Final Report

Seqwater Bulk Water Price

Review 2018–21
March 2018
 We wish to acknowledge the contribution of the following staff to this report:
Kwabena Osei, Angella Nhan, Jennie Cooper, William Copeman, Darren Page, Les Godfrey, Michael Blake
and Annette Seargent.

© Queensland Competition Authority 2018

The Queensland Competition Authority supports and encourages the dissemination and exchange of information.
However, copyright protects this document.

The Queensland Competition Authority has no objection to this material being reproduced, made available online or
electronically but only if it is recognised as the owner of the copyright
2 and this material remains unaltered.
Queensland Competition Authority Contents

Contents

EXECUTIVE SUMMARY III

1 INTRODUCTION 1
1.1 Background 1
1.2 Overview of Seqwater's services 2
1.3 The review process 3

2 APPROACH TO THE REVIEW 4

2.1 Guiding principles for this review 4
2.2 Our approach to calculating bulk water prices 4

3 DEMAND 7
3.1 Seqwater's proposal 7
3.2 QCA analysis and conclusion 9

4 OPERATING EXPENDITURE 11
4.1 Seqwater's proposed operating expenditure 11
4.2 QCA assessment 19

5 CAPITAL EXPENDITURE 35
5.1 Seqwater's historical capital expenditure 35
5.2 Seqwater's proposed capital expenditure for 2018–28 37

6 REGULATORY ASSET BASE 53

6.1 Opening value of the RAB at 1 July 2018 53
6.2 RAB roll-forward from 1 July 2018 55

7 RETURN ON ASSETS, WORKING CAPITAL ALLOWANCE AND TAX 58

7.1 Rate of return 58
7.2 The return on assets and working capital allowance 62
7.3 Tax allowance 64

8 TOTAL REVENUE 66
8.1 Establishing opening price path debt balance as at 1 July 2018 66
8.2 Price path debt repayment from 1 July 2018 to 30 June 2028 73
8.3 Total revenue 74

9 RECOMMENDED PRICES 76
9.1 Pricing options 76
9.2 Indicative impact on water bills 79

10 FUTURE REVIEWS AND OTHER ISSUES 80

10.1 Review events framework 80
10.2 Ex post assessments of capex 81
10.3 Treating opex as capex 82

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Queensland Competition Authority Contents

10.4 Incentive mechanisms 83

10.5 Tariff reform 83
10.6 Prudent discounting framework 84
10.7 Stakeholder engagement 84

GLOSSARY 86

APPENDIX A : REFERRAL 88

APPENDIX B : STAKEHOLDER SUBMISSIONS 93

APPENDIX C : OVERVIEW OF SEQWATER'S KEY OBLIGATIONS 94

REFERENCES 96

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Queensland Competition Authority Executive summary

EXECUTIVE SUMMARY

The Queensland Government (the Government) directed the Queensland Competition Authority to
recommend prices for the supply of bulk water by Seqwater for the period 1 July 2018 to 30 June 2021.
These are the prices charged by Seqwater to the five water retailers operating in the following 11 council
areas in south east Queensland: Brisbane, Gold Coast, Ipswich, Lockyer Valley, Logan, Moreton Bay,
Noosa, Redland City, Scenic Rim, Somerset and Sunshine Coast. Retailers pass on bulk water prices to
households and businesses as a separate charge on water bills.
This report sets out our final recommendations on Seqwater's bulk water prices and explains how we
arrived at these recommendations.

About our review

The starting point for the existing regulatory framework for bulk water pricing was in 2008 when, in
response to low water availability, the Government took over responsibility for bulk water supply from
local councils in south east Queensland. To reduce the price impact of significant investments made in
water infrastructure in response to low water availability, bulk water price increases were to be phased in
over time through a bulk water price path. Starting in 2008, prices were to initially recover less than the
cost of supplying bulk water, with the accumulated under-recovery (known as the 'price path debt') to be
repaid by 2028.
We have conducted this review under a referral issued by the Government under section 23 of the
Queensland Competition Authority Act 1997. Under the referral, we have been asked to recommend
prices that provide Seqwater with sufficient revenue to recover the prudent and efficient costs of
providing bulk water supply services and to repay 'price path debt' by 2028.
All prices and costs presented in this report are in nominal terms (unless otherwise stated).

Assessment of prudent and efficient costs

After assessing Seqwater's proposed costs for the 2018 to 2028 period for prudency and efficiency, we
have:
 reduced Seqwater's proposed operating expenditure from $2,765 million1 to $2,626 million (i.e. by 5
per cent)
 reduced Seqwater's proposed capital expenditure from $1,839 million2 to $1,480 million (i.e. by 20 per
cent)
 accepted the revised rate of return Seqwater proposed to earn on its investments3, but updated it to
reflect an increase in the risk-free rate since Seqwater made its submission. This results in a weighted
average cost of capital of 6.33 per cent in 2018–19.
 adjusted other cost components, as set out in this report.

1
This figure has been adjusted to remove revenue and costs not attributable to bulk water supply and does not
include Seqwater's proposed costs to remobilise part of the recycled water scheme.
2
Capital expenditure is presented on an as-commissioned basis. The figure presented here is higher than the
draft report because it reflects Seqwater's revised cost proposals for three major projects.
3
In response to the draft report, Seqwater revised its proposed rate of return to reflect the QCA's best
estimate of the market risk premium.

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Queensland Competition Authority Executive summary

Overall, we consider that Seqwater should be allowed to recover $8,380 million in costs between 2018
and 2028, which is $270 million higher than the indicative allowance in our draft report ($8,110 million).
The key driver of the increase is the adoption of a higher rate of return. Higher operating and capital
expenditure allowances also contribute to the increase, but to a lesser extent.

Repayment of price path debt

Under the terms of the referral, we have been asked to recommend two pricing options, both of which
are to result in Seqwater fully repaying price path debt by 2028. Price path debt is expected to peak at
$2.5 billion in 2018-19 and to reduce in each subsequent year until it is fully repaid in 2028.
The two pricing options differ slightly in their price path debt repayment profiles, with pricing option 1
resulting in higher repayments in the early years and lower repayments in the later years, relative to
option 2.

Recommended prices
Under the referral, the pricing options should have the following characteristics:
 Pricing option 1— the common price (for all council areas, except Redland City, Sunshine Coast and
Noosa) is to be reset in 2018–19, followed by annual increases by inflation. Transitional price paths for
Redland City, Sunshine Coast and Noosa council areas are to result in the common price being reached
by 2019–20.
 Pricing option 2—price increases are to be smoothed for all council areas (including Redland City,
Sunshine Coast and Noosa) over the three-year regulatory period.
We have been asked to recommend prices that are fully volumetric. A volumetric price refers to a price
consumers pay for each kilolitre (kL) of water consumed.
Pricing option 1
Under pricing option 1, we recommend a common price of $2.962 in 2018–19, which is an increase of
5.16 per cent on the 2017–18 common price. This is followed by increases of 2.50 per cent per year in
2019–20 and 2020–21. Customers in Redland City, Noosa and Sunshine Coast would face larger increases
and reach the common price in 2019–20, but they do currently pay lower prices than customers in other
council areas.
Figure 1 Pricing option 1 ($/kL)

3.200
3.112
3.100 3.037

3.000 2.962

2.900
2.817
$/kL

2.826
2.800 2.799

2.700

2.600 2.616
2.561
2.500
2017-18 2018-19 2019-20 2020-21

Redland City Sunshine Coast & Noosa Common Price

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Queensland Competition Authority Executive summary

Pricing option 2
Under pricing option 2, we recommend a common price of $2.915 in 2018–19, which is an increase of
3.49 per cent on the 2017–18 common price. This is followed by increases of 3.49 per cent per year in
2019–20 and 2020–21. The common price under this pricing option is slightly lower in 2018–19 and 2019–
20 than the common price under option 1.
In 2018–19 and 2019–20, customers in Redland City, Noosa and Sunshine Coast would face smaller
increases than under option 1 and reach the common price in 2020–21 instead of 2019–20.
Figure 2 Pricing option 2 ($/kL)

3.200
3.122
3.100
3.017
3.000
2.915 2.953 2.935
2.900
2.817
$/kL

2.800 2.785
2.748
2.700

2.600 2.616
2.561
2.500
2017-18 2018-19 2019-20 2020-21

Redland City Sunshine Coast & Noosa Common Price

Recommended prices—option 1 and 2

Our recommended prices under each pricing option are presented in Table 1. Prices are higher than the
indicative prices in our draft report because of an increase in allowed costs, primarily due to an increase in
the rate of return. The increase in allowed costs has been partially offset by a reduction in price path debt,
which means price path debt repayments are slightly lower.
Table 1 Recommended prices

Council area Year Pricing option 1 Pricing option 2

$/kL % change $/kL % change

Brisbane, Gold Coast, Ipswich, 2017–18 actual 2.817 2.817

Lockyer Valley, Logan, Moreton
Bay, Scenic Rim, Somerset 2018–19 2.962 5.16% 2.915 3.49%

2019–20 3.037 2.50% 3.017 3.49%

2020–21 3.112 2.50% 3.122 3.49%

Sunshine Coast and Noosa 2017–18 actual 2.616 2.616

2018–19 2.826 8.04% 2.785 6.46%

2019–20 3.037 7.44% 2.953 6.06%

2020–21 3.112 2.50% 3.122 5.72%

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Queensland Competition Authority Executive summary

Council area Year Pricing option 1 Pricing option 2

$/kL % change $/kL % change

Redland City 2017–18 actual 2.561 2.561

2018–19 2.799 9.29% 2.748 7.31%

2019–20 3.037 8.50% 2.935 6.81%

2020–21 3.112 2.50% 3.122 6.38%

Indicative impact on water bills

Based on our recommended prices, the potential impact on the bulk water component of water bills
under each pricing option is illustrated in Table 2. Calculations are based on average household
consumption across south east Queensland of 160 kL per year.
As prices are wholly volumetric, the percentage increases in bills are the same as the percentage increases
in prices.
Table 2 Indicative bulk water component of water bills for an average household

Council area Year Pricing option 1 Pricing option 2

$/year $ change Bill amount $ change

Brisbane, Gold Coast, Ipswich, 2017–18 actual 450.72 450.72

Lockyer Valley, Logan, Moreton
Bay, Scenic Rim, Somerset 2018–19 473.92 23.20 466.40 15.68

2019–20 485.92 12.00 482.72 16.32

2020–21 497.92 12.00 499.52 16.80

Sunshine Coast and Noosa 2017–18 actual 418.56 418.56

2018–19 452.16 33.60 445.60 27.04

2019–20 485.92 33.76 472.48 26.88

2020–21 497.92 12.00 499.52 27.04

Redland City 2017–18 actual 409.76 409.76

2018–19 447.84 38.08 439.68 29.92

2019–20 485.92 38.08 469.60 29.92

2020–21 497.92 12.00 499.52 29.92

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Final recommendations
A summary of our recommendations is provided in Table 3.
Table 3 Summary of the QCA's recommendations

Number Recommendation Chapter

1 Bulk water prices for each council area should be set according to pricing option 1 or pricing option 9
2, as set out in Table 60 in Chapter 9.

2 The definition of feedwater quality events that we recommended in the 2015 review should not be 10
changed.

3 Where Seqwater can demonstrate a change in prudent and efficient costs as a result of taking 10
drought response measures in accordance with the Water Security Program, Seqwater should be
able to recover these drought response costs as follows:
(a) Where the impact is material, drought response costs should be recouped through a price
adjustment during the three-year regulatory period.
(b) Where the impact is not material, drought response costs should be recouped through an end-
of-period adjustment.

4 The QCA should have discretion to undertake an ex post assessment of the prudency and efficiency 10
of capex in future reviews, regardless of whether actual capex is higher or lower than allowed capex.

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Queensland Competition Authority Introduction

1 INTRODUCTION

The Queensland Government (the Government) has asked the Queensland Competition
Authority (QCA) to recommend bulk water prices to apply in south east Queensland (SEQ) for the
period 1 July 2018 to 30 June 2021. A referral notice for the review (the referral) was issued to
the QCA under section 23 of the Queensland Competition Authority Act 1997 (the QCA Act).4
Bulk water prices are charged by Seqwater to the five water retailers operating in the following
11 council areas in SEQ: Brisbane, Gold Coast, Ipswich, Lockyer Valley, Logan, Moreton Bay,
Noosa, Redland City, Scenic Rim, Somerset and Sunshine Coast. Retailers pass on bulk water
prices to households and businesses as a separate charge on water bills.5

1.1 Background
The starting point for the existing regulatory framework for bulk water pricing was in 2008
when, in response to low water availability, the Government took over responsibility for bulk
water supply from local councils in SEQ.
To reduce the price impact of significant investments made in water infrastructure in response
to low water availability, bulk water price increases were to be phased in over time through a
bulk water price path. Starting in 2008, prices were to initially recover less than the cost of
supplying bulk water, with the accumulated under-recovery (known as the ‘price path debt’) to
be repaid by 2028.
In parallel with these pricing arrangements, the Government undertook institutional reform of
the SEQ bulk water supply sector by creating four government-owned water businesses:
 Seqwater (which owned and operated bulk water supply assets)
 WaterSecure (which owned and operated the manufactured water assets)
 LinkWater (which owned and operated bulk water transportation assets)
 the SEQ Water Grid Manager (which purchased bulk water supply services from the above
entities and held contracts to provide water to retailers and power stations).
Following mergers in July 2011 (when WaterSecure merged with Seqwater) and January 2013
(when LinkWater and the SEQ Water Grid Manager merged with Seqwater), Seqwater became
the bulk water supplier for SEQ.
While the Government determines the bulk water prices that Seqwater charges, it can ask the
QCA to recommend prices. We completed our first review of Seqwater's bulk water prices in
2015 for the period 1 July 2015 to 30 June 2018 (the 2015 review).6 The Government set bulk
water prices for that three-year period that were consistent with our recommendations.

4
The referral is provided in Appendix A.
5
Section 99AV(4) of the South-East Queensland Water (Distribution and Retail) Restructuring Act 2009 requires
the bulk water component to be included in the water bill under a separate heading called 'State bulk water
price'.
6
QCA, SEQ bulk water price path 2015–18, final report, March 2015.

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Queensland Competition Authority Introduction

Before the 2015 review, we were asked to recommend grid service charges (GSCs) for 2011–12
and 2012–13. These were the charges paid by the SEQ Water Grid Manager to the (then) grid
service providers of Seqwater and LinkWater for the supply of bulk water services.

1.2 Overview of Seqwater's services

Seqwater owns and operates a network of water supply assets, including dams, weirs, water
treatment plants, the Gold Coast Desalination Plant (GCDP)7 and the Western Corridor Recycled
Water Scheme (WCRWS)8. Seqwater's network of bulk water supply assets stretches from
Noosa on the Sunshine Coast in the north to Tugun on the Gold Coast in the south, and from
North Stradbroke Island in the east to Gatton in the west. Seqwater's pipeline network enables
drinking water to be transported around the region.

1.2.1 Bulk water supply services

Seqwater is a registered drinking water service provider under the Water Supply (Safety and
Reliability) Act 2008 and is responsible for supplying treated bulk water to local council areas in
SEQ. The water is supplied to bulk supply points and then delivered to businesses and
households by the retailer servicing each area:
 Queensland Urban Utilities (QUU) supplies the Brisbane, Ipswich, Lockyer Valley, Scenic Rim,
and Somerset council areas.
 Unitywater supplies the Moreton Bay, Sunshine Coast and Noosa council areas.
 Logan City Council, Redland City Council and Gold Coast City Council supply their respective
council areas.

1.2.2 Other services

Seqwater provides bulk water supply services to Stanwell Corporation (for its power stations),
Toowoomba Regional Council, irrigation customers and water entitlement holders (such as
Gympie Regional Council). Prices for the services provided to these customers are not the
subject of this review.
In addition, Seqwater provides flood mitigation services at Wivenhoe, Somerset and North Pine
dams and access to recreation facilities at various dams.9 In accordance with the referral, we
have included the costs of providing these services in our recommended bulk water prices.10

7
The GCDP is currently operating in ‘hot standby’ mode. Under this mode, Seqwater advised that it can
respond as a contingent supply and provide 33 per cent capacity within 24 hours and 100 per cent capacity
within 72 hours (Seqwater, sub. 2, p. 47).
8
The WCRWS is currently in 'care and maintenance' or 'cold standby' mode. Seqwater advised that the WCRWS
is maintained so that it can be made operational and ready to deliver recycled water in two years (Seqwater,
sub. 2, p. 48). Seqwater advised that it plans to soon remobilise a train at the Luggage Point Advanced Water
Treatment Plant (AWTP) to reduce key risks to the restart of the full WCRWS (Seqwater, sub. 13, p. 54) and
has proposed to recover the costs associated with this (Chapter 4).
9
Seqwater advised that more than 2.6 million people visited its recreation sites in 2016–17 and that this access
requires it to maintain public facilities such as car parks, picnic grounds and tables, barbecues, lavatories and
boat ramps (Seqwater, sub. 1, pp. 16–17; Seqwater, sub. 2, p. 4).
10
We note Unitywater's concern about the equity of including such costs in bulk water prices (Unitywater, sub.
11, p. 2); however, we recommend prices in accordance with the terms of the referral.

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Queensland Competition Authority Introduction

1.2.3 Seqwater's legislative and regulatory obligations

Seqwater must comply with a range of obligations when providing water services, as set out in a
number of legislative and regulatory instruments.11 More information about Seqwater's key
obligations is provided in Appendix C.

1.3 The review process

The referral for this review was issued by the Government on 25 May 2017 and published in the
Government Gazette on 2 June 2017.
Our review and public consultation process included:
 publishing a notice of investigation on 24 June 201712 and inviting initial submissions from
stakeholders and interested parties, due by 15 September 2017; and releasing a guidance
note with the notice of investigation to provide information about our review process and
assist stakeholders with their submissions
 publishing Seqwater's submission on our website for comment in early August 2017
 engaging two external consultants to provide advice to assist with our review:
 KPMG was engaged to provide advice on the prudency and efficiency of Seqwater's
proposed operating and capital expenditure.
 Incenta Economic Consulting (Incenta) was engaged to provide advice on firm-specific
parameters of the weighted average cost of capital (WACC).
 preparing a draft report with our draft recommendations after considering submissions from
Seqwater and other stakeholders, additional information obtained from Seqwater through a
request for information (RFI) process, and advice from our consultants
 providing our draft report to the Government on 30 November 2017, publishing the draft
report on our website on 7 December 2017 and inviting submissions, due by 31 January
2018
 preparing a final report with our final recommendations after considering submissions
received on our draft report, additional information obtained from Seqwater, and further
advice from KPMG.
The notice of investigation, guidance note, draft report, stakeholder submissions and consultant
reports are available on our website, www.qca.org.au.

11
Seqwater, sub. 1, p. 16.
12
The notice of investigation was published in The Courier Mail and The Australian newspapers and on our
website.

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Queensland Competition Authority Approach to the review

2 APPROACH TO THE REVIEW

In this chapter, we provide an overview of the principles guiding our review and our approach to
calculating bulk water prices.

2.1 Guiding principles for this review

In conducting this review, we have considered the matters in section 26 of the QCA Act,
inclusive of the terms of the referral13. These matters include:
 economic or efficiency factors, including the cost of providing the goods or services in an
efficient way, the need for efficient resource allocation and the protection of consumers
from abuses of monopoly power
 non-economic factors, including social welfare and equity considerations, the availability of
goods and services to consumers and the social impact of pricing practices.
Regulatory tools are limited in their ability to achieve multiple and sometimes conflicting
objectives. In this review, we have given priority to efficiency factors. Prices that reflect efficient
costs promote efficient resource allocation, including efficient investment, and protect
consumers from abuses of monopoly power. Sometimes the factors are not in conflict, for
instance, prices that reflect efficient costs can be considered fair, because a higher or lower
price would imply that the consumer is paying a price that is not his or her fair share.
We consider that non-economic factors are generally best addressed through government
policy. In the context of this review, government policy addresses non-economic factors as
reflected in, for instance, the terms of the referral, the legislative and regulatory obligations
that apply to Seqwater, and targeted subsidies to customers to address affordability concerns.14

2.2 Our approach to calculating bulk water prices

Under the terms of the referral, we have been asked to recommend prices that provide
Seqwater with sufficient revenue to recover the prudent and efficient costs of providing bulk
water supply services and repay price path debt (with interest) by 2027–28. We have been
asked to recommend prices for a three-year period from 1 July 2018 to 30 June 2021 and to
recommend prices on the basis that prices will increase by inflation in each subsequent year
until 2027–28.
Consistent with the guiding principles for this review, our approach has been to recommend
prices that reflect the terms of the referral and our assessment of the prudent and efficient
costs that Seqwater requires to provide bulk water supply services, and meet its legislative and
regulatory obligations.
In conducting our review, we have carefully considered the matters raised in submissions.15

13
We note that section 26(3) states that sections 26(1) and (2) do not limit the matters to which the QCA may
have regard in conducting an investigation. This would include the Minister's stated matters for
consideration under section 24(1)(b).
14
Queensland Government, 'Smart savings, Concessions and rebates', Energy and water category,
https://campaigns.premiers.qld.gov.au/smart-savings/#category=Energy-and-water.
15
Submissions are listed in Appendix B.

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Queensland Competition Authority Approach to the review

Unless otherwise stated, all costs and prices presented in this report are in nominal terms and
figures are reported as mid-year values.

2.2.1 Building block costs

Consistent with the 2015 review, we used a building block approach to calculate Seqwater's
bulk water costs for each year from 1 July 2018 to 30 June 2028. This approach involves
developing forecasts that reflect our assessment of the prudent and efficient costs of the
following cost components:
 operating expenditure (opex)—the ongoing costs of running the business and maintaining
assets (Chapter 4)16
 a return on assets—an appropriate return on investments in assets to provide bulk water
services. It reflects our assessment of capital expenditure (capex) (Chapter 5), the value of
Seqwater's regulatory asset base (RAB) (Chapter 6), and an appropriate rate of return
(Chapter 7).
 a return of assets (depreciation)—the cost of capital investments over the useful life of the
assets (Chapter 6)
 a return on working capital—the cost of holding capital to allow Seqwater to manage the
timing difference between the outflow of cash associated with current liabilities and the
receipt of cash associated with current assets (Chapter 7)
 tax—consistent with our post-tax nominal approach to WACC, we include an allowance for
tax as part of total costs (Chapter 7).
These are the costs of providing bulk water services, which we refer to in this report as building
block costs.

2.2.2 Repayment of price path debt (including interest)

Under the referral, prices are to be set so that price path debt (including interest) is fully repaid
by 2027–28, with interest on price path debt to be calculated using Seqwater's cost of debt, as
advised by Queensland Treasury Corporation (QTC).
In accordance with the referral, we have presented two pricing options. The two options result
in two slightly different debt repayment profiles, but both options result in the full repayment
of price path debt in 2028 (Chapter 8).
For the purposes of this report, we refer to revenue from bulk water prices that exceeds
building block costs as price path debt repayment.

2.2.3 Recommended prices

The sum of building block costs and price path debt repayment is the revenue to be recovered
through bulk water prices each year. We refer to this as total revenue.
Under the referral, prices we recommend should be fully volumetric (i.e. prices should apply to
each kilolitre (kL) of water used). This requires a forecast of water demand.17 We used

16
We have adjusted opex to remove the costs of supplying declared irrigation services and revenue Seqwater
receives from sources other than bulk water prices.
17
Demand forecasts are also relevant to the assessment of forecast capital and operating expenditure.

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Queensland Competition Authority Approach to the review

Seqwater's demand forecast after confirming it was consistent with the terms of the referral
(Chapter 3).
In accordance with the terms of the referral, we have presented two pricing options:
 Pricing option 1—a pricing option that results in:
 a common price (for all council areas, except Redland City, Sunshine Coast and Noosa)
that is reset in 2018–19 and then increases by inflation
 transitional price paths for Redland City, Sunshine Coast and Noosa council areas that
reach the common price by 2019–20
 Pricing option 2—an alternative pricing option that smooths any price increases for all
council areas (including Redland City, Sunshine Coast and Noosa) over the upcoming
regulatory period.
Recommended prices under each option are provided in Chapter 9, along with indicative bill
impacts.

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Queensland Competition Authority Demand

3 DEMAND

A forecast of water demand is used to assess Seqwater's expenditure forecasts (see Chapters 4
and 5) and to calculate bulk water prices (see Chapter 9). The referral asks the QCA to accept
Seqwater's demand forecast, provided it is within the range published in the SEQ Water Security
Program (WSP).18

3.1 Seqwater's proposal

The WSP contains three demand forecasts (low, medium and high), which combine forecasts of
per capita residential and non-residential consumption with forecasts of the service-connected
population.19 Seqwater uses the medium demand forecast for planning purposes, while the low
and high forecasts are used for scenario analysis.20
For the purposes of this review, Seqwater proposed a hybrid demand forecast (Figure 3), which
starts with the low WSP demand forecast and transitions to the medium WSP demand forecast,
as follows:
 From 2018–19 to 2021–22, demand grows in line with the low WSP demand forecast.
 From 2022–23 to 2026–27, demand transitions to the medium WSP demand forecast.
 For 2027–28, demand continues on the medium WSP demand forecast.
Under the hybrid demand forecast, Seqwater is forecasting total demand to increase from
307,430 megalitres (ML) in 2018–19 to 410,436 ML in 2027–28. This reflects the total amount of
bulk water expected to be produced by Seqwater. Although Seqwater supplies water to bulk
supply points (which is the point where the bulk supply network connects to the distribution
network) and charges for water delivered to these points, Seqwater advised that a small
amount of water is lost as it moves through the bulk supply network. Seqwater did not make a
downward adjustment to account for losses, because it considered the amount (at around
0.0015 per cent of total water produced in 2016–17) was not material.21
Seqwater has not included demand from power stations or Toowoomba Regional Council in its
hybrid demand forecast due to uncertainty about the volume of bulk water to be supplied.22 We
note that demand from power stations and Toowoomba Regional Council is not required to
calculate bulk water prices.

