p. 1

ta riffstr gy ate draft water plan 2012

[close]

p. 2

draft tariff strategy contents executive summary 1 introduction building on our customers experience 2 proposed approach principles for tariffs objective strategic priorities network supply systems 3 where we have come from history of current tariffs we provide many different services district pricing unbundling history of schemes structure of current tariffs 4 our future operating environment system modernisation murray-darling basin plan 5 process in developing revised strategy advisory group a strategic focus our work program 6 bulk water charges strategic decision for 2020 consensus recommendation recovering other headworks costs 3 4 4 5 5 5 6 6 7 7 7 8 8 8 9 10 10 10 11 11 11 11 12 13 14 14 7 service point fees current arrangements strategic decision for 2020 low service point fee raised service point fee discussion and consensus recommendation 8 delivery charges current arrangements strategic decision for 2020 discussion and consensus recommendation 9 delivery shares fixed charges casual users current arrangements strategic decisions for 2020 10 drainage 11 choice on levels of service current arrangements strategic decision for 2020 setting a single standard charge discussion and consensus recommendation 12 charges for diverters current arrangements tariff options 13 next steps 15 15 15 16 16 16 17 17 17 18 19 19 19 22 23 23 23 23 24 25 25 25 27 2

[close]

p. 3

executive summary this brochure seeks comments from our customers on the structure and design of our future charges our charges are a critical part of our business taken together the structure and design of our charges are called our tariffs the structure of our tariffs affects how we recover our costs and how we allocate charges between different activities and customer groups they are vital to how we interact with our customers and how we deliver services our current tariff structure is complex with many different charges depending on the location and type of service provided this reflects the complexity of the business we run and the history of the different services we have developed over time however we know that many of our customers want greater simplicity we are facing major changes to our business and operating environment the $2 billion investment to modernise our irrigation delivery system which means that in the future we will be operating our infrastructure as a single interconnected network we are also transforming our business management we need to make sure that the structure and design of our future charges help promote our new objectives and allow us to meet the new challenges we face the main objective of this paper is to identify the issues and start to articulate what our tariff structure should look like in 2020 we are developing a new tariff strategy to set the framework for our future charges the chairs of our water services committees are leading this process and have guided the development of this brochure which sets out their current thinking we are also committed to driving down our overall costs to ensure that we are competitive with other irrigation areas in our draft water plan we have guaranteed a productivity dividend to reduce our costs by $6 million over the next three years this brochure is the second in a series about future prices it aims to articulate what our tariff structure should be in 2020 it provides a framework to help us develop implementation and transition plans for specific charges over the coming seven years it identifies a set of key principles that should help guide our thinking and then uses those principles to steer a discussion about some difficult tariff challenges for example · · · · · · · should bulk water charges be averaged across catchments should delivery charges be set at a district scale should we have 100 fixed charges should service point fees recover their full costs should customers have greater choice in the services they receive by 2020 how should we recover costs of managing unregulated systems should we review the related drainage charges the target in each case is to identify where we want to be in the year 2020 when our major modernisation program is complete the next step will be to develop plans for how we will get there we seek advice and comments from customers in response to our brochure tariff strategy draft 2012 3

[close]

