VICTORIAN GOVERNMENT RESPONSE

TO

THE ECONOMIC AND BUDGET REVIEW COMMITTEE 27TH REPORT

TO PARLIAMENT

"ELECTRICITY, WATER AND GAS : LIMITS OF DEBT"

JUNE 1991

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Recommendation 1.1

Government business enterprises should not be geared so highly that they are exposed to losses, or obliged to raise prices inappropriately, as a consequence of the impact of temporarily adverse business conditions which are within the 'normal' range of conditions that the enterprise might expect to face. (page 11) .

It should be noted that the introduction of rate of return reporting has been and is a useful indicator of the financial performance of the major public authorities. The table below shows that each of the three authorit s subject to the inquiry achieved real rate of return in excess of 4% in the periods after 1986-1987, reflecting in part the low business risk of the services supplied.

REAL RATE OF RETURN ON ASSETS (per cent)

1985 6 1986-87 1987-88 1988-90 1989-90

SEC 4. 6 6.3 5.5 5.2 5.4 GFC 5.9 6.0 10.2 6.5 6.0 MMBW 2.6 3.3 4.5 4.5 4. 1

Pricing by the three authorities is tabled below. Prices have consistently shown real declines over the past 5 years, and the issue of inappropriate price rises has not occurred.

AVERAGE PUBLISHED TARIFF INCREASES (per cent)

1985-6 1986-87 1987 88 1988 90 1989-90

Inflation adjusted

SEC -3.2 -2.9 .7 -3.8 -3.6 GFC -2.9 -2.3 .3 -2.7 -3.1 MMBW -1.8 -2.2 -1.7 -0.8 -2.6

Recommendation 2.1

That the SECV, GFCV and MMBW produce adequate details of the capital commitments in the notes to the financial accounts to provide (i) details of the nature of the commitment; (ii) information relating to what extent the commitment is 'firm'; and (iii) the nature of the penalties for not continuing with the commitment. (page 25).

Details of non-budget authorities actual and proposed major capital projects are detailed in Budget Paper No. 2 (Appendix to Chapter 4), tabled in Parliament 28 August 1990. It would appear no more onerous for the electricity gas and water authorities to repeat this information in their annual accounts.

Providing further information on possible penalties for not proceeding with capital commitment is impractical for a

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commercial authority, given that the penalt negotiable.

Recommendation 2.2

are usually

. That the Government give consideration to whether Victorian Government business enterprises should recognise in current operating statements, gains or losses resulting from a debt restructuring where an existing debt is extinguished by the creation of a new debt. (page 30).

The Government notes the recommendation that Victorian Government business enterprises should recognise in current operating statements, gain or losses resulting from a debt restructuring, on the basis that this view accords with the treatment recommended in paragraph 13 of the Accounting Guidance Release -AAG 11.

The above guidance release draws together requirements referred to in AAS 1, and AAS 23 and refers specifically to debt restructuring. However, the position of the authorities is that rather than comply with unendorsed proposals, they comply with Accounting Standards approved by the relevant Standards Boards pursuant to the Annual Reporting (Business-Undertaking) Regulations 1988.

Recommendation 3.1

That, in view of the different approaches and rates being used by differ~nt GBEs (and within a GBE), the Government re-examine the question of the appropriate rate(s) of discount to be used in the evaluation of GBE investments.

That, in particular, the Government increase the minimum rate of discount to be used in evaluating GBE investment projects from the present 4 per cent, to a level which recognises the sustained real rise in interest rates. (page 40).

Recommendation 3.2

That the required Rate of Return on assets which is prescribed for Victorian GBEs be raised from its present level of 4 per cent. (page 45).

The Government notes the Committee's concern regarding appropriate level real rates of return on assets. As noted above in the response to 1.1 the SEC, GFCV and MMBW have all, since 1986-87, achieved rates of return in excess of 4%.

It will be timely for a review of the rates of return required of Victorian government authorities in the context of the Task Force report on performance monitoring due at the Special Premiers Conference.

Recommendation 3.3

That the Government consider the use of a 'CPI minus X' formula as the basis for regulating Government business enterprise price

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increases, while preserving the option to modify the price increases determined by the formula in order to take into account other policy considerations such as demand management and the financing needs of the enterprises. (page 48)

The Government notes the recommendation that price increases he set by a CPI-x formula as a basis of regulating the price increases. As the table in the response to the recommendation 1.1 shows, pricing increases of less than CPI have been achieved for the SEC, GFCV and MMBW by the last 5 years.

The CPI-X formula is not flexible in circumstances of active demand management and changing requirements for capital.

Overall, while the CPI-x formula has its attractions, this pricing mechanisms for public authorities need to be accompanied by performance targets since the mechanism does not guarantee that productivity improvement will be shared by consumers. For example, a price increase of CPI-X in the absence of other performance improvements may simply reflect a lowering of the quality of service supplied.

Recommendation 3.4

That the Government business enterprises publish the criteria upon which they select assets for sale. (page 49).

The Government has no objection to government business enterprises reporting the criteria on which assets are selected for sale. However, the criteria could clearly be in fairly broad terms such as 'surplus to requirements' and their publication is unlikely to add significantly to the amount of useful information about the enterprise.