18
Seqwater, Water for life: South East Queensland's Water Security Program 2016–46, March 2017.
19
Service-connected population refers to the estimated population in SEQ connected to the retail service
supply network.
20
Seqwater, Water for life: South East Queensland's Water Security Program 2016–46, March 2017, p. 43.
21
Seqwater response to QCA RFI 3.
22
Seqwater response to QCA RFI 3.

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Queensland Competition Authority Demand

Figure 3 Seqwater's demand forecasts (ML per year)

500,000

450,000

400,000

350,000

300,000

250,000
16-17 17-18 18-19 19-20 20-21 21-22 22-23 23-24 24-25 25-26 26-27 27-28

WSP Low demand WSP High demand

WSP Medium demand Hybrid demand

Source: Seqwater response to QCA RFI 12.

Under Seqwater's hybrid demand forecast, total demand is lower than the forecast used in the
2015 review. For instance, in the 2015 review, residential per capita demand was forecast to
increase to 185 litres per person per day (LPD) in 2018–19. However, Seqwater advised that
demand is currently around 169 LPD. Under Seqwater's hybrid demand forecast, residential
demand remains at 169 LPD until 2021–22 and then transitions over a five-year period to 185
LPD in 2026–27.23
Unitywater raised concerns about using a single regional average LPD, noting that sub-regional
differences should be taken into account when assessing the supply–demand balance.24
Seqwater advised that the WSP demand forecasts (for both residential and non-residential
demand) were developed from a base year of actual consumption and service-connected
population in each council area.25 As a result, LPD is a SEQ weighted average of council-specific
LPD consumption rates.
Council of the City of Gold Coast raised concerns about applying a forecast of 169 LPD that is
lower than the estimated usage for 2016–17 of 173 LPD and requested that we undertake a
detailed review of Seqwater's demand forecast.26 Seqwater advised that demand in 2016–17
was affected by very dry conditions and was therefore much higher than in previous years.27 We
also note that, under the terms of the referral, the QCA has been asked to confirm that
Seqwater's proposed demand forecasts are within the range published in the WSP, rather than
to undertake an independent assessment.

23
Seqwater, sub. 1, p. 5.
24
Unitywater, sub. 11, pp. 2–3.
25
Seqwater response to QCA RFI 3.
26
Council of the City of Gold Coast, sub. 12, p. 1.
27
Seqwater, sub. 1, p. 5.

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Queensland Competition Authority Demand

The Queensland Council of Social Service (QCOSS) stated that it did not 'believe encouraging
residents to use more water resources is an appropriate response to repay price path debt'.28
An individual stakeholder considered that prices should be reduced when there is excess supply
to increase demand.29 The terms of the referral, however, ask the QCA to recommend prices
that recover Seqwater's prudent and efficient costs and repay price path debt by 2028.

3.2 QCA analysis and conclusion

In accordance with the terms of the referral, we accept Seqwater's proposed demand forecast
(Table 4), which we have confirmed is within the range published in the WSP.
Demand forecasts should be as accurate as possible, particularly given that prices are fully
volumetric. If demand forecasts are significantly different from actual demand, then Seqwater
will under- or over-recover its required revenue over the next regulatory period. An under-
recovery of revenue will put upward pressure on prices beyond the next regulatory period. It is
also important that demand forecasts are reasonable, so that the prudent and efficient level of
costs can be assessed.
In future reviews, consideration should be given to asking the QCA to assess whether
Seqwater's demand forecast is reasonable for pricing purposes.

28
QCOSS, sub. 10, p. 2.
29
Mr Derbyshire, sub. 7, p. 1.

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Queensland Competition Authority Demand

Table 4 Seqwater's forecast annual water demand by council area (ML)

Year Brisbane Gold Coast Ipswich Lockyer Logan Moreton Scenic Rim Somerset Redland Sunshine Noosa Total
Valley Bay City Coast

2018–19 118,589 60,418 20,910 2,922 21,831 31,785 1,986 1,870 14,364 27,365 5,390 307,430

2019–20 119,645 61,549 21,896 3,028 22,262 32,284 2,100 1,936 14,544 28,119 5,425 312,788

2020–21 119,971 62,328 22,810 3,120 22,571 32,602 2,205 1,995 14,640 28,715 5,430 316,386

2021–22 120,578 63,247 23,829 3,222 22,948 32,987 2,319 2,061 14,769 29,378 5,450 320,787

2022–23 124,543 66,549 26,576 3,518 24,273 34,493 2,620 2,247 15,366 31,351 5,672 337,209

2023–24 129,413 69,837 28,700 3,760 25,530 36,077 2,846 2,400 16,033 33,117 5,918 353,630

2024–25 134,150 73,138 30,920 4,008 26,793 37,648 3,085 2,558 16,692 34,898 6,161 370,051

2025–26 138,810 76,456 33,195 4,256 28,070 39,235 3,316 2,717 17,345 36,675 6,398 386,473

2026–27 136,314 83,163 36,216 4,697 31,587 38,954 4,085 2,713 17,849 40,287 7,029 402,894

2027–28 137,292 84,755 38,034 4,858 32,361 39,615 4,282 2,799 18,080 41,249 7,111 410,436

Note: Totals may not add due to rounding.

Source: Seqwater pricing model 2017.

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Queensland Competition Authority Operating expenditure

4 OPERATING EXPENDITURE

Operating expenditure (opex) is the ongoing cost of providing bulk water supply services and
includes corporate costs and costs associated with the operation and maintenance of water
storage, treatment and transport assets. It forms a component of Seqwater's building block
costs.
The referral asks us to recommend prices that reflect prudent and efficient opex (including costs
associated with catchment management, recreational management and flood mitigation) and,
in doing so, to focus on cost areas that are material to price changes.
This chapter sets out our assessment of the prudency and efficiency of Seqwater's proposed opex
for the period 1 July 2018 to 30 June 2028, including our adjustments to remove costs and
revenue not attributable to bulk water supply.
We engaged KPMG to provide advice to assist with our assessment.

4.1 Seqwater's proposed operating expenditure

Seqwater proposed total opex of $3 billion over the period 2018–28 (Table 5).30 The category
that makes up the majority of Seqwater's proposed opex is employee expenses, followed by
contractors (service delivery) and other materials and services.
Table 5 Seqwater's proposed opex by category ($m, nominal)

2018–19 2019–20 2020–21 2021–28 Total

Employee expenses 94.0 96.8 99.7 799.5 1,090.1

Contract labour 11.0 11.3 11.6 93.3 127.3

Contractors (service delivery) 57.3 58.9 60.5 477.6 654.3

Chemicals 15.4 16.0 16.6 148.1 196.2

Electricity 26.8 28.5 30.8 308.4 394.5

Other materials and services 41.9 43.1 44.4 351.8 481.2

Base year costs plus 246.4 254.7 263.7 2,178.7 2,943.6

escalation

Step changes and one-off 2.6 3.7 5.4 34.9 46.7

costs

Continuing efficiency – (0.3) (0.6) (13.9) (14.8)

Total opex 249.1 258.1 268.6 2,199.8 2,975.5

Notes: Inclusive of non–bulk water costs. Totals may not add due to rounding.
Source: Seqwater pricing model 2017.

Seqwater stated that it has applied a base-step-trend approach to forecast opex.31 For fixed
opex, this involved:
 establishing a baseline of efficient opex for 2018–19 through a budgeting process

30
Seqwater, sub. 2. This includes non–bulk water costs such as irrigation costs.
31
Seqwater, sub. 2, p. 17.

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Queensland Competition Authority Operating expenditure

 making annual adjustments to the 2018–19 base year by subtracting one-off costs and
adding new ongoing costs from 2019–20
 escalating input costs using appropriate measures of input cost inflation
 applying a continuing efficiency target (i.e. annual cost savings that Seqwater expects to
achieve by operating more efficiently).
For variable opex, this involved:
 establishing a baseline of efficient variable costs per ML of production for 2018–19
 escalating annual production volumes using demand forecasts
 multiplying estimates of variable costs per ML of production by production volumes
 escalating variable costs using appropriate measures of input cost inflation
 applying a continuing efficiency target.
Seqwater then offset non–bulk water related costs and revenues from total opex.

4.1.1 2018–19 base year

Fixed opex
Seqwater's fixed opex forms the largest part (around 80 per cent) of its annual opex and
includes:
 operations and maintenance activities
 the fixed component of electricity and chemical costs
 minor equipment purchases
 costs associated with engaging specialist consultants and contractors
 costs associated with implementing strategic initiatives
 corporate costs
 fixed contract fees associated with the operation and maintenance of the Gold Coast
Desalination Plant (GCDP) and the Western Corridor Recycled Water Scheme (WCRWS). 32
Seqwater's estimate of the base year fixed opex for 2018–19 is $210.4 million.33 This is 5 per
cent higher than actual fixed opex for 2016–17 (Table 6).
Table 6 Actual fixed opex versus base year fixed opex ($m, nominal)

2015–16 2016–17 2017–18a 2018–19a

Fixed opexb 198.5 200.3 211.7 210.4c

Year-on-year change (per cent) 0.9 5.7 (0.6)

a Budget figure. b Includes non–bulk water costs. c Includes adjustments for new items as shown in Table 10.
Sources: Seqwater, sub. 2, p. 20; QCA calculations.

Seqwater's estimated base year fixed opex is 7 per cent lower than the fixed opex for 2018–19
that the QCA recommended in the 2015 review (Table 7).

32
Seqwater, sub. 2, p. 19.
33
Seqwater, sub. 2, p. 20.

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Queensland Competition Authority Operating expenditure

Table 7 Fixed opex, 2015–19 ($m, nominal)

2015–16 2016–17 2017–18 2018–19 Total

QCA recommendation from 217.5 224.3 223.9 226.6 892.3

the 2015 review

Seqwater's actual fixed 198.5 200.3 211.7 210.4 820.9

opexa

Difference (per cent) (8.7) (10.7) (5.4) (7.1) (8.0)

a 2017–18 and 2018–19 figures are budget figures.

Sources: QCA, SEQ bulk water price path 2015–2018, final report, March 2015; Seqwater, sub. 2, p. 20; QCA
calculations.

Variable opex
Seqwater's variable opex relates mainly to electricity, chemicals and the disposal of sludge
(wastewater products from its treatment plants). Seqwater's estimate of the base year variable
opex for 2018–19 is $38.6 million.34
In developing its estimate of variable opex for the base year, Seqwater noted that its actual
costs for 2015–18 were lower than the variable opex costs recommended by the QCA in the
2015 review (Table 8).
Table 8 Variable opex, 2015–19 ($m, nominal)

2015–16 2016–17 2017–18 2018–19 Total

QCA recommendation from 34.2 36.2 38.4 40.9 149.7

the 2015 review

Seqwater's actual variable 28.8 32.9 35.3 38.6 135.6

opexa

Difference (per cent) (15.7) (9.3) (8.2) (5.5) (9.5)

a 2017–18 and 2018–19 figures are budget figures.

Sources: QCA, SEQ bulk water price path 2015–2018, final report, March 2015; Seqwater pricing model 2017;
QCA calculations.

Seqwater advised that its variable opex savings over the 2015–18 period were tempered by
higher-than-expected increases in its variable electricity costs per ML of water produced (Table
9).
Table 9 Change in variable opex per ML—actual versus recommended by the QCA in the
2015 review (%)

2015–16 2016–17 2017–18 2018–19 Total

Electricity (8) 11 16 18 9

Chemicals (9) (10) (9) 0 (9)

Sludge (37) (39) (24) (21) (25)

Sources: QCA, SEQ bulk water price path 2015–2018, final report, March 2015; Seqwater, sub. 2, p. 26; Seqwater
pricing model 2017; QCA calculations.

34
Seqwater, sub. 2, p. 27; Seqwater pricing model 2017.

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Queensland Competition Authority Operating expenditure

Seqwater stated that, overall, its variable opex for the 2018–19 base year is based on similar
costs (per ML) for chemicals and sludge as for the 2015–18 period, but that electricity costs (per
ML) are higher due to recent large increases in electricity prices.
Seqwater also included a contingency in its variable opex for the 2018–19 base year to account
for minor variations in feedwater quality. This was set at $1.2 million for 2018–19 (or 8 per cent
of variable chemical costs). Seqwater stated that, if necessary, it would make a claim for any
major feedwater quality events over the 2018–21 period through the review event mechanism.

4.1.2 Step changes to base opex

Seqwater submitted that, for the 2018–28 period, it has adjusted baseline fixed opex to remove
one-off costs and include new ongoing costs. These adjustments amount to $46.7 million in
total.
Key adjustments (Table 10) include:
 costs associated with the commencement of source water monitoring at the WCRWS
 year-on-year changes in fixed opex at the GCDP and the WCRWS
 costs associated with an outreach program to engage SEQ communities on future water
supply options, including purified recycled water
 budget adjustments (which include one-off projects and accounting adjustments for
2018–19, such as the reclassification of costs from capex to opex)
 provision for fixed costs associated with the recommissioning of Ewan Maddock WTP and a
new WTP for Beaudesert (the Wyaralong WTP).
Table 10 Step changes and one-off adjustments to fixed opex for 2018–19 base year ($m,
nominal)

Adjustment 2018–19 2019–20 2020–21 2021–28 Total

Water quality reporting 0.4 0.4 0.4 0.8 1.9

GCDP and WCRWS – 0.2 0.1 4.0 4.2

Communication and education for 1.1 1.1 1.2 9.3 12.7

recycled water

Budget adjustments 0.3 1.2 1.2 9.5 12.1

Ewan Maddock WTP fixed costs 0.8 0.8 0.8 6.4 8.8

Wyaralong WTP fixed costs – – 0.8 6.4 7.2

Other 0.2 0.2 1.0 (1.5) (0.3)

Total adjustments 2.6 3.7 5.4 34.9 46.7

Note: Totals may not add due to rounding.

Source: Seqwater, sub. 2, p. 21.

4.1.3 Input price growth

Seqwater engaged PricewaterhouseCoopers (PwC) to provide advice on appropriate cost
escalation factors to apply to opex, to account for input price growth over the period 2019–28.
The resulting escalation factors are summarised in Table 11.

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Queensland Competition Authority Operating expenditure

Table 11 Seqwater's proposed annual cost escalation factors (%)

Cost category Basis for escalation factor Forecast Escalation

period factor

Employee and contract Queensland Treasury Wage Price Index (WPI) 2019–21 3.0
labour expenses projections for 2019–20 and 2020–21

Long-term (15-year) historical growth in the 2021–28 3.39

Queensland WPI

Contractors (service Weighted average of WPI and Consumer Price Index 2019–28 2.77 (in
delivery) (CPI) 2019-20)
increasing
to 2.99 (in
2021-28)

Electricity Average annual growth rate (between 2020 and 2019–21 4.83
2030) in the Australian Energy Market Operator's
(AEMO's) Queensland commercial electricity price
forecasts

Annual growth in AEMO's Queensland commercial 2021–28 Between

electricity price forecasts 3.87 and
6.29

Chemicals CPI (mid-point of the Reserve Bank of Australia (RBA) 2019–28 2.5
target range)

Other materials and CPI (mid-point of RBA target range) 2019–28 2.5
services

Insurance Based on forward-looking estimates prepared for 2019–28 5.0

Gladstone Area Water Board (GAWB) by the
insurance broker Marsh.

Sources: Seqwater, sub. 2, p. 20; Seqwater pricing model 2017.

4.1.4 Output growth

Seqwater stated that it based its production estimates (for variable opex) on its long-term
demand forecast and assumed that production would occur under the least-cost mode of
operations, where the water grid is optimised to minimise the overall cost of supply (Table
12).35 Seqwater is forecasting average annual growth of 3 per cent in total water production
over the period 2018–28.
Production volumes are multiplied by costs per ML (which are escalated by input cost inflation
rates) to determine variable cost forecasts over the period 2018–28.

35
Seqwater, sub. 2, p. 27.

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Queensland Competition Authority Operating expenditure

Table 12 Forecast water production by plant, 2018–28 (ML)

2018–19 2019–20 2020–21 2021–22 2022–23 2023–24 2024–25 2025–26 2026–27 2027–28

Off-grid communities 7,074 6,813 6,974 7,122 7,271 7,419 7,567 7,715 7,854 7,994

Grid-connected

Banksia Beach WTPa – – – – – – – – – –

Capalaba WTP 1,800 1,800 1,800 1,800 1,800 1,800 1,816 1,888 1,923 1,937

Ewen Maddock WTP 1,800 1,800 1,800 1,800 1,800 1,800 1,800 2,152 1,997 2,777

Gold Coast Desalination Plantb 504 504 504 504 504 504 504 504 504 504

Image Flat WTP 5,597 6,384 6,768 6,768 6,768 6,768 6,768 6,768 6,768 6,768

Landers Shute WTP 36,495 36,495 36,495 36,495 36,495 36,495 36,495 36,495 36,495 36,495

Molendinar WTP 32,731 33,402 34,181 37,237 40,304 43,382 46,277 48,304 48,975 49,310

Mount Crosby East Bank WTP 109,292 112,521 112,790 109,866 118,546 126,332 134,151 141,864 153,661 158,008

Mount Crosby West Bank WTP 27,323 28,130 28,198 27,467 29,636 31,583 33,538 35,466 38,415 39,502

Mudgeeraba WTP 19,315 19,424 19,556 20,488 21,405 22,307 23,399 25,357 26,275 27,048

Noosa WTP 2,160 2,160 2,160 2,160 3,600 6,161 8,657 9,000 9,000 9,000

North Pine WTP 53,280 53,280 53,280 57,200 57,200 57,200 57,200 59,000 59,000 59,000

North Stradbroke Island WTP 10,060 10,074 10,080 10,080 10,080 10,080 10,080 10,160 10,227 10,294

Petrie WTPc – – – – – – – – – –

Wyaralong WTP – – 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800

Sub-total, grid-connected 300,357 305,975 309,412 313,665 329,938 346,211 362,485 378,758 395,040 402,442

Total water production 307,430 312,788 316,386 320,787 337,209 353,630 370,051 386,473 402,894 410,436

a The plant is in care and maintenance mode. b The plant is in hot standby mode. c The plant is being decommissioned.
Note: Totals may not add due to rounding.
Source: Seqwater pricing model 2017.

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Queensland Competition Authority Operating expenditure

4.1.5 Continuing efficiency target

Seqwater stated that, since it has achieved and exceeded the efficiency target set by the QCA in
the 2015 review, an aggressive efficiency target is unwarranted.36 Instead, Seqwater proposed
to incorporate a continuing efficiency target (which is the ongoing cost savings Seqwater
expects to make from continuing efficiency improvements) of 0.2 per cent per annum
(cumulative)37 of base year controllable opex38 across the remainder of the price-path period.
Table 13 Seqwater's proposed efficiency savings ($ million, nominal)

2018– 2019– 2020– 2021– 2022– 2023– 2024– 2025– 2026– 2027–
19 20 21 22 23 24 25 26 27 28

Controllable 134.4 138.4 142.5 147.1 151.9 156.8 161.9 167.1 172.6 178.2
opexa

Continuing – 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8
efficiency
target (%)

Efficiency – 0.3 0.6 0.9 1.2 1.6 1.9 2.3 2.8 3.2
savings

a Seqwater applied the target to 2018–19 base year controllable opex adjusted for input cost escalation.
Source: Seqwater pricing model 2017.

Seqwater submitted that a 0.2 per cent per annum target (cumulative) was consistent with the
Independent Pricing and Regulatory Tribunal's (IPART's) 2016 pricing decision on Hunter Water
(a vertically integrated business in regional NSW providing both water and sewerage services).39
In that decision, IPART set a continuing efficiency target of 0.25 per cent (cumulative) of real
controllable opex.40

4.1.6 Revenue and cost offsets

Revenue offsets
Seqwater submitted that it had netted off $14.9 million of non–bulk water revenues from its
2018–19 base opex.41 These revenue offsets come from two main sources—Toowoomba
Regional Council and Stanwell Corporation. Seqwater advised that it provides these customers
with a back-up supply service in emergency and drought situations, and no demand has been
forecast from either customer over the 2018–28 period.
Cost offsets
Seqwater separately accounted for costs associated with irrigation services, as stipulated under
the terms of the referral. Specifically, Seqwater submitted that it reduced base opex by $3.6

36
Seqwater, sub. 2, p. 26.
37
The target applies from 2019-20 and is cumulative (i.e. increases by 0.2 per cent each year). This translates to
an average annual target of 0.9 per cent over the price path period or 0.2 per cent over the three-year
regulatory period.
38
Seqwater defined controllable opex to include costs for labour and contractors but to exclude costs for which
it pays market prices, such as insurance, chemicals and electricity. Controllable opex relates mainly to fixed
opex and accounts for around 65 per cent of Seqwater's fixed opex.
39
Seqwater, sub. 2, p. 26.
40
IPART, Review of prices for Hunter Water Corporation from 1 July 2016 to 30 June 2020, final report, June
2016.
41
Seqwater pricing model 2017.

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Queensland Competition Authority Operating expenditure

million to reflect the allocation of costs to irrigation services42 in accordance with the cost
allocation approach approved by the QCA in the 2013 irrigation review.43
Summary
Table 14 summarises Seqwater's proposed revenue and cost offsets.
Table 14 Seqwater's proposed revenue and cost offsets, 2018–28 ($m, nominal)

2018–19 2019–20 2020–21 2021–28 Total

Revenue offsets

Stanwell Corporation, 14.9 15.3 15.6 123.4 169.2

Toowoomba Regional
Council and other offsets

Total revenue offsets 14.9 15.3 15.6 123.4 169.2

Cost offsets

Irrigation 3.4 3.5 3.6 28.9 39.4

Non-irrigators in irrigation 0.1 0.1 0.1 1.2 1.6

schemes

Total cost offsets 3.6 3.7 3.8 30.1 41.0

Total offsets 18.4 18.9 19.4 153.4 210.2

Note: Totals may not add due to rounding.

Source: Seqwater pricing model 2017.

4.1.7 Additional proposal to remobilise a train at Luggage Point AWTP

In its submission to the draft report, Seqwater put in a proposal to recover additional opex of $3
million a year (and associated capex of $0.5 million a year relating to asset replacement and
renewals) to remobilise one of three reverse osmosis trains at the Luggage Point AWTP, a
component of the WCRWS.44
Seqwater stated that, while the scheme is in care and maintenance mode, this train is currently
partially operational, as it is required to flush the scheme pipeline periodically to avoid water
quality problems.45 Seqwater stated that opex associated with running the train in care and
maintenance mode is already included in its opex proposal.
Under the WSP, remobilisation of the WCRWS is required to commence once grid storages
reach 60 per cent and be completed within two years. However, Seqwater considers that
additional opex is required to recommission one train at Luggage Point AWTP in order to
resolve technical and community acceptance risks prior to the potential remobilisation of the
full scheme.
Seqwater submitted that, once the train is fully operational, it will produce 6 ML per day of
recycled water for industrial and other users. Seqwater is in discussion with potential customers
to take the recycled water as a substitute for potable water.

42
This includes $0.1 million allocated to high priority water access entitlement holders who are located in
irrigation schemes, but are not irrigators.
43
Seqwater pricing model 2017.
44
Seqwater, sub. 13, pp. 54-7.
45
The train produces around 200 ML a year for pipe flushing.

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Queensland Competition Authority Operating expenditure

4.1.8 Summary
Seqwater's proposed opex is summarised in Table 15.
Table 15 Seqwater's proposed opex ($m, nominal)a

2018–19 2019–20 2020–21 2021–28 Total

Base year fixed opex plus input 207.8 213.9 220.2 1,753.5 2,395.4
cost escalation

Adjustments/step changes 2.6 3.7 5.4 34.9 46.7

Continuing efficiency savings – (0.3) (0.6) (13.7) (14.5)

Fixed opex 210.4 217.3 225.1 1,774.8 2,427.6

Base year variable opex plus input 38.6 40.1 42.4 412.0 533.2
cost escalation

Output growth – 0.7 1.1 13.2 14.9

Continuing efficiency savings – 0.0 0.0 (0.2) (0.2)

Variable opex 38.6 40.8 43.5 425.0 547.9

Total opex 249.1 258.1 268.6 2,199.8 2,975.5

Revenue and cost offsets (18.4) (18.9) (19.4) (153.4) (210.2)

Net opex 230.6 239.2 249.2 2,046.3 2,765.3

a Excludes opex associated with partial remobilisation of the WCRWS.

