ICRCs tariff review 26 October 2016 Background Icon

ICRC’s tariff review 26 October 2016

Background Icon Water presentation 26 October 2016 Key dates – ICRC tariff review NOVEMBER 2015 Release of issue paper FEBRUARY 2016 Release of technical paper 1: Water demand elasticity JUNE 2016 Release of technical paper 2: Marginal cost pricing SEPTMEBER 2016 Release of draft report We are here NOVEMBER 2016 JANUARY 2017 Public forum Submission on draft report close ICRC Tariff Review Final report JUNE 2017 Icon Water regulatory submission APRIL 2018 Release of final ICRC pricing path JULY 2018 New Icon Water prices commence 2

Background Icon Water presentation 26 October 2016 Purpose To provide you with sufficient information on water and sewerage pricing options to enable you to: • consult with your members/constituents • provide feedback to Icon Water at the next CCF meeting on 8 December 2016. Please note: this slide pack should be considered in conjunction with information provided verbally by Icon Water at the Community Consultative Forum meeting on 26 October 2016. 3

Agenda Icon Water presentation 26 October 2016 1. Summary of ICRC draft report 2. Key considerations raised by the Community Consultative Forum • Affordability • Water security • Environmental sustainability • Economic efficiency 3. Tariff options • Options for sharing supply costs • Bill impacts 4

Icon Water presentation 26 October 2016 1. Summary of ICRC draft report 5

Key conclusions Icon Water presentation 26 October 2016 “The current tariff structure no longer provides the most efficient outcome given our current water security circumstances. ” “A mismatch between the Tier prices and marginal cost leads to inefficient use of the water infrastructure and water resource. ” Simply: • We have water security • We have reduced per capita consumption patterns • Large customers are finding off-network solutions • No longer need to use price to discourage consumption • Under utilisation of water and the network Summary of ICRC draft report 6

Other key content Icon Water presentation 26 October 2016 1. Drought pricing likely (>5 years) 2. Icon Water’s possible role in setting prices 3. Two transitional tariff path options proposed ICRC Options Supply charge ($ pa) Usage charge ($/k. L) Option A $610 $1. 74 Option B $390 $2. 61 Summary of ICRC draft report 7

ICRC proposed transitional tariff paths Icon Water presentation 26 October 2016 3, 000 Current tariff structure Annual water and sewerage bill ($) 2, 500 ICRC option B ($2. 61/k. L) 2, 000 ICRC option A ($1. 74/k. L) 1, 500 1, 000 Average residential consumption for all water users is 200 k. L a year – also step change from tier 1 to tier 2 in the current tariff structure. 500 0 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 Annual water usage (k. L) Average household usage Summary of ICRC draft report Current tariffs ICRC option A ICRC option B 8

Icon Water presentation 26 October 2016 2. Key considerations raised by Community Consultative Forum • Affordability • Water security • Environmental sustainability • Economic efficiency 9

Affordability Icon Water presentation 26 October 2016 Icon Water examined: • Consumption patterns of concession customers • Water and sewerage bill as a percentage of gross household income • Water affordability in other jurisdictions • − residential customers − large non-residential customers Water bill comparison in other jurisdictions and the ICRC options Key considerations raised by Community Consultative Forum 10

Affordability Icon Water presentation 26 October 2016 Water consumption by concession card holders Average residential consumption for all water users -200 k. L a year 14% Proportion of customers 12% 10% 8% 6% 4% 2% 0% 1 10 30 50 70 90 110 130 150 170 190 220 260 300 340 380 440 520 600 680 760 1000 More than Water usage k. L per annum 1000 Proportion of concession card holders Proportion of residential customers Source: Icon Water billing system, 2013 -14 Number of concession holders with 1 year of water consumption: 8320 Consumption by concession card holders is broadly consistent with all residential users. Key considerations raised by Community Consultative Forum 11

Affordability Icon Water presentation 26 October 2016 Water bills as a percentage of income Table 1. Water and sewerage bill as percentage of lowest quintile of gross household income ($29, 588 pa, ABS Statistics, 6523. 0) Percentage of income 8. 00% 7. 00% 6. 00% 5. 00% Current tariff 4. 00% ICRC Option A 3. 00% ICRC Option B 2. 00% 1. 00% 0. 00% 100 k. L 150 k. L 200 k. L 250 k. L 300 k. L 350 k. L 400 k. L Annual water usage Low income, low usage households will pay approximately $300 more per annum under the ICRC’s preferred option (option A). Key considerations raised by Community Consultative Forum 12

