CWMS Accounting Principles - lga.sa.gov.au Accounting... · CWMS Accounting Principles – The Costing and Pricing of CWMS ECM 633415 LGA of SA - November 2015 Page 2 of 60 Purpose

CWMS

Accounting

Principles The Costing and

Pricing of CWMS

November 2015

CWMS Accounting Principles – The Costing and Pricing of CWMS

ECM 633415 LGA of SA - November 2015 Page 2 of 60

Purpose and Introduction 4

1. How to Cost and Price a CWMS 5

Table 1 – Steps in the costing and pricing of a CWMS 8

1.1 Setting the Service Charge 9

2. Accounting and Pricing Issues 11

2.1 Service rates and charges 11

2.2 Accounting for a CWMS 12

2.3 Direct and Indirect Costs 13

2.4 Attribution of Indirect Costs 13

2.5 How can indirect costs be allocated to a CWMS? 13

Table 2 – Allocating Indirect Costs 16

2.6 Cost of Capital 16

2.7 Under or Over Recovery of Full Cost 17

2.8 Historical Aspects of Full Cost Recovery 17

2.9 Is a CWMS Reserve Account Necessary? 18

Table 3 – Reconciling the CWMS cash balance 19

Table 4 – Example cash balance reconciliation 20

2.10 Pricing policy framework 20

3. Other Issues 22

3.1 A Uniform Service Charge 22

3.2 Vacant vs. Occupied 23

4. CWMS Framework – Legislative and Other 25

4.1 Legislation 25

4.1.1 Local Government Act and Regulations 25

4.1.2 South Australian Public Health (Wastewater) Regulations 2013 26

4.2 ESCOSA determinations 26

4.3 CWMS Property Units Code 28

4.4 Other relevant material 28

Appendix 1 – An example of the application of CWMS Accounting Principles 29

Introduction 29

Calculating the Cost of Capital 29

Connection Fees and Developer Headworks Charges 29

Table 5 – DC Anytown Example – Calculating the Service Charge 30

Allowance for Risk 31



Service Charge Setting 31

What’s in the Reserve? 31

Common versus individual scheme pricing issues 32

Appendix 2 – Relevant legislation 33

Local Government Act 1999 as at July 9 2015 33

Local Government (General) Regulations 2013 as at November 20 2014 34

Appendix 3 - South Australian Public Health (Wastewater) Regulations 2013 37

Appendix 4 – National Water Initiative Pricing Principles 53

1. Principles for the recovery of capital expenditure 53

2. Principles for urban water tariffs 58



Purpose and Introduction The purpose of this document is to provide guidance to staff and elected members

who have, or will have, responsibility for planning, constructing, operating and

maintaining community waste water management schemes (CWMS), with particular

reference to the costing and charging regimes for such schemes.

CWMS schemes are now subject to a regulatory regime under the auspices of the

Essential Services Commission of South Australia (ESCOSA) and it is important that

Councils are familiar with the regulatory and reporting regime imposed by ESCOSA.

There are four main parts to the document:

A broad ‘how to’ guide that steps through the process that needs to be

followed to cost and price a CWMS.

Accounting and Pricing Issues: This part provides guidance and pragmatic

explanation of how the legislation, ESCOSA and other material is to be

applied.

Other Issues: This part provides guidance and pragmatic explanation on the

application of non-legislated sound business principles.

CWMS Framework – Legislative and Other: This part provides an outline of

the relevant legislation, ESCOSA and other material that Councils should

have knowledge of in relation to CWMS.

The four main parts of the document are supplemented by Appendices which

provide access to relevant legislation, ESCOSA and other material.



1. How to Cost and Price a CWMS The following table sets out the issues to be considered in determining the full cost of

a CWMS. The process is cyclical in nature although not every element of the

process needs to receive detailed consideration in each cycle of the process.

While this document focuses largely on accounting issues it will involve wide-ranging

participation from staff to provide information and the Council to provide policy

guidance to ensure that the CWMS is properly costed and that the price charged

ensures the long-run sustainability of the CWMS .

The left-hand side of the table sets out the steps in the process and the right-hand

side provides comments on the processes and reference to material in this

document and other sources of information.

Step Comments and references

1. Maintain a strategic focus using: a. Strategic plan; b. Long-term financial

plan; c. Infrastructure asset

management plan; and d. Key performance

indicators.

A CWMS is an essential service provided to the community on a long-term basis. The majority of the costs associated with a CWMS relate to the acquisition, maintenance and renewal of the scheme infrastructure. It is important to keep a focus on the long run through:

The regular (annual) review of asset valuations and assumptions related to useful life, including issues relating to technological change and obsolescence. This is in accordance with accounting standards AASB 13 – Fair Value and AASB 116 – Property, Plant and Equipment. Additional information on the application of those accounting standards is included in the Model Financial Statements published by the LGA.

A careful analysis and assessment of the peaks and troughs associated with major maintenance and asset renewal. This is important to ensure that funding will be available to cater for maintenance and renewal peaks. See also Section 2.8 of this paper.

The likely costs of expanding the scheme to new customers and the potential impact of new customers on economies of scale and future long-run costs to operate the scheme. This needs to be factored into strategic plans, the long term financial plan and the infrastructure asset management plan.

Any potential issues relating to the funding and financing of the CWMS. Financial Sustainability Information Paper No 15 – Treasury Management has a good discussion on these issues.



Expected long-run operating revenues and expenses including depreciation, cost of capital and cost of risk. These need to be factored into the long term financial plan. Sections 2.3 to 2.10 and Appendix 1 of this document provide guidance on these issues and this is further supplemented by Section 1.5 and Appendix 1 of ‘Costing Principles for Local Government’ published by the LGA.

The setting and monitoring of key performance indicators, both financial and non-financial is required by Section 122(1)(d) of the LG ACT. While Financial Sustainability Information Paper No 9 – Financial Indicators sets out standard financial indicators that apply across whole of council the discussion in the paper may assist in formulating appropriate financial indicators for a CWMS as will Financial Sustainability Information Paper No 26 – Service Range and Levels in relation to non-financial performance indicators.

2. Ensure there is an appropriate financial policy framework: a. Treasury

management; b. Financial

sustainability; c. Asset management; d. Risk management;

and e. Updating strategic

plans, long-term financial plan and infrastructure asset management plan

Financial Sustainability Information Paper No 18 – Financial Policies and Procedures provides an overview of the need for financial policies and a listing of policies for consideration by Councils.

Financial Sustainability Information Paper No 15 – Treasury Management provides guidance on issues to be considered in developing a treasury management policy.

Financial Sustainability Information Paper No 1 – Financial Sustainability provides a broad history and outline of financial sustainability issues for local government.

Financial Sustainability Information Paper No 6 – Infrastructure and Asset Management discusses a range of issues relating to infrastructure asset management, including the need for a policy framework in relation to the overall management of assets with reference to service levels. Note that Financial Sustainability Information Paper No 26 – Service Range and Levels will also be of use and any asset management policy needs to be consistent with any service level policy established by the Council. Further guidance is available from the three international standards on asset management – IOS 55000, ISO 55001 and ISO 55002.

Financial Sustainability Information Paper No 22 – Understanding Risk Management provides guidance on the risk management process. In



particular, it provides a clear explanation of the application of the Australian Standard on Risk Management AS/NZS ISO 31000.

Section 122(4) of the LG Act requires the annual review of a Council’s long-term financial plan. Given the interrelated nature of the long–term financial plan and the infrastructure asset management plan, especially in relation to future operating, maintenance and renewal cost for the Council’s assets a Council should have a policy on the review of strategic management plans.

3. Ensure there are appropriate financial procedures in place: a. Chart of accounts; b. Budget preparation,

approval and amendment; and

c. Management and financial reporting.

The chart of accounts is critical to ensuring the accurate collection, recording, aggregation and reporting of a Council’s costs and revenues. Section 2.1 of ‘Costing Principles for Local Government’ published by the LGA provide further guidance on the importance and principles for establishment of the chart of accounts. These principles provide guidance on the development of procedures relating to the establishment and maintenance of a comprehensive chart of accounts.

The preparation, approval and amendment of budgets is a key activity of Council. The LG Act in Section 44 makes it clear that the adoption and amendment of the budget may not be delegated by Council (see also Financial Sustainability Information Paper No 25 – Monitoring Council Budget Performance). Council should have clear procedures and instructions on the development of budgets which ensure as far as possible, that budget proposals are robust, well scrutinised, consistent with the long-term financial plan and supported by appropriate documentation and evidence (see also Financial Sustainability Information Paper No 23 – Financial Governance).

Management reporting is the provision of relevant financial information to Council, executive management, managers and team leaders which enables the effective and efficient management of Council resources. Financial reporting is the provision of statutory financial information as required by Australian Accounting standards. Management reports need to be timely and relevant. They should be provided so that decision-making based on the management reports can be undertaken in a timely manner. Relevant reports contain only the information that is relevant to the recipient (see also Financial Sustainability Information Paper No 23 – Financial



Governance and Section 1.2 of ‘Costing Principles for Local Government’ published by the LGA). Statutory financial reports need to be accurate. Effective procedures need to be in place to facilitate the preparation of management and financial reports.

4. Ensure there are formal approval processes for CWMS plans, budgets and service charges in place.

A CWMS (whether a single scheme or multiple schemes in a Council area) is effectively a business unit of Council, however operated. The formal approval of Council’s budget will encompass CWMS. However, the emergence of a regulatory framework under the auspices of ESCOSA which requires the development by Council of a pricing schedule, a pricing policy statement and the reporting of those matters to ESCOSA and the prospect of the monitoring of prices charged for CWMS means that more scrutiny will be brought to bear on CWMS operations and it is important that formal approval of plans, budgets and service charges takes place based on accurate and relevant information provided by Council staff (see also Sections 2.10, 4.2 and Appendix 4 of this document). See below for a discussion on setting the service charge.

5. Ensure there are appropriate monitoring and review procedures in place: a. Analysis of variances; b. Budget review; c. Management and

financial reporting; and d. Key performance

indicators.

Formal procedures and timelines need to be developed that ensure that the regular monitoring and review of the range of information available to decision-makers in relation to CWMS occurs and that corrective action is taken wherever possible. Careful analysis needs to be made to identify whether variations to budgets, plans and key performance indicators are trends, timing or aberrations (see also Financial Sustainability Information Paper No 23 – Financial Governance). These procedures should include:

the identification of the surplus or deficit on operations for the financial year, based on accrual accounting principles (and consistent with ESCOSA pricing principles) and the cumulative surplus/deficit of the CWMS; and

the cash balance of the CWMS reserve (if such reserve is maintained) at the end of each financial year. (Note: See Section 2.9 and Appendix 1 of this document).

Both of these balances may have implications for current and future pricing decisions and the cash available for asset renewal.