Note: Totals may not add due to rounding.
Sources: Seqwater, sub. 2, p. 18; Seqwater pricing model 2017; Seqwater supplementary submission.

4.2 QCA assessment

We have assessed the prudency and efficiency of Seqwater's proposed opex from 1 July 2018 to
30 June 2028. We consider opex to be prudent if the expenditure can be justified by reference
to an identified need or cost driver, such as a legal or regulatory obligation. We consider opex to
be efficient if it minimises Seqwater's long-run costs of providing bulk water supply services. We
have considered the advice of our consultant, KPMG, in making this assessment.

4.2.1 Governance arrangements

KPMG undertook an assessment of Seqwater's governance arrangements (including the
appropriateness of decision-making and corporate governance processes) in order to verify the
prudency of Seqwater's opex decision-making.
KPMG did not identify any systemic issues in Seqwater's corporate governance relating to
operating policies and procedures but recommended improvements in Seqwater's budgeting
process to move to an activity based costing approach whereby costs categories (e.g. employee
expenses) are built up by activity (e.g. operation of a WTP).46
Consistent with KPMG's advice, we suggest that Seqwater consider an activity based costing
approach for opex budgeting.

46
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 192.

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Queensland Competition Authority Operating expenditure

4.2.2 Prudency and efficiency of proposed opex

KPMG applied a base-step-trend approach to determine the prudency and efficiency of
Seqwater's proposed opex. This involved:
 determining a prudent and efficient level of base opex for 2018–19 by comparing Seqwater's
proposed opex for 2018–19 to its historical opex and making adjustments to ensure that it
reflects recurrent expenditure necessary to deliver on Seqwater's service and regulatory
obligations
 projecting base opex across the forecast period by making adjustments for step changes in
opex (e.g. due to new regulatory obligations) and forecast changes in input prices, output
and productivity.

Base year
KPMG noted that the base year would typically be based on the last year of actual costs or the
average of efficient actual costs over a number of years and that these costs would typically be
adjusted to:
 remove any one-off or non-recurring expenditure items or to add recurring items that might
not have been incurred in the year or years in question
 remove any cost savings expected to be realised prior to the commencement of the next
regulatory period.47
KPMG noted that Seqwater had, instead, established its base year of 2018–19 on the basis of a
budget forecast, with expenditure to be included only where it could be justified by evidence
such as contractual obligations, baseline operating scenarios or historical trends in actual
expenditure.48
KPMG noted that these approaches should, in principle, lead to similar outcomes, although
Seqwater's budgetary approach made it difficult to verify whether the necessary adjustments
had been made to the base year, as Seqwater does not apply an activity-based costing approach
to its budgeting.49
In assessing the efficiency of Seqwater's proposed base year opex, KPMG looked at:
 trends in historical expenditure—KPMG compared actual fixed opex per ML of actual
demand over 2015–18 with fixed opex per ML that we recommended in the 2015 review.
KPMG noted that Seqwater's actual fixed opex per ML increased in 2017–18 relative to our
recommended fixed opex per ML but that this was a result of an unanticipated contraction
in actual demand compared to forecast. When using forecast volumes, KPMG found there
was a clearly decreasing trend in actual fixed opex per ML compared to our recommended
fixed opex per ML. KPMG considered that this reflected that Seqwater had achieved
efficiencies in its fixed opex. While Seqwater's base variable opex per ML is higher than
historical costs, this is consistent with the observable trend in actual opex over 2014–17

47
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 190–1.
48
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 191.
49
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 192.

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Queensland Competition Authority Operating expenditure

 a comparison with recommended opex in the 2015 review—KPMG noted that actual
expenditure has been consistently below that recommended by the QCA in the 2015 review,
lending support to the contention that Seqwater has achieved efficiencies over the
regulatory period
 benchmarking with similar entities in Australia—while not definitive, KPMG considered that
Seqwater compared favourably to its peers in terms of opex per ML
 a comparison of the last available year of actual opex with the base year—KPMG noted
that, in real terms, Seqwater's proposed base year opex compares favourably with actual
opex for 2014–17.
We have supplemented this analysis by considering historical trends in Seqwater's main opex
categories (Table 16).
Table 16 Difference between the QCA's opex allowance (in the 2015 review) and Seqwater's
actual expenditure (2015–17) and budgeted expenditure (2017–19) by category,
2015–19 (%)

2015–16 2016–17 2017–18 2018–19a

Employee expenses 2.7 9.2 9.4 8.7

Contract labour 14.1 (18.2) (52.7) (58.1)

Contractors (service delivery) (31.2) (37.3) (26.0) (22.9)

Chemicals (15.3) (17.2) (19.2) (11.9)

Electricity (6.2) 3.0 1.2 0.1

Other materials and services 9.5 0.1 7.0 (13.6)

Total (9.7) (11.4) (6.1) (8.5)

a Seqwater provided additional information to correct for the allocation of costs between contract labour and
contractors (service delivery).
Sources: QCA, SEQ bulk water price path 2015–2018, final report, March 2015; Seqwater pricing model 2017,
Seqwater supplementary submission.

Employee expenses were just under 3 per cent higher than we recommended for 2015–16 and
are expected to stabilise at around 9 per cent higher than our allowance for each year over
2016–19. Conversely, Seqwater's expenditure for contract labour and contract services is
expected to come in significantly below our allowance.
Seqwater submitted that it had reduced its expenditure on contractors and consultants and that
over the period 2015–18 it had transferred some of its consulting and contracting costs into
employee costs. Seqwater considered that its detailed workforce planning in 2015–16 has
enabled it to optimise the skill set of its employee base and ensure it has the right people
working in the right areas at the appropriate times.50
Seqwater also submitted that it had made improvements to its maintenance strategy by moving
to an Insourced Collaborative Contract model in 2016 whereby Wood Group PSN has been
chosen as a maintenance partner until 2021. Under the partnership, Wood Group PSN operates
as an integrated workforce with Seqwater under a single management structure.51

50
Seqwater, sub. 2, p. 16.
51
Seqwater, sub. 2, p. 16.

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Queensland Competition Authority Operating expenditure

Fixed opex
On balance, we are satisfied that the 2018–19 base fixed opex reflects a normalised year of
efficient opex. However, on the recommendation of KPMG, we have adjusted base year opex to
exclude $0.6 million of expenditure that is non-recurrent in nature from Seqwater's base year
fixed opex.
KPMG noted that $0.6 million of proposed fixed opex relating to training and professional
development and other allowances did not appear to be recurrent in nature. We have accepted
this recommendation, as base opex should exclude one-off costs.
Variable opex
On balance, we are satisfied that the 2018–19 base variable opex reflects a normalised year of
efficient opex. However, on the recommendation of KPMG, we have adjusted base year opex to
exclude Seqwater's proposed contingency of $1.2 million for minor feedwater quality events
from base year variable opex.
KPMG stated that it could not determine whether the proposed level was efficient without
information on the frequency of these events and the costs associated with them.52
QUU submitted that the appropriate contingency to apply for feedwater quality events should
be based on the long-term average of these costs.53
We note that Seqwater's actual chemical costs for 2015–18 have been relatively stable in real
terms, which suggests that there is no significant variability in feedwater quality requiring a
contingency allowance. Seqwater may be able to claim for variations in feedwater quality under
the review events mechanism (Chapter 10). While Seqwater accepted our recommendation to
exclude the contingency allowance, Seqwater submitted a claim for a feedwater quality event
from 2017, which we have assessed in Chapter 8.
Summary
We have amended Seqwater's proposed base opex as shown in Table 17.
Table 17 Recommended adjustments to Seqwater's proposed 2018–19 base year opex ($m,
nominal)

Seqwater proposal QCA adjustment QCA recommendation

Base year fixed opex 207.8 (0.6) 207.2

Base year variable opex 38.6 (1.2) 37.4

Sources: Seqwater, sub. 2; QCA analysis.

Step changes
KPMG assessed Seqwater's proposed step changes using the following criteria:
 The step change should relate directly to a new obligation, a change in an existing obligation
or some other new expenditure.
 The step change should be material relative to the total opex proposed.54

52
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 212–3.
53
QUU, sub. 8, p. 3.

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Queensland Competition Authority Operating expenditure

 The expenditure associated with the step change should be prudent and efficient.
For our draft report, KPMG assessed some steps to be typical operational activities and ongoing
in nature and recommended that these steps would be better accounted for through an
adjustment to base opex.
However, we considered steps associated with typical operational activities to be business-as-
usual activities. We stated that we would expect Seqwater to meet these costs within its base
operating cost allowance.
Where a proposed step change was associated with a new obligation, a change in an existing
obligation or some other new expenditure, we considered that it should be treated as a step
change regardless of the materiality of the expenditure.
In response to our draft report, Seqwater stated that it had kept out some business-as-usual
costs from base year expenditure and separately identified those costs in the year they were
expected to be incurred, in order to enhance transparency.55 These costs include the GCDP and
WCRWS year-on-year changes ($4.2 million), provision of additional drafting services ($0.6
million), integrated master plan updates ($0.3 million) and EBA advice ($0.5 million). In the case
of the GCDP and WCRWS, Seqwater stated that it had prepared a detailed forecast for these
plants based on their required state of readiness (hot standby mode and care and maintenance
mode, respectively).56 Seqwater said that it was indifferent as to whether these costs were
treated as base year opex or step changes but that it should be allowed to recover these costs
as KPMG did not make a finding that the costs were not prudent or not efficient.57
Seqwater also:
 submitted that opex associated with the Wyaralong WTP upgrade should be reinstated as a
step change as it had provided further information to justify the efficiency of the associated
capex58
 provided further information to clarify that the proposed step change for budget
adjustments referred to costs that it had mistakenly excluded from opex in previous years
and other costs that it had mistakenly categorised as capex in previous years.59
We asked KPMG to reconsider its advice on the basis of the information provided by Seqwater.
We have summarised KPMG's recommended adjustments together with our response (Table
18).

54
KPMG applied a materiality threshold of 0.2 per cent for the ratio of the expenditure associated with the step
change to total opex. The threshold of 0.2 per cent is based on Seqwater's proposed continuing efficiency
target.
55
Seqwater, sub. 13, p. 8.
56
Seqwater, sub. 13, pp. 8-9.
57
Seqwater, sub. 13, p. 10.
58
Seqwater, sub. 13, p. 10.
59
Seqwater, sub. 13, pp. 12-13.

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Queensland Competition Authority Operating expenditure

Table 18 QCA recommended adjustments to step changes ($m, nominal)

Step change KPMG recommendation QCA position QCA

adjustment

Assessment of The proposed step change should not Consistent with our draft report, (1.0)
major contracts be included, as it appears to be we have accepted this
associated with typical operational recommendation.
activity and is immaterial, and there
are concerns regarding efficiency.
The proposed step change should not
be included in the base year, as it is
not ongoing in nature.

Water quality The proposed step change should not As the expenditure is associated –
reporting for be included, as expenditure only with a new obligation for the
recycled water applies to the first five years and is period 2018–23, we have treated it
immaterial. as a step change. This is consistent
with our view in the draft report.

GCDP and The proposed step change would be We have changed our draft report –
WCRWS—year better classified as base opex as it view. As KPMG's revised
on year changes appears to be associated with typical assessment has confirmed that
in fixed opex operational activity and is ongoing in Seqwater should be able to recover
nature. these costs through the base opex
KPMG reassessed base year opex allowance and as it makes no
following its reclassification of this difference to recommended opex
and other proposed step changes whether the expenditure is treated
and recommended that the QCA as base opex or a step change, we
accept the revised base as it have included it as a valid step
compares favourably to the costs we change.
approved in the last year of the
current regulatory period as well as
actual costs for 2017-18.

ICT projects The proposed step change should not Consistent with our draft report, 0.5
be included, as it appears to be we have accepted this
associated with typical operational recommendation.
activity, is immaterial and prudency
and efficiency has not been
demonstrated.

Provision of The proposed step change would be We have changed our draft report –
additional better classified as base opex as it view. As KPMG's revised
drafting services appears to be associated with typical assessment has confirmed that
operational activity and is ongoing in Seqwater should be able to recover
nature. these costs through the base opex
KPMG reassessed base year opex allowance and as it makes no
following its reclassification of this difference to recommended opex
and other proposed step changes whether the expenditure is treated
and recommended that the QCA as base opex or a step change, we
accept the revised base as it have included it as a valid step
compares favourably to the costs we change.
approved in the last year of the
current regulatory period as well as
actual costs for 2017-18.

QCA reviews The proposed step change should not The expenditure is associated with –
be included, as it appears to be cyclical variations in an existing
associated with typical operational obligation. Consistent with our
activity and is immaterial. draft report, we have treated
The proposed step should be Seqwater's adjustment as a valid
included in the base year, as it is step change.

24
Queensland Competition Authority Operating expenditure

Step change KPMG recommendation QCA position QCA

adjustment
related to typical operating activity
and is ongoing in nature.

Future water The expenditure appears to be Consistent with our draft report, as –
security associated with a new obligation but the expenditure appears to be
program the step change should not be associated with a new obligation,
updates included, as it is immaterial; rather, we have treated it as a valid step
the step change should be accounted change.
for in base opex.

Integrated The proposed step change would be We have changed our draft report –
master plan better classified as base opex as it view. As KPMG's revised
update appears to be associated with typical assessment has confirmed that
operational activity and is ongoing in Seqwater should be able to recover
nature. these costs through the base opex
KPMG reassessed base year opex allowance and as it makes no
following its reclassification of this difference to recommended opex
and other proposed step changes whether the expenditure is treated
and recommended that the QCA as base opex or a step change, we
accept the revised base as it have included it as a valid step
compares favourably to the costs we change.
approved in the last year of the
current regulatory period as well as
actual costs for 2017-18.

Communication The expenditure should be capped at Consistent with our draft report, (9.3)
and education three years, given that it relates to we have accepted this
for recycled the implementation of a three-year recommendation.
water program.

EBA advice The proposed step change would be We have changed our draft report –
better classified as base opex as it view. As KPMG's revised
appears to be associated with typical assessment has confirmed that
operational activity and is ongoing in Seqwater should be able to recover
nature. these costs through the base opex
KPMG reassessed base year opex allowance and as it makes no
following the reclassification of this difference to recommended opex
and other proposed step changes whether the expenditure is treated
and recommended that the QCA as base opex or a step change, we
accept the revised base as it have included it as a valid step
compares favourably to the costs we change.
approved in the last year of the
current regulatory period as well as
actual costs for 2017-18.

Additional The proposed step change should not Consistent with our draft report, (0.6)
leadership be included, as it appears to be we have accepted this
training associated with typical operational recommendation.
activity, is immaterial and prudency
and efficiency has not been
demonstrated.

Budget The proposed step change would be We have changed our draft report –
adjustments better classified as base opex on the view. As KPMG has now assessed
basis that KPMG has confirmed that that Seqwater should be able to
Seqwater had: recover these costs through the
 mistakenly classified planning base opex allowance and as it
costs for the monitoring control makes no difference to
recommended opex whether the
systems (MCS) class of assets, that
are recurrent in nature, as capex expenditure is treated as base opex
or a step change, we have included

25
Queensland Competition Authority Operating expenditure

Step change KPMG recommendation QCA position QCA

adjustment
in the 2018–19 base year it as a valid step change. We also
 mistakenly omitted planning costs accept KPMG's recommendation to
for the MCS class of assets from make a corresponding reduction to
opex from 2018-19 capex (see Chapter 5).

 mistakenly omitted recurrent

expenditure related to public
education campaigns and
community research from base
year opex as a result of an
organisational restructure.
However, KPMG noted that the
reclassification of planning costs
associated with the MCS asset class
should lead to a corresponding
reduction in capex associated with
MCS assets and recommended a
reduction in capex for 2022-28.

Ewan Maddock Expenditure is related to capex Consistent with our draft report, –
fixed costs aimed at increasing capacity, is we have accepted this
material and should be included as a recommendation.
step change.

Wyaralong WTP Expenditure is related to capex We have changed our draft report –
fixed costs aimed at increasing capacity, is view. We have accepted KPMG's
material and should be included as a revised recommendation.
step change as the corresponding
capex has been assessed to be
prudent and mostly efficient.

Total (10.5)
adjustments

Note: Totals may not add due to rounding.

Sources: KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 225—34; QCA analysis.

QUU submitted that Seqwater had not provided sufficient justification for assuming that the $4
million annual Moreton Bay Outcome Contribution, associated with recycled water from the
Murrumba Downs Advanced Water Treatment Plant, will continue beyond the current contract
term of 2020.60 Seqwater has advised that this is a contractual arrangement that is likely to be
extended beyond 2020. We are satisfied that the contractual arrangement is likely to extend
beyond 2020 and have therefore not made any adjustment to the proposed expenditure.
Based on our assessment above, we have therefore amended step changes (see Table 19).

60
QUU, sub. 8, p. 3.

26
Queensland Competition Authority Operating expenditure

Table 19 Recommended adjustments to Seqwater's proposed step changes ($m, nominal)

2018–19 2019–20 2020–21 2021–28 Total

Seqwater's proposed step 2.6 3.7 5.4 34.9 46.7

changes

QCA adjustmenta (–) (0.7) (0.3) (9.9) (11.0)

QCA recommended step changes 2.6 2.9 5.1 25.1 35.7

a Includes updates to inflation forecasts.

Note: Totals may not add due to rounding.
Sources: Seqwater, sub. 2; QCA analysis.

Input price growth

KPMG recommended that we accept all of Seqwater's proposed input price escalation factors
with the exception of the escalation factors for insurance and electricity.
With respect to insurance, KPMG recommended that we reduce the escalation rate for 2019–21
from 5 per cent to 2.5 per cent (reflecting available inflation forecasts) on the basis that
Seqwater had not provided sufficient explanatory documentation to justify a real increase and
that, in any case, Seqwater is best placed to manage the risk of real increases in insurance
premiums.
We agree that Seqwater is best placed to manage the risk of insurance premiums increasing
beyond inflation and we therefore accept KPMG's recommendation. For the final report, we
have revised the inflation forecast for 2019–20 from 2.5 per cent to 2.25 per cent to reflect the
RBA's latest short-term inflation forecast.61
With respect to electricity, KPMG recommended that we update AEMO's 2016 forecasts with
the latest 2017 forecasts. QUU also submitted that we should update AEMO's 2016 forecasts
with the latest 2017 forecasts.62
QUU noted that the significant price escalation for electricity costs would appear to be
influenced, in part, by Seqwater's procurement strategy (whereby it recontracts on a quarterly
basis) and the volatility in the electricity wholesale market.63 KPMG advised that its
consultations with Seqwater revealed that Seqwater manages the risk of volatility in prices by
using derivatives.64
We accept KPMG's recommendation and have updated the electricity cost escalation factor
with the latest available AEMO forecasts.
KPMG recommended that we accept Seqwater's proposed use of the Australian Bureau of
Statistics (ABS's) long-term (15-year) average growth in the Queensland WPI (3.4 per cent) as
the escalator for employee and contract labour expenses and the labour component of
contractors (service delivery) for 2021–28, but we do not accept this recommendation. KPMG's
recommendation was made on the basis that Seqwater's proposal is broadly similar to our
recommendation in the 2015 review, where we approved Seqwater's proposal to apply the
Queensland WPI forecast developed by Queensland Treasury.

61
RBA, Statement on Monetary Policy, February 2018, p. 63.
62
QUU, sub. 8, p. 3.
63
QUU, sub. 8, p. 3.
64
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 224.

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Queensland Competition Authority Operating expenditure

As noted by PwC in its report for Seqwater65, Queensland Treasury, in its most recent forecast
of the Queensland WPI, noted that real wage growth has been sluggish (as a result of CPI
growing even slower than nominal wages) and is expected to remain subdued, reflecting
ongoing spare capacity in the labour market; but, it is then expected to pick up as conditions in
the domestic market improve. However, it is not clear over what timeframe wages are expected
to recover or how strong the recovery may be. Queensland Treasury forecasts that the WPI will
recover before stabilising at 3 per cent in 2019–20 and 2020–21.66
We note that the long-term trend in the Queensland WPI, as determined by the ABS, has been
decreasing (Figure 4).
Figure 4 Queensland WPI, 2002–17

5.0
4.5
4.0
Per cent change per annum

3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

Source: ABS, Wage Price Index, Australia, December 2017, Table 8a: Ordinary Hourly Rates of Pay Excluding
Bonuses: All Sectors by State, Original, cat no 6345.0.

Given the evidence of a declining trend in the Queensland WPI, we have used the 10-year
average of the Queensland WPI of 3.1 per cent, consistent with our approach in the review of
GAWB's pricing practices.67 We consider that this is a better forecast, as the Queensland WPI
has not reached Seqwater's proposed forecast of 3.4 per cent since 2012.
In response to the draft report, Seqwater accepted our recommended adjustments to input cost
escalators but advised of an error in KPMG's recommended input price escalator for electricity
relating to the treatment of inflation.68 KPMG has since corrected this error and we have
accepted the revised forecast.69 Our recommended adjustments to Seqwater's proposed input
price escalators are summarised in Table 20.

65
Seqwater, sub. 3, p. 14.
66
Queensland Treasury, Queensland Budget 2017-18, Budget Strategy and Outlook, Budget Paper No. 2, June
2017, p. 49.
67
QCA, Gladstone Area Water Board Price Monitoring 2015–2020, final report, May 2015.
68
Seqwater, sub. 13, p. 13.
69
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 227.

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Queensland Competition Authority Operating expenditure

Table 20 QCA recommended adjustments to input cost escalation factors

Cost category Nature of adjustment

Employee and contract labour expenses Reduce proposed escalation factor for 2021–28 from
3.4 per cent to 3.1 per cent to reflect the 10-year
average of the Queensland WPI.

Insurance Reduce proposed escalation factor for 2019–21 from 5

per cent to 2.25 per cent (for 2019–20) and 2.5 per
cent (from 2020–21) to reflect the position that
Seqwater should bear the risk of real increases in
insurance costs.

Contractors (service delivery) Reduce WPI component of the escalation factor (for
2021–28) from 3.4 per cent to 3.1 per cent to reflect
the 10-year average of the Queensland WPI.

Electricity Update AEMO's Queensland commercial electricity

price forecasts with latest available data.

Our recommended input price escalators are shown in Table 21.

Table 21 QCA recommended input cost escalation factors (%)

Cost category Forecast period Escalation factor

Employee and contract labour expenses 2019–21 3.0

2021–28 3.1

Contractors (service delivery) 2019–28 2.77 (in 2019–20) increasing to

2.83 (in 2021–28)

Electricity 2019–21 –0.63 increasing to –0.30

2021–28 Between –1.56 and 4.36

Chemicals 2019–28 2.5a

Other materials and services 2019–28 2.5a

Insurance 2019–28 2.5a

a The 2019–20 escalation factor has been updated to 2.25 per cent to reflect the RBA's latest short-term
inflation forecast.
Sources: KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 218–228; QCA analysis.

Output growth
Seqwater's proposed output growth forecasts are consistent with its forecast growth in
demand. As we have accepted Seqwater's demand forecasts (Chapter 3), we also accept
Seqwater's proposed output growth forecasts.

Continuing efficiency target

Regulators often apply efficiency targets to controllable opex. Two types of efficiency targets
are commonly applied:
 a catch–up efficiency target—a firm-specific target to move a business closer to the efficient
frontier (typically measured as the best performing comparable businesses)

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Queensland Competition Authority Operating expenditure

 a continuing efficiency target—an industry-wide target reflecting the movement of the

efficient frontier over time as productivity improves, for example, due to innovation and the
adoption of new technologies.
We did not identify inefficiencies in Seqwater's proposed base opex and only made adjustments
to remove non-recurrent expenditure. As such, we have not applied a catch-up efficiency target.
However, we have considered Seqwater's proposal to apply a continuing efficiency target of 0.2
per cent per year (cumulative) of base year controllable opex.
For our draft report, KPMG advised that, relative to efficiency targets set by regulators in other
jurisdictions, Seqwater's proposed continuing efficiency target is low.70 As a result, KPMG
recommended that we apply a continuing efficiency target of 1 per cent per year of controllable
opex.
However, we chose to adopt a conservative approach by applying a continuing efficiency target
of 0.2 per cent per annum (cumulative), as proposed by Seqwater, rather than 1 per cent, as
recommended by KPMG. We asked Seqwater to provide more robust justification of its
proposed target in response to the draft report and advised that, in the absence of more robust
justification, we would consider applying a higher target in the final report.
In response to the draft report, Seqwater presented analysis to demonstrate that, when
compared on a consistent basis, its proposed cumulative annual target of 0.2 per cent is
comparable to targets set by regulators in other jurisdictions.71 KPMG advised that it had a
number of concerns with Seqwater's analysis, including:72
 Seqwater's assumption that the efficiency savings applied by the Essential Services
Commission (ESC) are static (like Seqwater's proposed savings), when they are actually
compounding. When savings in one year are not rolled into controllable opex in subsequent
years the effect is that the opex allowance is higher than it would otherwise have been if
savings had been embedded in base opex.
 Seqwater's adjustments to account for differences between cost escalators, output growth,
economies of scale and efficiency. KPMG noted the interaction between these variables, but
did not consider it appropriate to account for differences when making comparisons with
other water businesses (as Seqwater has done with SA Water and the Victorian water
businesses). Rather, each of these variables should be considered on its own merits. For
example, while Seqwater does not escalate fixed opex for volume growth, this could be
because it considers there are unrealised economies of scale in its fixed opex relative to
other businesses.
When considering both the application of Seqwater's proposed approach and the level of
efficiency savings proposed, KPMG remains of the opinion that Seqwater's proposed target is
relatively low. However, KPMG acknowledged that direct comparisons between efficiency
targets need to be undertaken with care.
KPMG sought to undertake analysis on the historical trends in the efficiency of Seqwater and
comparable water businesses to better inform its advice. However, due to inconsistencies in the

70
KPMG, Seqwater expenditure review: prudency and efficiency assessment, report for the QCA, November
2017, p. 185.
71
Seqwater, sub. 13, pp. 14–8.
72
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 238–9.