Affordability Icon Water presentation 26 October 2016 Water bills as a percentage of income Table 2. Water and sewerage bill as percentage of second quintile of gross household income ($70, 928 pa, ABS Statistics, 6523. 0) 3. 50% 3. 00% 2. 50% 2. 00% Current tariff ICRC Option A 1. 50% ICRC Option B 1. 00% 0. 50% 0. 00% 100 k. L 150 k. L 200 k. L 250 k. L 300 k. L 350 k. L 400 k. L Annual water usage The increase (approx. $300 per annum) is much more affordable for medium income, low usage households under the ICRC’s preferred option (option A). Key considerations raised by Community Consultative Forum 13

Affordability Icon Water presentation 26 October 2016 Water bills comparisons between capital cities and ICRC Option A Average residential customer (200 k. L pa) Large non-residential customer (10, 000 k. L pa, 150 mm meter) Sydney Perth Melbourne* Hobart Canberra Brisbane Adelaide 0 500 1, 000 1, 500 0 10000 20000 30000 40000 50000 60000 If we follow the ICRC’s preferred option the shift is outside industry norm. Key considerations raised by Community Consultative Forum 14

Affordability Icon Water presentation 26 October 2016 Movement of supply charge and usage charges 7 Index 2003 -04 = 1 6 5 4 Min Usage price ($/k. L) 3 Max Usage price ($/k. L) Fixed charge ($/a) 2 1 -1 7 6 16 – 1 20 5 20 15 – 1 4 20 14 – 1 3 20 13 – 1 2 12 – 1 20 20 11 – 1 1 0 20 10 – 1 9 20 09 – 0 8 20 08 – 0 7 07 – 0 20 20 06 – 0 6 5 05 – 0 20 04 20 20 03 – 0 4 0 Large usage customers have borne the cost of our water security initiatives. Key considerations raised by Community Consultative Forum 15

Water security in the ACT Icon Water presentation 26 October 2016 ACT Government’s water objective “For any year over the modelled period, there should be less than a 5% probability of any level of temporary water restrictions” Simply: We should not have water restrictions more than one year in every 20 years. Key considerations raised by Community Consultative Forum 16

Water security in the ACT Icon Water presentation 26 October 2016 The ACT community • Changed water usage habits to achieve a permanent reduction in per capita consumption of 40% on 2007 levels (the target was 25%) Icon Water • Upgraded Mt Stromlo treatment plant • • Upgraded Googong treatment plant Reinstated Cotter Pump Station Murrumbidgee River to Cotter pump station Ability to transfer water from Stromlo to Googong Enlarged Cotter Dam Murrumbidgee to Googong pipeline Ability to transfer water from Murrumbidgee River to Tantangara Dam In response to the Millennium drought, Icon Water and the community worked together to improve water security in the ACT Key considerations raised by Community Consultative Forum 17

Water security in the ACT Icon Water presentation 26 October 2016 Inflows and water demand 500 2010/11 to 2015/16 Average Inflow 238 GL/year Average Consumption 46 GL/year Annual Inflow & Demand (GL) 450 400 350 2000/01 to 2009/10 Average Inflow 85 GL/year Average Consumption 54 300 250 200 150 100 50 Total Inflow (GL) 16 15 / 15 20 14 / 14 20 13 / 20 12 / 13 12 20 11 / 11 20 10 / 10 20 09 / 09 20 08 / 08 20 07 / 07 20 06 / 20 05 / 06 05 20 04 / 04 20 03 / 20 02 / 03 02 20 01 / 20 20 00 / 01 0 Total Water Consumption (including losses) (GL) Substantial increase in inflows while consumption has remained steady Key considerations raised by Community Consultative Forum 18

Water security in the ACT Icon Water presentation 26 October 2016 Percent Full Capacity (GL) ACT dam storage levels 2000 -2016 Strong water security 19

Water security in the ACT Icon Water presentation 26 October 2016 Scenarios to determine the timing for the next water storage projects are: Project completion Scenario Details No demand growth Baseline – zero growth in water demand declining per capita consumption Post 2062 Minor demand growth Medium series population growth with 50% contribution to aggregate demand (Most likely scenario) 2060 Medium demand growth Incremental adjustment above scenario 1 – medium series population growth with proportionate growth in water demand 2043 High demand growth ABS’ series A population growth projection for ACT with 100% contribution to aggregate demand 2035 Key considerations raised by Community Consultative Forum 20

Water security in the ACT Icon Water presentation 26 October 2016 What if we went through another Millennium Drought? • The worst drought on record • Lowest actual storage - 63 GL (30%) in June 2007 Q. What would be the hypothetical storage level if we experience the same climate but with the current infrastructure and demand levels? A. Modelled minimum storage level would be 150 GL or 54% of current total storage. Stage 1 temporary water restriction would not have been triggered. Key considerations raised by Community Consultative Forum 21