Recommendation 3.5

That the Government business enterprises report explicitly on receipts and profits derived from major assets sales in each year. (page 50).

The Government has no objection to sales of major assets by government business enterprises being reported by receipts and profits.

Recommendation 3.6

That the criteria used in determining the actual amount of the Public Authority Dividend payable by a GBE in each year be clearly stated in that GBEs Annual Report. (page 55).

The criteria for determining the Public Authority Dividend payable are well established. The appropriate size of the dividend depends on factors which fluctuate in importance over time. These factors include the authority's capital program, the authority's debt level, the state of financial markets and the ability of authorities to borrow within the State's global borrowing limit. The amount of dividend is negotiated each year by the Treasurer and the authorities taking into account the factors mentioned above, prior to formal determination by the Treasurer in consultation with the relevant Minister.

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Recommendation 4.1

That in the light of substantial capital funding constraints, lower than projected growth in the demand for electricity and the potential benefits of the immediate pursuit of an aggressive demand management program, the Committee suggests the deferral by the SECV of both Loy Yang B2 and further refurbishment of Hazelwood, while utilising limited capital funds for proceeding with Loy Yang Bl in order to accommodate power supply requirements. (page 80).

Recommendation 4.2

That a decision on the construction of Loy Yang B3 and B4 be deferred. (page 82).

A decision on the deferral construction of Loy Yang B3 and B4 is not required in the immediate future.

For some years, the SECV in conjunction with the Government has had a policy deferring commitment to and commencement of new power stations for as long as possible, so long as this is consistent with adequate power supply and reasonable power station construction costs. This obviously extends to the four generating units in the Loy Yang B power stations. Of these, the first two, Bl and B2 are substantially committed, and construction is well advanced. The Government accepts the position that the B3 and B4 units be the next two base-load generators installed in Victoria, provided that all other options, such as demand reduction or gas-derived power or interstate supply, are proven to be less desirable or not achievable. The Government will consider the timing of B3 and B4 at the appropriate time.

Recommendation 4.3

That the SECV strengthen the mechanisms for the explicit consideration of the broader economic and social costs and benefits of potential SECV capital projects. {page 82).

In the Green Paper on Renewable Energy and Energy Conservation (REEC), Government made a commitment to undertake a study to examine the implications of environmental impacts and other externalities relating to the supply and demand of energy.

Arising from the recommendations of the National Resources and Environment Committee, the SECV and the Government have implemented a process for developing and refining an ricity Development Strategy for the State. This is a formal mechanism to allow a variety of perspectives to be applied to SECV projects.

Recommendation 4.4

That the SECV intensify its efforts to integrate economic evaluation more effectively into its capital expenditure decision-making process. (page 83).

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The SECV makes a major effort to identify and evaluate the financial and economic implications of all its capital expenditure options. The involvement of Treasury and Finance Departments with the considerable expertise of the SECV-in considering major items of capital expenditure ensures that economic (and financial) evaluation is carried out and available to decision makers where relevant.

Recommendation 4.5

That the SECV review its policy of leaving the conduct of project Post Implementation Reviews (PIRs) to the persons/business centres who were responsible for the project. The Committee urges the Commission to consider direct involvement in the conduct of PIRs by its Economic Evaluation Unit. (page 85).

This is a matter for SECV management.

Recommendation 4.6

That the Government take steps to ensure that it has the capacity to independently monitor the performance of the SECV in the area of demand management (particularly conservation) . (page 98) .

In its Green Paper on REEC, the Government announced its intention to establish a monitoring and reporting system for all REEC activity occurring across the Government Sector - this includes the demand management activities of the SECV. Initial steps tave been taken to discuss program monitoring and evaluation of such programs and the DMID will be continuing this project in conjunction with the energy authorities over the next year.

The SECV has developed procedures for evaluating the effectiveness, in terms of costs and energy saved, through its Demand Management Action Plan. The results of the Action Plan will be made public.

Recommendation 4.7

That the Government take steps to ensure that information on energy-efficiency and energy audits are widely available to customers on an independent and disinterested basis, and that these important functions are not compromised by becoming dominated by the marketing strategies of the energy utilities. (page 100) .

Energy audits, as a mechanism to encourage efficient use of energy, are of course, only a partial solution, as information about energy use does not necessarily lead to action and expenditures to change the amount of usage. The Government is not convinced of the merit of extending a free audit to all who seek it. However some level of incentive may be appropriate. The SECV has a trial program as part of its Demand Management Action Plan. Private sector service organisations and competition already offer an effective service.

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Recommendation 4.8

That the Government review the SECV's strategy for electric off­peak hot water systems with a view to determining whether the strategy is compatible with the 'least cost' policy cri~erion of meeting energy needs at minimum cost, taking into account societal costs. (page 102).

The Government has announced its position on domestic water heating which is that the utilities phase out their promotion of water heating and promote only systems that have a solar component. The SECV is to work to phase out day rate electric hot water.

Recommendation 4.9

That the Government initiate a review to identify means of facilitating the role of private energy management firms in the development of an 'energy arbitrage' role. (page 105).

The benefits of involving energy management firms as so-called "third parties" in the process of improving efficient energy supply, have been recognised for a number of years.