p. 4

1 introduction this brochure seeks comments from customers on our draft tariff strategy this is the second stage of our consultation program on our water plan proposals our tariffs are the structure of our charges they are critical to the way that we interact with our customers they affect the impact of our charges on different customers and drive the delivery of our services we are also committed to driving down our overall costs to ensure that our charges are affordable and that we are competitive with other irrigation areas in our draft water plan we have guaranteed a productivity dividend to reduce our costs by $6 million this represents the equivalent of about 6 of our annual operational expenditure over the next three years our current tariffs were developed to match our previous business environment we are transforming our irrigation delivery system with a $2 billion investment from governments we are also transforming our business systems our tariffs need to align with these new business systems and objectives we are developing a new tariff strategy to set the framework for our future charges the strategy will also inform our future water plans that set our business priorities and will guide our implementation plans and the water reforms that occur in the future the chairs of our water services committees have guided the development of the draft strategy they have been charged with describing what our tariffs should look like in 2020 after the completion of our $2 billion investment once we have finalised this strategy we will start the process of drafting our implementation plans for specific tariffs to ensure a smooth transition to a new model the group has developed this brochure and will lead discussions on the issues within each water services committee and district that means that the approach has been informed by practical experience from our customers we now seek comments and feedback from our customers on our draft tariff strategy building on our customers experience we recognise that the structure and design of our charges are of great importance to customers customers tell us that their main concerns are charges need to be clear simple and transparent · · · · the current charges are too complex and difficult to understand customers cannot tell what costs their charges cover delivery shares are seen as a liability not an asset and are leading to bad outcomes charges need to be clear and easy to understand so you can see what you are paying for all customers should pay a fair share · · · · small non agricultural customers are not paying their way casual use fees are not high enough the environment is not paying for its share similar service should see similar fees charges should support productive agriculture · · · · tariffs should encourage productive agriculture we need to allow for district diversity our tariffs should promote modernisation but not subsidise uncommercial small properties we need to recognise both public and private investments 4

[close]

p. 5

2 proposed approach principles for tariffs the advisory group agreed the following principles to help guide the development of our tariff strategy · encourage agricultural production tariffs should encourage productive agriculture as that underpins the regional economy and community it is important to support regional communities but that cannot be at the expense of viable irrigated enterprises simple clear and transparent to understand and manage customers want to understand what they are paying for without too much complexity g-mw needs an approach that can be managed without undue cost tariffs are equitable a similar service should attract a similar fee and charges should be cost reflective send clear signals on the real costs of services charges should send clear signals as to the real costs of providing services customers should be able to see how their decisions are reflected in their charges to enable robust business decisions provide predictability customers cannot manage their businesses if they face fluctuating prices both they and g-mw need predictable pathways for business investment decisions g eneratesufficientrevenue:g-mw needs to be financially sustainable but must demonstrate it is doing everything it can to keep prices down encourageefficientwatermarkets:water trading is an essential tool to promote viable irrigated businesses tariffs need to facilitate speedy trading with low costs are there other principles that we should adopt as guidelines for the exercise objective in developing our tariff strategy the advisory group agreed the following objective a simple and transparent tariff structure promoting productive agriculture supporting rural communities and providing a fair price for bulk water customers · does this objective sound right for 2020 · · · · · tariff strategy draft 2012 5

[close]

p. 6

2 proposed approach continue strategic priorities the strategy articulates what our tariff structures should look like in 2020 in developing our strategy our advisory group selected the following priority tariff issues for review as the core charges in each business area which will be critical to our future business success · · · · · bulk water charges delivery charges service point fees providing choice on levels of service drainage d the discussion focussed largely on our bulk and gravity irrigation customers however the strategy will cover the full range of our customers so this paper has taken the principles and recommendations and applied a similar approach to develop broad proposals for our diversion customers network supply systems we manage a vertically integrated supply business from the headworks storages through delivery systems to drainage disposal as well as discussing each tariff as a stand-alone issue we also looked at the relative balance between the charges that is does the tariff structure result in an appropriate overall level of revenue for each business function are there other tariff issues we should consider as a priority our advisory group reviewed these priority issues and tested them against the agreed objective and principles so they asked the questions · · · · · · · what are the options does the option help us achieve our vision does the option match our tariff principles who wins and who loses with each choice what are the risks and issues for customers and g-mw is there a consensus on which option we should recommend at this early stage what transition issues should we be aware of the review by the advisory group also triggered discussion of a range of related tariff issues such as · · · · · casual use fees are they high enough small volume customers what services and charges are needed after modernisation carryover do charges send the right signals for productive use of the water recreational use of our headworks how should the costs be recovered drainage do these need a full review as well 6

