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  • IPART review of developer charges and backlog sewerage charges for metropolitan water agencies 2017

    Sydney Water response to IPARTs Issues

    Paper December 2017

  • Response to IPARTs developer charges review Issues Paper | December 2017 Page | 1

    Table of contents

    1 Executive summary ................................................................................................................. 1

    2 Introduction ............................................................................................................................. 5

    2.1 Context ........................................................................................................................................... 5

    2.2 Outcomes ....................................................................................................................................... 6

    2.3 Structure of this report................................................................................................................... 6

    2.4 Summary of our response to IPARTs questions ......................................................................... 7

    3 Regulation of developer charges ......................................................................................... 14

    3.1 Is the current methodology fit for purpose? ............................................................................... 14

    3.1.1 Options for change ................................................................................................................. 16

    3.2 Voluntary agreements between developers and utilities ........................................................... 17

    4 Review of the current developer charges methodology ..................................................... 19

    4.1 Input parameters .......................................................................................................................... 19

    4.1.1 Existing assets ........................................................................................................................ 19

    4.1.2 Period for inclusion ................................................................................................................. 20

    4.1.3 Headworks ............................................................................................................................. 22

    4.1.4 Methods to apportion shared assets ........................................................................................ 24

    4.1.5 Asset valuation methods - MEERA vs RAB or DORC .............................................................. 25

    4.1.6 The reduction amount ........................................................................................................... 26

    4.1.7 Discount rate .......................................................................................................................... 27

    4.1.8 Indexation ............................................................................................................................... 28

    4.1.9 Use of the Equivalent Tenement (ET) as the cost and revenue metric ..................................... 28

    4.2 Impact of wholesale price determination .................................................................................... 31

    5 Procedural requirements to set developer charges ............................................................ 32

    5.1 Appropriate scale and number of DSPs ...................................................................................... 32

    5.2 Improvements to the current process ......................................................................................... 33

    6 Backlog sewerage and minor service extension charges .................................................. 35

    6.1 Backlog sewerage ........................................................................................................................ 35

    6.2 Minor service extension charge .................................................................................................. 37

    7 Sydney Waters Developer Direct ......................................................................................... 39

    7.1 Background .................................................................................................................................. 39

    7.1.1 Price regulation prior to 1 July 2017 ........................................................................................ 40

    7.2 Introduction of Developer Direct ................................................................................................. 40

    7.2.1 Current pricing for Developer Direct ........................................................................................ 43

    7.2.2 Alternatives to price regulation for Developer Direct construction services ............................... 43

    7.2.3 Options for regulating prices for Developer Direct construction services .................................. 45

    8 Glossary ................................................................................................................................. 47

  • Response to IPARTs developer charges review Issues Paper | December 2017 Page | 1

    1 Executive summary

    Sydney Water Corporation (Sydney Water) welcomes the opportunity to respond to the

    Independent Pricing and Regulatory Tribunals (IPARTs) Review of developer charges and

    backlog sewerage charges for metropolitan water agencies, Sydney Water Corporation, Hunter

    Water Corporation, Central Coast Council - Issues Paper - Water - October 2017 (the Issues

    Paper).

    Developer charges are a method for helping fund the cost of infrastructure needed to serve

    population and employment growth. Developer charges can improve economic efficiency by

    ensuring infrastructure costs are considered in decisions about the location and scale of growth

    areas. A funding framework that includes developer charges can also promote a fairer outcome for

    the community, as the main beneficiaries of new infrastructure are obliged to bear some (or all) of

    the cost and risk of development decisions.

    The growth challenge and integrated water cycle management

    The level of population and employment growth envisioned in the Greater Sydney and Illawarra-

    Shoalhaven Regional Plans will require significant new economic infrastructure such as water,

    transport, gas, electricity and communications, as well as social infrastructure such as hospitals,

    schools and open space. This represents a major funding challenge.

    IPARTs Issues Paper is necessarily focussed on the methodology used to determine developer

    charges for the water, wastewater and stormwater infrastructure provided by Sydney Water,

    Hunter Water, and Central Coast Council. However, Sydney Water considers that there would be

    merit in undertaking a broader review of infrastructure funding arrangements, which could include:

    exploring the advantages and disadvantages of different funding mechanisms, including

    developer charges, user fees, and value capture

    identifying and removing any material barriers to competition

    developing consistent national guidelines on developer charges.

    There are likely to be significant benefits in developing a more consistent approach across sectors

    and between jurisdictions. For example, who bears the cost of providing trunk stormwater

    infrastructure in Sydney depends on where the development is located. In some locations, the

    entire cost will be borne by developers, and in others the developer bears little or no cost.

    Differences in funding mechanisms and allocation principles can distort investment decisions by

    developers, customers and infrastructure providers, potentially leading to suboptimal outcomes.

    This is likely to be a growing issue, as utilities increasingly plan their servicing solutions based on

    integrated water cycle management (IWCM) principles. Under this approach, the traditional

    distinction between different products (that is, water, wastewater, recycled water and stormwater)

    begins to break down, and customers are simply provided with water services. This must be

    supported by a move towards more integrated pricing approaches (for example, a single integrated

    charge instead of multiple charges for different products).

  • Response to IPARTs developer charges review Issues Paper | December 2017 Page | 2

    Objectives of a developer charges framework

    In undertaking a review, it is important to understand the objectives that the relevant policy or

    methodology is trying to achieve. Sydney Water considers that a developer charges framework

    (and any associated methodologies) should have the following objectives:

    to achieve an appropriate balance of cost sharing between direct beneficiaries and the

    wider community

    ensure costs are allocated in a logical and transparent manner

    provide a price signal that reflects the difference in cost to develop in different locations and

    promotes a competitive market

    minimises administrative effort for all parties

    ensures risk is allocated to the party best able to manage it (for example, exposure to

    development forecasting risk should rest mainly with developers)

    be flexible enough to ensure they meet the above objectives under the full range of likely

    future population and economic growth scenarios.

    In practice, a trade-off between objectives may be ne