Table 1 – Steps in the costing and pricing of a CWMS



1.1 Setting the Service Charge

The process for setting the service charge is not dissimilar to the rates setting

process, with the constraint that the upper limit for the revenue from a service charge

is the estimated full long-run average cost, on a whole of life basis, of providing the

service. And just like the rates setting process there may be a need to phase in

significant increases in the service charge to achieve full cost recovery over time

(see Section 2.1 of this document).

Most of the information needed to calculate the service charge will be derived from

the information about the CWMS that has been provided for the long-term financial

plan (or for a CWMS long-term financial plan).

The service charge for a particular year should be set based on the medium to long

run expected expenses and revenues with a view to ensuring that, over time, the full

cost (whole-of-life) of the CWMS will be recovered and that where increases in the

service charge are needed to recover the full cost that sharp increases will be

avoided as far as possible.

1. In making the assessments and calculations discussed below it is important to:

a. Include the impact of additional customers;

b. Include the impact of likely new connection fees; and

c. Exclude the cost of expenditure on new infrastructure, but assess the

impact of acquiring new assets on depreciation and cost of capital

2. Assess the likely expenses, with specific consideration of peaks and troughs of

major maintenance costs, in the medium to long-term (see Sections 2.3 to 2.5

and Appendix 1 of this document and also Appendix 1 of the LGA’s ‘Costing

Guidelines for Local Government’).

3. Calculate the cost of capital over the same time frame (see section 2.6 of this

document and Section 1.5.4 of the LGA’s ‘Costing Guidelines for Local

Government’).

4. Calculate the cost of risk specifically for unspecified risks and residual risk over

the same time frame (see Appendix 1 of this document).

5. Assess the requirements for capital renewal and upgrade over the same time

frame – this information should be available from the infrastructure asset

management plan.

6. Determine the extent to which capital renewal1 financing will be met from

CWMS accumulated funds or grants and whether borrowings will be necessary.

Note this will require an analysis of likely movements in the cash position of the

CWMS reserve (if maintained) (see Sections 2.7 to 2.9 and Appendix 1 of this

document).

1 The term ‘capital renewal’ includes that portion of a capital upgrade that reflects the value of

replacing the asset with the same or a similar asset without upgrading it. For example, if a 150cm pipe is being replaced with a 200cm pipe to cater for system expansion then the capital renewal portion is the cost to replace a 150cm pipe. See Note 7 to the LGS’s Model Financial Statements for a more detailed discussion on capital renewal and capital upgrade.



7. Assess the likely revenue from other CWMS related sources over the same

time frame (e.g. sale of water).

8. Based on items 1-7 determine the revenue requirement to recover the

estimated full long-run cost of the CWMS.

9. Calculate the required service charges based on the likely number of units in

each category where differential service charges are applied or, if no differential

service charges are applied, the service charge as a function of the number of

units (see the CWMS code).



2. Accounting and Pricing Issues

2.1 Service rates and charges

The cost of most of the goods and services provided by governments are met from

taxation revenue. This relates to the distinction between ‘public goods’ and ‘private

goods’. Generally, ‘public goods’ are provided by governments communally and it is

usually not possible to exclude consumers from using them. ‘Private goods’ are

those goods supplied by the market at a price. However, some goods and services

provided by governments have similar characteristics to private goods and it is

possible for them to be provided at a fee as the users of the goods or service can be

readily identified and charged.2

A CWMS is an ideal candidate for the application of a user charge to recover the

cost of providing the service. User charges reduce the burden of rates on ratepayers

and where the full cost of the service is recovered from a user charge, only the users

of the service meet the costs of the service. The LG Act makes it clear that Councils

are entitled to recover the full cost of providing a CWMS from the users of the

service. The full cost of the service equates to a ‘whole-of-life’ approach to

determining costs and includes:

Operating and maintenance costs;

Capital renewal and upgrade;

Cost of capital; and

Cost of risk.

Any medium to long term under recovery of the full cost could mean that

Non-cash expenses such as depreciation and cost of capital are not being

recovered

General ratepayers are subsidising the CWMS, i.e. general rates revenue is

being used to support the service

That funds raised are not sufficient to effectively operate and maintain CWMS

service levels.

As such this is potentially likely to mean that the Council may struggle to be able to

accommodate renewal and replacement of CWMS infrastructure as required over

the long run.

Councils should ensure, as far as possible, that only those persons who have, or

have access to, the service meet the full costs of the service and that service charges

each year are sufficient to recover the full long-run whole-of-life cost of the service

over time

2 For a fuller discussion of these concepts see the LGA’s Financial Sustainability Information Paper

No. 20 available at: http://www.lga.sa.gov.au/webdata/resources/files/20%20-%20Rating%20and%20Other%20Funding%20Policy%20Options%202015.pdf

http://www.lga.sa.gov.au/webdata/resources/files/20%20-%20Rating%20and%20Other%20Funding%20Policy%20Options%202015.pdf

http://www.lga.sa.gov.au/webdata/resources/files/20%20-%20Rating%20and%20Other%20Funding%20Policy%20Options%202015.pdf



2.2 Accounting for a CWMS

Full cost, in an accounting sense, includes all of the direct costs and those indirect

costs that can be reasonably attributed to the service. Those costs must be

accumulated on an accrual accounting basis. Accrual accounting matches costs and

revenues with the time period in which they were incurred or earned thus ensuring

that all of the financial transactions that relate to a particular financial year (or other

accounting period) are gathered together in the relevant time frame. This facilitates

the correct calculation of the full cost of the service to be compared with the

revenues earned from service charges. Some of the other benefits of an accrual

accounting approach to identifying the costs and revenues of a CWMS are:

Complete financial information – recognising non-cash expenses and all

assets and liabilities.

Full cost information for pricing decisions.

Consistency of information – accrual accounting principles enable meaningful

comparison of financial information over accounting periods for both decision-

makers and other stakeholders.

It is not possible to accurately calculate total costs and revenues using the cash

basis of accounting. Cash accounting paints a misleading picture. Some typical

issues with cash accounting include, but are not limited to:

Revenues calculated on a cash basis will be overstated by revenues received

relating to a previous (or future) time period and understated by revenues

earned but not yet received for the current time period.

Similarly, costs relating to goods and services will be overstated by cash

payments for goods and services relating to a previous (or future) time period

and understated by payments not yet made for goods and services received

in the current time period.

The non-recognition of depreciation means that the consumption of the asset

base of the CWMS, which is a cost of operating the CWMS, will not be

included.

The inclusion of cash payments for new and replacement assets seriously

overstate costs in any particular accounting period.

Failure to include the non-cash elements of employee costs (provisions for

long service leave, untaken annual and sick leave) understates the costs of

the CWMS.

Full cost, in an economic sense, recognises the return on investment from capital

invested in the CWMS and should also include an allowance for unquantifiable risks

associated with the CWMS. ESCOSA recognises full cost in this economic sense.

Failure to recognise the ‘cost of capital’ where the Council has provided from its own

resources, whether from corporate borrowing or the use of surplus cash, the funds



for new or replacement capital expenditure understates the full economic cost of the

CWMS.

Most risks associated with a CWMS should be readily quantifiable, particularly

insurance costs and the costs of responding to adverse events the potential for

which have been accepted as a residual risk. However, there may be other risks

associated with the operation of a CWMS that are difficult to quantify and it is entirely

appropriate to make an allowance for the potential response to such risks, even if it

is difficult to quantify their likely impact in financial terms.

2.3 Direct and Indirect Costs

Direct costs are those costs (including direct on-costs) that can be directly attributed,

in a cost-effective way, to the CWMS. Typically, they include direct labour (plus

direct labour on-costs), cost of materials, contractual expenses, plant hire, electricity

and depreciation of CWMS assets.

Indirect costs are those costs, sometimes called support costs, that cannot be

directly attributed to the CWMS in a cost-effective manner. Typically they include

billing and collection, information technology and communications, personnel and

human resources, insurance, occupancy, purchasing and other administrative

charges.

To some extent the distinction between direct and indirect costs is one based around

the cost to obtain the information. It is often more cost-effective to aggregate costs

into cost pools and then allocate those costs using an appropriate driver or

methodology. However, the increasing use and sophistication of financial and

costing systems is providing the opportunity for more costs to be directly allocated to

services as an integral part of the system. These benefits can be derived within a

Council’s financial and costing system or as a benefit from improved invoicing

information from suppliers.

2.4 Attribution of Indirect Costs

For an indirect cost to be reasonably attributed to the service there must be some

causal basis for the CWMS using the activity for which the CWMS will receive a cost

attribution.

For example, it is likely that CWMS charges will be raised and collected through the

same system used to create, charge and collect general rates and it would be

appropriate that a proportion of the costs of the operation and maintenance of the

property and rating elements of the financial information system would be

attributable to a CWMS. Typically those costs could include, among others, updating

and maintenance of the property database; invoicing costs and collection costs.

2.5 How can indirect costs be allocated to a CWMS?

Traditional methods of indirect cost allocation have focused on creating a single pool

of indirect costs and then allocating them on some basis.



Allocation bases have included:

Direct labour hours (or FTEs)

Direct labour dollars

Direct material costs

Total budget dollars

Machine hours.

Like any method of indirect cost allocation, these allocation bases are arbitrary in

nature and, in fact, may bear little resemblance to the actual way in which indirect

costs are consumed by a CWMS. It may be more appropriate to aggregate indirect

costs into cost pools that are logical to group together and that are capable of having

a single ‘driver’ that can be used to allocate the indirect costs on a causal basis, or,

alternatively, to allocate each separate indirect cost using a unique driver for each

one. The following table lists the indirect costs that were used along with suggested

drivers, in the appendix to the Costing Guidelines paper.3 Some further comments

are provided to assist in better understanding of the indirect cost pool and how the

driver should be used, as well as some alternative approaches to allocating the

costs.

Indirect Cost Driver Comments

Billing and Collection

Allocation based on no. of invoices processed

This indirect cost pool includes the licence and maintenance costs for software associated with the property and rating systems; printing and postage costs; cost of collecting outstanding debts.

A potential allocation of this indirect cost on the basis of invoices processed for an accounting period – the number of CWMS invoices printed/reprinted as a proportion of total invoices printed, noting that each quarterly invoice for rates counts as one invoice. If the same system is used for the production of other Council invoices, all invoices must be included in the count.

If postage costs for CWMS can be separately identified then they should be include as a direct cost and postage costs excluded from the cost pool. Any other costs that can be separately identified should be treated similarly.

3 Local Government Association of South Australia, (2015), Costing Principles for

Local Government, Appendix 1, p. 22



ITC Allocation based on no. of PC's

This indirect cost pool includes the operating and maintenance cost of hardware associated with the property and rating systems and the cost of telecommunications, including depreciation costs.

Some telecommunications costs for the CWMS, such as telemetry, may be able to be separately identified and treated as a direct cost. Any other costs that can be separately identified should be treated similarly.