There are two eo-generation projects proceeding in Victoria where a private sector company will sell steam and electricity to sites and the SECV respectively. One is a public sector project involving eight Victorian Hospitals and the other is a private sector project.

The Government recognises the importance of a dynamic energy sector with private sector participants and a diversity of expertise. The SECV's 3 year Demand Management Action Plan is drawing heavily on the private sector and a major reason for this is to build private sector experience, viability and expertise.

Recommendation 4.10

That the Government initiate a review to identify what actions can be taken to encourage consumers to invest in energy­efficiency and that this review give particular consideration to the potential scope for subsidies or rebates in this area. (page 106) .

The Government has initiated a number of actions to encourage consumers to invest in energy efficiency. The joint SECV/DMID Demand Management Study has resulted in the 3 year Demand Management Action Plan and the establishment of a D.M. Unit within the SECV. It is expected that the data and experiences gathered during the 3 year life of the Action Plan will assist greatly in design of future targeted demand management programs. A similar development involving GFCV is underway. Under least cost planning, incentives are often appropriate, but these should be distinguished from subsidy, which implies a benefit greater than is justified.

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Recommendation 4.11

That the Government give consideration to means of increasing the availability and reducing the price of compact fluorescent light bulbs. That consideration also be given to direct loca~ production of these bulbs by private enterprise or by the SECV, where the provision of extra jobs by this means may ease the task of shedding labour in power production. (page 106).

The SECV is running a program (as part of its Demand Management Action Plan) that aims to increase the efficiency of residential lighting primarily through encouraging the replacement of incandescent bulbs with compact fluorescent lamps. Recent activities have included:

SECV demonstration program of the bulk purchase of 30,000 compact fluorescent lamps which were then resold through a number of major retail outlets at prices well below the average retail price for such units; Government funded promotion and advertising;

SECV developed a lighting information kit for consumers; and

SECV has been working with a number of manufacturers to establish a local capability for compact fluorescents and indications are that locally designed and built compact fluorescent light bulbs will be commercially feasible.

Recommendation 4.12

That the Government examine ways of protecting the SECV's financial position in the context of the immediate implementation of more aggressive demand management. That, in this context, particular attention be paid to the investigation of increasing prices in conjunction with implementing demand management measures, so that higher charges per KWh for electricity are combined with reduced or at least constant average electricity bills for given levels of energy service. (page 108).

It is recognised that where programs are cost-effective from a societal perspective, but impose a net cost on the utility implementing the program, it may be necessary for the Government to protect the business of the utility in the form of raised energy prices. The Government will continue to examine and monitor this issue in the context of tariff reviews.

Recommendation 4.13

That the Government closely monitor the terms of contract offered by the SECV to producers of cogenerated power (together with other small-scale independent power generation, including from renewable energy sources) in order to ensure that potential cogeneration is not being discriminated against vis-a-vis internal SECV power generation. (page 112).

A Cogenerations and Renewables Incentive package has been initiated by the SECV. As part of this "incentive" buyback rates were set in December 1990. This was supported by DMID.

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The SECV has developed a private generation policy, released in January 1991. DMID has been monitoring industry reaction which to date has been minimal. The major barrier is the lack of long term gas contracts and this is being addressed.

As part of the Government support for cogeneration, the Health Department of Victoria and DMID are jointly sponsoring competitive bids for the provision of cogenerated power to nine hospitals.

Recommendation 4.14

That the SECV pursue in a determined manner the further labour force reductions which seem possible in view of the overmanning practices of the past and the achievements of interstate and overseas electricity authorities. (page 118).

Recommendation 4.15

That the SECV publish details of its cost management (including labour force reductions) and productivity improvement strategy, including quantitative details of the extent and time frame of costs and benefits anticipated and actually achieved. (page 120) .

Recommendation 4.16

That the SECV review its GWh per employee target for 1992-93 with the view to setting a more challenging target (achievable only with sustained effort) in order that the potentially attainable productivity improvement be delivered. (page 122) .

Response to 4.14, 4.15, 4.16 and 4.20

The Government anticipates continuing productivity improvements from the SECV, and these would be expected to cover all aspects of the organisation's operations, including work practice and work force size. Attention will be given to the practices employed in similar organisations elsewhere, not only in Australia. With regard to publishing forecasts of productivity improvement, it is to be noted that making changes will involve negotiations with affected parties in many instances, and it may be counter productive to signal in advance too much detail about desired outcomes. Nonetheless, the Government supports the release of broad forecasts of productivity.

Recommendation 4.17

That the SECV continue to publish in its Annual Report the estimate of GWh per employee to allow the continued monitoring of the valuable information contained in the long term trends in this indicator. (page 124).

Recommendation 4.18

That the SECV publish in its Annual Report up-to-date estimates of GWh per employee for its interstate and overseas counterparts in order to facilitate 'yardstick' comparisons. {page 125).

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Recommendation 4.19

That the SECV publish in its Annual Report information on plant availability which allows its performance in this regarq to be assessed against those of interstate and overseas electricity authorities. (page 126).