[close]

p. 7

3.where we have come from history of current tariffs our current tariff structure is complex with many different elements this reflects our structure and history we provide many different services we run a range of different business activities and services that includes · · · · our headworks business where we harvest store and deliver bulk water services for urban irrigation and environmental customers as well as providing recreational facilities for the public licensed diverters where we manage shared access to groundwater and surface water resources in both regulated and unregulated catchments irrigation areas where we own and manage infrastructure to deliver water to irrigators in six irrigation districts as well as drainage services to minimise risks of water-logging and salinity water districts where we provide piped supplies for stock and domestic use figure 1 diagrammatic representation of the system figure 1 provides a simple illustration of those different elements our tariff structure reflects this business structure with separate charges for each component tariff strategy draft 2012 7

[close]

p. 8

3 where we have come from district pricing we currently set our charges for delivery services on a district basis this approach was introduced following the mcdonald review in the 1990s which recommended giving local communities greater opportunity to influence the trade-off between levels of service and charges over time this has resulted in substantial price differences between districts the discussion with our advisory group questioned whether this rationale is still appropriate when the $2 billion investment to modernise our delivery system will provide a standard level of service across our irrigation districts and result in an interconnected and integrated network history of schemes as we have introduced new supply systems we have developed charges for those schemes that reflect the costs we incurred and the level of any external funding from government or other agencies the level of the charges has then been set to recover the outstanding costs of that particular scheme and the contribution expected from the users of that service this approach means that we have different charges for a long list of services many of which are very similar to one another in terms of the service we provide for example we provide piped stock and domestic water supplies to water districts at normanville tungamah and east loddon but the charges vary depending on the historical costs of the scheme and the external funding provided this approach is also true of our drainage charges where a range of different services have been developed at different times each with its own separate charge we now have 14 different drainage charges grouped into three categories with different values for each charge depending on the location finally we have around 150 separate miscellaneous charges for a wide range of specific services and transactions including applications for works water trading and licence renewals unbundling in 2007 `water rights held by irrigators in districts were split into three separate parts · water shares which gave customers a share of the water resource this is a tradeable right independent of ownership of land water shares were also split into classes with different levels of security delivery share which gave irrigators in a district a share of the delivery capacity of the infrastructure water use licences which gave irrigators the right to use the water at a specific location · · our charges follow this same structure 8

[close]

p. 9

structure of current tariffs the outcome of this history is that our current structure of charges is complex with multiple categories and separate levels of charge depending on the service and the location that means that a standard bill for a customer in an irrigation district will typically include a series of separate charges to reflect the separate business activities we manage and the unbundling of the water entitlement · · a `service fee that reflects the costs of managing the customer account a `storage fee for the use of the headworks based on the volume of water share held in terms of ml of either high and/or low reliability entitlement a `service point fee for the costs of the meter and outlet an `infrastructure access fee that charges for use of the local delivery system based on the number of delivery shares held in terms of ml/day this charge varies by location an `infrastructure use fee that reflects the volume of water delivered to the property a `drainage charge that reflects the services provided to the property by location diverters and customers in our water districts face a similar suite of charges for the different services they receive this approach is very precise in allocating costs and charges to particular customer segments for specific services however many customers find it difficult to understand and it is expensive to manage it also means that customers in different locations are paying different charges even though they are receiving the same product or service if there is an unforseen event in a specific area it also results in price adjustments for small parts of the customer base · · · · tariff strategy draft 2012 9

[close]

p. 10

4 our future operating envir onment our future operating environment will be determined by a number of major factors it is critical that our revised tariff strategy takes account of this murray-darling basin plan the murray-darling basin plan will determine how much of our water is available for irrigation and how much is allocated for environmental flows this has already lead to a substantial reduction in the total volume of water delivered to properties across g-mw both in our irrigation districts and to our licensed diverters it is still unclear what changes will be required and how and when they will take effect it will most likely result in a reduction in total diversions from around 1,600 gl down to around 900 gl system modernisation we are transforming our irrigation delivery system through our $2 billion modernisation program this will automate a backbone of major channels and replace all the previous spur channels with new modernised connections this will also have the effect of reducing local costs as activities such as system operations and asset management become centralised the new backbone will provide an enhanced level of service for all connected properties promoting greater productivity on-farm this level of service will be at a single standard level that will apply across the entire goulburn murray irrigation district replacing the considerable variation between districts these changes will have a profound effect on our future operating environment affecting how we deliver water the skills and labour required to manage the system the extent and nature of our costs and the likely pattern of demand from our customers 10