An allocation basis based on the number of PC’s (or terminals) used for CWMS is appropriate, but an alternative basis for allocation could be the dollar cost of CWMS hardware as a proportion of total hardware costs.

Records Allocation based on no. of file accesses

This allocation method will only be possible where a modern records system is in place which records file accesses. Alternatively, some reasonable assessment will need to be made of that portion of the records activity that relates to CWMS.

Occupancy Allocation based on floor space occupied

It is likely that a number of structures will be dedicated to CWMS operations and their maintenance and operating costs should be considered direct costs.

Where there is shared occupancy of buildings then the ratio of CWMS occupied floor space to total space occupied can be used to allocate the operating and maintenance costs of buildings. (Note that shared facilities such as toilets, reception areas and the like should be excluded from the total floor space in such calculations). Similarly, where a portion of an employee’s time is allocated to CWMS then that portion of the employee’s occupancy costs will be allocated to CWMS.

Insurance Allocation based on $ value of assets insured

If the CWMS assets are not separately insured then the value of the CWMS assets as a proportion of the total asset pool should be used to calculate the allocation to CWMS costs. A similar approach may be



taken for other insurances.

Purchasing Allocation based on no. of requisitions processed

The total cost of the purchasing function should be apportioned on the basis of the number of requisitions processed for CWMS as a proprotion of the total number of requisitions processed.

Payroll and HR Allocation based on no. of FTEs

The total cost of the payroll and HR activity should be apportioned on the basis of the number of FTEs working on CWMS activities as a proportion of total FTEs. Note that this will not necessarily be the same from year to year as there may be times when there is more intense activity associated with CWMS for major extension or renewal projects that may consume more FTEs.

Table 2 – Allocating Indirect Costs

It is important to consider the costs and benefits of any method of cost allocation.

The simpler the allocation method the lower the cost of allocation. It may be

necessary to use a less accurate method of cost allocation because the cost of more

accurate methods outweighs the benefits of the greater accuracy.

Where indirect costs are being allocated it is important that a full cost regime has

been applied to the indirect cost before it is allocated. For example, where a

proportion of an employee is being allocated the total cost being allocated should

include all relevant on-costs (workers compensation insurance, superannuation, etc.)

and the non-cash elements of the employee’s costs (provisions for long service

leave, untaken annual and sick leave).

2.6 Cost of Capital

The cost of capital needs to be recognised in the calculation of the full cost of

providing the service. There are fundamentally three sources of capital for asset

acquisition for a CWMS:

1. Council funds (whether from cash surpluses or corporate borrowings4)

2. Capital contributions from developers and users

3. Grant funds from other levels of government

As there is no cost to Council for capital acquisitions made from 2 and 3 above

calculations of the cost of capital should exclude assets purchased from those

sources. However, it is recognised that Council records may not be able to identify

older asset transactions where assets were purchased from such sources and the

National Water Initiative Pricing Principles5 provide that where Council records

4 Corporate borrowings includes borrowings specifically for CWMS infrastructure

5 See Appendix 4



cannot distinguish between funding sources for those assets acquired before

January 1 2007 (the ‘legacy date’) then all such assets may be included in the

calculation of cost of capital. Section 1.5.4 to the Costing Guidelines provides an

example of how the cost of capital may be calculated.6

2.7 Under or Over Recovery of Full Cost

A CWMS is a complex, long-lived activity. The LG Act encourages the recovery of

the full cost of operating the system from users of the service but does not state the

timeframe over which the recovery is to be made. While it could be assumed that

the full cost recovery is to occur over the life of the CWMS defining the life of a

CWMS, given the nature of asset renewal and replacement over time, is obviously a

difficult task. Pragmatically, provided that sound budgeting and accounting practices

are followed, full cost recovery can be based on regularly reviewed estimates of full

long-run costs as determined in accordance with ESCOSA guidelines. Any such

periodic review should also have regard to future forecast CWMS outlays in a

Council’s long-term financial plan and infrastructure and asset management plan.

Note that the consideration of outlays here will be broader than the accrual

accounting definition of ‘expenses’. Setting service charges to achieve full cost

recovery based on long run costs means that there will always be some under or

over recovery on an annual basis and it is important that a ‘running tally’ of the under

or over recovery is maintained so that service charges can be adjusted in future

years to ensure that the principle of full cost recovery is met over the medium term,

say a three to five year period. See the appendix to the Costing Guidelines paper for

a simple methodology to do this.7

2.8 Historical Aspects of Full Cost Recovery

The previous Local Government Act also allowed the recovery of the full cost of

providing a CWMS.8 Unfortunately, most Councils would have been using cash

accounting to calculate the relevant service charges and are most likely to have

under recovered the full cost of the service. It is possible to go back and calculate

what should have been charged, but both time-consuming and impractical. Further, it

is not possible to adjust the previous service charges to recover under charges, so

the intergenerational equity issue cannot be resolved.

A more sensible approach is to be prospective in setting service charges, as

allowed by the LG Act, and ensure that service charges set each year as far as

possible recover the full cost of that year’s operations based on sound long term

financial management and asset management plans, keeping in mind that the aim is

to recover the full cost of the CWMS operation in the long-run and that cost recovery

needs to take account of the potential to ‘smooth out’ revenue-raising regardless of

maintenance and renewal peaks and troughs.

6 Local Government Association of South Australia, (2015), Costing Principles for

Local Government, Appendix 1, pp. 8-10 7 Local Government Association of South Australia, (2015), Costing Principles for

Local Government, Appendix 1, p. 21 8 Local Government Act 1934, Section 177(5)



Similarly, where a Council has not kept a tally of the surpluses or deficits of the full

cost of CWMS operations over the years there is no necessity to go back and

recreate such a record. Again, be prospective and ensure that such a record is

maintained in the future, based on likely future revenues and expenses. It will be

necessary to have such information to show the regulator that the service charges

have been properly based.

2.9 Is a CWMS Reserve Account Necessary?

Many Councils have traditionally included CWMS reserve accounts in their financial

statements, with the balance of the reserve being included in the Statement of

Financial Position and movements in the reserve being recorded in the Statement of

Changes in Equity. There is no legal requirement to do so. Where Councils have

done so the balance of such reserves has typically been determined based on

historic cashflows (and only cashflows) associated with their CWMS activity. LGA

guidance material neither encourages nor discourages creation of equity reserves

where not specifically required. Some Councils find them useful for some purposes.

It is important to stress though that where a Council creates/maintains a CWMS

reserve account that there is no need to back this reserve with quarantined cash.9

LGA treasury management guidance material discourages such practices.10

There are arguments for and against keeping of discretionary reserves but it is

understandable that some Councils may find it useful to maintain a record of ongoing

CWMS cash inflows and outflows. This is so because for many years cash outlays

may be less than revenue generated (based on accrual accounting costs inclusive of

depreciation) but in some years large capital outlays (e.g. for renewal) may be

required. Keeping a record of accumulated past net cash inflows may make it easier

for a Council to agree to large periodic renewal outlays. If a Council choses to

recognise this net CWMS cashflow balance in its financial statements it would be

important to highlight in supporting notes what this balance represents and in

particular that it does not reflect the difference between CWMS service accumulated

operating revenues and expenses.

The difference between the opening and closing CWMS cashflow balance in any

year should be as follows:

OPENING Cash Balance $x,xxx,xxx

PLUS:

Operating revenue generated (not all which may have been received)

$x,xxx,xxx

Depreciation (a non-cash expense) $x,xxx,xxx

Opportunity cost of capital (a non-cash expense)

$x,xxx,xxx

9 See Note 9 of the South Australia (Local Government) Model Financial Statements.

10 See LGA Financial Sustainability Information Paper No. 15, Treasury Management.



Any nominal interest income earned (including from internal lendings) and received during the year

$x,xxx,xxx

Any financial injections (not operating revenue) made (e.g. such as grants or additional borrowings to finance CWMS capital works)

$x,xxx,xxx

Repayment of any internal borrowings made to the CWMS account

$x,xxx,xxx $x,xxx,xxx

LESS:

Expenses (actual calculated in accordance with LGA Costing Guidelines)

$x,xxx,xxx

Any operating revenue generated that has not yet been received

$x,xxx,xxx

Nominal interest expenses paid (including from internal borrowings)

$x,xxx,xxx

Any associated loan (principal) repayments made

$x,xxx,xxx

Any CWMS capital related outlays (these are not an accrual accounting expense)

$x,xxx,xxx

Any internal lendings made from the CWMS account for other purposes (such practice is consistent with LGA recommended treasury management approaches)

$x,xxx,xxx $x,xxx,xxx

CLOSING Cash Balance $x,xxx,xxx

Table 3 – Reconciling the CWMS cash balance

It should be carefully understood, as mentioned above, that this ‘balance’ IS NOT

the balance of the under or over recovery of costs. In fact, it is likely to be

significantly different from the long-run surplus or deficit on CWMS operations.

The long-run surplus or deficit is based on the full cost of delivering the service,

including depreciation of the infrastructure and the cost of capital and the total

revenues earned (whether received or not). The closing cash balance simply

reflects the balance of cash flows, excluding those cost and revenue elements

that are not cash.



Again, the consideration of outlays here is broader than the accrual accounting

definition of ‘expenses’ as it includes inflows from borrowings and outflows for capital

transactions and principal repayments.

Note that not every element of the table will necessarily be used in calculating the

cash balance of CWMS operations. A simple example is:

DC Anytown

OPENING Cash Balance $2,579,653

PLUS:

Operating revenue generated $1,209,792

Depreciation $245,664

Opportunity cost of capital $380,800

National Water Security Plan grant $350,000 $2,186,256

LESS:

Expenses $973,200

Operating revenue generated that has not yet been received

$31,716

Principal repayments made $54,328

Infrastructure renewal expenditure $717,000 $1,776,244

CLOSING Cash Balance $2,989,665

Table 4 – Example cash balance reconciliation

Appendix 1 provides an example of the application of these principles, plus some

further discussion on their application.

2.10 Pricing policy framework

ESCOSA, in its price determination of 23 July 2015, require Councils to provide a

pricing schedule and a pricing policy statement by November 30 each year. Note

that the LG Act at Section 170 requires the publication of a service charge within 21

days of the declaration of the charge.

The pricing schedule will be underpinned by the pricing policy framework and the

LGA’s CWMS Property Units Code.

The pricing policy framework needs to cover the following issues:

Overview – purpose of policy, what is a CWMS, current and future operations.

Service provision – connecting to the system, service standards, key

performance indicators, complaints and contacts.



Pricing issues – full cost basis for pricing (summary of budgeted basis for full

cost recovery – current and previous year, with reference to the CWMS long

term financial plan), application of CWMS property units code, information on

discounts and rebates, relief from financial hardship, basis for price changes

from previous financial year.

Current (and previous) pricing schedule.