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Queensland Competition Authority Operating expenditure

available data and different reporting arrangements for comparator water businesses, KPMG
was unable to do so.
KPMG advised that, in the absence of more sophisticated analysis of efficiency, the QCA should
accept Seqwater's proposal. However, the QCA may consider undertaking further analysis
before the next review using techniques such as total factor productivity, stochastic frontier or
data envelopment analysis.
Given the inherent difficulties of directly comparing efficiency targets and in the absence of
empirical evidence to the contrary, we have accepted Seqwater's proposed continuing
efficiency target.
KPMG also recommended that we expand Seqwater's definition of controllable opex to include
contract based costs (on the basis that Seqwater can exert control to negotiate or renegotiate
these costs), variable electricity and chemical costs (on the basis that Seqwater has control over
how it uses these inputs) and other miscellaneous expenditures, such as property expenses (on
the basis that these are within the capacity of Seqwater to control). This reclassification
increases Seqwater's proposed controllable opex from $134.4 million to $211.8 million in 2018–
19. We have accepted this recommendation and have adjusted the application of Seqwater's
proposed continuing efficiency target accordingly. In response to our draft report, Seqwater
accepted this recommendation.73
Table 22 QCA recommended efficiency savings ($ million, nominal)

2018– 2019– 2020– 2021– 2022– 2023– 2024– 2025– 2026– 2027–
19 20 21 22 23 24 25 26 27 28

Controllable 211.8 217.6 223.6 230.1 236.8 243.4 250.3 257.5 265.0 272.7
opex

Continuing – 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8
efficiency
target (%)

Efficiency – 0.4 0.9 1.4 1.9 2.4 3.0 3.6 4.2 4.9
savings

Source: QCA analysis.

Revenue and cost offsets

Seqwater has proposed to apply offsets for revenue and costs not attributable to bulk water
supply. The purpose of these adjustments is to ensure that Seqwater does not recover more
than its costs of supply. Under the terms of the referral, we have been asked to apply offsets
for:
 costs associated with Seqwater's declared irrigation services, in accordance with the cost
allocation approach adopted by the QCA in its 2013–17 irrigation price review
 revenue from the sale of water to power stations, Toowoomba Regional Council and other
sources.
Cost offsets
Following the finalisation of Network Service Plans for its irrigation schemes, Seqwater provided
the QCA with actual irrigation scheme costs for 2016–17. Seqwater submitted total scheme

73
Seqwater, sub. 13, p. 14.

31
Queensland Competition Authority Operating expenditure

costs of $14.4 million, of which it allocated $3.3 million to irrigation services in accordance with
the cost allocation approach adopted by the QCA in the 2013 irrigation price review. This cost
was then escalated to determine a cost offset of $3.6 million for the 2018–19 base year which is
$0.1 million higher than Seqwater's original submission. Seqwater also increased the allocation
to high priority water access entitlement (WAE) holders in its irrigation schemes by $0.1 million
from $0.1 million to $0.2 million.
We have reviewed this information and have confirmed that Seqwater has applied the cost
allocation approach adopted in the 2013 irrigation price review to determine the irrigation cost
share. However, we have removed $0.2 million representing the cost share of high priority WAE
holders, as we have applied a revenue offset approach for these customers.
Revenue offsets
We have reviewed Seqwater's submission and additional information provided by Seqwater
(including contracts with Toowoomba Regional Council and Stanwell Corporation) and consider
the revenue offsets proposed by Seqwater are reasonable.
However, we consider that an additional revenue offset should apply to account for revenue
received from the provision of services provided to high priority WAE holders who are not
irrigators. While Seqwater proposed a cost offset approach, we consider that a revenue offset
approach is more appropriate. This is consistent with our approach in the 2015 review and with
the terms of the referral, which states that cost offsets are only to be applied for declared
irrigation services. We have offset base opex by a further $0.7 million, representing Seqwater's
forecast revenue from these customers in 2018–19.
Summary
Our adjustments to revenue and cost offsets are summarised in Table 23.
Table 23 Recommended adjustments to Seqwater's proposed revenue and cost offsets ($m,
nominal)

2018–19

Seqwater's initial proposal 18.4

Seqwater update to irrigation cost offset 0.1

Seqwater update to high priority WAE holders cost offset 0.1

QCA adjustment (cost offset) (0.2)

QCA adjustment (revenue offset) 0.7

QCA's recommendation 19.1

Source: QCA analysis.

Seqwater's proposal to remobilise a train at the Luggage Point AWTP

KPMG reviewed Seqwater's additional proposal relating to expenditure to remobilise a train at
the Luggage Point AWTP, which forms part of the WCRWS.

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Queensland Competition Authority Operating expenditure

KPMG advised that Seqwater had not adequately demonstrated that the benefits of fully
remobilising a train before the 60 per cent trigger is reached, would outweigh the costs that
would be passed through to customers.74 In particular, KPMG noted that:75
 Storages are currently above the 60 per cent trigger (80 per cent as of 6 March 201876) and
Seqwater has not provided any evidence that storages are expected to decrease materially
in the short term necessitating the need to remobilise the WCRWS as a drought response
measure.
 The QCA has allowed funding of $1 million per year over the next regulatory period for
community engagement initiatives and it is not clear why the remobilisation of a train at
Luggage Point AWTP would be required to support these initiatives.
 Seqwater has not offset the additional costs of remobilising the train with savings from
producing less water at other water treatment plants.
 Once the train is remobilised, it would operate on an ongoing basis regardless of storage
levels and end use customers could end up paying for recycled water that they do not need.
 Seqwater has not provided adequate evidence that community and stakeholder engagement
could not be effectively completed during the two year lead period in which the WCRWS
would be required to become fully operational following the 60 per cent trigger.
 In the event that the 60 per cent trigger was reached, Seqwater may be able to recover the
additional costs of remobilising the plant through the drought response review event
mechanism (see Chapter 10).
We accept KPMG's recommendation that Seqwater has not sufficiently justified its proposal to
recover costs associated with remobilising a train at Luggage Point AWTP. We also note that
Seqwater submitted this proposal late in the review, meaning there was limited time to
consider the proposal and no opportunity to consult with stakeholders.

Summary
The QCA’s recommended opex (Table 24) differs from Seqwater’s proposed opex because of
downward adjustments to base opex; input cost escalation rates, and step changes in base
opex; and upward adjustments to the continuing efficiency target (to reflect the application of
the target to a broader opex base), and revenue and cost offsets.
Relative to our draft report, we have increased the opex allowance by $24.5 million, or 0.9 per
cent, reflecting the inclusion of step changes that Seqwater has demonstrated to be efficient.

74
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 259.
75
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 260.
76
Seqwater, South East Queensland dam storage levels, viewed 6 March 2018,
http://www.seqwater.com.au/water-supply/dam-levels.

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Queensland Competition Authority Operating expenditure

Table 24 QCA’s recommended opex ($m, nominal)

2018–19 2019–20 2020–21 2021–28 Total

Base year fixed opex plus input cost 207.2 212.8 218.6 1,716.1 2,354.7
escalation

Adjustments/step changes 2.6 2.9 5.1 25.1 35.7

Continuing efficiency savings (fixed – (0.4) (0.7) (18.0) (19.1)

opex)

Fixed opex 209.8 215.4 222.9 1,723.2 2,371.3

Base year variable opex plus input 37.5 38.4 39.8 359.1 474.7
cost and growth escalation

Continuing efficiency savings – (0.1) (0.1) (3.5) (3.7)

(variable opex)

Variable opex 37.5 38.3 39.7 355.6 471.0

Total opex (inclusive of non-bulk 247.3 253.7 262.6 2,078.8 2,842.3

water costs)a

Revenue and cost offsets (19.1) (19.5) (20.0) (157.5) (216.1)

QCA recommended net opex 228.2 234.1 242.6 1,921.3 2,626.2

Seqwater’s proposed net opexa 230.6 239.2 249.2 2,046.3 2,765.3

Variance (2.4) (5.0) (6.5) (125.1) (139.1)

a Excludes costs associated with partial remobilisation of the WCRWS.

Note: Totals may not add due to rounding.
Sources: Seqwater pricing model 2017; Seqwater supplementary submission; QCA analysis.

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Queensland Competition Authority Capital expenditure

5 CAPITAL EXPENDITURE

Capital expenditure (capex) is expenditure to upgrade or replace an existing asset or invest in a

new asset. Capex may relate to a diverse program of capital works on a single asset (e.g. a
water treatment plant (WTP) upgrade or a dam safety upgrade) or a relatively uniform program
of capital works on a series of assets (e.g. a meter replacement program). Capex that we assess
to be prudent and efficient is included in Seqwater's regulatory asset base (RAB) and Seqwater
earns a return on the RAB as part of its building block costs.
The referral asks us to form a view on prudent and efficient capex (including costs associated
with catchment management, recreational management and flood mitigation). Specifically, we
are to review:
 actual capex (to the extent available) over the period 1 July 2014 to 30 June 2018, if it
exceeds capex we recommended in the 2015 review
 forecast capex over the period 1 July 2018 to 30 June 2028.
This chapter assesses the prudency and efficiency of Seqwater's capex. We engaged KPMG to
provide advice to assist with our assessment.
KPMG's assessment and recommendations are based on the as-incurred values. Given that we
only include capex in the RAB at the time of commissioning, the values presented in this section
are on an as-commissioned basis. These values are in nominal terms and include interest during
construction to the middle of the year of commissioning.

5.1 Seqwater's historical capital expenditure

Under the terms of the referral, we have been asked to review the prudency and efficiency of
actual capex for the period 1 July 2014 to 30 June 2018, if it exceeds capex we recommended in
the 2015 review. If actual capex is lower than capex we recommended in the 2015 review, we
will roll it into Seqwater's RAB on an as-commissioned basis, as is our standard practice.
Seqwater submitted that its actual capex for 2014–18 was $132.2 million77 lower than what the
QCA recommended in the 2015 review (Table 25).
Table 25 Seqwater's actual capex, 2014–18 ($m, nominal)a

2014–15 2015–16 2016–17 2017–18 Total

QCA recommendation 107.4 122.7 124.3 195.9 550.1

from 2015 review

Seqwater actual/budget 106.6 88.4 93.6 129.4b 418.0

Differencec (0.8) (34.2) (30.7) (66.5) (132.2)

a Capex is on an as-commissioned basis. b Figures are based on budget. c Totals may not add due to rounding.
Sources: QCA, SEQ bulk water price path 2015–18, final report, March 2015; Seqwater, sub. 2, p. 32; Seqwater
pricing model 2017; Seqwater supplementary submission.

As Seqwater has changed its approach to determining asset lives, involving a consolidation of
asset types, it is not possible to undertake a full comparison, by asset type, between capex

77
Seqwater provided an updated estimate for capex in 2017–18, as actual capex is not yet available.

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Queensland Competition Authority Capital expenditure

recommended by the QCA in the 2015 review and Seqwater's actual capex. Figure 5 shows that
Seqwater's capex savings were achieved mainly through an underspend on major dam safety
capex. Seqwater advised that it had deferred commissioning dates for a number of major dam
safety upgrades and improvement projects, including works at Lake MacDonald (now expected
to be commissioned in 2022), Sideling Creek (now expected to be commissioned in 2021) and
Ewen Maddock Dam (now expected to be commissioned in 2021).78 As a result, Seqwater stated
that it spent $111.6 million less on dam safety during the 2014–18 period than had been
recommended by the QCA.79
Figure 5 Seqwater's actual capex (dam safety and other capex) compared to QCA's
recommended capex from the 2015 review, 2014–18 ($m, nominal)

350.0

300.0

250.0

200.0

150.0

100.0

50.0

-
QCA recommendation from 2015 review Seqwater actual/budget

Dams Other

Note: Capex is on an as-commissioned basis.

Sources: QCA 2015; Seqwater pricing model 2017; Seqwater response to QCA RFI 10.

5.1.1 QCA assessment

In accordance with the referral, as Seqwater's actual capex is lower than we recommended in
the 2015 review over 2014–15 to 2017–18, we have not assessed it further and have updated
Seqwater's RAB to reflect actual capex (Chapter 6).80
Table 26 QCA recommended capex, 2014–18 ($m, nominal)a

2014–15 2015–16 2016–17 2017–18 Total

QCA recommendation 106.6 88.4 93.6 125.1b 413.7

a Capex is on an as-commissioned basis. b Updated for QCA modelling adjustments.

Sources: Seqwater, sub. 2, p. 32; Seqwater pricing model 2017; Seqwater supplementary submission; QCA
analysis.

78
Seqwater, sub. 2, p. 33.
79
Seqwater response to QCA RFI 10.
80
As actual capex is not available for 2017–18, Seqwater provided an updated estimate. We have updated the
RAB with this estimate.

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Queensland Competition Authority Capital expenditure

5.2 Seqwater's proposed capital expenditure for 2018–28

Under the terms of the referral, we have been asked to form a view on the prudency and
efficiency of Seqwater's proposed capex for the 2018–28 period and, in doing so, to:
 focus on cost areas that are material to price changes
 give consideration to demand forecasts, which are to be within the range published in the
WSP (see Chapter 3)
 accept the prudency of augmentations expected to be required under the WSP.

5.2.1 Seqwater’s submission

Seqwater initially proposed capex of $1,558.1 million over the period 2018–28, but
subsequently submitted a revised proposal for three projects which increased the overall claim
to $1,839.2 million.81 The biggest driver of the capex program is compliance, followed by
growth, as shown in Figure 6 below.
Figure 6 Seqwater's forecast capex by investment driver, 2018–28 ($m, nominal)

Compliance Growth Efficiency Renewal Improvement (Service)

Note: Capex is on an as-commissioned basis.

Sources: Seqwater pricing model 2017; Seqwater, sub. 13, pp. 22, 24, 26; Seqwater submitted that the revised
cost for the Somerset dam safety upgrade was $353 million but subsequently corrected this to $344 million.

By asset type, the largest category of capex is water treatment assets, followed by water
storage and other (which includes other infrastructure projects and non-infrastructure projects)
(Figure 7).

81
Seqwater, sub. 13, pp. 19–27. Seqwater submitted that the revised cost for Somerset dam safety upgrade
was $353 million, but subsequently corrected this to $344 million.

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Queensland Competition Authority Capital expenditure

Figure 7 Seqwater's forecast capex by asset type, 2018–28 ($m, nominal)

Water storage Water Transport Water Treatment Other

Note: Capex is on an as-commissioned basis.

Sources: Seqwater pricing model 2017; Seqwater, sub. 13, pp. 22, 24, 26; Seqwater submitted that the revised
cost for Somerset dam safety upgrade was $353 million but subsequently corrected this to $344 million.

The majority of expenditure that Seqwater expects to capitalise in the next regulatory period is
on water treatment assets. The majority of expenditure that Seqwater expects to capitalise
towards the end of the 10-year price path is on water storage and water transport assets
(Figure 8).
Figure 8 Seqwater's forecast capex by asset type and year of commissioning ($m, nominal)

450.0
400.0
350.0
300.0
250.0
200.0
150.0
100.0
50.0
-
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Water storage Water Transport Water Treatment Other

Note: Capex is on an as-commissioned basis.

Sources: Seqwater pricing model 2017; Seqwater, sub. 13, pp. 22, 24, 26; Seqwater submitted that the revised
cost for Somerset dam safety upgrade was $353 million but subsequently corrected this to $344 million.

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Queensland Competition Authority Capital expenditure

5.2.2 QCA assessment

We have assessed the prudency and efficiency of Seqwater's proposed capex for the 2018–28
period. We consider capex to be prudent if the expenditure can be justified by reference to an
identified need or cost driver, such as a legal or regulatory obligation. We consider capex to be
efficient if it is the least cost option to deliver on an appropriately defined scope and standard
of works.
We engaged KPMG to provide advice to assist with our assessment. KPMG's assessment
involved:
 reviewing Seqwater's governance, capital planning and asset management frameworks
 undertaking detailed project reviews against Seqwater's key drivers and obligations
(including the range of alternatives considered and efficiency of proposed cost estimates)
 identifying any systemic issues from the project reviews and drawing on the assessment of
Seqwater's governance, capital planning and asset management frameworks
 assessing trade-offs between capex and opex.

Adequacy of Seqwater's governance, capital planning and asset management

frameworks
KPMG reviewed Seqwater's corporate governance arrangements for capital expenditure and
delivery to determine whether there were any systemic issues. In assessing corporate
governance, KPMG applied the ISO 55001 international standard and specifically considered
Seqwater's risk management, compliance, investment governance and procurement processes.
KPMG noted that Seqwater had made progress in its corporate governance arrangements since
the last review and noted that the overarching corporate governance and procurement
procedures are now, in large part, designed to be fit for purpose with ongoing improvements in
embedding these procedures.
Overall, KPMG considered Seqwater's corporate governance and procurement framework to be
one that provides an effective approach to managing key asset and investment risks and
compliance obligations, but identified some potential improvements in a few areas (Box 1).82
KPMG considered that, overall, Seqwater's capital planning framework is commendable and
consistent with its legislative requirements and good industry practice, but identified a number
of areas in asset management where Seqwater could make improvements (Box 1).83

82
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 50.
83
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 65–7.

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Queensland Competition Authority Capital expenditure

Box 1: Potential improvements to governance, capital planning and asset

management frameworks
Governance arrangements
Seqwater should consider improvements by:
(a) using data driven metrics from condition and performance assessments to help
predict the likelihood and consequence of asset failure and better prioritise
investments
(b) including additional procedures to its investment gateway process to minimise the
risk of projects passing through gateways without appropriate documentation,
review or completion of necessary approvals
(c) automating low value spend (i.e. below $5,000) to free up resources to monitor
larger projects with significantly higher spend.

Capital planning and asset management frameworks

Seqwater should consider improvements to asset management by:
(a) ensuring that the asset management system includes relevant resourcing
requirements
(b) ensuring that the selection and prioritisation of work in the asset portfolio master
plan is based on criteria that have been agreed with customers
(c) formalising the asset management policy and communicating it widely through the
organisation
(d) ensuring that key performance indicators are informed by asset management
objectives
(e) ensuring that the strategic asset management plan evolves to focus on setting a
direction for asset management and providing a roadmap for future improvements
(f) finalising asset class plans to gain a clearer view of lifecycle activities
(g) prioritising the testing and implementation of a renewals support tool to increase
analytical capability.

Recommended adjustments to forecast capex program

KPMG undertook its review of prudency and efficiency of the forecast capex program in two
steps. In the first step, KPMG undertook a detailed review of a sample of capex projects. In the
second step, KPMG applied its findings from the sampled projects to the broader capex
program where it considered that it had found systemic issues in its assessment of the sampled
projects.
KPMG's review was also informed by its assessment of the substitution possibilities between
capex and opex.
Recommended adjustments to reviewed capex sample
KPMG selected a sample of 12 capex projects (including the largest projects by value) for
detailed analysis. This sample represents 48 per cent of the as-commissioned value of

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Queensland Competition Authority Capital expenditure

Seqwater's proposed capex and includes a representative mix of capex by driver and asset type
(Table 27).
Table 27 Capital expenditure sample reviewed by KPMG ($m, nominal)

Project Primary driver Year of As-incurred cost As-commissioned

commissioninga cost

Beaudesert pipes upgrade Growth 2023b 128.3b 195.1b

Mount Crosby East Bank WTP Compliance 2021 30.4 35.6

filtration upgrade

Mount Crosby East Bank WTP Growth 2021 32.7 33.7

sedimentation upgrade

North Pine WTP filtration Growth 2025 45.1 46.7

capacity upgrade (250 ML/day)

Enterprise Resource Planning Efficiency Ongoing 33.7b 33.7b

Program

Holts Hill Reservoir pH Improvement 2021 8.9 9.3

correction upgrade (Service)

Somerset Dam safety upgrade Compliance 2026b 285.5b 343.7b,c

Lake MacDonald Dam upgrade Compliance 2022 82.9 95.7

stage 2

Leslie Harrison Dam upgrade Compliance 2021 23.9 29.6

stage 1

Mobile plant and fleet renewals Renewal Ongoing 19.3 19.3

Mudgeeraba WTP long term Renewal Ongoing 21.2 21.2

renewals

Mount Crosby East Bank water Renewal Ongoing 24.8 24.8

pump station (WPS) long term
renewals

Total sampled capex 736.5b 888.3b

Total proposed capex 1,598.2b 1,839.2b

Sample as a proportion of total 46.1 48.3

(per cent)

a Ongoing capex relates mainly to renewal expenditure and is capitalised into the RAB as it is incurred. b
Reflects Seqwater's revised proposal, which was submitted in response to the draft report. c Seqwater submitted
that the revised cost for Somerset dam safety upgrade was $353 million but subsequently corrected this to $344
million.
Note: Totals may not add due to rounding
Source: KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 94.

In assessing prudency, KPMG considered, among other things:84

 the level of documentation of key expenditure drivers

84
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 72.

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Queensland Competition Authority Capital expenditure

 evidence documenting the problem to be addressed and the approach to addressing the
problem
 demonstration of the appropriateness of proposed project timing, including commencement
and completion dates.
In assessing efficiency, KPMG considered factors such as whether:85
 the scope of works reflects the most appropriate means of resolving the need identified
 the standard of works complies with relevant legislative, regulatory and industry obligations,
standards and codes for design and construction and the works are compatible with existing
infrastructure and take account of modern engineering options and technology
 the cost of the proposed solution represents the least overall cost to deliver the works
consistent with conditions in relevant input markets.
In the draft report, we relied on KPMG's assessment that, while the prudency of all but one
project had been demonstrated, it was not possible to verify the efficiency of projects that were
at an early stage in Seqwater's investment gateway process (typically between gateway 0 and
gateway 2) as there was insufficient supporting information available. Where Seqwater had not
adequately demonstrated the efficiency of a project, we accepted KPMG's recommendation to
remove the proposed expenditure associated with that project. We did not consider it
appropriate to accept projects into the RAB that lacked robust justification to demonstrate
efficiency.
In response to the draft report, Seqwater did not agree that the total cost of projects found to
be prudent should be removed when the QCA judges that there is insufficient information to
demonstrate efficiency.86 Seqwater said that this approach:87
 could create uncertainty about the future regulatory treatment of the expenditure, which
could affect investment decisions
 could introduce price shocks once the projects are included in the RAB
 could incentivise Seqwater to prepare fully completed and scoped business cases to fit with
regulatory cycles, rather than follow good asset management practice
 is inconsistent with the QCA's regulatory pricing principles (relating to cost reflective and
forward looking prices, and revenue adequacy and promotion of sustainable investment)
 is inconsistent with the QCA's prior approach and the approach in other jurisdictions.
Seqwater submitted that the QCA should either include a reasonable proportion of project costs
in prices where the project is not fully scoped, costed or internally approved; or set the
reasonable estimate of costs as the lower-end of the range implied by the accuracy of the
proposed costs (e.g. if the proposed cost has an accuracy of plus or minus 30 per cent, then the
QCA could apply 70 per cent of the proposed cost).
We consider that capex should be allowed into the RAB if it is demonstrated to be prudent and
efficient. The last two referrals from the Government have included a provision for an ex post
assessment of the prudency and efficiency of capex and we recommend that the QCA should

85
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 72.
86
Seqwater, sub. 13, p. 19.
87
Seqwater, sub. 13, p. 28, pp. 43-6.