Recommendation 4.20

That the SECV examine - with a view to adoption - the successful changes to shift work maintenance by permanent staff of the Queensland Electricity Commission and the Electricity Corporation of New South Wales and the increased use of external contractors. (page 128) .

See Response to 4.16

Recommendation 4.21

That, in addition to total factor productivity estimates, the SECV develop and publish partial factor productivity estimates for labour, capital and materials. (page 131). Recommendation 4.22 ·

That the SECV publish, where obtainable, estimates of partial and total factor productivity for its interstate and overseas counterparts. (page 131).

See Response to 4.25 below.

Recommendation 4.23

That the SECV encourage and assist the establishment of a consumer council along the lines of the Telecom Australia Consumer Council. (page 138).

Five years ago, the SECV initiated several customer panels, each designed to represent the interests of a certain category of electricity users. These panels have been providing opportunity for customer feedback to the SECV. The SECV holds public meetings on pricings. As well, other groups such as the Energy Action Group provide a mechanism for community feedback. The Government is not of the view that further feedback processes are needed.

Recommendation 4.24

That, since there will naturally be incentives for an enterprise to select indicators which present its performance in best light, the development of performance indicators not be left entirely to each enterprise. (page 139).

See Response to 4.25 below.

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Recommendation 4.25

That the Auditor-General be closely involved in the development of effective systems of performance indicators (including non­financial indicators) for Government business enterprise·s. (page 139) .

Response to 4.17, 4.18, 4.19, 4.21, 4.22, 4.24 and 4.25

Seven of the EBRC recommendations relate to various aspects of performance reporting and hence accountability of the SECV to s customers, and incentives for improved performance.

The SECV has in recent years been recognised for its reporting of aspects of performance. It has gone further in this regard than most comparable organisations, and is to be commended for this.

The Government supports the development of performance indicators as a consultative process between the enterprises and the government. Currently work is being undertaken in the Department of the Treasury on productivity indicators for the enterprises. The SECV itself, along with the Victorian and other Governments in Australia, has recognised the merits of publication of performance figures in a standard format particularly to allow comparison between similar utilit s around Australia. The latter is being progressed under the auspices of the Special Premier Conference Task Force on performance monitoring.

The Auditor-General is now empowered under a 1990 amendment to the Auait Act to conduct performance audits of public authorities. Although this function may involve the Auditor­General in the development of appropriate performance indicators, it is considered more appropriate that performance indicators be negotiated between the Government and the agency.

Recommendation 5.1

That the GFCV produce demand projections for natural gas that reflect differing levels of demand management and differing assumptions about possible climatic changes (in a similar manner to the SECV's scenario approach). (page 161).

The Gas and Fuel Corporation has already taken some steps towards producing a range of demand scenarios rather than a single line forecast and it is anticipated that further sensitivity analysis will be introduced in future forecasts.

Recommendation 5.2

That the GFCV ensure that all appliances in the Corporation's showrooms are clearly labelled with the Australian Gas Association's energy rating. (page 167).

Gas appliance labelling is voluntary, and experience has shown that the makers of poorly performing appliances are not willing to add labels, notwithstanding considerable encouragement from GFCV. It is intended to introduce energy appliance standards in 1993.

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Recommendation 5.3

That the GFCV cease advertising non-energy efficient appliances in their promotional material. (page 168).

Recent GFCV sales catalogues include only "starred" appliances, ie those appliances whose performance is above base grade energy efficiency. All GFCV sales have been trained to promote those appliances with a high grade energy efficiency. In the financial year to the end of February 1991, 77.6% of all water and space heaters sold through GFCV showrooms were in the category of 2 stars or above. It should be noted that, at present, not all appliances are available in very high efficiency models.

Recommendation 5.4

That the GFCV promote the sale of energy efficient appliances by (i) the use of rebates on such appliances and (ii) by making credit terms available at lower rates on these appliances. (page 169) . A major study now being undertaken by GFCV and DMID which is designed to determine the appropriate benefits by various financial incentives to promote the use of energy efficient appliances. By early 1992 there will be much better basis for evaluating the merits of incentives. One point to be noted is that many appliances are selected and installed by persons other than the appliance users e.g. by house builders. This poses some problefus for incentive schemes.

Recommendation 5.5

That the Government empower the Renewable Energy Authority of Victoria to investigate the environmental benefits of promoting gas usage of appliances, in areas competing with electricity, and in these cases to investigate the provision of a subsidy by the GFCV to reduce the differential between installation costs of gas and electrical appliances. (page 173).

The respective merits of these fuels have been the subject of much investigation in the past two decades. The main factor that has changed in recent times is public interest in their contributions to greenhouse warming. Emissions of greenhouse gases are relatively straightforward to quantify, though their precise impact still generates debate.

REAV now has the power to investigate and comment on the merits of fuel substitution. However REAV cannot direct the activities of the utilities. As Amory Lovins noted in his recent report on energy policy to DMID, there is something to be said both for co­operation (between energy activities) - certainly for close and cordial relations and for a bit of institutional rivalry to ward off complacency or ingrown habits. REAV's broader community base and shorter history may make it a useful vehicle for the more adventurous and experimental kinds of pilot programmes. It would not, however, be desirable to vest in REAV responsibil ies or projects that the existing energy bodies ought to undertake

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themselves, thereby relieving them of the necessity for changing how they do business.