Annual review of policy and prices.

There is no specific requirement for this policy framework to be published but it is

strongly recommended that it be published on Council’s website.



3. Other Issues

3.1 A Uniform Service Charge

An argument that often arises is whether a Council that has more than one CWMS

should charge different rates for each scheme based on the different cost structure

of the scheme.

There are four main points to consider:

1. The service provided by each scheme is the same – the removal of wastewater

from a property. It would seem equitable that users receiving a similar service in

a Council area would pay similar charges for the service.

2. Each customer in a specific scheme pays the same service charge, regardless of

the fact that the actual cost to provide the service to a specific customer may be

higher than the average as a result of long pipe runs and pumping costs from low

points in the network. The same principle arguably should hold true for schemes

across a Council area.

3. Many schemes received a subsidy for their initial establishment, which varied to

the extent necessary to enable expected net long-run costs to be recovered

based on a common standard charge across all schemes (notionally equivalent

to average SA Water country sewerage rates). If the ‘net costs’ are meant to be

the same why would charges be any different?

4. Differences in the full cost of each scheme are likely to be related to:

a. The size of each scheme and the economies of scale available to

larger schemes over smaller schemes.

b. The age of the assets and technology employed in each scheme, with

increased operating costs for schemes with older assets and old

technology.

It does not seem equitable that users of schemes within a Council area that are more

expensive to operate should be disadvantaged compared to schemes that are either

benefitting from economies of scale, have lower operating costs through newer

assets or better technology than that available to other Council CWMS .

On balance, it would seem to be a more equitable treatment of users of multiple

CWMS within a single Council area to have one common pricing regime apply

across the Council area. Any other course of action would seem to be discriminatory

to smaller townships with less efficient schemes. The state-wide sewerage charges

provided by SA Water across rural South Australia have a uniform rating system.

An exception to having a uniform service charge is warranted where communities

have agreed to develop schemes at their own cost, i.e. without state subsidy. There

are a number of such schemes, particularly associated with areas where the

freeholding of shacks occurred and the explicit arrangement was that those areas

would meet the full CWMS costs. As such, owners of the shack properties have

received significant capital gains and it would be inequitable for those owners to



benefit from the capital gain, but have the CWMS community in the Council area

subsidise the cost of the CWMS.

Note that ESCOSA permits the use of pricing commonality between schemes for the

first Price determination period, which ends on June 30 2017. ESCOSA has stated

that it “…will confirm its position for future regulatory positions as part of the next

Price Determination.”11

3.2 Vacant vs. Occupied

Some Councils have differential rates for vacant land where the differential rate for

vacant land is greater than the differential rate for residential and other land use

types. The basis for this is a policy one – increasing the rates on vacant land to

ostensibly discourage the holding and stockpiling of vacant blocks.

The CWMS Code makes it clear that the basis for charging properties provided with

or having access to a CWMS is the estimated volume of effluent generated by the

property, with the cost to each residential unit being equalised at one property unit.

It also provides that each vacant allotment should be charged on the basis of one

property unit. All other property categories (excluding vacant) are compared to the a

single residential dwelling and where it is estimated that the volume of effluent for

other property categories is greater than for a single residential dwelling then the

number of property units to apply to other property categories is greater than 1.

Section 155(3) of the LG Act permits the variation of the service rate or annual

service charge on the basis of whether the land is vacant or occupied. In the case of

an annual service charge this is generally taken to mean that the annual service

charge applying to vacant land may be less than that applying to occupied land on

the basis that there is no provision of service even though the service is available to

the land.

The imposition of a higher annual service charge on vacant land is discouraged on

the following basis:

It is inequitable to charge a higher annual service charge where no service is

provided.

Charging a higher annual service charge on vacant land effectively means

that other service users are being subsidised as it is not possible to charge

more than the full cost of providing the service – this is not in line with the

basis for charging set out in the CWMS code.

Councils should consider whether there should a differential service charge for

vacant land that is less than the residential service charge on the basis that while the

infrastructure has been provided for the piece of land there is no service being

provided, noting that the infrastructure depreciation and cost of capital components

are most likely the major elements of the cost of the service. A sound method of

11

As advised by ESCOSA to the LGA on November 12, 2015.



applying a differential service charge for vacant properties is to reduce the residential

service charge by the proportion that the average annual operating and maintenance

costs bears to the full cost, effectively only charging for the provision of the

infrastructure to the property.



4. CWMS Framework – Legislative and Other

4.1 Legislation

4.1.1 Local Government Act and Regulations

The Local Government Act 1999 (LG Act) provides that a CWMS is a ‘prescribed

service’ for the purposes of the Act. Prescribed services are the treatment or

provision of water; the collection, treatment or disposal of waste; television

transmission or retransmission or any other service prescribed by regulations.12

The application of fees and charges for ‘prescribed services’ are covered by Section

155 of the LG Act with further clarification provided by Regulations 12 and 13 of the

Local Government (General) Regulations 2013.

An overview of the legislative provisions follows.13

Where a Council provides or makes available a prescribed service to a piece of land

it may charge a service rate, an annual service charge or a combination of both to

rateable land. For land that is non-rateable it may only charge an annual service

charge. The fact that the Council uses a third party to provide or make available the

service does not abrogate the Council’s power to levy a service rate and/or an

annual charge.

Generally, where the service is not provided or made available to a piece of land

then no service rate or annual service charge may be applied, except under certain

circumstances.14

In setting service rates and annual service charges may vary based on whether the

land is occupied or vacant or on any other factor prescribed by regulation. Two

factors have been prescribed – (1) variation by land use and (2) the number of

property units applicable to the land as defined in the CWMS Property Units Code.

The amount recovered by a service rate and/or an annual service charge generally

must not exceed the full cost of providing the service. Where a Council has

established a reserve to identify any surplus from CWMS operations then the

amounts identified in the reserve must only be applied to the CWMS service.

Where ESCOSA makes a price determination in relation to a prescribed service then

the determination made by ESCOSA has precedence over other price setting

mechanisms.

Should a CWMS be discontinued then any excess of funds held by Council may be

applied for another purpose which has been specifically identified in a Council’s

annual business plan .

12

No other services have yet been prescribed by regulation. 13

Refer to Appendix 2 for the text of the relevant legislation. 14

As set out in Regulation 13 of the Local Government (General) Regulations – see Appendix 2 for text.



4.1.2 South Australian Public Health (Wastewater) Regulations 2013

These regulations15, made under the South Australian Public Health Act 2011,

prescribe:

a Community Wastewater Management Systems Code which provides

guidance to “…consultants, local Councils, developers, builders and

plumbers, property owners and occupiers on:

o The technical requirements to be considered in the planning stages

of a CWMS

o The requirements for the design of the CWMS

o The procedures and required information for the submission of

applications to the DHA for assessment of a proposed CWMS

o Ongoing operation and maintenance requirements for a CWMS.”16

The requirements for establishing a CWMS.

The regulations and the code are largely technical in nature.

4.2 ESCOSA determinations

Section 35 of the Water Industry Act 2012 provides that ESCOSA has the power to

make price determinations in relation to sewerage services.

ESCOSA issued a varied price determination on 23 July 2015 which made the

following price determination for sewerage services:17

“2 PRICE DETERMINATION

2.1 Pricing Principles

2.1.1 The retail prices charged by a licensee for each

regulatory year must comply with the following pricing

principles:

…

(b) Where sewerage services are supplied, the following

National Water Initiative Pricing Principles apply:

(i) Principles 1, 2, 3, 4, 5, and 6 of the Recovery of Capital

Expenditure set of principles; and

15

The full text of the regulations is at Appendix 3. 16

Department of Health and Ageing (2013), Community Wastewater Management Systems Code, p. 3 17

Essential Services Commission of South Australia, (2015), 2013-2017 Price Determination for Minor and Intermediate Retailer, accessed at http://www.escosa.sa.gov.au/library/20150723-Water-VariationTo2013-2017PriceDetermination-MIR.pdf

http://www.escosa.sa.gov.au/library/20150723-Water-VariationTo2013-2017PriceDetermination-MIR.pdf

http://www.escosa.sa.gov.au/library/20150723-Water-VariationTo2013-2017PriceDetermination-MIR.pdf



(ii) Principles 1, 4, 5, 6, 7, 8, 9 and 10 of the Setting Urban

Water Tariffs set of principles.

…

2.1.2 In addition to the matters specified under clause 2.1.1,

in setting retail prices for each regulatory year, a licensee

must also comply with any principles, requirements or matters

specified by the Commission under an industry code,

industry rule or guideline as in force from time to time in

respect of the provision of retail services.

2.2 Price Monitoring

2.2.1 The Commission may, during the period of this

determination:

(a) monitor the retail prices charged by a licensee; and

(b) publish reports on retail prices or monitor and publish

reports on matters relating to retail prices charged by a

licensee.

2.3 Reporting Requirements

2.3.1 A retail licensee must provide the Commission, by 30

November each year:

(a) a Pricing Schedule containing the retail prices, fees and

charges for water services and retail services imposed by

the licensee, for the current and previous financial year; and

(b) a Pricing Policy Statement demonstrating compliance of

those retail prices with the National Water Initiative Pricing

Principles relevant to the retail services offered by the

licensee, in accordance with clause 2.1.1 of this

determination.”

The relevant National Water Initiative Pricing Principles referred to above in relation

to sewerage services are included at Appendix 4.18 It is interesting to note that while

the background material on both the Recovery of Capital Expenditure and Setting

Urban Water Tariffs state that the principles outlined will not apply to wastewater

schemes that ESCOSA have determined that a number of the principles, but not all,

will apply as set out in the price determination.

18

The full text of the National Water Initiative Pricing Principles is available at http://www.environment.gov.au/resource/national-water-initiative-pricing-principles

http://www.environment.gov.au/resource/national-water-initiative-pricing-principles



4.3 CWMS Property Units Code

The Department for Health and Ageing together with the Local Government

Association of South Australia (LGA) have jointly developed a CWMS Property Units

Code (CWMS Code) which has legislative endorsement.19 The code sets out the

rationale for defining a ‘property unit’ and the basis for application of the ‘property

unit’ concept to the broad range of properties likely to be connected to a CWMS.

This forms the basis for charging differentially between the full range of properties

having access to a CWMS.

Note that the CWMS Code does not specify the amount to charge. Service charges

will be based on the recovery of the estimated full long-run cost of the CWMS and

the basis that a Council has determined for differential service charges, if any.

4.4 Other relevant material

Two other documents provided by the LGA are of use in determining the cost and

pricing of CWMS. They are:

1. Costing Principles for Local Government – Guidelines for Council Staff (issued

December 2013 and revised January 2015).20 These guidelines include

detailed information that will assist Councils to determine the costs and the

pricing basis of a CWMS consistent with the LG Act and ESCOSA price

determinations. The guidelines include a worked example based on CWMS.