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Queensland Competition Authority Capital expenditure

have the discretion to undertake ex post assessments of capex in future reviews (see Chapter
10). This approach mitigates the risk to Seqwater of differences between forecast and actual
capex, because it recognises that forecasting capex over a long time horizon is difficult,
particularly where the program contains several large and complex projects. The approach also
provides incentives for Seqwater to make efficient investment decisions, because it provides a
mechanism for capex to enter the RAB if it is assessed as efficient.
We do not consider that our approach, when applied to sampled projects, will introduce price
shocks once the projects are included in the RAB. We note that deferring the inclusion of
individual projects in the RAB by three years will have very little impact on prices as these
projects have long asset lives, with some due to be included in the RAB towards the end of the
price path period.
Contrary to Seqwater's submission, we consider that our approach incentivises Seqwater to
only include projects in its regulatory submission that have sufficient detail on options analysis,
scope and standard of works to enable a reasonable assessment of efficient costs. However, if
the QCA does not provide an ex ante allowance for a project because the efficiency of that
project has not been demonstrated, this should not be interpreted to mean that the QCA does
not approve the project or considers the project should not proceed.
As noted by KPMG, the approach is also consistent with that adopted by other Australian
regulators. For example, in Victoria, the ESC has stated that, where capital projects are not fully
scoped, costed or internally approved, it would consider a number of options for mitigating
construction and capital forecasting risk, including applying an 'uncertain or unforeseen event'
mechanism whereby the actual project costs are passed through to prices at the end of the
period.88 The ESC also considers options that involve including some portion of project costs
(such as project development costs) in the RAB.89 However, as noted by KPMG, the ESC adds
capex to the RAB as it is incurred which makes it reasonable to include a forecast of project
development costs, expected to be incurred in a given year, in the RAB. In contrast, we add
capex to the RAB in the year of commissioning. This requires us to form a holistic view of the
efficient 'as commissioned' cost of a project, rather than including a portion of project costs in
the RAB.
Contrary to Seqwater's submission, our approach is not novel to this review. For example, in the
2015 review, we recommended adjustments to five of 10 projects reviewed by our consultant,
CH2M Hill. For some of these projects, such as Mount Crosby to Greenhill Pipeline, we excluded
the entire expenditure at the draft report stage, as recommended by CH2M Hill, on the basis
that insufficient evidence was provided to support the proposed cost estimate. For the Mount
Crosby to Greenhill Pipeline project, Seqwater subsequently provided additional information on
two minor sub-projects which CH2M Hill assessed to be prudent and efficient and which we
then included in the RAB for the purposes of our final report.90
For our 2015 price monitoring investigation of Gladstone Area Water Board (GAWB), our
consultant, Jacobs, sampled GAWB's capex program to assess prudency and efficiency and, in all
cases where Jacobs found a project to be prudent and efficient, a preferred option had been
identified. In one instance, the project was at a relatively early stage. However, a preferred
option had been identified and the associated works had been appropriately scoped. In that

88
ESC, 2018 Water Price Review: Guidance paper, November 2016, p. 35.
89
ESC, 2018 Water Price Review: Guidance paper, November 2016, p. 35.
90
CH2M Hill, Seqwater: Operating and Capital Expenditure Review, Assessment of Prudency and Efficiency,
March 2015.

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Queensland Competition Authority Capital expenditure

case Jacobs assessed the independent cost estimate developed for the works to be appropriate
for the phase of the project as Jacobs anticipated that the standard of works would likely be
consistent with good industry practice.91 We agree that, where possible, reasonable cost
estimates of prudent capex should be included in the RAB. However, where project
development is at such an early stage that a preferred option is yet to be identified, we consider
that deferring the inclusion of project costs in the RAB is appropriate.
We note that three of the projects assessed by KPMG for this review were previously assessed
to be efficient in the 2015 review. These are safety upgrades at Somerset, Leslie Harrison and
Lake Macdonald dams. It is instructive to note that we have revised our efficient cost estimate
by much more for projects that were at a relatively early stage in the investment lifecycle at the
time of the 2015 review (Somerset Dam safety upgrade and Leslie Harrison Dam safety
upgrade). For example, we have reduced our estimate of the efficient cost of the Leslie Harrison
Dam safety upgrade, which was at the conceptual options assessment stage (or Gate 1) of
Seqwater's then System Master Planning process, by more than 250 per cent between the 2015
review and this review. Conversely, our estimate of the efficient cost of Lake Macdonald Dam
Safety upgrade, which was at the validation, planning and investment committee stage (or Gate
3) with an approved business case, has increased by around 20 percent mainly because of an
updated geotechnical study. This highlights the significantly greater cost uncertainty associated
with projects at a relatively early stage of the investment gateway process.
For these reasons, we consider it appropriate to exclude costs from the RAB where there is
insufficient documentation to substantiate efficiency.
In response to the draft report, Seqwater submitted additional information to demonstrate the
efficiency of the Somerset Dam safety upgrade, Beaudesert pipes upgrade and the Enterprise
Resource Planning program.92 In light of this information, we have revised our findings for these
projects. However, we have maintained our findings for other projects.
We have explained our adjustments to sampled capex (which considers this new information)
and our final recommendation in Table 28.
Table 28 QCA's recommended adjustments to the value of sampled capex projects ($m,
nominal)

Project Assessment Assessment of Adjustment Comments

of prudency efficiency

Beaudesert Prudent Mostly (52.4) Seqwater has identified a growth driver

pipes upgrade efficient for this project making it prudent.
The project consists of three sub projects,
to be undertaken within the price path
period, including a new storage plant at
Beaudesert, a pipeline from Beaudesert to
Logan City Council's network and the first
stage of an upgrade to the Wyaralong
WTP.
These projects are all appropriately
scoped and the standard of proposed
works is appropriate. Seqwater has
generally demonstrated the robustness of
its cost estimates except for assumptions

91
QCA, Gladstone Area Water Board Price Monitoring 2015–2020, May 2015, p. 37.
92
Seqwater, sub. 13, pp. 20-7.

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Queensland Competition Authority Capital expenditure

Project Assessment Assessment of Adjustment Comments

of prudency efficiency
regarding contingency allowances and
indirect costs.

Mount Crosby Prudent Efficient – Seqwater demonstrated the need to

East Bank WTP address compliance obligations and
filtration growth. Seqwater provided robust
upgrade supporting documentation around the
scope, standard and cost of the proposed
works.

Mount Crosby Prudent Efficiency not (33.7) Seqwater has established an appropriate
East Bank WTP demonstrated growth and compliance driver for this
sedimentation project. However, the project scope is yet
upgrade to be fully established, the standard of
works is dependent on the completion of
a full options assessment and there is
significant uncertainty around the
ultimate project costs. KPMG advised it
would be expected that a project that is
due to commence within the regulatory
period would have a greater degree of
certainty around the scope, standard and
cost of works.

North Pine WTP Prudent Efficiency not (46.7) The project is prudent, as the WSP
filtration demonstrated requires the capacity of the plant to be
capacity increased to meet growing local and
upgrade regional demand. However, the project
scope is yet to be fully established, the
standard of works is dependent on the
completion of future design work and the
cost of the project will be dependent on
the preferred option selected.

Enterprise Prudent Mostly (12.3) The project is prudent as Seqwater has

Resource efficient demonstrated the need to replace a failing
Planning platform that is close to reaching the
Program expiry of the associated contract.
Seqwater is undertaking a rigorous,
market led process to develop an
appropriate technology solution and
scope of works.
While Seqwater has clearly detailed the
basis of its cost estimates and applied
appropriate levels of contingency, it has
made some errors in referencing costs
from the business case and converting
nominal values into real values.
We do not consider Seqwater has
demonstrated the efficiency of its
proposed renewal expenditure for the
new technology because a new
technology would not be expected to
require significant renewal expenditure
immediately after the investment.

Holts Hill Prudent Efficiency not (9.3) Seqwater has identified an appropriate
Reservoir pH demonstrated driver and provided sufficient evidence to
correction justify the proposed works. However,
upgrade further work is required to determine the

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Queensland Competition Authority Capital expenditure

Project Assessment Assessment of Adjustment Comments

of prudency efficiency
appropriate scope, standard and cost of
works. KPMG advised it would expect a
project that is due to commence within
the regulatory period to have a greater
degree of certainty around the scope,
standard and cost of works.

Somerset Dam Prudent Mostly (72.2) Seqwater has identified an appropriate

safety upgrade efficient driver and provided sufficient evidence to
justify the proposed works.
While Seqwater has a preferred option for
delivering the project, it is progressing
four alternatives, along with the preferred
option, as they are similar in scope and
one of them could potentially replace the
currently preferred option in the event
that it proves unfeasible.
Seqwater has established a robust scope
of works for each of the options to
support a more detailed assessment and
has demonstrated that the required
standard of works has been implemented
in the design process.
Seqwater has generally demonstrated the
robustness of its cost estimates except for
some unit rates and assumptions
regarding contingency allowances.

Lake MacDonald Prudent Efficient – Seqwater has demonstrated a need for

Dam upgrade the project (which is to address a
stage 2 compliance obligation). Seqwater
provided robust supporting
documentation around the scope,
standard and cost of the proposed works.

Leslie Harrison Prudent Efficient – Seqwater has demonstrated a need for

Dam upgrade the project (which is to address a
stage 1 compliance obligation). Seqwater
provided robust supporting
documentation around the scope,
standard and cost of the proposed works.

Mobile plant Prudent Efficient – Seqwater has established the prudency of

and fleet replacing the vehicle fleet consistent with
renewals its replacement policies. Seqwater
provided robust supporting
documentation around the scope,
standard and cost of the proposed
renewal program.

Mudgeeraba Prudent Efficient – Seqwater has established the prudency of

WTP long term the renewal program and provided robust
renewals supporting documentation around the
scope, standard and cost of the proposed
works.

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Queensland Competition Authority Capital expenditure

Mount Crosby Prudent Efficient – Seqwater has established the prudency of

East Bank WPS the renewal program and provided robust
long term supporting documentation around the
renewals scope, standard and cost of the proposed
works.

Total (226.7)

Note: Capex is on an as-commissioned basis. Total may not add due to rounding
Sources: QCA analysis; KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated
report for the QCA, March 2018, pp. 93–174.

Based on this assessment, we have revised sampled capex as summarised in Table 29.
Table 29 QCA's recommended capex for sampled capex projects, 2018–28 ($m, nominal)

Project Seqwater's proposal QCA adjustment QCA recommended

Beaudesert pipes upgrade 195.1a (52.4) 142.7

Mount Crosby East Bank WTP 35.6 – 35.6

filtration upgrade

Mount Crosby East bank WTP 33.7 (33.7) –

sedimentation upgrade

North Pine WTP filtration 46.7 (46.7) –

capacity upgrade (250 ML/day)

Enterprise Resource Planning 33.7a (12.3) 21.3

Program

Holts Hill Reservoir pH correction 9.3 (9.3) –

upgrade

Somerset Dam safety upgrade 343.7a (72.2) 271.5

Lake MacDonald Dam upgrade 95.7 – 95.7

stage 2

Leslie Harrison Dam upgrade 29.6 – 29.6

stage 1

Mobile plant and fleet renewals 19.3 – 19.3

Mudgeeraba WTP long term 21.2 – 21.2

renewals

Mount Crosby East Bank WPS 24.8 – 24.8

long term renewals

Total 888.3 (226.7) 661.6

a Reflects Seqwater's revised proposal, which was submitted in response to the draft report.
Notes: Capex is on an as-commissioned basis. Totals may not add due to rounding.
Source: QCA analysis.

Recommended adjustments to the broader capital expenditure program

KPMG assessed the potential for systemic issues in the broader capex program based on its
review of sampled capex and Seqwater's corporate governance arrangements, and capital
planning and asset management practices.

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Queensland Competition Authority Capital expenditure

For the draft report, we relied on KPMG's advice that, while it had not identified any systemic
issues with the development of Seqwater's renewals program, its sample assessment had raised
an issue related to capital planning—namely the early gateway status of some projects. KPMG
advised that its review of sampled projects showed a fairly clear correlation between the
gateway status of a project and the likelihood of it being assessed to be efficient, with efficiency
not demonstrated for all projects at the early stage of the gateway process (gateway 0, 1 or 2).
KPMG's assessment was that this correlation was due to these early stages involving a wider
range of options with cost estimates at a higher level and with a greater degree of uncertainty
compared to later stages.
On the basis of this assessment, KPMG advised that it was likely that a large number of capital
projects in the 10-year price path period would fail the efficiency test primarily due to lack of
supporting documentation. However, rather than removing all projects of this type from the
broader capex program, as with the sampled projects, KPMG stated that it had also taken
project commencement into account. Specifically, KPMG said that, from a capital planning
perspective, it would expect projects commencing in the next three years to have a robust level
of supporting documentation to demonstrate efficiency while this would be unreasonable to
expect for projects commencing further out.93
Based on this assessment, KPMG recommended a systemic adjustment to the broader capex
program to remove costs of non-renewal projects that are at an early stage in the gateway
process (i.e. gateway 0, 1 or 2) and expected to commence within the next regulatory period.
We noted KPMG's advice that it may be unreasonable to expect full documentation to
demonstrate efficiency for projects commencing more than three years in advance, but also
noted that the referral asks the QCA to assess the prudency and efficiency of capex over a 10-
year period.
We considered that, given KPMG's advice of a fairly clear correlation between the gateway
stage of a sampled project and the likelihood that the efficiency of the project can be
demonstrated, there could be an argument to remove the costs of all non-renewal projects
between gateways 0 and 2 over the 10-year period. However, as we also considered there was
some uncertainty as to whether this correlation could be fully extrapolated to the broader
capex program, we chose to adopt a more conservative approach by focussing on the capex
program expected to be delivered in the next regulatory period. Consequently, for the purposes
of the draft report, we only removed the costs of non-renewal projects that were at an early
stage in the gateway process (i.e. gateway 0, 1 or 2) and expected to be commissioned within
the next regulatory period. This amounted to $168.1 million on an as commissioned basis.
As with sampled capex, Seqwater submitted that it did not agree with the general
methodological approach of removing the total cost of projects (in this case un-sampled, non-
renewal projects between gateways 0 and 2 to be commissioned by 2021) when the QCA judges
that there is likely to be insufficient information to demonstrate efficiency.94 However, as
discussed above in relation to sampled capex, we maintain our view that it is appropriate to
remove projects from the capex program where efficiency is unlikely to be demonstrated.

93
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, report for the QCA, November
2017, p. 137.
94
Seqwater, sub. 13, pp. 43–45.

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Queensland Competition Authority Capital expenditure

Seqwater also raised a number of specific issues with our assessment which we address in
turn.95
Seqwater submitted that, in practice, the most efficient option for delivering a project is
determined within gateway 2 and that, of the gateway 2 projects that we removed from non-
sampled capex, $31 million (or 80%) worth of projects had a preferred option.
KPMG tested this claim by assessing updated information on sampled projects at gateway 2
with a preferred option and, on this basis, advised that Seqwater has demonstrated that
projects within gateway 2, with a preferred option, tend to have sufficient documentation to
justify the scope and standard of works. However, KPMG advised that while these projects tend
to have a robust cost build up, assumptions about contingency allowances and indirect costs are
not consistent with industry standards and thus the associated costs should be adjusted to
reflect appropriate allowances. We accept KPMG's recommendation to reinstate projects at
gateway 2 with a preferred option, subject to making adjustments for contingency allowances
and indirect costs, which KPMG advised tended to be overstated by 18 per cent in the sample of
projects it reviewed.96
Seqwater also stated that some projects at gateways 0, 1 and 2 that we removed from non-
sampled capex have since either progressed to gateway 2 with a preferred option (in the case of
projects initially at gateways 0 and 1) or progressed beyond gateway 2.
As we have not received any revisions in cost associated with the progression of these projects
through the gateway process, we have not made any adjustments to account for progression
through the gateway process.
Seqwater also submitted that some projects at gateways 0 and 1, such as capital works on
natural assets or involving technology (e.g. control systems) and works on the Mount Crosby
flood resilience program, are akin to renewals and should be reinstated in the capex program,
because KPMG had not identified any systemic issues with Seqwater's renewals program.
KPMG assessed this information and concluded that Seqwater had demonstrated that natural
assets and 75 per cent of control system assets are similar to renewal projects and should be
reinstated on the basis that KPMG had not identified any systemic issues with Seqwater's
renewals program. However, KPMG found that Seqwater had not demonstrated that the Mount
Crosby flood resilience program reflected an asset renewals program and recommended that
we treat this program as non-renewal expenditure.97 We accept these recommendations.
We have adjusted Seqwater's proposed capex as summarised in Table 30. We maintain our
position in the draft report that it is appropriate to adopt a conservative approach by continuing
to limit adjustments to the un-sampled capex program expected to be commissioned in the
next regulatory period.

95
Seqwater, sub. 13, pp. 31–8.
96
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, p. 184.
97
KPMG, Seqwater expenditure review: Prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 182–3.

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Queensland Competition Authority Capital expenditure

Table 30 QCA's recommended capex for the remainder of the capex program, 2018–28 ($m,
nominal)a

2018–28

Seqwater's proposalb 950.9

less non-renewal projectsc at gateways 0 and 1 over the 2018–21 regulatory period 106.9

less non-renewal projectsc at gateway 2, without a preferred option identified, over 9.6
the 2018–21 regulatory periodd

QCA's recommendation 834.4

a Capex is on an as-commissioned basis. b Exclusive of projects sampled by KPMG. c Non-renewal projects are
exclusive of natural assets and 75 per cent of MCS assets. d Includes an adjustment to contingency allowances
and indirect costs for non-renewal projects at gateway 2 with a preferred option identified.
Source: QCA analysis.

Substitution possibilities between capex and opex

KPMG reviewed Seqwater's asset management processes and sought evidence that Seqwater
had assessed all options, including non-infrastructure solutions, when assessing the prudency of
Seqwater's proposed capex program. KPMG did not identify any deficiencies in Seqwater's
processes.
Overall assessment of forecast capex program
Our recommended adjustments result in an allowance of $129 million (December 2017 dollars)
per year (on average) over the forecast period (see Table 32 below).98 This is higher than
Seqwater's historical capex in recent years, which averaged around $106 million (December
2017 dollars) per year over 2014-18. While comparisons of average capex over different periods
need to be undertaken with care, given the general lumpiness of capex, we consider Seqwater's
capex allowance over the forecast period provides a reasonable ex ante allowance.
As noted above, we consider it appropriate to undertake ex post assessments of capex in future
reviews. This mitigates the risk to Seqwater of differences between forecast and actual capex,
while incentivising Seqwater to make efficient investment decisions, because it provides a
mechanism for capex to enter the RAB if it is assessed to be prudent and efficient.

Cost escalation factor for capex

As in the 2015 review, Seqwater has forecast its capex program in real terms (i.e. December
2016 dollars) and then, for the purposes of price modelling, converted these forecasts into
nominal dollars using a capex escalator.
Seqwater applied the RBA's short-term inflation forecast as the escalation factor for 2016-18 as
data on the growth in the Queensland engineering construction activity implicit price deflator,
which we accepted in the last review, is only available to 2015–16. We accept this approach.
However, we have updated the 2016-17 escalator for actual inflation and the 2017-18 escalator
for the RBA's most recent short-term inflation forecast.99
Seqwater applied the midpoint of the RBA's inflation target range (2.5 per cent) as the capex
escalator for 2018–28. This is consistent with the capex escalator that we accepted in the 2015

98
We have expressed the recommended allowance in real terms to facilitate comparison with Seqwater's
historical capex.
99
ABS, Consumer Price Index, Australia, September 2017, Table 1: All Groups Index Numbers and Percentage
Changes, cat. No. 6401.0; RBA, Statement on Monetary Policy, February 2018, p. 63.

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Queensland Competition Authority Capital expenditure

review. Consistent with this previous practice, the QCA accepts this approach. However, we
have updated the capex escalators for 2018-19 and 2019-20 with the RBA's most recent short-
term inflation forecasts of 2.25 per cent for each year.100

Interest during construction

Seqwater has included an allowance for interest during construction (IDC) for multi-year capex
projects. For capex over the period 2018–28, Seqwater has calculated IDC using its proposed
WACC. The QCA considers that the WACC is an appropriate discount rate to apply for IDC and
has applied the WACC as determined in Chapter 7.

Allocation of assets to declared irrigation services

Seqwater allocated capex expected to be commissioned over the period 2018–28 between
declared irrigation services and urban bulk water services using various allocation methods for
the tariff groups in its irrigation schemes as shown in Table 31.
Table 31 Recommended (non-metering) bulk renewal cost allocation (%)

Tariff group Methoda Allocation to irrigation

customers

Cedar Pocket Dam None required—MP only 100

Central Brisbane River Adjusted ratio of MP to HP 1.6

Central Lockyer Valley Share of nominal WAE 98.9

Logan River HUF 16

Lower Lockyer Valley None required—MP only 100

Mary Valley HUF 26

Warrill Valley HUF 11

a MP refers to medium priority entitlement holders (i.e. irrigation customers), HP refers to high priority
entitlement holders (i.e. urban bulk water customers), WAE refers to water access entitlement, and HUF refers to
headworks utilisation factor.
Source: Adapted from QCA, Seqwater Irrigation Price Review 2013–17, final report, Volume 1, April 2013, p. 149.

This is consistent with our recommended approach and the allocation factors used in the 2013
irrigation price review. It is therefore consistent with the terms of the referral and we have
accepted this approach.

Summary
Our recommended capex for 2018–28 is summarised in Table 32.
Relative to our draft report, we have increased the capex allowance by $472 million, or 47 per
cent, to reflect further information provided by Seqwater to substantiate the efficiency of three
of the sampled projects and a portion of the non-sampled projects.

100
RBA, Statement on Monetary Policy, February 2018, p. 63.

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Table 32 QCA's recommended capex for 2018–28 ($m, nominal)a

2018–19 2019–20 2020–21 2021–28 Total

Seqwater's proposed capex 126.1 128.8 274.0 1,310.3 1,839.2

QCA adjustment to (0.5) (0.4) (43.6) (182.2) (226.7)

sampled projectsb

QCA adjustment to (14.6) (40.9) (61.0) – (116.5)

remainder of the capex
program

QCA modelling (0.8) (0.5) (1.0) (14.3) (16.5)

adjustmentsc

QCA recommendation 110.2 87.0 168.4 1,113.9 1,479.5

a Capex is on an as-commissioned basis. b Includes adjustment for capex that has subsequently been reclassified
as opex (see Chapter 4). c Adjustments for QCA modelling correction, updated CPI forecasts and the application
of our recommended WACC.
Note: Totals may not add due to rounding
Source: QCA analysis.

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Queensland Competition Authority Regulatory asset base

6 REGULATORY ASSET BASE

The regulatory asset base (RAB) represents the value of assets. It is used for the purpose of
determining the return on assets, a component of building block costs. The value of the RAB
changes over time to reflect additions for capital expenditure and asset appreciation
(inflationary gain), and deductions for depreciation.
This chapter shows how we have calculated the opening value of the RAB at 1 July 2018 by
applying the approach specified in the referral. We have then calculated the value of the RAB in
each subsequent year to 2027–28.

6.1 Opening value of the RAB at 1 July 2018

Consistent with the referral, we established the opening value of the RAB at 1 July 2018, by:
 starting with the value of the RAB at 1 July 2014, not optimising this value and accepting the
remaining asset lives used in our 2015 review
 rolling forward the RAB to 30 June 2018 to reflect the following adjustments:
 adding actual capital expenditure (adjusted for the findings of an ex post assessment, if
required)
 calculating asset appreciation (which we refer to as inflationary gain) using actual
inflation
 calculating depreciation using actual inflation over the period and applying the straight-
line depreciation method.
The value of the RAB as at 1 July 2014 is $8,439 million.101 We have calculated the RAB in each
year to 1 July 2018 by adding capital expenditure and an inflationary gain, and deducting for
depreciation.

6.1.1 Capital expenditure

Consistent with the referral, we have used Seqwater's actual capital expenditure for 2014–15,
2015–16 and 2016–17, and estimated capital expenditure for 2017–18 (Chapter 5).

6.1.2 Inflationary gain

Consistent with standard QCA practice, we index the RAB each year by the inflation rate.
However, as we apply a nominal rate of return on assets, we make an adjustment to building
block costs to deduct an amount equivalent to the inflationary gain in the RAB value.102 This
avoids the double counting of inflation that would otherwise occur from indexing the RAB by
inflation and applying a nominal rate of return on assets (Chapter 7, section 7.2.1).103

101
QCA, SEQ bulk water price path 2015–18, final report, March 2015, p. 40.
102
The inflationary gain added to the RAB is reported in end-of-year values, while the inflationary gain
component deducted from building block costs will be reduced by a cash flow adjustment to reflect mid-year
values.
103
QCA, Financial Capital Maintenance and Price Smoothing, information paper, February 2014, p. 12,
http://www.qca.org.au/getattachment/ba6b1a87-d2b5-4941-b5d4-6736fb4c1d43/Financial-Capital-
Maintenance-and-Price-Smoothing.aspx.

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Queensland Competition Authority Regulatory asset base

As requested in the referral, we have indexed the RAB by applying actual inflation for 2015–16
and 2016–17 and forecast inflation for 2017–18 (Table 33).
Table 33 Inflation rates (%)

2014–15 2015–16 2016–17 2017–18

actual actual forecast/actuala forecastb

Seqwater proposal 1.51 1.49 2.00 2.00

QCA recommendation 1.51 1.49 1.83 2.00

a Actual inflation for 2016–17 of 1.83 percent became available after Seqwater's initial submission. Actual
inflation for 2014–15 to 2016–17 is based on Brisbane All Groups CPI index published by the ABS. b Seqwater's
proposed 2017–18 inflation forecast is based on the mid-point of the RBA's short-term forecast in the February
2017 Statement on Monetary Policy. We note the RBA's short-term forecast in the February 2018 Statement on
Monetary Policy is 2 per cent, requiring no change to Seqwater's forecast inflation rate.
Sources: Seqwater, sub. 2, p. 9; ABS, Consumer Price Index, Australia, September 2017, Table 1: All Groups, Index
Numbers and Percentage Changes, cat. no. 6401.0; RBA, Statement on Monetary Policy, February 2018, p. 63.