Incentives relating to installation cost have been addressed in comments under the previous recommendation.

Recommendation 5.6

That the Government should amend the Victorian Building regulations to require that gas hot water systems and heating systems installed in new buildings should meet minimum standards of energy efficiency. (page 174).

As noted previously, appliance standards are planned for 1993. The Government also anticipates standards and guidelines for energy efficient housing by 1993, and these may involve amendments to Building Regulations.

Recommendation 5.7

That the GFCV provide information to domestic consumers on reading gas meters and revise the format of gas accounts to include information on previous consumption levels, so as to facilitate consumer comparisons of gas usage to encourage energy consumption. (page 176).

The GFCV bill format has been reviewed. Changes are being made in response to customer feedback, as well as the comments of the EBRC.

Recommendation 5.8

That the on-site energy audits offered by the Home Energy Advisory Service be extended to all domestic gas consumers. (page 177).

The matter is addressed in the response to recommendation 4.7 and the same comments apply to gas.

Recommendation 5.9

That the Renewable Energy Authority of Victoria review the impact of the inverted tariff as a conservation measure. Where an inverted tariff is applied, a differential threshold should be established between summer and winter so as to ensure that the inverted tariff operates as a conservation measure throughout the year. (page 179).

The tariff policy of utilities is not within REAV's scope of activities. The approach preferred by the Government and utilities is to promote conservation where it is cost-effective to do so. In fact, there are greater gas supply costs incurred during winter, as a result of the need to meet a high total usage rate. There is merit in addressing this via price signals, and possibly some adjustment could be made to the gas tariffs to better achieve this. The gas demand management study is reviewing tariffs.

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The possibility of seasonal or more frequent variations in prices has been considered in recent years. While a revenue-neutral change of this sort would create some cash flow problems for GFCV, they would be manageable.

It is to be noted that short-run effects of changed energy prices are not likely to be substantial for most customers, particularly domestic ones. Long-run effects, ating to equipment/appliance purchase, are more so. Accordingly, it is not particularly beneficial to have different thresholds for an inverted tariff at different times of the year. It would increase the administrative burden and, probably, create disputes about the price change-over date.

Recommendation 5.10

That the GFCV play a more active role in the promotion and marketing of cogeneration. (page 182).

The Government agrees with the recommendation that GFCV should become more involved. Potential eo-generators have been seeking to minimise their financial risk by means of long-term contracts for gas purchase and electricity sales. Availability of gas is not an issue for such long-term agreements, but GFCV faces uncertainty as to the gas price it pays to producers, and is not prepared to bear all the risk associated with long term price arrangements. A more structured and balanced approach to risk sharing is being developed.

Recomm6ndation 5.11

That the GFCV include in its Annual Report one year and five year targets for each performance indicator, and Annual Reports from 1990-91 include a comparison of actual performance with previously published targets. (page 182).

The Government supports this concept, as a means of improving accountability to shareholders and customers. The GFCV is currently selecting the most appropriate indicators for this. As noted under recommendation 4.25, a process is commencing to standardise performance reporting among similar utilities around Australia, to facilitate comparisons and to encourage improvement.

Recommendation 5.12

That the Government employ independent consultants, as part of a broader review, to undertake a detailed study of the GFCV's relative efficiency compared with other gas authorities, and its relative position in relation to the SECV in areas such as pricing, customer service and operational efficiency and that the findings of this study be available publicly. (page 184).

A major independent review of GFCV is to occur during 1991 which will examine the Corporation's efficiency. As noted in response to 4.25, the Government is supportive of work currently being undertaken to develop national performance indicators.

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Recommendation 5.13

That the GFCV quantify its community service obligations and have these estimates verified independently as part of the broader review of the Corporation. (page 195).

This issue is being separately addressed by a further EBRC enquiry.

Recommendation 5.14

That the GFCV increase its efforts to improve the efficiency of its operations, and report in the Annual Report yardstick measures of its efficiency relative to comparable authorities. (page 196) .

See response to 5.24.

Recommendation 5.15

That the GFCV should undertake an extensive review of management and work practices with a view to improving productivity and that this review be the subject of further evaluation by independent consultants as part of a broader review. (page 199).

See response to 5.19.

Recommendation 5.16

That tLe GFCV give greater attention to evaluating the use of contracting-out as a means of increasing operational efficiency within the Corporation and that these evaluations be based on fair industrial relations practice and cost-effectiveness of the operations. (page 202).

See response to 5.19

Recommendation 5.17

That the GFCV (i) review its stated policy that there will be no reductions in staffing levels and (ii) take positive steps to assess staffing levels with a view to eliminating any excess. (page 207) .

See response to 5.19.

Recommendation 5.18

That the GFCV initiate discussions with the unions on voluntary redundancy and early retirement packages in order to facilitate structural changes within the organisation as a means of improving operational efficiency. (page 207).

See response to 5.19.

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Recommendation 5.19

That the GFCV advertise all middle and senior appointments externally and set in place processes to ensure that selection is solely on merit. (page 210).

Response to 5.15, 5.16, 5.17, 5.18 and 5.19.

