly become a fan.

In closingIn closing