26 April 2023
The Essential Services Commission (ESC) has issued a draft decision in relation to Coliban Water’s Price Submission (PS23).
The ESC has requested additional information from Coliban Water in relation to its proposed new system of Customer Contributions (NCC) specifically:
Justification for phasing in the new NCC prices, due to potential impacts on the general customer base
- Definition of infill and greenfield areas and why we didn’t propose charges to reflect this distinction
- Clarification on how the proposed methodology and previous methodology differ
- Comparison with a re-calculation of the new customer contributions using the old methodology
For a summary of what we proposed for NCCs in our Price Submission for 2023-2028, please click on the yellow button on the right - New Customer Contribution proposal 2023-2028.
We want to consult with you to help shape our response to the ESC, so please read the information below and provide us with any feedback that you have.
Note that all feedback will be considered as part of our response to the ESC, but we may not be able to implement all of your suggestions.
1. Justification for phasing in the new NCC prices, due to potential impacts on the general customer base
Our transition strikes a balance between the interests of existing customers which are met by the adoption of an Average Incremental Cost (AIC) based NCC, that can send appropriate incentives for efficient development and smoothing over time, and lessen the potential impact on developers and new customers who may have already made investment decisions based on the previous NCC approach.
| 2023 Pricing Submission - with transition | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Water NCC | $2,148 | $2,362 | $2,599 | $2,858 | $3,144 | |
| Sewer NCC | $2,148 | $2,577 | $3,092 | $3,711 | $4,453 | |
| Sewer NCC - discounted | $648 | $1,077 | $1,592 | $2,211 | $2,953 | |
| Recycled NCC | $1,074 | $1,181 | $1,299 | $1,429 | $1,572 | |
| Total per property water and sewer | $4,295 | $4,939 | $5,691 | $6,569 | $7,597 | |
| % increase from current prices | 20% | 38% | 59% | 84% | 112% | |
| Option with no transition | Water NCC | Sewer NCC | TOTAL per property | Sewer NCC - Discounted | Recycled NCC | % increase from current prices |
| 2023 Pricing Submission - no transition | $3,979 | $5,112 | $9,092 | $3,612 | $1,990 | 154% |
2. Definition of infill and greenfield areas and why we didn’t propose charges to reflect this distinction
In its Draft Decision the ESC noted that we had not provided them with enough information to assess how we distinguished between infill and greenfield growth areas and its reasons for not proposing charges to reflect this distinction. In response to the Draft Decision we have separately identified the expenditures related to infill and greenfield developments and estimated separate NCCs based on these distinctions.
We have calculated two separate approaches to area specific NCCs which look at the defined growth areas with greenfield specific capital investment - Huntly, Strathfieldsaye, Maiden Gully, and Marong (see NCC Greenfield Growth Zones in the right hand column), and system specific NCC charges for 3 supply zones of Coliban North with Campaspe, Coliban South with Trentham, and the balance of the region (See Regional Map in yellow tab in right hand column).
On the basis of the developer consultation outcomes and the inherent difficulties in identifying infill development, we did not propose to differentiate scheduled NCCs for infill and greenfield developments. The calculation of the infill/greenfield NCC's returned values that were higher than the proposed NCC cap in the transition.
3. Clarification on how the proposed methodology and previous methodology differ
Average Incremental Cost (AIC) based NCCs are set based on a minimum 20-year forward estimation of cost and growth. The NCC will reflect the net present value of these forward estimates. The long-term nature of the NCC calculation raises issues regarding the alignment of the period used to generate NCCs and the five-year regulatory pricing periods proposed in the Price Submission.
These price paths are subject to review after the first five-year regulatory period. The review would focus on adjusting the NCC to account for:
- Changes in forecasted connections growth;
- Any bring forward of planned works that had occurred during the period; and
- Material changes in the capital program associated with the NCC
This approach will allow us to account for and recover growth related expenditure over a reasonable timeframe and provide continuity in NCCs over time. It will also avoid potentially large step increases and decreases in NCCs due to the large lumpy nature of capital expenditure that may occur over a shorter five-year price path.
Maintaining the current net cashflow approach to calculating NCCs results in material increases in contributions for the 2023-2028 regulatory period. These increases exceed those that are being proposed under our AIC NCC methodology. The primary driver for these increases is a material rise in growth related capital expenditure over the current regulatory period (2018 to 2023) relative to the preceding regulatory period (2013 to 2018). These growth capital expenditures impact NCCs through the level of sunk asset incorporated in the net cash flow calculation. The NCC revenue over the current regulatory period has not been sufficient to recover growth capital expenditure which results in a material increase in the residual unrecovered growth expenditure which forms the basis for sunk assets.
In order to meet Water Industry Regulatory Order (WIRO) principles around efficient pricing our proposed AIC based NCC approach excludes sunk assets from its calculation.
4. Comparison with a re-calculation of the new customer contributions using the old methodology
We have calculated the NCC’s using the Net Cash Flow (NCF) approach using the ESC published model, which was the previously adopted methodology for NCC calculations.
The calculations produced Water and Sewer NCCs that were higher than our proposed cap in our Price Submission.
Under the status quo of using the NCF method we would not be applying a transition method, as it is our current approach for NCC calculation. The transition pricing is in response to adopting the AIC methodology.
All alternatives that were investigated were above our transitional cap pricing. In the event that the transition is not supported, we will reconsider whether to adopt a NCF approach or differential pricing.