2. Guidelines for the Pricing and Costing of Retail Water Services by Local

Governments.21 These guidelines amplify the Costing Principles for Local

Government. In particular, there is a detailed analysis of the ESCOSA

requirements and while the focus is water retail services the discussion relating

to the National Water Initiative Pricing Principles is of relevance to CWMS.

There is also a comprehensive discussion on the concept of full cost from both

an accounting and an economic perspective.

19

Regulation 12 of the Local Government (General) regulations 2013 refers – See Appendix 2 for the text. 20

Accessed at http://www.lga.sa.gov.au/webdata/resources/files/Costing%20Principles%20for%20Local%20Government.pdf 21

Accessed at https://www.lga.sa.gov.au/sitedata/unity/resources/files/ECM_628850_Guidelines%20for%20the% 20Costing%20and%20Pricing%20of%20Retail%20Water.pdf

http://www.lga.sa.gov.au/webdata/resources/files/Costing%20Principles%20for%20Local%20Government.pdf

http://www.lga.sa.gov.au/webdata/resources/files/Costing%20Principles%20for%20Local%20Government.pdf

https://www.lga.sa.gov.au/sitedata/unity/resources/files/ECM_628850_Guidelines%20for%20the%25%2020Costing%20and%20Pricing%20of%20Retail%20Water.pdf

https://www.lga.sa.gov.au/sitedata/unity/resources/files/ECM_628850_Guidelines%20for%20the%25%2020Costing%20and%20Pricing%20of%20Retail%20Water.pdf



Appendix 1 – An example of the application of CWMS

Accounting Principles

Introduction

The following example (see next page) is based on a single year’s revenue and

expenses for simplicity. In reality, pricing decisions should be based on regularly

reviewed estimates of full long-run (whole-of-life) costs as determined in accordance

with ESCOSA guidelines and should have regard to future forecast CWMS outlays in

a Council’s long-term financial plan and infrastructure and asset management plan.

Calculating the Cost of Capital

Note that the example has used the ‘Legacy Date’ for assessing the cost of capital.

Councils are reminded that where they “… have appropriate records, of have a

reasonable basis for estimating assets gifted from other spheres of government,

either directly or through grants, or contributed by developers or third parties then

that information should be used to ensure that the cost of capital applied to the

CWMS is as fair and reasonable as possible.”22

Connection Fees and Developer Headworks Charges

CWMS schemes often charge developers and individual users a connection fee for

the right to access the scheme. In the case of developers this is commonly called a

developer headworks charge. The purpose of the connection fee is for the

developer or individual to make a contribution to the cost of the scheme

infrastructure.

In calculating the cost of capital developer headworks charges should be treated as

a capital contribution, reducing the quantum on which the cost of capital is

determined.23 Note that in the Statement of Comprehensive Income connection fees

need to be shown as Income in the category ‘Grants, Subsidies and Contributions’

as the income is not specifically for new or upgraded assets.24

The connection fee paid by individual property owners should be treated as a service

charge as should any fee charged by Council to make the physical connection to the

CWMS, i.e. plumbing the property to the scheme.

22

Local Government Association of South Australia (2015), Costing Principles for Local Government, p. 10 23

See the discussion at the foot of page 19 of the LGA’s Costing Principles for Local Government 24

Refer to the current set of Model Financial Statements published by the LGA



Table 5 – DC Anytown Example – Calculating the Service Charge

DC Anytown - 2014/15 Financials

Township A Township B Township C Total

$000's $000's $000's $000's

Operating Revenue

CWMS service charges 743 173 98 1,014

Interest received 50 1 - 51

Sale of treated water 26 - - 26

Other income - - - -

Total Operating Revenue 819 174 98 1,091

Operating Expenses

Contractual expenses 37 19 19 75

Plant, materials and maintenance 137 54 15 206

Infrastructure maintenance 87 23 26 136

Insurance 3 1 1 5

Depreciation 183 48 37 268

Other expenditure 4 2 2 8

Support costs allocated 37 18 18 73

Total Operating Expenses 488 165 118 771

Operating Surplus/(Deficit) 331 9 (20) 320

Cost of Capital

Cost of capital - 4% real interest

rate of Legacy Date assets - all

subsequent assets financed

through reserve or contributed by

developers 180 40 26 246

Cost of capital - 2% for

unspecifed and residual risk on

WDV of all assets 130 42 27 199

Total Cost of Capital 310 82 53 445

Net Operating Surplus/(Deficit) 21 (73) (73) (125)

Connection fees 10 5

Current WDV of infrastructure 5,971 2,005 1,337 9,313

Current value of Land 532 110 12 654

6,503 2,115 1,349 9,967

Current WDV of infrastructure

held at Legacy Date 4,074 974 650 5,698

Current Value of Land held at

Legacy Date 420 18 10 448

4,494 992 660 6,146

CWMS Reserve balance 2,743 72 (168) 2,647

No. of units serviced 1,920 457 257 2,634

Unit Charge 380$

Average operating cost per unit

(excluding cost of capital) 254.17 361.05 459.14 292.71

Average operating cost per unit,

including cost of capital 415.53 540.44 666.85 461.72



Allowance for Risk

As part of its return on investment a Council is permitted to recover any allowance

for risk where the cost of the risk has not been included in operating expenses.

Typically, this would include any allowance for residual risk assumed by the scheme

and any allowance for unforeseen events that have not been covered by mitigation

strategies (e.g. insurance). The most appropriate manner to recover such an

allowance for risk is to increase the interest rate to be applied to the asset base to

calculate the cost of capital. Note, however, that the cost of capital is calculated on

the asset base, excluding contributed assets. The calculation of risk should be made

on the WDV of the total asset base.

It is difficult to prescribe what allowance should be made for risk. In the case of

residual risk, if the scheme has been operating for some time there may be sufficient

experience from the manifestation of residual risk to make a reasonable estimate of

expected costs. For unforeseen events the calculation of an allowance for risk is

more challenging and will need a level of judgement. Potentially, the assessment

could be based on the likelihood of some event (say once every thirty years) and the

magnitude of the impact (say affecting 25% of the asset base). Where a Council has

a significant CWMS reserve, with the capacity to finance the recovery from an

unforeseen event (and rebuild the reserve in future years), then this should be taken

into consideration in establishing the allowance for risk.

Service Charge Setting

Provided that the single financial year information is typical of the long run revenue

and cost structure then we see from the example that the current uniform service

charge made across the three schemes ($380) more than recovers the operating

cost per unit of the scheme ($293), ignoring the cost of capital. However, when the

cost of capital (plus an allowance for unspecified risks) is included then the full cost

per unit of the scheme is $462 and the under recovery is $82 per unit representing a

deficit of $216,000 on the full cost of the scheme.

It is assumed that ESCOSA would encourage DC Anytown to increase the service

charge to cover the full cost of the service. DC Anytown may continue with its

current charging regime with little impact on CWMS operations in the short to

medium term. However, in the long run, it is likely to have insufficient cash reserves

to finance asset renewal and will likely need to resort to borrowings for this purpose.

What’s in the Reserve?

The balance in the reserve represents the accumulated surpluses and deficits of

cash flows over the life of the scheme, as discussed in the section above entitled “Is

a CWMS Reserve Account Necessary?”. It is not a representation of the

accumulated surpluses and deficits of the scheme as it:

includes cash inflows and outflows that are not revenues and expenses in

accrual accounting terms – proceeds of borrowings, principal repayments,

cost of infrastructure;



includes cash outflows that are not treated as costs for ESCOSA purposes –

interest expense; and

excludes costs that are recognised by ESCOSA – cost of capital, allowance

for risk.

Common versus individual scheme pricing issues

The three schemes of DC Anytown have a uniform service charge and it is clear

from the net operating surplus/deficit of each of the three schemes that the larger the

scheme the greater the opportunities to achieve economies of scale. If each scheme

was required to ‘stand-alone’ then full cost recovery of the relevant costs of each

scheme would result in service charges as follows (based on this single year):

Township A - $416

Township B - $541

Township C - $667

Clearly, the service charges for Townships B and C, schemes with 457 and 257 units

serviced respectively, are significantly greater than for Township A which services

1,920 units. This reinforces the discussion in the main body of this paper of the

equity issues relating to using a single service charge across multiple schemes in a

Council area.



Appendix 2 – Relevant legislation

Local Government Act 1999 as at July 9 2015

155—Service rates and service charges (1) In this section— prescribed service means any of the following services:

(a) the treatment or provision of water; (b) the collection, treatment or disposal (including by recycling) of waste; (ba) a television transmission (or retransmission) service; (c) any other service prescribed by the regulations for the purposes of this definition.

(2) A council may impose—

(a) a service rate, an annual service charge, or a combination of a service rate and an annual service charge, on rateable land within its area to which it provides, or makes available, a prescribed service; (b) an annual service charge on non-rateable land to which it provides, or makes available, a prescribed service.

(2a) Subsection (2) does not apply in prescribed circumstances. (3) A service rate, or annual service charge, may vary—

(a) according to whether the land to which it applies is vacant or occupied; or (b) according to any other factor prescribed by the regulations and applied by the council.

(4) If a council provides more than one prescribed service of a particular kind in its area, a different service rate or annual service charge may be imposed in respect of each service. (5) A council must not seek to recover in relation to a prescribed service an amount by way of service rate, annual service charge, or a combination of both exceeding the cost to the council of establishing, operating, maintaining, improving and replacing (including by future capital works and including so as to take into account the depreciation of any assets) the service in its area (being a cost determined taking into account or applying any principle or requirement prescribed by the regulations). (5a) Subsection (5) is subject to the qualification that if the Essential Services Commission (ESCOSA) makes a determination under another Act that fixes a price for the provision of a prescribed service that is inconsistent with that subsection, the determination made by ESCOSA will prevail to the extent of the inconsistency (and ESCOSA may, in acting under another Act in a case that is relevant to the operation of this section, apply or take into account a factor or principle that is in addition to a matter referred to in subsection (5)). (6) Subject to subsection (7), any amounts held in a reserve established in connection with the operation of subsection (5) must be applied for purposes associated with improving or replacing council assets for the purposes of the relevant prescribed service.



(7) If a prescribed service under subsection (6), is, or is to be, discontinued, any excess of funds held by the council for the purposes of the service (after taking into account any expenses incurred or to be incurred in connection with the prescribed service) may be applied for another purpose specifically identified in the council's annual business plan as being the purpose for which the funds will now be applied. (8) An annual service charge may be based on—

(a) the nature of the service; or (b) the level of usage of the service; or (c) any factor that applies under subsection (3); or (d) a combination of 2 or more factors under the preceding paragraphs.