6.1.3 Depreciation
An allowance for depreciation is a component of building block costs that is also used to
calculate the value of the RAB.104 An allowance for depreciation allows Seqwater to recover the
cost of prudent and efficient capital investments over the useful life of the assets.
Depreciation—for any given year—is a function of the opening RAB, the amount of capital
expenditure added, inflationary gain and asset lives. Consistent with the referral, we have
accepted the remaining lives of assets that entered the RAB before 1 July 2014 and calculated
depreciation using the straight-line method. We have accepted Seqwater's proposed asset lives
for assets entering the RAB from 2014–15 to 2017–18, which are based on capital expenditure
as commissioned (or forecast, in the case of 2017–18).

6.1.4 Asset disposals

In its submission, Seqwater noted that it had received proceeds from the sale of assets over the
three years to 2016–17.105 While we would generally make an adjustment to the RAB to remove
the value of the disposed assets, Seqwater proposed deducting these costs from building block
costs, given it was not able to identify the individual assets in the RAB.106 Because the costs are
immaterial and Seqwater could not identify the individual assets in the RAB, we have made an
adjustment to building block costs (see Chapter 8, section 8.1.1).

6.1.5 Summary
A summary of our calculation of the RAB over the period 1 July 2014 to 30 June 2018 is provided
in Table 34. The closing value of the RAB as at 30 June 2018 is $8,523.4 million and this becomes
the opening value of the RAB at 1 July 2018.

104
Similar to inflationary gain, the depreciation allowance included in building block costs is reduced by a mid-
year cash flow adjustment.
105
Seqwater, sub. 1, p. 54.
106
Seqwater response to QCA RFI 4.

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Queensland Competition Authority Regulatory asset base

Table 34 RAB roll-forward to 30 June 2018 ($m, nominal)

2014–15 2015–16 2016–17 2017–18

Opening RAB 8,439.1 8,456.1 8,447.4 8,465.7

plus capital expenditure 106.6 88.4 93.6 125.1

plus inflationary gain 128.4 126.6 155.8 170.6

less depreciation 218.1 223.7 231.2 237.9

Closing RAB 8,456.1 8,447.4 8,465.7 8,523.4

Notes: Capital expenditure, inflationary gain and depreciation for 2017–18 are forecasts only. All values are
reported as end-of-year values. Totals may not add due to rounding.
Source: QCA calculations.

6.2 RAB roll-forward from 1 July 2018

In this section we explain how we have calculated the value of the RAB in each year from 1 July
2018 to 30 June 2028. We start with the opening value of the RAB as at 1 July 2018 and then
roll-forward the RAB by:
 adding capital expenditure we have assessed to be prudent and efficient
 indexing the RAB for forecast inflation (inflationary gain)
 deducting depreciation.
This section focuses on the RAB roll-forward for the three-year period from 1 July 2018 to 30
June 2021, with a summary of the RAB roll-forward calculations for the period 1 July 2018 to 30
June 2028 provided in Table 38.

6.2.1 Capital expenditure

Capital expenditure that we assess to be prudent and efficient is added to the RAB in the year
the project in commissioned (Chapter 5). The capital expenditure that we recommend adding to
the RAB is provided in the RAB roll-forward table (Table 38).

6.2.2 Inflationary gain

As explained in section 6.1.2, we index the RAB each year by the inflation rate. This requires an
inflation forecast. We agree with Seqwater's proposed approach for 2018–19 onwards, noting
the inflation forecasts reflect:
 for 2018–19, the RBA short-term forecast
 for 2019–20 onwards, the mid-point of the RBA inflation target range of 2 to 3 per cent.
However, we have updated the 2018–19 and 2019–20 inflation forecasts to 2.25 per cent, to
reflect the updated forecasts in the RBA's February 2018 Statement on Monetary Policy.107
Table 35 shows the RAB inflationary gain over the 2018–21 regulatory period. Our
recommended inflationary gain differs from Seqwater's, due to the changes in the opening RAB
each year and the revised inflation forecast for 2018–19 and 2019–20.

107
RBA, Statement on Monetary Policy, February 2018, p. 63.

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Queensland Competition Authority Regulatory asset base

Table 35 Inflationary gain ($m, nominal)

2018–19 2019–20 2020–21

Seqwater proposal 215.1 217.5 221.7

QCA recommendation 193.0 194.1 217.4

Note: All values are reported as end-of-year values.

Sources: Seqwater pricing model 2017; QCA calculations.

6.2.3 Depreciation
The referral asks us to calculate depreciation using the straight-line method. This is consistent
with our approach in the 2015 review.
As part of our investigation, we undertook an analysis of Seqwater's proposed asset lives for
future capital expenditure. Upon requesting further information from Seqwater, we have made
minor adjustments to reflect the asset lives in Seqwater's APMP, which Seqwater advised are
based on internal engineering advice.108 Our recommended asset life schedule is presented in
Table 36 below.
Table 36 QCA-recommended asset lives to 2020–21

1 July 2018 2018–19 2019–20 2020–21

RAB capex capex capex

Value ($m) 8,523.4 110.2 87.0 168.4

Weighted-average asset 56.1 55.6 54.2 86.3

life (years)

Source: QCA calculations.

Our recommended depreciation is lower than Seqwater's proposed depreciation for each year
of the 2018–21 period, due to changes in the RAB and our adjustments to asset lives (Table 37).
Table 37 Depreciation ($m, nominal)

2018–19 2019–20 2020–21

Seqwater proposal 243.6 250.5 257.9

QCA recommendation 243.4 249.6 256.2

Note: All values are reported as end-of-year values.

Sources: Seqwater pricing model 2017; QCA calculations.

6.2.4 Summary
Table 38 summarises our RAB roll-forward calculations for the period 1 July 2018 to 30 June
2028. The closing RAB, across all years, is higher than the closing RAB in the draft report,
primarily due to an increase in capex (Chapter 5).

108
Seqwater response to QCA RFI 6.

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Queensland Competition Authority Regulatory asset base

Table 38 RAB roll-forward ($m, nominal)

2018–19 2019–20 2020–21 2021–22 2022–23 2023–24 2024–25 2025–26 2026–27 2027–28

Opening RAB 8,523.4 8,583.1 8,614.6 8,744.2 8,951.0 8,974.2 8,985.7 9,020.0 9,020.7 9,187.6

plus capital expenditure 193.0 194.1 217.4 221.7 224.6 225.1 225.8 226.3 228.5 233.9

plus inflationary gain 110.2 87.0 168.4 248.0 68.8 63.8 93.0 65.2 236.4 338.7

less depreciation 243.4 249.6 256.2 262.9 270.2 277.4 284.5 290.7 297.9 305.6

Closing RAB 8,583.1 8,614.6 8,744.2 8,951.0 8,974.2 8,985.7 9,020.0 9,020.7 9,187.6 9,454.6

Notes: All values are reported as end-of-year values. Totals may not add due to rounding.
Source: QCA calculations.

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Queensland Competition Authority Return on assets, working capital allowance and tax

7 RETURN ON ASSETS, WORKING CAPITAL ALLOWANCE AND TAX

This chapter explains how we have calculated the rate of return, return on assets, working
capital allowance and tax allowance.
The return on assets is a significant component of building block costs. It is calculated by
applying a rate of return to the RAB. The working capital allowance reflects the costs of holding
capital to allow a business to manage the timing difference between the outflow of cash
associated with current liabilities and the receipt of cash associated with current assets. It is
calculated by applying a rate of return to the working capital balance. The tax allowance
compensates a business for its tax liabilities.

7.1 Rate of return

Under the referral, we have been asked to apply a rate of return to calculate the return on
assets and working capital allowances. This rate of return reflects the weighted average cost of
capital (WACC).
The WACC is the weighted average of the cost of equity and cost of debt, with the respective
weights representing the shares of equity and debt in the capital structure of the firm. It is the
rate of return an investor expects to earn on an asset of comparable risk and represents the
opportunity cost of the capital invested to provide the relevant service. Setting prices that
reflect an appropriate WACC ensures that revenue is sufficient to provide an appropriate rate of
return on capital and to promote efficient investment, but no higher.
The QCA's standard approach, like the approach of most other regulators, is to estimate a
benchmark WACC. The cost of equity and cost of debt components are set with reference to
relevant, external benchmarks. Firm-specific parameters such as the capital structure, for
example, are benchmarked against those of firms with comparable cash flow volatility. This
creates an incentive for the regulated business to outperform the benchmark by adopting the
most efficient financing practices, driving costs towards efficient levels. Market parameters,
such as the risk-free rate (RFR) and market risk premium (MRP), are more general in nature and
are unlikely to differ from business to business.
Under the terms of the referral, we have been asked to determine a WACC using a cost of
equity as determined by the QCA for the equity component, and Seqwater's cost of debt as
estimated by QTC for the debt component.109 As the referral asks the QCA to adopt Seqwater's
cost of debt for the debt component, we have diverged from our standard WACC approach for
the purposes of this review. We have also diverged from our standard WACC approach in the
2015 review, when we were asked to adopt a rate of return reflecting the long-term cost of
debt advised by QTC.110

109
However, the referral states that if the cost of equity calculation determined by the QCA is lower than
Seqwater's cost of debt, the rate of return applying to assets should be Seqwater's cost of debt as advised by
QTC.
110
QCA, SEQ bulk water price path 2015–18, final report, March 2015, pp. 103–106.

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Queensland Competition Authority Return on assets, working capital allowance and tax

We engaged Incenta Economic Consulting (Incenta) to provide advice on the appropriate values
for the firm-specific parameters, which include the benchmark asset beta, equity beta, and
capital structure.111

7.1.1 Capital structure

We have adopted a benchmark capital structure to determine the relative weights for the debt
and equity components of the cost of capital. In doing so, our objective has been to estimate
the WACC of a firm with an efficient benchmark capital structure.
Seqwater proposed a capital structure of 60 per cent debt and noted:
 A gearing of 60 per cent debt has almost uniform support from Australian regulators of
water businesses.
 Such a gearing is consistent with the QCA's recommendation in the 2012–13 review of grid
service charges (GSC).112
 Seqwater does not carry the same risks as GAWB, where the QCA adopted a capital structure
of 50 per cent debt.113
Incenta assessed Seqwater's submission and supporting documentation and agreed with
Seqwater's view that the Australian regulatory precedent for water businesses is a benchmark
capital structure of 60 per cent debt. Incenta also agreed with Seqwater's view that the
circumstances applying to GAWB do not apply to Seqwater.114
This regulatory precedent for a benchmark capital structure of 60 per cent debt originated from
the regulated Australian energy sector, as there are no publicly listed, regulated water
businesses in Australia. As a result, Incenta reviewed the energy sector to assess whether 60 per
cent debt continues to remain appropriate for Seqwater. Incenta's analysis showed that the
average capital structure of the three energy businesses that are listed, over 10 years, is close to
60 per cent debt.115
In its assessment of an appropriate asset beta, Incenta selected a number of listed regulated
water businesses, based in the United States (US) and United Kingdom (UK), for its sample.
Incenta analysed the capital structures of these firms and concluded that the average capital
structure is 38 per cent debt. However, for the UK firms, this figure is close to 50 per cent debt.
Incenta considered the UK firms' capital structures to be more relevant because of the similarity
between the UK and Australian tax regimes and regulatory approaches.116
Incenta said that while 60 per cent debt is materially higher than the observed capital structures
of the US firms, and 10 per cent higher than the UK firms, it is consistent with its observation of
the three remaining listed energy businesses. Taking into account the UK water evidence and

111
Incenta's report is available on our website.
112
We were asked to accept a capital structure of 50 per cent for the 2012–13 review of GSC.
113
Seqwater, sub. 2, p. 55.
114
Incenta, Estimating Seqwater's firm-specific WACC parameters for the 2018–21 bulk water price
investigation, November 2017, p. 28.
115
Incenta, Estimating Seqwater's firm-specific WACC parameters for the 2018–21 bulk water price
investigation, November 2017, p. 28.
116
Incenta, Estimating Seqwater's firm-specific WACC parameters for the 2018–21 bulk water price
investigation, November 2017, pp. 28–29.

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the Australian energy sector evidence, Incenta recommended a benchmark capital structure of
60 per cent debt for Seqwater.117

Conclusion
On the basis of Incenta's advice, we accept Seqwater's proposal to apply a benchmark capital
structure of 60 per cent debt.

7.1.2 Cost of debt

In other decisions, we have estimated the benchmark cost of debt using the on-the-day rate
consistent with the benchmark credit rating of the regulated business. However, in accordance
with the referral, we have applied Seqwater's forecast cost of debt, as advised by QTC.
Following our draft report, Seqwater submitted updated cost of debt estimates provided by
QTC (Table 39). The updated cost of debt estimates are slightly higher than Seqwater's initial
submission, across all years, with the exception of 2027–28, where it is unchanged.118
Table 39 Cost of debt, proposed by Seqwater (%)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Initial cost of debt 5.50 5.25 5.10 4.95 4.80 4.70 4.65 4.60 4.55 4.55

Updated cost of debt 5.55 5.35 5.15 5.00 4.90 4.80 4.70 4.65 4.60 4.55

Sources: Seqwater, sub. 2, p. 55; Seqwater, email to the QCA, 1 March 2018.

Conclusion
In accordance with the referral, we accept Seqwater's proposed cost of debt, as advised by QTC.

7.1.3 Cost of equity

In its initial submission, Seqwater proposed a cost of equity of 6.82 per cent, which is the sum of
its proposed RFR of 1.84 per cent and its proposed equity premium of 4.98 per cent.119
Seqwater said that while the parameters underpinning its proposed WACC are based on our
past decisions, the QCA's approach to estimating some of the parameters could be improved.
Seqwater proposed to contribute to the ongoing development of the QCA's approach in future
reviews and provided reports by Frontier Economics, which provides alternative views on the
estimation of the RFR, MRP and gamma.120
In our draft report, we accepted Seqwater's proposed cost of equity. However, consistent with
Seqwater's proposal, we updated the RFR based on the latest market information. This resulted
in a cost of equity of 7.05 per cent.121
In response to our draft report, Seqwater submitted that the QCA should set the cost of equity
to reflect an MRP that the QCA considers appropriate in the prevailing market conditions.122 We
estimated this to be 7 per cent in our draft report.123

117
Incenta, Estimating Seqwater's firm-specific WACC parameters for the 2018–21 bulk water price
investigation, November 2017, pp. 28–29.
118
Seqwater, email to the QCA, 1 March 2018.
119
Seqwater, sub. 2, p. 57.
120
Seqwater, sub. 2, pp. 54–58; Seqwater, sub. 13, p. 48; Seqwater, sub. 14, p. 5.
121
QCA, Seqwater bulk water price review 2018–21, draft report, November 2017, p. 57.

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Risk-free rate
The RFR is the rate of return on an asset with zero default risk. The rate of return on a risk-free
asset compensates the investor for the time value of money and is the base to which the
investor adds a premium for risk (i.e. the equity premium).
Seqwater proposed a RFR of 1.84 per cent, which it advised was based on the following
approach applied by the QCA in previous decisions:
 using Commonwealth Government bonds as a proxy for a risk-free asset
 aligning the term to maturity to the length of the regulatory period (three years)
 applying a 'current' rate, as proxied by a short-term average over 20 business days close to
the start of the regulatory period.
 Seqwater considered that its estimate, which was based on an indicative 20-day averaging
period ending on 21 April 2017, should be updated for the final report.124
We accept Seqwater's proposed methodology, as it is based on the approach we have adopted
in other decisions. Consistent with our draft report, which said we would update the RFR for the
final report, we recommend a RFR of 2.14 per cent, reflecting a 20-day averaging period to 28
February 2018. This estimate is higher than the indicative RFR of 2.07 per cent in our draft
report.

Equity premium
The equity premium is the additional return above the RFR that investors require to invest in an
asset of comparable risk.125
In our draft report, we accepted Seqwater's proposed equity premium of 4.98 per cent. We
considered it was consistent with the aim of protecting consumers from monopoly pricing
because it was lower than our estimate of the benchmark equity premium. We also considered
it was consistent with the promotion of efficient investment because:
 as a monopoly business, we expected Seqwater to propose a cost of equity (as part of an
overall WACC) that provides sufficient incentives to invest
 it was within the range of estimates from recent regulatory decisions in the water sector.126
In response to our draft report, Seqwater said that the QCA should not have accepted
Seqwater's proposed equity premium because it was based on an MRP of 6.5 per cent, rather
than the QCA's current, best estimate of 7 per cent. Seqwater said that its initial proposal on the
MRP was solely based on the QCA's previous decisions, and developed using an approach that
Seqwater had clearly stated was inadequate and not based on the latest information.127
Seqwater argued that there are a number of problems with the QCA accepting an MRP that is
below a figure the QCA considers appropriate, including that it is inconsistent with incentive-

122
Seqwater, sub. 13, p. 48.
123
QCA, Seqwater bulk water price review 2018–21, draft report, November 2017, p. 54.
124
Seqwater, sub. 2, p. 57.
125
It is a product of the MRP and equity beta.
126
QCA, Seqwater bulk water price review 2018–21, draft report, November 2017, pp. 56–7.
127
Seqwater, sub. 13, p. 48.
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based regulation and the QCA's approach of updating the RFR for more recent market data.128
Seqwater also submitted a report by Frontier Economics that contested aspects of our approach
to estimating the MRP, but the report nevertheless concluded that the relevant evidence
supported an MRP of at least 7 per cent.129
While we do not agree with all aspects of Seqwater's submission on this matter, we accept
Seqwater's argument that an equity premium that reflects the QCA's best estimate of the MRP
(7 per cent) is appropriate. However, in future, we encourage Seqwater to submit a proposal it
can support and justify.
After updating the MRP to reflect our best estimate, we recommend an equity premium of 5.36
per cent.

Conclusion
Our final position is to adopt a cost of equity of 7.50 (compared to 7.05 per cent in the draft
report), based on an RFR of 2.14 per cent and an equity premium of 5.36 per cent.

7.1.4 Summary of WACC

We recommend a WACC of 6.33 per cent in 2018–19, decreasing to 5.73 per cent in 2027–28, in
line with the scheduled reductions in the cost of debt (see Table 40 for our recommended
WACC for the three years to 2020–21).
Table 40 WACC, recommended by the QCA (%)

Parameter 2018–19 2019–20 2020–21

Capital structure 60 60 60

Cost of debt 5.55 5.35 5.15

Cost of equity 7.50 7.50 7.50

Post-tax nominal (vanilla) WACC 6.33 6.21 6.09

Source: QCA analysis.

7.2 The return on assets and working capital allowance

We have applied the QCA-recommended WACC to calculate the return on assets and working
capital allowance.

7.2.1 Return on assets

The return on assets is calculated by applying the WACC to the RAB. Our recommended
allowance for the return on assets is higher than the indicative allowance in the draft report,
primarily due to our higher recommended WACC (Table 41).

128
Seqwater, sub. 13, p. 48.
129
Seqwater, sub. 14, p. 5.

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Table 41 Return on assets ($m, nominal)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

QCA 526.7 519.9 514.4 516.8 518.7 514.7 511.1 509.7 511.9 521.4
recommendation

Source: QCA analysis.

The RAB is rolled forward for inflation, at a forecast inflation rate, to maintain the real value of
those assets (Chapter 6). Given this adjustment, it follows that a deduction for inflationary gain
is required from building block costs to avoid double counting.
The deduction for inflationary gain is generally higher than the deduction in the draft report,
because the RAB we recommend in this report is higher (Table 42). However, the deduction for
inflationary gain in 2019–20 is lower, because the 2019–20 inflation forecast is now lower
(Chapter 6, section 6.2.2).
Table 42 Deductions for inflationary gain ($m, nominal)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

QCA 187.2 188.3 211.1 215.3 218.2 218.8 219.5 220.0 222.1 227.5
recommendation

Source: QCA analysis.

7.2.2 Working capital allowance

The working capital allowance Seqwater proposed was calculated by applying the proposed
WACC to Seqwater's working capital balance (i.e. accounts receivable plus inventory minus
accounts payable), where:
 accounts receivable = building block costs x days receivable / days in a year = building block
costs x 45 / 365
 inventory = operating expenditure x days in inventory / days in a year = operating
expenditure x 3 / 365
 accounts payable = operating expenditure x days payable / days in a year = operating
expenditure x 30 / 365.
We accept Seqwater's proposed methodology, which is consistent with the approach we
applied in the 2015 review.
We confirm that Seqwater's contract terms require water retailers to pay within 30 days upon
receiving an invoice. This is the number of days receivable between the recording of credit sales
and the receipt of cash from its customers.
Consistent with past decisions (i.e. the 2011–12 and 2012–13 GSCs investigations, and the 2015
review) we have allowed an additional 15 days receivable, or a total of 45 days, based on the
assumption that services are delivered, on average, in the middle of the month.
Table 43 sets out our recommended allowance for working capital.

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Table 43 Working capital allowance ($m, nominal)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

QCA 5.1 5.0 4.8 4.7 4.8 4.8 4.7 4.8 4.8 5.0
recommendation

Source: QCA analysis.

7.3 Tax allowance

Under the referral, we have been asked to provide Seqwater with an allowance for tax (if
applicable). As we apply a nominal post-tax WACC to calculate the return on assets (see section
7.1.4), our general approach is to include an explicit allowance for tax that reflects the
benchmark tax liabilities of the regulated business. We calculate tax by applying a tax rate of 30
per cent (adjusted for the effects of dividend imputation) to taxable income.
We did not provide an allowance for tax in our 2015 review, because Seqwater's return on
assets reflected a cost of debt rate of return only. Under a cost of debt rate of return, no tax is
expected to be paid, as tax losses generally accrued in the early life of assets can be used to
offset tax payable in future.

7.3.1 Seqwater's proposal

Seqwater advised that it is now appropriate to include a tax component, because a WACC rate
of return, which incorporates a return on equity and a benchmark capital structure that is no
longer 100 per cent debt, will apply from 2018.130
Seqwater proposed a tax allowance calculated on the basis of building block costs rather than
total revenue.131 Total revenue is less than building block costs in the early years of the price
path, but exceeds building block costs in the later years to recover price path debt.
In Seqwater's proposed tax allowance, no accumulated tax losses are recognised before 1 July
2018. As a result, the proposed tax allowance commences from 2018–19, which corresponds to
the first year Seqwater anticipates earning positive taxable income for regulatory purposes.
Seqwater has derived tax depreciation by deflating regulatory depreciation back to the year of
commissioning of the underlying capital expenditure. For existing assets, Seqwater has deflated
depreciation back to when the existing RAB was conceptually incurred on 1 July 2013.

7.3.2 QCA's assessment

We accept Seqwater's proposal to calculate the benchmark tax allowance on the basis of
building block costs. Setting a tax allowance based on total revenue would require the
establishment of a RAB and tax asset base at the start of the price path in 2008, to ensure
symmetry in the treatment of tax losses over the price path. This is not possible, as we were
asked to accept the RAB as at 1 July 2013—as advised by the Minister for Energy and Water
Supply—for the purposes of the 2015 review, which was our first review of bulk water prices.
We note that Seqwater has not provided any information about its tax assets and asset lives.
Instead, its pricing model derives tax depreciation based on RAB depreciation deflated to when

130
Seqwater, sub. 1, p. 36.
131
Seqwater, sub. 1, p. 36.

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the underlying capex or RAB was incurred. This effectively sets the tax value of assets equal to
the existing RAB at 1 July 2013.
We have assessed whether Seqwater would have accumulated tax losses since the
establishment of the RAB (and, in effect, the tax asset base) when its cash flows are modelled
on a benchmark basis. We consider that tax losses accumulated over this period should be
taken into account, because tax losses can be used to reduce Seqwater's future tax liability. This
is consistent with the request in the referral to recommend prices that allow Seqwater to
recover prudent and efficient costs incurred between 2018–19 and 2027–28.
We have calculated Seqwater's tax allowance based on building block costs and the application
of a benchmark estimate of Seqwater's accumulated tax losses commencing from 1 July 2013
(Table 44).
Table 44 Tax allowance ($m, nominal)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

QCA – – – – – – – – – 6.9
recommendation

Source: QCA analysis.

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8 TOTAL REVENUE

In this chapter, we explain how we have calculated:

 the opening price path debt balance as at 1 July 2018
 the price path debt repayment, from 1 July 2018 to 30 June 2028, which would allow
Seqwater to repay price path debt (including interest) by 2027–28
 total revenue, which is the sum of the building block costs and price path debt repayment.

8.1 Establishing opening price path debt balance as at 1 July 2018

Since 2008, bulk water prices have recovered less than the cost of supply, and this accumulated
under-recovery is known as the price path debt.
Consistent with the referral, we established the opening price path debt balance as at 1 July
2018 by rolling forward the price path debt balance as at 1 July 2014 (from the 2015 review)
based on:
 updating the building block costs132 from 1 July 2014 to 30 June 2018, by adjusting for the
updated capital costs based on rolling forward the RAB, and applying asset indexation and
inflationary gain consistent with the approach used in the 2015 review
 updating interest costs for the actual cost of debt, as advised by QTC
 any prudent and efficient costs arising from review events
 Seqwater's actual revenue from 1 July 2014 to 30 June 2017 and forecast revenue for 1 July
2017 to 30 June 2018.