[close]

p. 11

5 process in developing revised strategy advisory group the chairs of our water services committees have been asked to guide the development of our draft tariff strategy with support from two members of the g-mw board the chairs have formed an advisory group to develop recommendations to the board on the best way forward the advisory group has met several times to develop this strategy we are also consulting with our bulk water customers through direct discussions this covers urban water corporations and the environmental water holders this brochure focuses on · · · confirming the objective of the review agreeing a set of core principles to guide the development of future tariffs identifying what we want our tariffs to look like in the year 2020 our work program we propose a three stage exercise in developing our new tariffs · developing the strategy our brochure sets out proposals for a new tariff strategy we propose to finalise the strategic framework by september 2012 to help guide our final water plan to be submitted to the essential services commission implementation plans we will use the tariff strategy to help us develop implementation plans for all of our individual charges implementation we would expect any revised tariffs to be implemented over the next seven years to give customers sufficient advance notice to plan with confidence and manage any changes in the charges they face a strategic focus it is easy to get swamped by the complexity of designing individual charges so we have started by developing a strategic framework this identifies the important principles to consider and the broad direction that we want to head in that will provide us with guidelines as we assess individual tariff issues · · figure 2 developing our tariff strategy july to september october 2012 to july 2013 tariff strategy tariff implementation plans tariff strategy draft 2012 11

[close]

p. 12

6 bulk water charges g-mw operates and manages 16 water storages to supply bulk water across northern victoria we are setting up our headworks as a standalone business called catchment services this means that all the costs of harvesting storing and delivering the water are recovered from bulk-water customers including our irrigation districts increasingly our storages are being managed as an integrated supply network meaning that operational decisions on resource management are made at a system or regional scale for example water from lake buffalo on the ovens may be released to support irrigators on the murray the headworks storages are used to supply bulk water to a number of different customers headworks rural supply g-mw irrigation districts regulated diverters lower murray water grampians-wimmera-mallee water environmental flows commonwealth environmental water holder victorian environmental water holder urban supply central highlands water coliban water goulburn valley water gwmwater lower murray water north east water many of these `bulk water customers then supply that water to retail customers in towns and irrigation schemes or to generate environmental outcomes the main question is at what scale should we recover our costs we currently have a two-tier tariff structure · a wholesale charge to all bulk water customers these charges recover our costs at basin scale ie by catchment all of our bulk water customers including urban water corporations the environment and our own irrigation business pay this wholesale `basin charge · a retail charge for on-sale of this bulk product we then supply this water to our irrigation customers in doing this we average our costs across basins at a `system scale so that our irrigators pay a `system based charge this reduces the level of the charges that would otherwise be paid by small numbers of customers in certain small catchments such as the bullarook this is the same approach as is adopted by the urban water companies such as goulburn valley water that sources water from 13 different systems each with its own costs but supplies water to its residential customers at one standard averaged charge 12

[close]