(9) A service charge imposed by a council under this section is recoverable as if it were a rate (even as against non-rateable land). (10) A council may declare a service rate or an annual service charge in respect of a particular prescribed service despite the fact that the service is provided on behalf of the council by a third party. (11) If a prescribed service, in relation to a particular piece of land, is not provided at the land and cannot be accessed at the land, a council may not impose in respect of the prescribed service a service rate or annual service charge (or a combination of both) in relation to the land unless the imposition of the rate or charge (or combination of both)—

(a) is authorised by the regulations; and (b) complies with any scheme prescribed by the regulations (including regulations that limit the amount that may be imposed or that require the adoption of a sliding or other scale established according to any factor, prescribed by the regulations, for rates or charges (or a combination of both) imposed under this section).

Local Government (General) Regulations 2013 as at November 20 2014

12—Service rates and charges

(1) In this regulation—

CWMS Property Units Code means the Code for Establishing and Applying Property Units as a Factor for the Imposition of Annual Service Charges for Community Wastewater Management Systems published by the LGA on 20 April 2006, as in force at the time that this regulation is made.

(2) For the purposes of this regulation— (a) the LGA is declared to be a prescribed body under section 303(4) of the Act; and (b) the Code is adopted by these regulations pursuant to section 303(4) of the Act; and (c) the principal office of the LGA (at 148 Frome Street, Adelaide, 5000 or, if the LGA moves its principal office, at that new address) is specified for the purposes of section 303(7)(c) of the Act.



(3) For the purposes of section 155(2a) of the Act, the prescribed circumstances in which section 155(2) of the Act does not apply are where the land is non-rateable land of 1 of the following classes and the prescribed services are not made use of at the land:

(a) unalienated Crown land used wholly or primarily for— (i) the conservation or protection of natural resources within the meaning of the Natural Resources Management Act 2004; or (ii) recreational or sporting activities;

(b) unalienated Crown land within the meaning of the Crown Land Management Act 2009; (c) land constituted as a reserve under the National Parks and Wildlife Act 1972; (d) land constituted as a wilderness protection area or wilderness protection zone under the Wilderness Protection Act 1992; (e) land vested, under section 15 of the Harbors and Navigation Act 1993, in the Minister to whom that Act is committed.

(4) Pursuant to section 155(3)(b) of the Act, the following factors are prescribed: (a) any category of land use declared as a permissible differentiating factor under regulation 14; (b) in respect of a service for the collection, treatment or disposal of wastewater or effluent—the number of property units that apply with respect to the relevant land, as determined under the CWMS Property Units Code.

(5) For the purposes of section 155(5) of the Act, the cost of capital (as understood as an economic concept) may be taken into account when determining the cost to the council of establishing, operating, maintaining, improving or replacing the relevant service. 13—Rates and charges for services not provided at the land

(1) For the purposes of section 155(11), a council is authorised to impose a service rate or annual service charge (or a combination of both) for a prescribed service in respect of the collection of domestic waste in accordance with the scheme set out in subregulation (2). (2) For the purposes of subregulation (1), the following provisions apply to the imposition of rates or charges in relation to a particular piece of land:

(a) if the prescribed service is provided no more than 500 metres from the access point to the land—the full service rate or annual service charge (or a combination of both) may be charged for the prescribed service; (b) if the prescribed service is provided more than 500 metres but no more than 2 kilometres from the access point to the land—75% of the service rate or annual service charge (or a combination of both) may be charged for the prescribed service; (c) if the prescribed service is provided more than 2 kilometres but less than 5 kilometres from the access point to the land—50% of the service rate or annual service charge (or a combination of both) may be charged for the prescribed service; (d) if the prescribed service is provided 5 kilometres or more from the access point to the land—no rate or annual service charge may be charged for the prescribed service (but nothing in this paragraph prevents



a council from entering into an agreement for the provision of a prescribed service in respect of the collection of waste that involves the payment of an amount for the provision of the prescribed service).

(3) In this regulation— access point means the point on the land where the land is generally accessed; domestic waste means waste produced in the course of a domestic activity.



Appendix 3 - South Australian Public Health (Wastewater)

Regulations 2013 Contents Part 1—Preliminary 1 Short title 3 Interpretation 4 Prescribed codes 5 On site wastewater systems 6 Relevant authority Part 2—Establishment of community wastewater management systems 7 Interpretation 8 Public notification of proposed community wastewater management system 9 Connection to community wastewater management system 10 Exemptions Part 3—Wastewater system requirements 11 Wastewater works 12 Operation, maintenance and servicing of wastewater systems 13 Reuse or disposal of wastewater from wastewater systems 14 Sale of on site wastewater systems 15 Exemptions from prescribed codes Part 4—Approvals Division 1—Product approvals 16 Application 17 Determination of application 18 Duration of approval 19 Conditions of approval 20 Identification of manuals 21 Revocation of approval 22 Register of product approvals Division 2—Wastewater works approvals 23 Application 24 Determination of application 25 Conditions of approval 26 Expiry of approval 27 Registers of wastewater works approvals Part 5—Enforcement 28 Inspections and testing 29 Requirement to obtain expert report Part 6—Miscellaneous 30 Reuse of wastewater from SA Water sewerage infrastructure 31 False or misleading statements 32 Access to codes, standards etc 33 Fees Schedule 1—Fees Schedule 2—Transitional provisions Part 2—Transitional provisions 2 Interpretation 3 Modification of prescribed code 4 Product approvals



5 Wastewater works approvals 6 Notices under regulation 24 of revoked regulations Legislative history Part 1—Preliminary 1—Short title These regulations may be cited as the South Australian Public Health (Wastewater) Regulations 2013. 3—Interpretation (1) In these regulations, unless the contrary intention appears—

Act means the South Australian Public Health Act 2011; capacity of a wastewater system—see subregulation (2); community wastewater management system means a system for the collection and management of wastewater generated in a town, regional area or other community, but does not include SA Water sewerage infrastructure; contravention includes failure to comply; EP—see subregulation (2); installation of a wastewater system includes the commissioning of the system; management of wastewater includes treatment, reuse and disposal of wastewater; mandatory notification stage—see regulation 25(2)(a)(i); on site wastewater system—see regulation 5; operator of a wastewater system means— (a) in the case of an on site wastewater system—the owner of the premises on which the system is located; (b) in the case of a community wastewater management system—the council or other person responsible for the operation of the system; prescribed code—see regulation 4; prescribed expiable condition—see regulation 25(2)(a); product approval—see Part 4 Division 1; relevant authority—see regulation 6; revoked regulations means the Public and Environmental Health (Waste Control) Regulations 2010; SA Water means South Australian Water Corporation; SA Water sewerage infrastructure means sewerage infrastructure (within the meaning of the Water Industry Act 2012) owned or operated by SA Water; sell includes offer for sale or possess for the purpose of sale; technical specifications includes technical, scientific and engineering details, plans, drawings and specifications; wastewater engineer means an engineer who— (a) is a member of the Institution of Engineers, Australia of the category "Chartered Professional Engineer" or is registered on the National Professional Engineers Register administered by that Institution; and (b) has experience in wastewater system or geotechnical engineering; wastewater system means— (a) an on site wastewater system; or (b) a community wastewater management system;



wastewater works means— (a) the installation of a wastewater system (including a temporary system) or part of a community wastewater management system; or (b) the alteration of a wastewater system involving— (i) a change to the capacity of the system; or (ii) a change in the type of system used for collecting or managing wastewater; or (c) the decommissioning of a wastewater system (excluding a temporary system); or (d) the connection of a wastewater system to a community wastewater management system or the disconnection of a wastewater system from a community wastewater management system; or (e) the connection of a community wastewater management system to SA Water sewerage infrastructure or the disconnection of a community wastewater management system from SA Water sewerage infrastructure; wastewater works approval—see Part 4 Division 2.

(2) For the purposes of these regulations, the capacity of a wastewater system is to be determined in accordance with the prescribed codes and is expressed as a number of equivalent persons (EP) or a number of litres. 4—Prescribed codes (1) The following are prescribed codes: (a) in relation to an on site wastewater system—the On site Wastewater Systems Code published by the Minister, as in force from time to time, together with the standards or other documents prepared or published by a prescribed body, as in force from time to time, referred to in the code; Note— The code is modified as set out in Schedule 2 Part 2 clause 3. (b) in relation to a community wastewater management system—the Community Wastewater Management Systems Code published by the Minister, as in force from time to time, together with the standards or other documents prepared or published by a prescribed body, as in force from time to time, referred to in the code. (2) For the purposes of subregulation (1), the following are prescribed bodies: (a) Standards Australia; (b) National Health and Medical Research Council; (c) Environment Protection and Heritage Council; (d) SA Water; (e) Local Government Association of South Australia; (f) Water Services Association of Australia Limited; (g) a Minister or administrative unit of the Public Service. (3) For the purposes of section 109(6)(c) of the Act, a copy of each of the prescribed codes will be available for inspection at the following address: Public Health Level 1 Citi Centre 11 13 Hindmarsh Square Adelaide SA 5000. 5—On site wastewater systems (1) For the purposes of these regulations, an on site wastewater system is a system used on premises for the on site collection and management of wastewater generated at the premises where—



(a) the wastewater collected and managed is predominantly— (i) human waste either alone or in combination with water; or (ii) water that has been used in washing, laundering, bathing or showering; or (iii) water containing food or beverage waste; or (iv) water containing other trade waste; or (v) a combination of the above; and (b) some or all of the wastewater is reused or disposed of by means other than disposal to a community wastewater management system or to SA Water sewerage infrastructure, and includes any associated irrigation or other system for the disposal of the wastewater on land other than that from which the wastewater is collected. (2) An on site wastewater system includes (but is not limited to) a septic tank, waterless composting toilet, or an aerated wastewater treatment system, to which AS/NZS 1546 applies. (3) An on site wastewater system may, but need not, be connected to a community wastewater management system or to SA Water sewerage infrastructure. 6—Relevant authority (1) The relevant authority for a matter relating to an on site wastewater system with a capacity that does not, or will not, on completion of wastewater works, exceed 40 EP and that is located or to be located in a council area is— (a) subject to paragraph (b)—the council; or (b) if the system is to be operated by the council or wastewater works related to the system are to be undertaken by the council, or by a person acting in partnership, or in conjunction, with the council—the Minister or any other council that agrees to act as the relevant authority. (2) The relevant authority in any other case under these regulations is the Minister. (3) Without limiting subregulation (1), a matter relating to an on site wastewater system of a kind referred to in that subregulation includes the following: (a) an application for a wastewater works approval relating to the system; (b) an application for an exemption relating to the system; (c) any variation or revocation of conditions of a wastewater works approval or exemption relating to the system; (d) any requirement for the provision of certificates or other documents relating to the system or wastewater works relating to the system; (e) any requirement for notification of the sale of land on which the system is located. Part 2—Establishment of community wastewater management systems 7—Interpretation In this Part— prescribed details, in relation to a community wastewater management system, means the following details: (a) details of the nature and type of system; (b) a description of any land that would be benefited by the system; (c) an estimate of the costs of the system; (d) particulars of the manner in which the system would be financed, including the manner in which the capital and operating costs would be recovered; (e) details of any plans and specifications relating to the system that are available for public inspection.