Water security in the ACT Icon Water presentation 26 October 2016 Volume of Water in Storage (GL) 100% 90% 250 80% 200 70% 60% 150 50% 40% 100 30% 20% 50 10% 0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 0% 2017 Observed Historical Storage Modelled Storage with Current System Indicative Trigger for Stage 1 Indicative Trigger for Stage 2 Indicative Trigger for Stage 3 Indicative Trigger for Stage 4 Percentage of Current Icon Water Total Storage ACT water restriction triggers If we went through another Millennium Drought we wouldn’t need to trigger water restrictions. Key considerations raised by Community Consultative Forum 22

Water security in the ACT Icon Water presentation 26 October 2016 Key messages Water security projects undertaken in the past 5 years mean there is no need for major water supply projects for at least 20 years and possibly longer. Increased inflows and rainfall mean that water storage levels are currently at a record high compared to the last 15 years. Key considerations raised by Community Consultative Forum 23

Environmental sustainability Icon Water presentation 26 October 2016 Environmental compliance obligations Avoid or mitigate damage to the environment Demonstrate Ecological Sustainable Development (ESD) Success through partnerships and engagement Key considerations raised by Community Consultative Forum 24

Environmental sustainability Icon Water presentation 26 October 2016 Our obligations 45 pieces of environmental legislation across ACT, NSW and Commonwealth jurisdictions, such as: • Environment Protection Act 199 x (ACT) • Water Resources Act 199 x (ACT) • Protection of the Environment (Operations ) Act 199 x (NSW) • Nature Conservation Act 199 x (Commonwealth) • Tree Protection Act 199 x (ACT) • Heritage Act 199 x (ACT) • Environment Protection and Biodiversity Conservation Act 199 x (Commonwealth) • National Greenhouse Energy Reporting Scheme Act 199 x (Commonwealth) Key considerations raised by Community Consultative Forum 25

Environmental considerations Icon Water presentation 26 October 2016 Key messages Mandatory environmental flow releases contribute to the ACT Government’s Sustainable Diversion Limit (‘water for the environment’) requirements Effluent quality must be high in the ACT as an ‘environmental return’ to the Murray Darling Basin Trade-off - high water users may seek alternative, non-potable water sources at risk to environmental flows Climate change and carbon policies can impact on water use and water prices Key considerations raised by Community Consultative Forum 26

Economic efficiency Icon Water presentation 26 October 2016 Weighing up the costs and benefits of water use Costs Benefits Pumping, energy and treatment User benefits Bringing forward next dam build / demand management Stormwater improvement Environmental / scarcity of water use Visual (suburban gardens) Tourism Ideally, we should use water when benefits are greater than costs. Therefore, tariff should reflect costs. Key considerations raised by Community Consultative Forum 27

Economic efficiency Icon Water presentation 26 October 2016 How is the long-run marginal cost of water estimated? $1. 74/k. L Key considerations raised by Community Consultative Forum 28

Economic efficiency Icon Water presentation 26 October 2016 Current state for large users • Large users are predominantly paying for water charged at the Tier 2 usage price. • Highest top tier usage charge among all Australian major utilities. LRMC Price Tier 1 $2. 61/k. L <$1. 74/k. L Tier 2 $5. 24/k. L • Non-residential customers are considering investments in alternative (off-network) supply arrangements that are considerably more expensive than Icon Water’s long-run marginal cost of supply. Key considerations raised by Community Consultative Forum 29

Economic efficiency Icon Water presentation 26 October 2016 Impact of off-network supply arrangements (aka uneconomic bypass) What if the ACT’s top 10 consumers no longer sourced water from Icon Water? • Total costs would need to be spread across the remaining customer base. • Increase in prices of 10. 6% for remaining customers would be required. Key considerations raised by Community Consultative Forum 30

Icon Water presentation 26 October 2016 3. Tariff options A usage price of $1. 74/k. L would cover around 40% of Icon Water’s total costs. The following slides present six options for recovering the residual 60% of Icon Water’s costs. 31

Tariff options Icon Water presentation 26 October 2016 # Title Usage charge Supply charge 1 ICRC’s preferred tariff structure Single usage charge at long-run marginal cost across all customer types Divided equally across all customer types 2 Differentiation by customer type Single usage charge at long-run marginal cost across all customer types Different supply charge for residential and non-residential customers 3 Differentiation by connection size Single usage charge at long-run marginal cost across all customer types Residential: single supply charge 4 Single usage charge, no change to supply charge Single usage charge based on recovery of residual costs across all customer types No change to the supply charge 5 Two tier usage charge, higher supply charge Tier 1: based on average of current tier 1 price and long-run marginal cost Divided equally across all customer types to recover residual costs Status quo No change to two tier usage charge 6 Tariff options Non-residential: supply charges based on connection size Tier 2: based on set price to avoid uneconomic bypass No change to the supply charge 32