p. 13

strategic decision for 2020 in the year 2020 we will have the option of choosing between implementing fully disaggregated charges by basin at one end of the spectrum system charges within the murray and goulburn systems as a mid point or fully averaged charges at a regional scale at the other all charges by basin mixed basin system charges single average system charge charges by basin setting both wholesale and retail charges at the basin scale creates some benefits · it makes a very strong connection between costs and charges this means that end-users have incentives to critique proposed investments to confirm that the higher prices at a local scale are justified by the higher levels of service generated it implements a users pays principle as end users pay only for their own costs and don t cross-subsidise other users elsewhere it recognises that each basin offers different level of reliability it reduces charges for the majority of our customers who are located in the two largest basins ie the goulburn and murray systems which have the lowest unit costs system or regional scale the current two-tier approach has the following impacts · it appears to be inconsistent with different wholesale and retail tariffs for the same service or product however it supports irrigation communities at a regional scale it reflects the reality that operational decisions on resource management are made at a system or regional scale for example water from lake buffalo on the ovens is released to support irrigators on the murray if it is not required locally it supports irrigators in smaller catchments who would otherwise face unaffordable costs · · · · · · moving all customers to a `regional charge would · reflect the regional scale of resource management and the integrated nature of the headworks management across northern victoria for example irrigators in rochester may be supplied from the goulburn campaspe or supported by the loddon systems be simple to apply as there would only be a single standard supplement charge however the approach can also create adverse impacts · it means that even though end-users receive the same service they face very different charges depending on their location and on prior government investment decisions over which they have little control it will constrain operational decisions by g-mw who manage the resource at a region scale moving to this approach would increase costs for irrigators in smaller basins to unviable levels and limited operational flexibility for the broader customer base it is complex with multiple different charges depending on basin · · · · tariff strategy draft 2012 13

[close]

p. 14

6 bulk water charges continu however the approach would · soften the strength of price signals about the real costs of investment decisions as those costs would be shared across the whole customer base marginally increase costs for customers supplied by the goulburn and murray basins as they have the lowest catchment costs ed recovering other headworks costs g-mw provides a wide range of services at our storages to promote recreational use by the general public such as boat-ramps toilets and barbecues the cost of the upkeep of these facilities is largely funded through water charges to local urban water customers this is a simple way to gain a community wide contribution to a resource that is available to the general public however it is not necessarily fair to ask everyone in the region to pay when the facilities are only used by a proportion of the community and when many of the users come from outside the region and currently make no contribution to the costs the department of sustainability and environment dse is currently developing a state-wide policy approach for this issue g-mw is preparing recreation management plans to articulate the costs associated with providing services around storages such as boat ramps toilets carparks and access tracks this will set the basis for cost sharing arrangements with all users how should we recover the costs of maintaining recreational facilities at our headworks · consensus recommendation the members of the advisory group recommended that the preferred strategic endpoint in 2020 should be an averaged charge at a regional scale this choice reflects the scale at which the resource is managed is this a reasonable target for 2020 why 14

[close]

p. 15

7 service point fees service point fees recover costs associated with providing metered outlets from the delivery system or natural carrier to farm properties there are therefore two issues regarding service point fees · · providing incentives for efficient decisions during system modernisation driving lower regional cost outcomes in the longer-term current arrangements our current service point fees are set at a standard charge of $250/service point across all irrigation districts g-mw is moving from an irrigation supply system of long lengths of small channels with multiple dethridge wheels to an automated backbone and private connections with a smaller number of high functionality outlets the decision on which form of outlet to adopt is driven partly by the end-user and partly by the needs of the system manager nvirp will pay for the up-front capital costs of outlet rationalisation and up-grading however irrigators will carry the costs of operating maintaining and replacing any new outlet that is installed those costs will be far higher than the current costs of the dethridge wheels modelling by g-mw identified that the average long-term cost of operating maintaining and replacing modernised outlets is more like $2,000 per year once the replacement cost of the new meters is taken into account the decisions that irrigators take about how many outlets to retain will affect the costs of the wider irrigation district if the service point fee does not cover the full `whole-oflife cost of the outlet then the balance will need to be recovered through the infrastructure access fee that will increase the on-going fixed costs for all irrigators in the district however if the service point fee is increased then this will allow the infrastructure access fee to be reduced to generate the same overall revenue strategic decision for 2020 the question is do we set the service point fees to be cost reflective and/or whether to recover these costs through the infrastructure access fee the choices for 2020 are between setting a high service point fee with a low infrastructure access fee or leaving the service point fee at a low level and using the infrastructure access fee to recover most fixed costs low service point fee high infrastructure access fee fullycostreflectiveservice point fee low infrastructure access fee tariff strategy draft 2012 15

[close]