8—Public notification of proposed community wastewater management system (1) If a council proposes to establish a community wastewater management system for the whole or part of its area in the interests of public and environmental health, the council must give notice to the owners of land in the area affected by the proposal containing the prescribed details relating to the proposal and inviting submissions in relation to the proposal within a period (which must be at least 21 days) specified in the notice. (2) The council must consider any submissions made in response to the notice and may abandon the proposal or proceed with it with such modifications as it thinks fit. (3) If the council resolves to proceed with the community wastewater management system, it must obtain a wastewater works approval from the Minister in accordance with these regulations. 9—Connection to community wastewater management system (1) On obtaining a wastewater works approval for a community wastewater management system, a council may, by written notice, require the operator of an on site wastewater system— (a) to connect the system to the community wastewater management system; and (b) for that purpose, to complete and submit an application to the relevant authority, within the period specified in the notice, for a wastewater works approval for— (i) the connection; and (ii) if necessary, consequential alterations to the on site wastewater system. (2) A notice under subregulation (1) must contain the prescribed details relating to the community wastewater management system (adjusted to reflect the council's resolution to proceed with the system and any conditions of the wastewater works approval for the system). (3) The operator of an on site wastewater system must not, without reasonable excuse, fail to submit an application in accordance with a notice given to the person under subregulation (1). Maximum penalty: $1 250. Expiation fee: $160. (4) If the operator of an on site wastewater system does not submit an application within the period specified in a notice under subregulation (1), the relevant authority may grant a wastewater works approval for the required wastewater works as if the application had been made. (5) If a wastewater works approval is granted for the connection of an on site wastewater system to a community wastewater management system required under this regulation, the operator of the on site wastewater system must carry out the wastewater works in accordance with the approval. Maximum penalty: $5 000. Expiation fee: In the case of an offence comprising a contravention of a prescribed expiable condition—$315. (6) If wastewater works are not carried out in accordance with a wastewater works approval for the connection of an on site wastewater system to a community wastewater management system required under this regulation, the relevant authority may cause the requirements to be carried out (and a person authorised to do so by the relevant authority may enter land at any reasonable time for the purposes of carrying out the relevant work).



(7) The relevant authority may recover as a debt the costs and expenses reasonably incurred in exercising a power under subregulation (6) and the fee that would have been payable had the application been made as required under subregulation (1) from the person who failed to comply with the notice. (8) A person must not, without reasonable excuse, hinder or obstruct a person carrying out work at the direction of the relevant authority under subregulation (6). Maximum penalty: $5 000. 10—Exemptions (1) The operator of an on site wastewater system may apply to the relevant council for an exemption from compliance with regulation 9. (2) The Minister may issue binding directions to councils about the granting of exemptions under this regulation. (3) An exemption must be given by the council by written notice and is subject to conditions stated in the notice. (4) An exemption may be varied or revoked by the council by further written notice to the holder of the exemption. (5) A person who has been exempted from compliance with regulation 9 must not contravene a condition of the exemption. Maximum penalty: $5 000. Part 3—Wastewater system requirements 11—Wastewater works (1) A person undertaking wastewater works or causing wastewater works to be undertaken must ensure that the following requirements are met: (a) in the case of the installation of an on site wastewater system, the system must be the subject of a product approval; (b) in any case, the works must be undertaken in accordance with— (i) a wastewater works approval for the works; and (ii) the prescribed codes to the extent that they are applicable. Maximum penalty: $5 000. Expiation fee: In the case of an offence against paragraph (b)(i) comprising a contravention of a prescribed expiable condition—$315. (2) A suitably qualified person who has undertaken wastewater works subject to a wastewater works approval must, within 28 days after completing the work, provide the relevant authority, and the owner or occupier of the land on which the work was undertaken, with— (a) a certificate in a form approved by the Minister signed by the person or another suitably qualified person certifying that the work has been undertaken in accordance with the wastewater works approval; and (b) in the case of the installation of pipes, fittings or other system components or equipment—a detailed drawing showing all pipes, fittings, components or equipment installed, including their position and dimensions. Maximum penalty: $5 000. Expiation fee: $315. (3) In this regulation— suitably qualified person means— (a) the holder of a plumbing contractors licence under section 7(1)(a) of the Plumbers, Gas Fitters and Electricians Act 1995; or



(b) the holder of a plumbing contractors licence under section 7(1)(d)(i) of that Act subject to conditions limiting the work that may be performed under the authority of the licence to sanitary plumbing work or draining work; or (c) the holder of a plumbing workers registration under section 14(1)(a) of that Act; or (d) the holder of registration as a plumbing worker under section 14(1)(d)(i) of that Act subject to conditions limiting the work that may be carried out under the authority of the registration to sanitary plumbing work or draining work. 12—Operation, maintenance and servicing of wastewater systems (1) The operator of a wastewater system must ensure that the system is operated, maintained and serviced in accordance with— (a) any conditions of a wastewater works approval relating to the system (whether granted before or after the person became the operator of the system); and (b) the prescribed codes to the extent that they are applicable. Maximum penalty: $5 000. Expiation fee: In the case of an offence against paragraph (a) comprising a contravention of a prescribed expiable condition—$315. (2) A person who maintains or services a wastewater system must do so in accordance with— (a) any conditions of a wastewater works approval relating to the system; and (b) the prescribed codes to the extent that they are applicable. Maximum penalty: $5 000. Expiation fee: In the case of an offence against paragraph (a) comprising a contravention of a prescribed expiable condition—$315. 13—Reuse or disposal of wastewater from wastewater systems (1) The operator of a wastewater system must ensure that wastewater from the system is not reused or disposed of to land or otherwise unless— (a) the reuse or disposal is authorised by conditions of a wastewater works approval relating to the system (whether granted before or after the person became the operator); and (b) the wastewater is reused and disposed of in accordance with— (i) those conditions; and (ii) the prescribed codes to the extent that they are applicable. Maximum penalty: $5 000. Expiation fee: In the case of an offence against paragraph (b)(i) comprising a contravention of a prescribed expiable condition—$315. (2) A person must not reuse or dispose of wastewater from a wastewater system except in accordance with— (a) any conditions of a wastewater works approval relating to the system; and (b) the prescribed codes to the extent that they are applicable. Maximum penalty: $5 000. Expiation fee: In the case of an offence against paragraph (a) comprising a contravention of a prescribed expiable condition—$315. 14—Sale of on site wastewater systems A person must not sell a system for use as an on site wastewater system unless— (a) the system— (i) is the subject of a product approval; and



(ii) in the case of a pre fabricated system, bears the marking required by the prescribed codes (either as in force at the time of the approval or as in force at the time of the sale); and (b) copies of the manuals for the system referred to in the product approval (either as in force at the time of the approval or as in force at the time of the sale) are provided to the purchaser of the system. Maximum penalty: $5 000. Expiation fee: $315. 15—Exemptions from prescribed codes (1) A person may apply to the relevant authority for an exemption from compliance with specified provisions of these regulations requiring compliance with the prescribed codes for a specified activity to be undertaken by the person. (2) The Minister may issue binding directions to councils about the granting of exemptions under this regulation. (3) An exemption must be given by the relevant authority by written notice and is subject to conditions stated in the notice. (4) An exemption extends to each person involved in the activity to which the exemption relates. (5) An exemption may be varied or revoked by the relevant authority by further written notice to the holder of the exemption. (6) A person who has been exempted from compliance with specified provisions of these regulations must not contravene a condition of the exemption. Maximum penalty: $5 000. Part 4—Approvals Division 1—Product approvals 16—Application (1) A person who has designed or proposes to manufacture, construct or sell an on site wastewater system may apply to the Minister for a product approval in relation to the system. (2) An application for a product approval must— (a) be made to the Minister in a manner and form determined by the Minister; and (b) be accompanied by— (i) technical specifications for the wastewater system; and (ii) manuals as contemplated by the prescribed codes; and (iii) a statement of the expected service life of the system and its components; and (c) include, or be accompanied by other information or documents required to be supplied by the form or the prescribed codes (which may include a certificate of an independent wastewater engineer in relation to the wastewater system or other factors); and (d) be accompanied by the fee fixed by Schedule 1. (3) The Minister may, by written notice, ask the applicant to provide the Minister with further technical specifications, information or documents relevant to the application or to modify the technical specifications or manuals accompanying the application. 17—Determination of application The Minister may refuse to grant a product approval— (a) if the applicant fails to satisfy the Minister of 1 or more of the following:



(i) that the technical specifications for the wastewater system comply with the prescribed codes; (ii) that the wastewater system is suitable for its purpose; (iii) that the wastewater system will not, if properly installed and operated, adversely affect or threaten public or environmental health; (iv) that the manuals required to accompany the application are suitable; or (b) for any other sufficient reason. 18—Duration of approval (1) A product approval expires 5 years after it is granted or, if a lesser period is specified in the instrument of approval, at the end of the specified period. (2) However, an application may be made for a further product approval for the same wastewater system. 19—Conditions of approval (1) A product approval is subject to the conditions specified by the Minister in the instrument of approval. (2) The Minister may, for example, grant an approval subject to a condition— (a) that specifies requirements relating to— (i) the design, manufacture or construction of the wastewater system; or (ii) a quality assurance scheme for the manufacture or construction of the wastewater system; or (b) that requires the holder to monitor the performance of wastewater systems that have been installed and to report the findings to the Minister; or (c) that requires records of a specified kind to be created, maintained, and provided to the Minister or a person nominated by the Minister. (3) A condition of approval may— (a) provide that a matter or thing is to be determined according to the discretion of the Minister or some other specified person or body; and (b) operate by reference to a specified code as in force at a specified time or as in force from time to time. (4) If a code is referred to in a condition of approval— (a) a copy of the code must be kept available for inspection by members of the public, without charge and during normal office hours, at the principal office of the Department; and (b) evidence of the contents of the code may be given in any legal proceedings by production of a document apparently certified by the Minister to be a true copy of the code. (5) The Minister may, on application in a form approved by the Minister and payment of the fee fixed by Schedule 1, by written notice to the applicant, vary or revoke a condition of a product approval. (6) The Minister may, on the Minister's own initiative, by written notice to the holder of a product approval, vary or revoke a condition of the product approval or impose a further condition, but in that case, the variation, revocation or imposition may not take effect until at least 6 months after the giving of the notice unless— (a) the holder of the approval consents; or (b) the Minister states in the notice that, in his or her opinion, the variation, revocation or imposition is necessary in order to prevent or mitigate significant harm to public or environmental health or the risk of such harm. (7) A person to whom a product approval is granted must ensure that the conditions of the approval are complied with. Maximum penalty: $5 000.