The Government expects continuing productivity improvements from the Corporation. In this regard, the GFCV document, 'Corporate Goals and Strategies, 1991/92-1995/6' outlines goals for improving operational efficiency and effectiveness and for staffing development and sets out the measures of performance by which the Corporation's progress towards achieving these goals may be measured.

Staffing and productivity improvements at the GFCV will be addressed in the independent review of the GFCV now underway (see response to Recommendation 5.24).

The GFCV Board currently anticipates a staff reduction to a total of 5500 by June 30, 1992. Although the Government would not arbitrarily requires staff reductions, without consideration to the services provided to customers, it believes that productivity improvements and appropriate reductions of staffing levels should be fully evaluated by the Corporation. Negotiations with unions would of course be part of any broad change in workplace practices and relations.

Similarly, the extent of use of contracting-out labour is a matter for GFCV management, but the Corporation will be encouraged to investigate whether cost reduction improvements can be achieved more appropriately through improving the performance of in-house labour or through contracting-out.

The Government is aware that the GFCV might benefit from the introduction of more non-Corporation appointments to senior positions. The Corporation advises that this often occurs under present arrangements. On the other hand, the experience of long­term employees is a real strength, and so a balance needs to be struck.

Recommendation 5.20

That the Gas and Fuel Corporation Act 1958 have a specific section on effectiveness and efficiency reviews, similar to the section in the State Electricity Commission Act 1958. (page 211) .

Update of legislation for GFCV may be needed following the review discussed in the next response of GFCV's activit and outlook. The Government would prefer consistency among the State's major trading authorities.

Recommendation 5.21

That the GFCV give prompt attention to the introduction of 'cost centre' business units right across its operations. (page 214).

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Recommendation 5.22

That the measures of customer satisfaction published in the GFCV Annual Report include satisfaction with each element of the service, as well as the overall level of service. (page 215).

Recommendation 5.23

That the GFCV take an active role in the debt management area in an effort to reduce their finance charges. (page 218).

Recommendation 5.24

That the Government employ independent consultants to conduct an expert management/performance review of the GFCV and the results of this review should be reported to Parliament. This review should incorporate:

(i) comparisons of relative efficiency;

(ii) an evaluation of management and work practices;

(iii) a review of the structure of the Corporation including the introduction of business centres; and

(iv) a review of staffing levels. (page 219) .

Response to 5.14, 5.21, 5.22, 5.23 and 5.24

A substantial review has been initiated, and is to report in the second half of 1991. The review which in the first instance be reported to the Board of the GFCV will review the operational efficiency of the GFCV with respect to:

leadership of the GFCV optimal organisational structure business priorities of the GFCV financial management and control potential productivity improvements accountability and appropriate corporate performance indicators

The Government intends that the GFCV play its part in the overall Debt Management Strategy.

Recommendation 6.1

That the MMBW develop and implement a strategy for increasing charges levied for the disposal of industrial wastes, not only for the purpose of enhancing revenue but in order to increase the fiscal incentives for greater pollution control at source. (page 233).

The Board introduced revised and increased trade waste charges on 1 July 1990. These charges will ensure that the costs associated with the disposal of indust al wastes will be 100% recovered and that adequate financial incentives are provided to industry to minimise waste. The Board is currently developing a long term trade waste pricing plan for industry.

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Recommendation 6.2

That, in making water demand projections, the MMBW use explicit forecasts of the impact of reductions in water leakages.: (page 244).

The Board agrees that demand forecasts should take explicit account of water leakage. A major study was undertaken this year to provide a more accurate estimate of leakage. Similar studies will be undertaken on an annual basis in future.

Recommendation 6.3

That the forecasting methodologies employed by the MMBW be strengthened and that their improvement should form a part of any demand management strategy. (page 245).

The forecasting process used for future water demands has been extensively revised since the Board's presentation to the EBRC in late 1989, as will be seen from this year's annual report.

The process now used includes an upper bound projection based on current demand management measures, a lower estimate of consumption based on much greater application of demand management and a "no growth 1 forecast (except for an increase in the number of households) has been included for comparative purposes.

Improved data from household studies should enable the Board in future to establish relationships between water consumption and key determinants of consumption such as household size, customer attitudes and price.

Recommendation 6.4

That the MMBW develop and publish a comprehensive water demand management strategy along the lines of the SECV's demand management strategy in order to facilitate public consultation and appraisal. (page 247).

The Board prepared a draft demand management program in 1990. This program is currently being revised to give a clearer indication of all elements of the program, the level of resourcing and responsibil s for implementation. An initial two year public consultation program has been planned and will commence in the first half of. 1991. This plan involves an independent consultative panel.

Recommendation 6.5

That the MMBW continue, indeed, strengthen, its efforts to estimate the cost information necessary to guide water pricing reform.

That the MMBW publish a report on the level and structure of water supply costs and the way that the Board proposes to use such information to guide water pricing reform. The key

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information on this issue should also be published in the MMBW's Annual Report. (page 254).

The Board is continuing to undertake more detailed cost analyses of its major services. The results of a detailed analy&is of water supply costs, indicating the extent of cost recovery from its major customer groups, are included in the 1989/90 Annual Report.