8.1.1 Building block costs

Seqwater proposed an update to building block costs that is $149.9 million higher over the
2014–18 period than the building block costs we recommended in the 2015 review (Table 45).
In deriving these updated costs, Seqwater used the RBA's inflation forecast of 2 per cent for
2016–17 and 2017–18.
Seqwater's higher building block costs are primarily due to the lower-than-expected inflationary
gain deduction (inflationary gain is deducted from building block costs to avoid double counting
(Chapter 6, section 6.1.2)). Due to lower-than-expected inflation, the inflationary gain deduction
from the updated building block costs was less than expected.

132
The term 'maximum allowable revenue' in the referral is equivalent to the term 'building block costs' in this
report.

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Table 45 Seqwater's proposed update to building block costs ($m, nominal)

2014–15 2015–16 2016–17 2017–18

QCA recommendation (2015 review) 823.5 731.9 771.4 784.2

Seqwater updated assessment 802.5 835.6 808.0 814.9

Note: Seqwater's updated assessment excludes its proposed value of asset disposals.
Source: Seqwater, sub. 2, p. 9.

We have updated building block costs in accordance with the terms of the referral (Table 48),
which includes, among other things, adjusting for our recommendation on the RAB (Chapter 6).
We have also made an adjustment to Seqwater's proposed value of asset disposals, which was
not included in Seqwater's proposed building block cost update.

Asset disposals
Seqwater proposed $2.8 million in land, fleet and other asset disposals between 2014–15 and
2016–17. Seqwater's proposal does not reflect the full value of the proceeds of sale ($3.7
million) because it proposes to share the proceeds from the disposal of land equally between
itself and customers (Table 46).133 This is based on Seqwater's proposal to establish an incentive
mechanism for the disposal of land into future regulatory arrangements.134
Table 46 Seqwater's proposed value for asset disposals ($m, nominal)

2014–15 2015–16 2016–17 2017–18

Land 0.15 0.71 0.05 –

Fleet 0.52 0.77 0.55 –

Other 0.04 – – –

Total 0.72 1.48 0.60 –

Source: Seqwater pricing model 2017.

We do not accept Seqwater's proposal. As the incentive scheme has been proposed ex post,
that is, after the land assets have already been disposed, it is unclear that the justification to
dispose of land assets (at the time) and the incentives driving those decisions, would be
appropriate in a revenue-sharing mechanism as proposed by Seqwater.
We consider the value of asset disposals should reflect the full value of the proceeds from sale,
which is $3.7 million (Table 47).135 Lastly, we note that further consideration should be given to
the establishment of incentive mechanisms when the regulatory framework is more conducive
to the provision of regulatory commitments and after proper consideration of the costs and
benefits (Chapter 10, section 10.4).

133
Seqwater response to QCA RFI 4.
134
Seqwater, sub. 1, p. 54.
135
This is consistent with our recommendation in the draft report. Seqwater acknowledged this
recommendation in its submission to our draft report (Seqwater, sub. 13, p. 60).

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Table 47 QCA's recommended value for asset disposals ($m, nominal)

2014–15 2015–16 2016–17 2017–18

QCA recommendation 0.9 2.2 0.6 –

Source: QCA analysis.

Conclusion
Our recommended update to building block costs (Table 48) differs from Seqwater's proposed
update, primarily as a result of the following:
 For 2016–17, we updated Seqwater's inflation forecast to reflect actual inflation (1.83 per
cent136), which decreased the inflationary gain deduction, leading to higher building block
costs in that year.
 We have not made an adjustment to reflect Seqwater's proposed operating cost savings,
which increased building block costs across all years (section 8.1.4).
 Our adjustments for asset disposals decreased our recommended update across all years,
except in 2017–18 where the adjustment is zero.
Table 48 QCA's recommended update to building block costs ($m, nominal)

2014–15 2015–16 2016–17 2017–18

QCA update to building block costs 803.5 837.1 822.9 817.8

less adjustment for asset disposals 0.9 2.2 0.6 0.0

Total 802.7 834.9 822.3 817.8

Source: QCA analysis.

8.1.2 Interest on price path debt

For the 2015 review, we determined the amount of interest on price path debt by applying
QTC's cost of debt estimates to the price path debt. Seqwater proposed an update to interest
on price path debt based on the actual cost of debt, as advised by QTC (Table 49 and Table 50).
Table 49 Cost of debt applicable to interest on price path debt (%)

2014–15 2015–16 2016–17 2017–18

2015 review cost of debt 5.90 6.25 6.25 6.25

Actual cost of debt (QTC) 5.71 5.61 5.44 5.11

Source: Seqwater, sub. 2, p. 9.

Table 50 Seqwater's proposed update to interest on price path debt ($m, nominal)

2014–15 2015–16 2016–17 2017–18

Seqwater updated assessment 110.1 118.1 124.7 122.4

Source: Seqwater, sub. 2, p. 9.

136
ABS, Consumer Price Index, Australia, Sep 2017, Table 1: All Groups, Index Numbers and Percentage
Changes, cat. no. 6401.0.

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QUU said that a 'true-up' for the interest costs is inappropriate because the debt composition is
a commercial decision for Seqwater.137 However, consistent with the referral, we have updated
interest costs for QTC's actual cost of debt (Table 51).
We have adopted Seqwater's methodology for calculating interest costs. However, our interest
costs are slightly different, because of slight differences in the inputs to our calculations.
Table 51 QCA's recommended update to interest on price path debt ($m, nominal)

2014–15 2015–16 2016–17 2017–18

QCA recommendation 112.5 121.1 125.2 121.6

Source: QCA analysis.

8.1.3 Review events

Under the referral, review events are:
 'review events' as defined by the QCA in the 2015 review—emergency events, changes in
law or government policy events, and feedwater quality events that cause a change in
revenue, or prudent and efficient costs, and cost of debt events138
 drought response measures taken in accordance with the WSP, where the costs associated
with those measures are efficient and material.

Emergency events
After the release of our draft report, Seqwater submitted a claim of $1.5 million associated with
damage to its assets from cyclone Debbie, which occurred in March 2017. Seqwater said these
costs reflect its actual incremental operating cost in 2016–17, which were incurred to allow the
water grid to continue to deliver water.139,140
KPMG assessed the prudency and efficiency of Seqwater's proposed claim and said:
 Cyclone Debbie was an event that was outside of the control of Seqwater, which was not
reasonably foreseeable earlier than a week in advance of the event. The magnitude of the
event meant that it could not be responded to under normal network operations, and
required Seqwater to incur additional costs to ensure the continued operation of the water
grid. The event meets the criteria of an emergency event, as defined in the 2015 review.
 Seqwater has generally provided robust evidence and analysis in support its claim, however
there were some unjustified costs ($0.08 million) related to another weather event that
should not be recovered. KPMG recommends that Seqwater be allowed to recover prudent
and efficient costs of $1.4 million (which is $0.08 million lower than Seqwater's claim).141
We accept KPMG's advice that Seqwater's proposal to recover $1.4 million for this emergency
event is appropriate.

137
QUU, sub. 8, p. 2.
138
QCA, SEQ bulk water price path 2015–18, final report, March 2015, pp. 91–94.
139
Seqwater response to QCA RFI 104.
140
Seqwater intends to submit further claims for costs incurred in 2017-18 at the next review, currently
estimated at $1.5 million in opex and $1.5 million in capex (Seqwater response to QCA RFI 104).
141
KPMG, Seqwater expenditure review: Prudency and efficient assessment, updated report for the QCA, March
2018, pp. xxiv, 244–60.

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Changes in law or government policy events

Seqwater did not propose any review event adjustments due to changes in law or government
policy.142

Feedwater quality events

After the release of our draft report, Seqwater submitted a claim of $0.4 million for a feedwater
quality event in October 2017. Seqwater said it incurred these costs in 2016–17.143
Seqwater said the claim was triggered by rainfall from 15 to 22 October 2017, where the Mt
Crosby WTPs experienced three conductivity spikes, each lasting several days. To maintain
water quality, Seqwater used additional chemicals from 20 October to 15 November 2017.144
KPMG assessed the prudency and efficiency of Seqwater's proposed claim and said:
 Water quality levels were breached at the Mt Crosby WTPs, which triggered Seqwater's
procedure for responding to extraordinary water events. The event meets the definition of a
feedwater quality event, as defined in the 2015 review.
 Seqwater tracked and claimed for additional costs consistent with its operational procedure,
and calculated its chemical costs using rates that reflect the average daily cost. KPMG
recommends Seqwater be allowed to recover prudent and efficient costs of $0.4 million, as
proposed.145
We accept KPMG's advice that Seqwater's proposal to recover $0.4 million for this feedwater
quality event is appropriate.

Cost of debt events

The cost of debt drives the following:
 interest on price path debt
 the rate of return, which is primarily used to calculate the return on assets.
In accordance with our definition of cost of debt events in the 2015 review, a cost of debt event
is triggered if QTC advises the actual cost of debt.146 The QCA would then update the cost of
debt estimates for the actual cost of debt. Alternatively, the Government could request an
update to the cost of debt through the referral.
Consistent with the referral, we have updated interest costs on price path debt for the actual
cost of debt, as advised by QTC (see section 8.1.2 above).
After the draft report, Queensland Treasury provided actual cost of debt figures from QTC for
the rate of return, which is used to calculate the return on assets and working capital
allowances (Table 52).

142
Seqwater, sub. 2, p. 10.
143
Seqwater, sub. 13, p. 49.
144
Seqwater, sub. 13, p. 49.
145
KPMG, Seqwater expenditure review: Prudency and efficient assessment, updated report for the QCA, March
2018, pp. xxiv, 260–2.
146
QCA, SEQ bulk water price path 2015–18, final report, March 2015, p. 94.

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Table 52 Cost of debt applicable to the rate of return (%)

2014–15 2015–16 2016–17 2017–18

2015 review cost of debt 5.90 6.25 6.25 6.25

Actual cost of debt (QTC) 6.15 6.20 6.05 5.70

Sources: Seqwater, sub. 2, p. 9; Queensland Treasury, email to the QCA, 5 March 2018.

We have updated the return on assets and working capital allowances for the actual cost of
debt, as advised by QTC (Table 53).
Table 53 QCA's recommended update to the return on assets and working capital allowances
($m, nominal)

2014–15 2015–16 2016–17 2017–18

QCA recommendation 20.1 (4.0) (16.1) (44.5)

Source: QCA analysis.

Drought response events

In its initial submission, Seqwater advised that it intended to make a claim for drought response
costs associated with diverting bulk water to the northern region of south-east Queensland.147
After our draft report, Seqwater submitted a claim of $0.8 million ($0.4 million for 2016–17 and
$0.4 million for 2017–18) in drought response costs. Seqwater said these costs reflect its actual
incremental operating costs.148,149
Seqwater said the claim was triggered by Baroon Pocket Dam falling below the 50 per cent
storage trigger level, stipulated in the WSP, in February 2017. As a result, Seqwater diverted
bulk water from central SEQ to the Sunshine Coast.150
KPMG assessed the prudency and efficiency of Seqwater's proposed claim and said:
 The event was outside of Seqwater's control and required Seqwater to diverge from its
normal operating procedures. Seqwater implemented operational procedures that were
consistent with the WSP, which included operating the Northern Pipeline Interconnector in a
northerly direction. The event meets the definition of a drought response event as defined in
the referral.
 Seqwater provided extracts from its general ledger, and validated that it appropriately
apportioned costs to this event. Seqwater also demonstrated the appropriateness of its cost
estimates. KPMG recommends Seqwater be allowed to recover prudent and efficient costs
of $0.8 million, as proposed. 151
We accept KPMG's advice that Seqwater's proposal to recover $0.8 million in drought response
costs ($0.4 million in 2016–17 and $0.4 million in 2017–18) is appropriate.

147
Seqwater, sub. 2, pp. 10–11.
148
Seqwater response to QCA RFI 105.
149
Seqwater also said that it intends to submit another claim for the November 2017 to June 2018 period (at
the next review) if the costs are material.
150
Seqwater response to QCA RFI 105.
151
KPMG, Seqwater expenditure review: Prudency and efficient assessment, updated report for the QCA, March
2018, pp. xxiv, 262–6.

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Queensland Competition Authority Total revenue

However, the referral indicates that the costs should be material to be eligible for recovery by
Seqwater, although a materiality threshold was not specified. We consider the costs are
sufficiently material to accept because the QCA's costs to assess and incorporate the claim into
recommended prices as part of this review are relatively low. In addition, Seqwater continues to
incur costs, so it is reasonable to expect the costs associated with this review event will
continue to grow.

8.1.4 Actual revenue

Due to lower-than-forecast water demand, Seqwater's actual revenue has been lower than the
forecast at the 2015 review. Seqwater proposed an update to the price path debt to reflect
actual revenue in 2014–15, 2015–16, and 2016–17 and forecast revenue in 2017–18 (Table
54).152
Table 54 Seqwater's update for actual revenues ($m, nominal)

2014–15 2015–16 2016–17 2017–18

Total revenue in the 2015 reviewa 783.7 803.1 866.5 933.1

Proposed actual revenue 736.3 766.8 829.5 848.1b

a Building block costs plus price path debt repayment. b This is based on Seqwater's updated forecast provided
after the release of our draft report.
Sources: Seqwater, sub. 2, pp. 11–12; Seqwater, email to the QCA, 15 February 2018.

Lower demand has also reduced total variable operating costs, and Seqwater has proposed to
incorporate these savings in the total adjustments (not shown in Table 54). The total
operational cost savings varied from $0.8 million in 2014–15 to $3.7 million in 2017–18.153
Consistent with our draft report, we accept Seqwater's adjustment to the price path debt based
on actual and forecast revenues (Table 55), but we have not made an adjustment for the
proposed operational cost savings.
We note Seqwater's submission to our draft report that an adjustment for operational cost
savings would be consistent with the price path framework, whereby customers bear the long-
term demand and volume risk.154 However, we reiterate that we have followed the terms of the
referral, which lists the adjustments to be made. An adjustment for operational cost savings is
not listed.155
Table 55 QCA's recommended update for actual revenues ($m, nominal)

2014–15 2015–16 2016–17 2017–18

QCA recommendation 736.3 766.8 829.5 848.1a

a This is based on Seqwater's updated forecast provided after the release of our draft report.

152
Originally, Seqwater's 2016–17 actual revenue of $829.5m (Seqwater, sub. 2, pp. 11–12) was presented as a
forecast. However, Seqwater has subsequently confirmed that this is actual revenue.
153
Seqwater, sub. 2, pp. 11–12.
154
Seqwater, sub. 13, p. 60.
155
QCA, Seqwater bulk water price review 2018–21, draft report, November 2017, p. 67.

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Queensland Competition Authority Total revenue

8.1.5 Conclusion
Based on our adjustments above, we recommend a price path debt opening balance of $2,463.2
million as at 1 July 2018 (Table 56).156 Our opening balance is lower than Seqwater's proposal,
primarily because we have updated the return on assets for the actual cost of debt, advised by
QTC.
Table 56 QCA's recommended updated price path debt ($m, nominal)

2014–15 2015–16 2016–17 2017–18

Opening balance 1,927.7 2,126.7 2,311.8 2,416.0

plus updated building block costs 802.7 834.9 822.3 817.8

plus updated interest costs 112.5 121.1 125.2 121.6

plus review event costs (emergency, 0.0 0.0 2.3 0.4

feedwater quality and drought
response events)

plus review event costs (cost of debt 20.1 (4.0) (16.1) (44.5)
event)

plus actual revenue (736.3) (766.8) (829.5) (848.1)

Closing balance 2,126.7 2,311.8 2,416.0 2,463.2

Note: Totals may not add due to rounding.

Source: QCA analysis.

8.2 Price path debt repayment from 1 July 2018 to 30 June 2028
The price path debt repayment, and its calculation, consists of:
 the opening balance, as at 1 July for a particular financial year—we recommend an opening
balance of $2,463.2 million as at 1 July 2018 (see section 8.1.5 above)
 the principal repayment—which is the difference between the price path debt repayment
and interest costs
 the interest costs—where Seqwater's cost of debt estimates as advised by QTC (5.11 per
cent per year over the 10 years to 2027–28) is applied to the debt balance
 the closing balance, as at 30 June for a particular financial year.
Under the terms of the referral, we have been asked to recommend two pricing options
(Chapter 9), both of which are to result in Seqwater fully repaying price path debt by 2027–28.
Each pricing option will result in a slightly different price path debt repayment profile, with
pricing option 1 resulting in higher repayments in the early years and lower repayments in the
later years, relative to option 2. Figure 9 shows the price path debt repayment profile for option
1.

156
The opening balance as at 1 July 2018 is the same as the closing balance as at 30 June 2018.

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Queensland Competition Authority Total revenue

Figure 9 QCA's price path debt repayment profile–pricing option 1, ($m, nominal)
700 2,800

600 2,400

500 2,000
Price path debt repayment

Price path debt balance

400 1,600

300 1,200

200 800

100 400

0 0
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Financial year

Principal repayment Interest Cost Price path debt balance as at 30 June

Source: QCA analysis.

8.3 Total revenue

Total revenue is the sum of the building block costs and price path debt repayment.
Table 57 summarises our recommended building block costs. Unlike the price path debt
repayment, these costs do not vary with the pricing approach. Building block costs are higher
than in our draft report, primarily as a result of our higher recommended WACC, which has
increased the return on assets.
Table 57 QCA's recommended building block costs ($m, nominal)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Return on assets 526.7 519.9 514.4 516.8 518.7 514.7 511.1 509.7 511.9 521.4

plus return of capital 236.1 242.2 248.8 255.3 262.6 269.6 276.6 282.6 289.7 297.2
(depreciation)

less inflation 187.2 188.3 211.1 215.3 218.2 218.8 219.5 220.0 222.1 227.5

plus operating 228.2 234.1 242.6 247.4 257.1 265.0 273.1 282.8 293.5 302.4
expenditure

plus tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.9

plus working capital 5.1 5.0 4.8 4.7 4.8 4.8 4.7 4.8 4.8 5.0
allowance

Total 808.8 812.9 799.4 809.0 824.8 835.3 846.0 859.9 877.8 905.4

Source: QCA analysis.

Our assessment of total revenue to be recovered under each pricing option is presented in
Tables 58 and 59. A comparison between pricing option 1 (Table 58) and pricing option 2 (Table
59) shows pricing option 1 results in higher price path debt repayments in the early years and
lower repayments in the later years, relative to option 2.

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Queensland Competition Authority Total revenue

Price path debt repayments are slightly lower than in the draft report, primarily because we
updated the return on assets for the actual cost of debt from 2014–15 to 2017–18 (section 8.1.3
above).
Table 58 Total revenue based on pricing option 1 ($m, nominal)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Building block 809 813 799 809 825 835 846 860 878 905
costs

Price path debt 95 137 185 214 278 350 425 501 576 613
repayment

Total revenue 904 950 985 1,023 1,103 1,185 1,271 1,361 1,454 1,519

Source: QCA analysis.

Table 59 Total revenue based on pricing option 2 ($m, nominal)

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Building block 809 813 799 809 825 835 846 860 878 905
costs

Price path debt 81 127 188 218 281 354 429 505 581 618
repayment

Total revenue 890 940 988 1,027 1,106 1,189 1,275 1,365 1,459 1,523

Source: QCA analysis.

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Queensland Competition Authority Recommended prices

9 RECOMMENDED PRICES

In this chapter, we present our recommendations on bulk water prices for the period 1 July 2018
to 30 June 2021, as well as indicative bill impacts.
Under the terms of the referral for this review, we have been asked to recommend two pricing
options. Under each option, prices are calculated to enable Seqwater to recover its total revenue
allowance, which includes building block costs and price path debt repayment components (see
Chapter 8, Table 58 and Table 59). We converted total revenue to prices using Seqwater's
demand forecasts (see Chapter 3, Table 4).
The Government will determine prices after considering whether to accept our recommended
prices.

9.1 Pricing options

Under the referral, we have been asked to recommend two pricing options:
 Pricing option 1— the common price (for all council areas, except Redland City, Sunshine
Coast and Noosa) is to be reset in 2018–19, followed by annual increases by inflation.
Transitional price paths for Redland City, Sunshine Coast and Noosa council areas are to
result in the common price being reached by 2019–20.
 Pricing option 2—price increases are to be smoothed for all council areas (including Redland
City, Sunshine Coast and Noosa) over the three-year regulatory period.
We have been asked to recommend prices that are fully volumetric. A volumetric price refers to
the price consumers pay for each kilolitre of water consumed.
Consistent with our approach in the 2015 review, we have smoothed increases in the common
price (under pricing option 2) by applying a constant percentage increase each year, and
smoothed increases in transitional prices (under both pricing options) by applying a constant
dollar per kilolitre increase. We note that the referral does not specify a preference for any
particular smoothing approach.
Under option 1 (Figure 10), we recommend a common price of $2.962 in 2018–19, an increase
of 5.16 per cent on the 2017–18 common price. This is followed by increases of 2.50 per cent
per year in 2019–20 and 2020–21. Customers in Redland City, Noosa and Sunshine Coast would
face larger increases and reach the common price in 2019–20, but they do pay lower prices than
customers in other council areas.

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Queensland Competition Authority Recommended prices

Figure 10 Pricing option 1 ($/kL)

3.200
3.112
3.100 3.037

3.000 2.962

2.900
2.817
$/kL

2.826
2.800 2.799

2.700

2.600 2.616
2.561
2.500
2017-18 2018-19 2019-20 2020-21

Redland City Sunshine Coast & Noosa Common Price

Source: QCA calculations.

Under option 2 (Figure 11), we recommend a common price of $2.915 in 2018–19, an increase
of 3.49 per cent on the 2017–18 common price. This is followed by increases of 3.49 per cent
per year in 2019–20 and 2020–21. In 2018–19 and 2019–20, the common price under pricing
option 2 is slightly lower than the common price under option 1.
In 2018–19 and 2019–20, customers in Redland City, Noosa and Sunshine Coast would face
smaller increases than under option 1 and reach the common price in 2020–21, instead of
2019–20.
Figure 11 Pricing option 2 ($/kL)

3.200
3.122
3.100
3.017
3.000
2.915 2.953 2.935
2.900
2.817
$/kL

2.800 2.785
2.748
2.700

2.600 2.616
2.561
2.500
2017-18 2018-19 2019-20 2020-21

Redland City Sunshine Coast & Noosa Common Price

Source: QCA calculations.

Our recommended prices under each pricing option are presented in Table 60. Prices are higher
than the indicative prices in our draft report, because of an increase in allowed costs, primarily
due to an increase in the rate of return. The increase in building block costs has been partially

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Queensland Competition Authority Recommended prices

offset by a reduction in price path debt, which means price path debt repayments are slightly
lower.
Table 60 Recommended prices

Council area Year Pricing option 1 Pricing option 2

$/kL % change $/kL % change

Brisbane, Gold Coast, 2017–18 actual 2.817 2.817

Ipswich, Lockyer
Valley, Logan, 2018–19 2.962 5.16% 2.915 3.49%
Moreton Bay, Scenic
2019–20 3.037 2.50% 3.017 3.49%
Rim, Somerset
2020–21 3.112 2.50% 3.122 3.49%

Sunshine Coast and 2017–18 actual 2.616 2.616

Noosa
2018–19 2.826 8.04% 2.785 6.46%

2019–20 3.037 7.44% 2.953 6.06%

2020–21 3.112 2.50% 3.122 5.72%

Redland City 2017–18 actual 2.561 2.561

2018–19 2.799 9.29% 2.748 7.31%

2019–20 3.037 8.50% 2.935 6.81%

2020–21 3.112 2.50% 3.122 6.38%

Note: % change reflects the year-on-year percentage change.

Source: QCA calculations.

Stakeholders who commented on the pricing options preferred option 2 over option 1. 157
Unitywater supported option 2 because of the consistency (of price increases) it provides—
noting customers are sensitive to inconsistent price changes—and because it eliminates cross-
regional inequity.158
Moreton Bay Regional Council considered it to be inequitable for customers to pay different
prices depending on their council area and contended that all customers should pay the same
price.159 Under the referral, we have been asked to continue to transition customers in Redland
City, Sunshine Coast and Noosa council areas to the common price that is paid by customers in
the other council areas. If our recommendations are adopted, customers in all council areas will
pay the common price by 2019–20 (pricing option 1) or 2020–21 (pricing option 2).
QCOSS was concerned that low income and vulnerable households, who often rent their home,
are impacted by wholly volumetric bulk water pricing because landlords are permitted to pass
through volumetric prices.160 The QCA notes QCOSS's submission, but under the referral, the
QCA has been asked to recommend prices that are volumetric only. We discuss the potential for
alternative tariff structures in Chapter 10.

157
Redland City Council, sub. 16, p. 1; Unitywater, sub. 17, p. 2.
158
Unitywater, sub. 17, p. 2.
159
Moreton Bay Regional Council, sub. 9, p. 1.
160
QCOSS, sub. 10, pp. 1–2.

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Queensland Competition Authority Recommended prices

Several stakeholders shared concerns about the impact of bulk water prices on customers. 161
We acknowledge these concerns; however, we have followed the terms of the referral to
recommend prices that provide Seqwater with sufficient revenue to recover prudent and
efficient costs and to repay price path debt over the next 10 years. We also note that the
intention of the price path is to reduce the price impact of significant investments made in
response to low water availability, by phasing in price increases over time.