Tariff options Options Icon Water presentation 26 October 2016 Residential Customers Non-residential Customers Usage # Title Tier 1 Tier 2 Usage Supply Tier 1 Tier 2 Supply 1 ICRC’s preferred tariff structure $1. 74 n/a $593. 13 2 Differentiation by customer type $1. 74 n/a $562. 76 $1. 74 n/a $1, 125. 50 3 Differentiation by connection size $1. 74 n/a $558. 00 $1. 74 n/a 4 Single usage, no change to supply charge $3. 69 n/a $101. 48 5 Two tier usage, higher supply charge $2. 18 $4. 00 $294. 50 6 Status quo $2. 61 $5. 24 $101. 48 Tariff options Esample Size 20 mm 50 mm 150 mm Charge $558. 00 $3, 485. 00 $31, 369. 00 33

Tariff options Options Icon Water presentation 26 October 2016 Affordability Water security Environmental sustainability Economic efficiency ICRC’s preferred tariff structure Differentiation by customer type Differentiation by connection size Single usage charge, no change to supply charge Two tier usage charge, higher supply charge Status quo The following slides inform judgements on affordability. Tariff options 34

Tariff options Icon Water presentation 26 October 2016 Residential bill estimates by option 3, 000 Option 1 ICRC preferred option Annual water and sewerage bill ($) 2, 500 Option 2 Differentiation by customer type 2, 000 Option 3 Differentiation by connection size Option 4 Single usage charge, no change to supply charge 1, 500 1, 000 Average residential consumption for all water users is 200 k. L a year 500 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 475 500 Option 5 Two tier usage charge, higher supply charge Option 6 Status quo Annual water usage (k. L) Which option is best for the ACT? Tariff options 35

Tariff options Icon Water presentation 26 October 2016 Impact for houses Proportion of houses 100% 10% 80% 60% 8% 40% 6% 20% 0% 4% -20% 2% -40% % Change in total bill 120% 12% -60% 0 50 10 0 15 0 20 0 25 0 30 0 35 0 40 0 45 0 50 0 55 0 60 0 65 0 70 0 75 0 80 0 85 0 90 0 95 0 10 00 0% Proportion (LHS) Proportionofofhousesbybywateruse (LHS) by customer type 22 -- Differentiation Customer type charge, no change to 44 -- Single Usageusage charge supply charge 11 - Equal ICRC preferred option 33 - Connection size Differentiation by connection type 55 - Remove uneconomic Two tier usage charge, bypass higher supply charge Options with higher usage charge have lower impact for houses. Tariff options 36

Tariff options Icon Water presentation 26 October 2016 Impact for residential units 25% 100% 80% 60% 40% 15% 20% 10% 0% % Change in total bill Proportion of customers 20% -20% 5% ~10% sample -40% 0% -60% 1 10 30 50 70 Proportion of units and flats. . . 90 110 130 150 170 190 220 260 300 340 380 440 520 600 680 760 1000 Equal Customer type Connection size Usage charge Uneconomic bypass Options with higher usage charges have lower impact for units. Tariff options 37

Tariff options Icon Water presentation 26 October 2016 Impact for non-residential with 20 mm and 50 mm connections The largest users will have the biggest decrease under all options. Tariff options 38

Next steps forum members Icon Water presentation 26 October 2016 Today Icon Water has provided you with sufficient information on water and sewerage pricing options to enable you to: • consult with your members/constituents • provide feedback to Icon Water at the next Community Consultative Forum meeting on 8 December 2016. Icon Water will provide you with: • An information pack containing a copy of this presentation and a feedback template (to be sent to you electronically following this meeting) • Assistance in talking to your members/constituents, if required 39

Key dates forum meetings Icon Water presentation 26 October 2016 08 December 2016 16 February 2016 27 April 2017 40

Glossary Icon Water presentation 26 October 2016 Long-run marginal cost The cost added by producing one extra item of a product. In our case, the cost of producing one extra kilolitre of water taking into account the impact on the timing of future capital works. Uneconomic bypass When a user establishes an off-network source of supply that is more costly to the community (though cheaper for the user) than supply by the primary network. Economic efficiency Maximising total wellbeing without regard to equity amongst individuals. Environmental flows The quantity, timing, and quality of water flows required to sustain freshwater and estuarine ecosystems and the human livelihoods that depend on these ecosystems. Sustainable diversion limits The maximum amount of water that can be taken from a river system for consumption before it has a detrimental impact on the ecosystem. 41

How do we use water in the ACT? Icon Water presentation 26 October 2016 0% 0% Non-residential Commercial 0% 0% Residential 0% 0% 0% 2008 -09 2009 -10 2010 -11 2011 -12 2012 -13 2013 -14 Source: ABS 2015, ABS Cat. No. 4610. 0 Water Account Australia 42