Recommendation 6.6

That the MMBW consider and report publicly on the benefits and costs, prospects and manner of reducing peak demand for water including the use of pay-for-use pricing. (page 256).

The Board is currently developing a water pricing strategy which will recommend a pricing system that suppresses peak demand and continues to move towards a user-pays system. All issues relating to the introduction of such a pricing system are being examined, including consultation.

Recommendation 6.7

That the MMBW report on the feasibility, manner, and the costs and benefits of pay-for-use charging for water used in sewage systems and for non-domestic water use. (page 257).

All commercial and industrial water users pay for water on a user-pays basis where the value of the water used exceeds the water rate. Institutions such as Councils, hospitals and universities also pay on a volumetric basis.

The Board acknowledges that volumetric charging for sewage disposal has the potential to influence water consumption and sewage discharge. However, a comprehensive analysis of costs and system loads needs to be undertaken to properly assess this potential. The Hunter District Water Board is the only major Australian water authority currently utilising a pay-for-use sewerage pricing system.

Recommendation 6.8

That, in order to identify future funding requirements, the MMBW estimate the additional costs of meeting the community's increasing environmental demands and present these estimates as a separate component of its capital works expenditure program. (page 258) .

Identification of the costs associated with the increasing environmental demands is supported. already been taken to incorporate environmental into the capital works expenditure.

community's Action has and social goals

In July 1990, work commenced on the preparation of a policy statement and strategy on sustainable development and asset management. The work is now nearing completion.

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The work addresses total assets - man-made, natural and intellectual that form part of or support the Board's core business activities. Asset operation is also included.

Work has also commenced on the consequent development of. specialist material in environmental economics to assist management decisions.

Recommendation 6.9

That the MMBW investigate and report publicly on the benefits and costs (and feasibility) of incorporating a 'polluter-pays' component more comprehensively into user charges for various forms of water usage. (page 258).

The costs of meeting EPA standards for effluent disposal and odour control in the vicinity of the Board's treatment plants are included in the Board's cost base. The Board's trade waste charges to industry recover, on a user-pays or polluter-pays basis, those costs directly attributable to the collection, treatment and disposal of trade wastes. However, a suitable reporting format is to be developed.

Recommendation 6.10

That the MMBW investigate and report publicly on the nature, extent, scheduling and cost of asset replacement which will be necessary over the next twenty years. (page 259).

Policies and practices are currently being developed to identify costs and lives of assets. This will enable estimation of consolidated replacement schedules and profiles. It is anticipated that the rate of replacement will depend greatly on the Board's ability to accumulate the necessary surpluses to fund such programs.

Recommendation 6.11

That the MMBW publish a strategy for accomplishing the necessary asset replacement. (page 260).

An asset management study was initiated as a corporate task. The project is being progressively implemented with a final asset replacement strategy available for publication in June 1992.

Recommendation 6.12

That a central unit within the Board appraise all evaluation studies of investment projects (above a minimum value to be set by the MMBW's Board of Management) emanating from the various divisions of the Board to ensure that the Board's espoused evaluation policies and principles are being adhered top. (page 264) .

The Board has an investment evaluation unit to ensure implementation of the evaluation policy for all major projects. Post project reviews ensure that evaluation has occurred.

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Recommendation 6.13

That for major projects which require Cabinet approval, an evaluation study be prepared and be made publicly available for appraisal. (page 264).

In line with the Board's investment evaluation procedures, all major projects requiring Cabinet approval are subject to financial and economic evaluation. This evaluation is part of the documentation for Cabinet and is available for public appraisal subject to the Freedom of Information Act.

Recommendation 6.14

That for major projects which require Cabinet approval, a post­completion study be prepared and be made publicly available for appraisal. (page 2 64) .

The Board is applying post project evaluation procedures on a trial basis to determine the regimen with which post project evaluations will be done within the Board. This process will facilitate the availability of public documents.

Recommendation 6.15

That the MMBW review its productivity target to ensure that this target more closely reflects the Board's full productivity improvement potential. (page 270).

To effe~tively target this indicator, it will be necessary to develop a hierarchy of inputs and activities to facilitate analysis of the impact of key variables and productivity improvement movement in all major areas of the Board. The Board is investigating ways to improve the calculation of this indicator.

Recommendation 6.16

That the MMBW publish in its Annual Report, information about its own productivity performance, alongside those of comparable water authorities in Australia and overseas (particularly those indicators published by the Australian Water Resources Council), in order to facilitate 'yardstick' comparisons. (page 270).

The AWRC comparisons across Australian water authorities are the result of significant co-operative effort between water authorities and concentrate primarily on financial indicators. They do not include comparative productivity improvement indicators.

One of the major problems in such comparisons is the establishment of common and consistent data and methodologies between organisations. Because of this, the Board often uses less sophisticated data for AWRC purposes (to facilitate more direct comparison with other agency data) than it does for its own purposes and inclusion in the annual report. To publish both results could be confusing and open to misinterpretation.

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There is also a significant time lag between the compilation of the AWRC comparisons and the publication of the Board's annual report. For example, the AWRC comparisons for 1988/89 have yet to be published. Therefore, publication within the context of the Board's annual reports is not immediately practical.:

Recommendation 6.17

That the MMBW undertake work to produce and publish Total-Factor Productivity estimates in addition to its labour productivity estimates. (page 273).