Recommendation 1
Bulk water prices for each council area should be set according to pricing option 1 or pricing
option 2, as set out in Table 60 above.

9.2 Indicative impact on water bills

Bulk water prices are included as a separate charge in the water bills of households and
businesses. Based on our recommended prices, the potential impact on the bulk water
component of water bills is illustrated in Table 61. Calculations are based on average household
consumption across SEQ of 160 kL per year.162
As prices are wholly volumetric, the percentage increases in bills are the same as the
percentage increases in prices (refer to Table 60 above).
Table 61 Indicative bulk water component of water bills for an average household

Council area Year Pricing option 1 Pricing option 2

$/year $ change Bill amount $ change

Brisbane, Gold Coast, 2017–18 actual 450.72 450.72

Ipswich, Lockyer
Valley, Logan, 2018–19 473.92 23.20 466.40 15.68
Moreton Bay, Scenic
2019–20 485.92 12.00 482.72 16.32
Rim, Somerset
2020–21 497.92 12.00 499.52 16.80

Sunshine Coast and 2017–18 actual 418.56 418.56

Noosa
2018–19 452.16 33.60 445.60 27.04

2019–20 485.92 33.76 472.48 26.88

2020–21 497.92 12.00 499.52 27.04

Redland City 2017–18 actual 409.76 409.76

2018–19 447.84 38.08 439.68 29.92

2019–20 485.92 38.08 469.60 29.92

2020–21 497.92 12.00 499.52 29.92

Source: QCA calculations.

161
QCOSS, sub. 10, p. 1; Council of the City of Gold Coast, sub. 12, p. 1; Unitywater, sub. 11, p. 2; Mr Buglar,
sub. 6, p. 1; Mr Derbyshire, sub. 7, p. 1; Redland City Council, sub. 14, p. 1.
162
Based on information provided by Seqwater, we estimate that average household consumption is around
160 kL per year. This reflects consumption of around 169 LPD and an estimate of average household size in
SEQ of 2.53 (Seqwater response to QCA RFI 12).

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Queensland Competition Authority Future reviews and other issues

10 FUTURE REVIEWS AND OTHER ISSUES

Other important issues, some of which are relevant to future price reviews, are discussed in this
chapter. These issues are the review events framework; ex post assessments of capex;
Seqwater's proposal to treat some operating expenditure (opex) as capital expenditure (capex);
incentive mechanisms; tariff reform; prudent discounting; and stakeholder consultation and
consumer engagement.

10.1 Review events framework

Seqwater supported the continuation of the review events framework beyond 1 July 2018, but
proposed the following amendments:
 clarifying when feedwater quality events apply
 adding drought response events163.

Feedwater quality events

Seqwater proposed that feedwater quality events only apply to extreme events (such as
cyclones or floods) that lead to a sustained and severe deterioration in feedwater quality.
Seqwater proposed to bear the risk of seasonal or climatic variations in the quality of feedwater
and included a contingency within its opex proposal to account for this.164
In our draft report, we explained that it may be difficult to assess whether an event met the
definition of an extreme event without establishing a review threshold. We also considered that
Seqwater had provided insufficient justification to include a contingency allowance to account
for minor variations in feedwater quality (see Chapter 4).
We maintain our draft recommendation (which Seqwater accepted165) that no change be made
to the definition of feedwater quality events that we recommended in the 2015 review.

Recommendation 2
The definition of feedwater quality events that we recommended in the 2015 review
should not be changed.

Drought response events

The referral provides for the QCA to review the efficiency of any additional costs for drought
response, where these occur in accordance with the Water Security Program and the costs are
material.
Seqwater proposed that drought response events should be included as a review event on an
ongoing basis. We consider that Seqwater's proposal to amend the review event framework to

163
Defined as changes to operating mode, response to regional drought triggers and local drought in off-grid
areas (Seqwater, sub. 1, p. 53).
164
Seqwater, sub. 1, pp. 44–45, 52–53.
165
Seqwater, sub. 13, p. 49.

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Queensland Competition Authority Future reviews and other issues

include drought response events is reasonable, particularly given that droughts are
unpredictable and the impact on costs is uncertain.
Queensland Urban Utilities considered that any true-up for drought response costs should occur
at the end of the regulatory period, because it would be difficult for retailers to manage
customer price impacts if a true-up occurred during the regulatory period.166 Consistent with
our recommendations in the 2015 review167, we consider that changes in costs that have
material implications for Seqwater should be eligible for review during the regulatory period.
We also still consider that the Government is best placed to determine when an impact is
material and, therefore, when a within-period review is necessary.

Recommendation 3
Where Seqwater can demonstrate a change in prudent and efficient costs as a result of
taking drought response measures in accordance with the Water Security Program,
Seqwater should be able to recover these drought response costs as follows:
(a) Where the impact is material, drought response costs should be recouped through a
price adjustment during the three-year regulatory period.
(b) Where the impact is not material, drought response costs should be recouped
through an end-of-period adjustment.

Other review events

We consider our recommendations from the 2015 review regarding other review events,
including emergency events and law or government policy events, continue to be appropriate.

10.2 Ex post assessments of capex

Under the terms of the referral, we were asked to undertake an ex post assessment of capex if
actual capex is higher than the capex we approved in the 2015 review (see Chapter 5).
We recommend that we be given the discretion in future reviews to undertake an ex post
review of capex, regardless of whether actual capex is higher or lower than allowed capex.
Given that annual capex on an as-commissioned basis can be driven by lumpy, multi-period
projects, the deferral of major projects may obscure potential inefficiencies in other projects.
Such discretion will give us the flexibility to apply further scrutiny as appropriate, for example,
in circumstances where actual capex is lower than allowed capex as a result of the deferral of
capex to future regulatory periods.

166
Queensland Urban Utilities, sub. 8, pp. 2–3.
167
QCA, SEQ bulk water price path 2015–18, final report, March 2015, pp. 91–98.

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Queensland Competition Authority Future reviews and other issues

Recommendation 4
The QCA should have discretion to undertake an ex post assessment of the prudency and
efficiency of capex in future reviews, regardless of whether actual capex is higher or lower
than allowed capex.

10.3 Treating opex as capex

In its submission to the draft report, Seqwater argued that some costs that would be
categorised as opex by accounting standards should be treated as capex for regulatory pricing
purposes.168
Seqwater explained that some opex associated with large capex projects is more akin to capex
and is also difficult to estimate when projects are at an early planning stage. Seqwater provided
the following examples:
 the costs of operating plants normally in hot-standby (such as the desalination plant) during
major shutdowns when upgrading water treatment plants (WTPs) and dams. Seqwater
argues that the costs of maintaining supply, over and above business-as-usual opex, is
directly attributable to the upgrade projects, because the upgrades could not occur without
an alternative supply source.
 payments to third parties for augmentations or modifications to assets owned by those third
parties.
Seqwater advised that it had not included any of these costs in its opex proposal but considered
that the additional opex should be capitalised over the life of the associated assets and
recovered through the regulatory asset base (RAB) because:
 it avoids the need to include large and uncertain allowances in opex forecasts
 the costs are a direct result of capex. Including the costs in the RAB ensures current and
future customers contribute to the costs because both groups benefit from the projects.
We asked KPMG to assess Seqwater's proposal. KPMG advised that Seqwater had not provided
clear evidence of the need to move away from current accounting standards to classify
expenditure.169
KPMG considered that the costs of operating plants (such as the desalination plant) to maintain
supply during major shutdowns for works at other treatment plants are not direct inputs into
capital works associated with upgrading offline assets. Rather, these assets help to ensure
security of supply across the grid and the associated opex should not be treated differently to
opex associated with the operation of Seqwater's other assets.
KPMG also advised that Seqwater should retain its treatment of payments to third party asset
owners as opex, consistent with current accounting standards, as these payments are not

168
Seqwater, sub. 13, pp. 51-54. These costs are not included in Seqwater's proposed opex or capex
allowances.
169
KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018, pp. 261.

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Queensland Competition Authority Future reviews and other issues

directly attributable to the construction of assets, in which Seqwater retains rights and
obligations.
In KPMG's view, departures from accounting standards are typically by exception and driven by
the regulator seeking to address issues that may be significantly distorting outcomes.
We have considered KPMG's advice and the concerns it has raised with Seqwater's proposal.
However, as Seqwater's proposal was received late in the review, there has been insufficient
time to fully consider the proposal and its potential implications. There has also been no
opportunity to consult with stakeholders and consider their views. It would be appropriate to
consider this issue as part of the next review.

10.4 Incentive mechanisms

Seqwater submitted that the current arrangements for the disposal of land do not provide
strong incentives to take up opportunities to sell surplus land, as the current arrangements
could result in all proceeds from such a sale being removed from the RAB.
Seqwater considered it should be incentivised to dispose of surplus land and purchase strategic
land around its dams, by sharing the proceeds of land sales with customers and retaining land
sale proceeds (without any adjustment to the RAB), for the purchase of strategic land.170
Incentive mechanisms should not be developed in isolation, but should be considered
holistically rather, through the development of a package of incentives that work together.
Incentive mechanisms may be established to provide incentives for firms to, for instance,
reduce costs, better utilise existing assets by earning revenue from other sources (e.g. by
leasing land to third parties or selling hydro-electric power) or sell assets that are no longer
used, as noted by Seqwater.
Incentive mechanisms are generally approved prior to the beginning of the relevant regulatory
period, rather than being approved ex post. A key component of an effective mechanism is the
strength of up-front commitments by regulators not to claw back outperformance over the
regulatory period. It is difficult for the QCA to provide such commitments, because our reviews
are at the discretion of the Government and are based on government policy positions at the
time of each review.
We consider that the establishment of incentive mechanisms should be further considered
when the regulatory framework is more conducive to providing regulatory commitments and
after proper consideration of the costs and benefits. Seqwater supported the development of
an incentive framework in future.171

10.5 Tariff reform

Seqwater submitted that wholly volumetric tariffs mean that price resets are very sensitive to
demand (i.e. where actual demand is lower than forecast, prices must increase to address the
resulting shortfall in revenue). Seqwater submitted that this could be addressed by moving to a

170
Seqwater, sub. 1, p. 54.
171
Seqwater, sub. 13, p. 60.

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Queensland Competition Authority Future reviews and other issues

two-part tariff that is more reflective of Seqwater's cost structure (i.e. high fixed costs relative
to variable costs).172
We note that tariff reform involves both costs and benefits, and therefore requires careful
consideration and consultation with stakeholders and customers. There may be merit in
considering the matter of tariff reform further.

10.6 Prudent discounting framework

In its submission to the draft report, Seqwater highlighted that the current pricing
arrangements may result in some end-use customers inefficiently bypassing the water supply
network and investing in alternative water supply options (for example, desalination). Seqwater
advised that the reduction in demand would adversely affect other customers, because prices
would need to increase to enable Seqwater to recover its fixed costs.173
To address this issue, Seqwater proposed the introduction of a prudent discounting framework
modelled on the arrangements applying in the electricity transmission sector under the National
Electricity Rules. Seqwater considered that the ability to offer a discount to users with a viable
alternative supply option could benefit all water users:174
 The water user receiving the discount would benefit, because the discounted price would be
lower than the costs of the alternative supply option.
 Other users would be better off, because it would mitigate the increase in prices that would
otherwise occur.
In accordance with the referral, we have recommended a fully volumetric common price for all
customers (except those on a transitional price path). Inherent in this pricing arrangement is the
potential for some customers to reduce their costs by investing in their own supply
arrangements. This may result in inefficient duplication of water supply infrastructure and
higher prices for other water users.
While considering Seqwater's proposed prudent discounting framework is outside the scope of
this review, this is a proposal the Government may wish to investigate, potentially in
conjunction with a review of tariff structures (section 10.5).

10.7 Stakeholder engagement

We note QCOSS's suggestion that consumer engagement could be improved. QCOSS considered
that Seqwater should improve engagement with consumers and consumer advocacy
organisations and that the QCA should consider extending the terms of reference for the QCA's
Consumer Advisory Committee to include water issues.175
Seqwater advised that it works collaboratively with its customers (who are the water retailers)
to improve outcomes, reduce costs and better manage risks, and that it consulted with
customers about its capital expenditure forecast for the purposes of developing its

172
Seqwater, sub. 1, p. 54.
173
Seqwater, sub. 13, pp. 57–60.
174
Seqwater, sub. 13, p. 57.
175
QCOSS, sub. 10, pp. 2–3.

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Queensland Competition Authority Future reviews and other issues

submission.176 We encourage Seqwater to continue to consult and collaborate with customers

in future, including when it develops its regulatory submission.
The QCA's Consumer Advisory Committee, which was established under the Electricity Act 1994,
advises the QCA on electricity and gas issues, in which the QCA has an ongoing regulatory role.
The QCA does not have an ongoing role in water pricing and does not regulate water prices, but
provides advice at the request of the Government in accordance with the terms of reference
established for each review. Therefore, the regulatory arrangements that apply to water pricing
do not support establishing an advisory committee in relation to water issues at this time.
In any review, we aim to run an open and transparent review process and we encourage all
stakeholders and interested parties to participate in the process by making submissions and,
where relevant, attending workshops. When we prepare our advice and recommendations, we
carefully consider all submissions received.

176
Seqwater, sub. 1, pp. 26, 46.

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Queensland Competition Authority Glossary

GLOSSARY

2015 review the QCA's review of bulk water prices for the period 1 July 2015 to 30 June 2018,
which was completed in March 2015

ABS Australian Bureau of Statistics

AEMO Australian Energy Market Operator

APMP asset portfolio master plan

AWTP advanced water treatment plant

capex capital expenditure

CPI consumer price index

DEWS Queensland Department of Energy and Water Supply (now the Queensland
Department of Natural Resources, Mines and Energy)

DNRM Queensland Department of Natural Resources and Mines (now the Queensland
Department of Natural Resources, Mines and Energy)

EBA enterprise bargaining agreement

ESC Essential Services Commission (Victoria)

FTE full time equivalent

GAWB Gladstone Area Water Board

GCDP Gold Coast Desalination Plant

GSC grid service charge

HUF headworks utilisation factor

ICT information and communications technology

IDC interest during construction

Incenta Incenta Economic Consulting

IPART Independent Pricing and Regulatory Tribunal (New South Wales)

kL kilolitre (1,000 litres)

LOS level of service

LPD litres per person per day

MAR maximum allowable revenue

MCS monitoring control system

ML megalitre (1 million litres)

MRP market risk premium

Opex operating expenditure

price path debt repayment revenue from bulk water prices that exceeds building block costs, for the purpose of
repaying price path debt by 2028.

QCA Queensland Competition Authority

QCA Act Queensland Competition Authority Act 1997

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Queensland Competition Authority Glossary

QCOSS Queensland Council of Social Service

QTC Queensland Treasury Corporation

QUU Queensland Urban Utilities

RAB regulatory asset base

RBA Reserve Bank of Australia

RFI Request for information

RFR risk-free rate

SEQ south east Queensland

the Government the Queensland Government

the referral the referral for the review issued by the Government to the QCA under section 23 of
the QCA Act

the review the QCA's review of bulk water prices for the period 1 July 2018 to 30 June 2021

UK United Kingdom

US United States

WACC weighted average cost of capital

WAE water access entitlement

WCRWS Western Corridor Recycled Water Scheme

WPI wage price index

WPS water pump station

WSP Water Security Program

WTP water treatment plant

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Queensland Competition Authority Appendix A: Referral

APPENDIX A: REFERRAL

The referral was issued by the Government on 25 May 2017 and published in the Government Gazette on 2
June 2017.

88
Queensland Competition Authority Appendix A: Referral

89
Queensland Competition Authority Appendix A: Referral

90
Queensland Competition Authority Appendix A: Referral

91
Queensland Competition Authority Appendix A: Referral

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Queensland Competition Authority Appendix B: Stakeholder submissions

APPENDIX B: STAKEHOLDER SUBMISSIONS

Stakeholder Submission Document/date of submission

number

Initial submission from Seqwater

Seqwater 1 Submission Part A, July 2017

Seqwater 2 Submission Part B, July 2017

Seqwater 3 Appendix 1, Cost escalation factors, final report, prepared by

PwC, July 2017

Seqwater 4 Appendix 2, The weighted-average cost of capital for Seqwater,

prepared by Frontier Economics, July 2017

Seqwater 5 Appendix 3, Updated cost of debt estimates for Seqwater,

prepared by Queensland Treasury Corporation, July 2017

Initial submissions from other stakeholders

Mr Buglar 6 June 2017

Mr Derbyshire 7 July 2017

Queensland Urban Utilities 8 September 2017

Moreton Bay Regional Council 9 September 2017

Queensland Council of Social Service 10 September 2017

Unitywater 11 September 2017

Council of the City of Gold Coast 12 September 2017

Submissions on the draft report

Seqwater 13 Submission, January 2018

Seqwater 14 Attachment 1, Market risk premium issues in the QCA's draft

report for Seqwater, prepared by Frontier Economics, January
2018

Seqwater 15 Attachment 2, Procedure for tracking and claiming of additional

costs for extraordinary water events, January 2018

Redland City Council 16 January 2018

Unitywater 17 January 2018

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Queensland Competition Authority Appendix C: Overview of Seqwater's key obligations

APPENDIX C: OVERVIEW OF SEQWATER'S KEY OBLIGATIONS

The Water Supply Regulator (within the Department of Natural Resources, Mines and Energy) regulates
the quality and provision of drinking and recycled water quality and service provider performance in
Queensland. Seqwater is a registered drinking water service provider under the Water Supply (Safety and
Reliability) Act 2008 and must comply with a range of obligations in this Act and other legislative and
regulatory instruments.177

Water quality obligations

Seqwater provides bulk water to water retailers that has been treated to drinking water quality
standards.178 Seqwater's bulk water supply agreements with the retailers179 detail specific quality
parameters, while also requiring compliance with the Australian Drinking Water Guidelines.180 Seqwater
must also meet obligations with respect to fluoride and E.coli levels181, comply with an approved Drinking
Water Quality Management Plan182 and report its performance against drinking water quality
standards.183

Water security planning obligations

Following its establishment on 1 January 2013, Seqwater assumed responsibility for long-term water
security planning for SEQ.
The Water Act 2000 enables the creation of desired LOS objectives for water security in SEQ and the
requirement for Seqwater to have a WSP to facilitate the achievement of the LOS objectives.
LOS objectives have been set in the Water Regulation 2002.184 Broadly, they require that the bulk water
supply network is able to supply enough water:185
 to meet the projected regional average urban demand (as estimated by Seqwater) for each year over
the next 30 years
 so that medium level water restrictions on residential water use will not occur more than once every
10 years (on average) or restrict average water use to less than 140 LPD per day
 so that medium level water restrictions are expected to last no more than one year on average

177
Seqwater, sub. 1, p. 16.
178
Seqwater has bulk water supply agreements to supply raw water (rather than treated water) to other
customers, including Stanwell Corporation and Toowoomba Regional Council.
179
Agreements are determined by the Minister for Energy and Water Supply under s. 360G of the Water Act
2000.
180
The Australian Drinking Water Guidelines, which are developed by the National Health and Medical
Research Council, set minimum guideline values for drinking water quality at the bulk water supply point and
also set out the practices for managing water quality risks.
181
For example, under the Public Health Act 2005.
182
Under the Water Supply (Safety and Reliability) Act 2008, the plan must be approved by the Water Supply
Regulator.
183
Seqwater is required to report on its performance under the Bulk Water Supply Code, which commenced on
1 January 2013 and was made by the Minister for Energy and Water Supply under s. 360M of the Water Act
2000.
184
If changes are made to the LOS objectives, this may result in changes to the WSP. See Seqwater, Water for
Life: South East Queensland's Water Security Program 2016–46, March 2017, p. 11.
185
Seqwater, Water for Life: South East Queensland's Water Security Program 2016–46, March 2017, p. 144.

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Queensland Competition Authority Appendix C: Overview of Seqwater's key obligations

 to provide an essential minimum supply volume of 100 LPD and not be reduced to being able to supply
only this volume more than once in every 10,000 years, on average.
The LOS objectives also require that the bulk water supply network should be operated so that three key
storages (Baroon Pocket, Wivenhoe and Hinze dams) do not reach their minimum operating level more
than 1 in every 10,000 years on average.
Seqwater's WSP covers the long-term planning arrangements in place to facilitate the LOS objectives for
south east Queensland for the next 30 years. It includes information about operating the bulk water
supply system, future bulk water infrastructure options and drought response.
Seqwater has released two versions of the WSP so far, with the latest version released in March 2017.
The WSP remains in force until it is updated through a review, which must occur at least every five
years.186

Dam safety and flood mitigation obligations

Seqwater is responsible for the safety of its dams under the Water Supply (Safety and Reliability) Act
2008.187 Seqwater's obligations in relation to dam safety include:
 having an effective dam safety management program to minimise the risk of dams failing, and protect
life and property, in accordance with the Queensland Dam Safety Management Guidelines188
 complying with the national guidelines of the Australian National Committee on Large Dams 189
 having an approved emergency action plan in place for each dam190
 meeting requirements relating to acceptable flood capacity in the Guideline on Acceptable Flood
Capacity for Water Dams191
 undertaking flood operations in accordance with approved flood mitigation manuals for Wivenhoe,
Somerset and North Pine Dams.192

Other obligations
Seqwater must comply with the Bulk Water Supply Code and bulk water supply agreements with water
retailers. These instruments include requirements relating to the establishment of operating protocols
(governing requirements such as minimum storage levels in reservoirs, and flow rates and pressure at
connection points), metering obligations and standards, provision of water consumption data, emergency
planning, and the supply of sufficient water to meet customers' demand.193
Seqwater must also comply with a number of other obligations, including those relating to performance
reporting, flood operations and notifications, water entitlements and resource management,
development conditions, environmental obligations, licensing, and noxious weeds and pests. 194

186
Seqwater, sub. 2, pp. 4, 22.
187
Seqwater, sub. 1, p. 29.
188
DNRM, Queensland Dam Safety Management Guidelines, February 2002.
189
Seqwater, sub. 1, p. 29.
190
Water Supply (Safety and Reliability) Act 2008, s. 352E.
191
DEWS, Guidelines on Acceptable Flood Capacity for Water Dams, July 2017.
192
Flood mitigation manuals must be approved by the Minister for Energy and Water Supply, in accordance
with the provisions of the Water Supply (Safety and Reliability) Act 2008.
193
Seqwater, sub. 1, p. 16.
194
Seqwater, sub. 1, pp. 16, 18.

95
Queensland Competition Authority References

REFERENCES

ABS (Australian Bureau of Statistics), Consumer Price Index, Australia, Sep 2017, Table 1: All Groups Index
Numbers and Percentage Changes, cat. no. 6401.0, viewed 6 November 2017,
http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Sep%202017?OpenDocument.

ABS (Australian Bureau of Statistics), Wage Price Index, Australia, Dec 2017, Table 8a: cat. No 6345.0,
viewed 13 March 2018,
http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6345.0Dec%202017?OpenDocument.

CH2M Hill, Seqwater's Operating and Capital Expenditure Review, Assessment of Prudency and Efficiency,
final report, March 2015.

DEWS (Department of Energy and Water Supply), Guidelines on Acceptable Flood Capacity for Water
Dams, Queensland Government, July 2017.

DNRM (Department of Natural Resources and Mines), Queensland Dam Safety Management Guidelines,
Queensland Government, February 2002.

ESC (Essential Services Commission), 2018 Water Price Review: Guidance Paper, November 2016.

Incenta Economic Consulting, Estimating Seqwater's firm-specific WACC parameters for the 2018–21 bulk
water price investigation, November 2017.

IPART (Independent Pricing and Regulatory Tribunal), Review of Prices for Hunter Water Corporation from
1 July 2016 to 30 June 2020, final report, June 2016.

KPMG, Seqwater expenditure review: prudency and efficiency assessment, report for the QCA, November
2017.

KPMG, Seqwater expenditure review: prudency and efficiency assessment, updated report for the QCA,
March 2018.

QCA, Seqwater Irrigation Price Review 2013–17, final report, Volume 1, April 2013.

QCA, Financial Capital Maintenance and Price Smoothing, information paper, February 2014.

QCA, SEQ bulk water price path 2015–18, final report, March 2015.

QCA, Gladstone Area Water Board Price Monitoring 2015–2020, final report, May 2015.

QCA, Seqwater bulk water price review 2018–21, draft report, November 2017.

Queensland Government, 'Smart savings, Concessions and rebates: Energy and water', viewed 16 October
2017, https://campaigns.premiers.qld.gov.au/smart-savings/#category=Energy-and-water.

Queensland Treasury, Queensland Budget 2017-18, Budget Strategy and Outlook, Budget Paper No. 2,
June 2017.

RBA (Reserve Bank of Australia), Statement on Monetary Policy, February 2018,

https://www.rba.gov.au/publications/smp/2018/feb/.

Seqwater, Water for life: South East Queensland's Water Security Program 2016–46, March 2017.

Seqwater, South East Queensland dam storage levels, viewed 6 March 2018,
http://www.seqwater.com.au/water-supply/dam-levels.

96