The Board's current productivity improvement indicator reflects operating and maintenance costs and excludes capital. In addition to the review of its existing indicators referred to in response to Recommendation 6.15 above the Board will also examine an appropriate methodology to measure Total Factor Productivity.

Recommendation 6.18

That the MMBW strengthen and broaden its efforts to obtain information on the factors influencing, and the methods of enhancing, customer satisfaction. (page 274).

The program to obtain information on customer satisfaction is reviewed continuously to ensure produces accurate and relevant data.

Customer surveys covering a wide range of issues are conducted annually.

During 1990/91 the following additional actions will be taken:

An on-going customer monitor survey will be conducted to measure satisfaction on a monthly basis. This will enable the effects of particular events and initiatives to be measured more directly.

Surveys will be conducted on levels of service.

Community consultation will begin in relation to development of Melbourne's future water management strategy.

Recommendation 6.19

That the MMBW sustain its efforts to develop an effective system of performance indicators including quality of service and other non-financial indicators of performance. (page 275).

The Board has included objectives and associated performance indicators in its Annual Reports since 1986/87. Over the years, changes have been made to the set of indicators as improved or additional indicators have been developed. Further improvements in this area are under way.

jbe Library, Parliament of Vic:c.rfa

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Recommendation 7.1

That, subject to the adoption of substantive new procedures for the enhancement of Parliamentary monitoring of GBEs as recommended in this report, debt limits for individual authorities no longer be set by legislation. (page 291).

The Government has supported since 1988 the removal of debt limits for commercial authorities, as a limit largely irrelevant to authorities' operations and control procedures.

Recommendation 7.2

That the Auditor-General assume responsibility for the regular performance auditing of Government business enterprises and be provided with resources adequate to this purpose. Audit policy is to provide for the conduct of a comprehensive performance audit every three years. The performance audit may be carried out by Audit Office staff or by private contractors operating under the direction of the Auditor-General. (page 303).

Under S.6 of the Audit (Amendment) Act 1990, the Auditor General may conduct 'any audit he or she considers .necessary to determine whether a Department or a public authority is achieving its objectives effectively and doing so economically'. Under this Act the report must be transmitted to Parliament.

Recommendation 7.3

That Renewable Energy Authority Victoria be entrusted with the additional role of examining energy supply options (including capital works programs), demand management and other relevant energy policy issues in respect to Government Energy Enterprises. (page 303).

Comments on REAV's role have been provided previously in the responses to 5.5 and 5.9. The Government considers it inappropriate to give REAV a primary role in examining energy supply options. Options for energy supply need to be evaluated by the responsible utilities under integrated least cost planning principles. REAV has a primary role of decentralised supply of renewable energy. To the extent that there is a need for an overview capability or co-ordinating role, it is best managed by the responsible Minister.

Recommendation 7.4

That the Government create appropriate improved monitoring mechanisms for the review of capital investment plans and other relevant classes of business decisions by non-energy Government business enterprises such as the MMBW. (page 304).

Capital expenditure plans are already reviewed by Government on an annual basis. The intention of Government however, is not to add another level of detailed monitoring of the commercial authorities but to set target performance objectives.

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Recommendation 7.5

That the SECV, MMBW and GFCV report to the Parliament {in the form of a supplementary document to the Annual Report) the following:

1. Projections {on an annual basis for a five year period) of

(a) capital works expenditure;

(b) cash flow from operations including revenue, expenditure (by major component) and finance charges; and

(c) borrowing requirements and impact on total debt.

2. Demand projections, using a scenario approach, on an annual basis for a five year period and then at five yearly intervals for the ensuing 15 years.

3. Details of current and proposed pricing strategies.

4. Details of current and proposed demand management strategies, including pricing options designed to optimise demand management.

5. Details of major capital works programs (with reference to evaluation documents to be available on request) .

6. Details of major projects recently completed (with reference to Post Implementation Review documents).

7. An overview of long-term supply options, including shared operations/joint ventures with other states, for the next 10 to 20 years together with an analysis of their environmental consequences. (This section would require reference to supporting documents) .

That a Parliamentary Committee be provided with adequate resources to:

(i) examine relevant aspects of these reports;

(ii) consider the advice of the Renewable Energy Authority Victoria on demand management, substitution of energy sources, and supply options; and

(iii) report to the Parliament. (page 305) .

The Government supports supplementary reporting by the SECV, MMBW and GFCV to Parliament and proposes the scrutiny of these reports by the EBRC on an annual basis.

This initiative would be in keeping with the Government's increase the accountability of commercial Public Authorit Parliament. Parliament's ability to closely monitor the activities of the SECV, MMBW and GFCV would be enhanced significantly by the provision of detailed supplementary and projections.

aim to to

reports

·~ : / lj ./ I

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Given the establishment of additional reporting requirements, the Government supports the removal of the legislated debt limits for the SECV, MMBW and GFCV as these are no longer a relevant control mechanism for the activities of these organisations.

(UG.KF.222)

1he Libra1y, Parliament of Victrli'ftJ