20—Identification of manuals (1) A product approval must identify the manuals to be supplied to a purchaser of the wastewater system. (2) The Minister may, on application by the holder of a product approval and payment of the fee fixed by Schedule 1, vary the product approval so as to refer to a new version of a manual. 21—Revocation of approval (1) The Minister may, by written notice to the holder of a product approval, revoke the approval if satisfied that— (a) the approval was obtained improperly; or (b) a condition of the approval has been contravened. (2) Before the Minister revokes a product approval, the Minister must— (a) give the holder of the approval written notice of the Minister's proposed action specifying reasons for the proposed action; and (b) allow the holder of the approval at least 14 days within which to make submissions to the Minister in relation to the proposed action. 22—Register of product approvals (1) The Minister must keep a register of product approvals granted under these regulations. (2) The register must include, in relation to each product approval, a statement of— (a) the date of the approval; and (b) the name and contact address of the holder of the approval; and (c) the duration of the approval; and (d) the type of wastewater system approved; and (e) if the approval has been revoked, a note of that fact and the date of the notice of revocation. (3) The register may be extended to include product approvals granted under the revoked regulations. (4) The register must be kept up to date, including by noting the date of any variation or revocation of conditions of approval or the imposition of further conditions of approval. (5) The register must be kept available for inspection by any person during ordinary office hours at the principal office of the Department and the register or extracts of the register may be made available to the public by electronic means. (6) The register may include other information considered appropriate by the Minister, but that information need not be made available to the public. (7) A person may, on payment of the fee fixed by Schedule 1, obtain a copy of any part of the register (except a part containing information that need not be made available to the public). Division 2—Wastewater works approvals 23—Application (1) An application for a wastewater works approval must— (a) be made to the relevant authority in a form determined by the Minister; and (b) be accompanied by the technical specifications for the wastewater works; and (c) if the works comprise the installation or alteration of a wastewater system—be accompanied by proposed conditions for the operation, maintenance and servicing of the system or the system as altered (as the case requires); and



(d) if it is proposed that wastewater from the wastewater system be reused or disposed of—be accompanied by proposed conditions for the reuse or disposal of the wastewater; and (e) include, or be accompanied by other information or documents required to be supplied by the form or the prescribed codes (which may include a certificate of an independent wastewater engineer in relation to the wastewater system or wastewater works concerned); and (f) be accompanied by the fee fixed by Schedule 1. (2) The relevant authority may, by written notice, ask the applicant to provide the relevant authority with further technical specifications, information or documents relevant to the application or to modify the technical specifications submitted for approval. 24—Determination of application (1) The relevant authority may refuse to grant a wastewater works approval— (a) if the applicant fails to satisfy the relevant authority of either or both of the following: (i) that the technical specifications for the wastewater works comply with the prescribed codes; (ii) that the wastewater works will not, if undertaken in accordance with the conditions of approval, adversely affect or threaten public or environmental health; or (b) for any other sufficient reason. (2) If an application for a wastewater works approval relates to the connection of a community wastewater management system to SA Water sewerage infrastructure or a significant increase in the amount of wastewater to be discharged from a community wastewater management system to SA Water sewerage infrastructure, the relevant authority must give SA Water a reasonable opportunity to comment on the application and must take into account any comments so made. 25—Conditions of approval (1) A wastewater works approval is subject to the conditions specified by the relevant authority in the instrument of approval. (2) The relevant authority may impose— (a) any 1 or more of the following prescribed expiable conditions: (i) a condition that sets out mandatory notification stages during the progress of wastewater works when a person is required to notify the relevant authority in a specified manner and stop the work pending an inspection carried out at the person's expense; (ii) a condition that requires the display of specified notices on the premises on which the wastewater system is located; (iii) a condition that requires a person to monitor the performance of the wastewater system in a specified manner (including by inspections carried out at specified times at the person's expense) and to provide the relevant authority with specified information in a specified manner and at specified times; (iv) a condition that provides that specified material must not, or that only specified material may, be discharged into, or from, the wastewater system; (v) a condition that requires the wastewater system to be operated, maintained or serviced by a person of a specified class; (vi) a condition that requires records of a specified kind to be created, maintained, and provided to the relevant authority; or (b) any other conditions including any 1 or more of the following: (i) a condition that requires decommissioning of the wastewater system—



(A) after a specified trial period; or (B) in specified circumstances; or (C) on written notice to the operator of the system; (ii) a condition that requires a wastewater system to be connected to a community wastewater management system; (iii) a condition that prevents activities that would adversely affect the operation or maintenance of a drain or treatment or disposal system or the reuse of wastewater from the wastewater system; (iv) a condition that requires a wastewater system to have various access points for maintenance or inspection (raised to or terminating at surface level, or as required by the relevant authority); (v) a condition that provides that a wastewater system must not be used unless or until it has been inspected or tested by an independent wastewater engineer and the relevant authority supplied with a certificate given by that expert certifying that the wastewater works have been undertaken in accordance with the approved technical specifications; (vi) a condition that otherwise specifies requirements relating to— (A) the installation of the wastewater system; or (B) the decommissioning of the wastewater system; or (C) the connection of the wastewater system to a community wastewater management system or SA Water sewerage infrastructure or the disconnection of the wastewater system from a community wastewater management system or from SA Water sewerage infrastructure; or (D) the operation, servicing and maintenance of the wastewater system; or (E) the reuse or disposal of wastewater from the wastewater system. (3) A condition of approval may— (a) provide that a matter or thing is to be determined according to the discretion of the relevant authority or some other specified person or body; and (b) operate by reference to the manuals referred to in a product approval for the wastewater system; and (c) operate by reference to a specified code as in force at a specified time or as in force from time to time. (4) If a code is referred to in a condition of approval— (a) a copy of the code must be kept available for inspection by members of the public, without charge and during normal office hours, at, if the relevant authority is the Minister, the principal office of the Department and, if the relevant authority is a council, the office of the council; and (b) evidence of the contents of the code may be given in any legal proceedings by production of a document apparently certified by the relevant authority to be a true copy of the code. (5) If a condition of approval authorises the reuse or disposal of wastewater from a wastewater system, the authorisation is conditional on any necessary authorisation of the activity being in force under section 127 of the Natural Resources Management Act 2004. (6) The relevant authority may, on application and payment of the fee fixed by Schedule 1, by written notice to the applicant, vary or revoke a condition of a wastewater works approval. (7) The relevant authority may, on its own initiative, by written notice to the operator of a wastewater system to which a wastewater works approval applies, vary or revoke a condition of the approval or impose a further condition, but in that case,



the variation, revocation or imposition may not take effect until at least 6 months after the giving of the notice unless— (a) the operator consents; or (b) the relevant authority states in the notice that, in its opinion, the variation, revocation or imposition is necessary in order to prevent or mitigate significant harm to public or environmental health or the risk of such harm. 26—Expiry of approval (1) A wastewater works approval expires if the works are not commenced, or are commenced but are not substantially completed, within 24 months after the date of the approval. (2) A relevant authority may, on application and payment of the fee fixed by Schedule 1, postpone the expiry of a wastewater works approval for a specified period. 27—Registers of wastewater works approvals (1) Each relevant authority must keep a register of wastewater works approvals granted by the authority under these regulations. (2) The registers to be kept under this regulation must include, in relation to each wastewater works approval, a statement of— (a) the date of the approval; and (b) the nature of the wastewater works to which the approval relates; and (c) the location or proposed location of the wastewater system concerned; and (d) the type of wastewater system concerned; and (e) the conditions of approval or a summary of the conditions of approval; and (f) any postponement of the expiry of the approval. (3) The registers may be extended to include wastewater works approvals granted under the revoked regulations. (4) The registers must— (a) be kept in a manner facilitating retrieval of relevant information for all approvals relating to a particular wastewater system; and (b) be kept up to date, including by noting the date of any variation or revocation of conditions of approval or the imposition of further conditions of approval. (5) The registers must be kept available for inspection by any person during ordinary office hours at, if the relevant authority is the Minister, the principal office of the Department and, if the relevant authority is a council, the office of the council and the registers or extracts of the registers may be made available to the public by electronic means. (6) The registers may include other information considered appropriate by the relevant authority, but that information need not be made available to the public. Part 5—Enforcement 28—Inspections and testing (1) An authorised officer may, in connection with the administration or enforcement of these regulations— (a) enter premises and inspect, examine or test a wastewater system and undertake work or an activity reasonably necessary to facilitate or undertake an inspection, examination or test, or give directions as to an inspection, examination or test; and (b) take samples of a substance or thing for analysis.



(2) In the exercise of a power under this regulation, an authorised officer may be accompanied by such assistants as may be necessary or desirable in the circumstances. (3) A person must not, without reasonable excuse, hinder or obstruct an authorised officer, or a person assisting an authorised officer, in the exercise of a power under this regulation. Maximum penalty: $5 000. (4) In this regulation— wastewater system includes part of a wastewater system. 29—Requirement to obtain expert report (1) If the Minister or a council suspects on reasonable grounds that a wastewater system is adversely affecting or threatening public or environmental health, the Minister or council may give the operator of the system a written notice requiring the operator to obtain and provide to the Minister or council a written report from an independent wastewater engineer within a specified period addressing specified matters. (2) A person must comply with a notice under subregulation (1). Maximum penalty: $5 000. (3) If the requirements of a notice under this regulation are not complied with, the Minister or council may obtain the required report (and a person authorised to do so by the Minister or council may enter land at any reasonable time for the purposes of the report) and recover costs and expenses reasonably incurred in doing so from the person who failed to comply with the notice, as a debt. Part 6—Miscellaneous 30—Reuse of wastewater from SA Water sewerage infrastructure (1) A person must not— (a) reuse wastewater from SA Water sewerage infrastructure or a treatment plant associated with SA Water sewerage infrastructure; or (b) supply such wastewater for reuse, except in accordance with an approval of the Minister. Maximum penalty: $5 000. (2) A reference in subregulation (1) to the reuse of wastewater includes a reference to the disposal of the wastewater to land for irrigation. 31—False or misleading statements A person must not make a statement that is false or misleading in a material particular (whether by reason of the inclusion or omission of any particular) in any information provided, or record kept, under these regulations. Maximum penalty: $5 000. 32—Access to codes, standards etc For the purposes of section 109(6)(c) of the Act, copies of codes, standards or other documents must be kept available for inspection at the principal office of the Department. 33—Fees (1) A relevant authority may refund, reduce or remit payment of a fee payable under these regulations if the relevant authority considers that appropriate in the circumstances. (2) A fee payable to a relevant authority may be recovered by the relevant authority by action in a court of competent jurisdiction as a debt due to the relevant authority.



Schedule 1—Fees 1 Application for a product approval $451.00 2 Application for a wastewater works approval if the relevant authority is a council— (a) for the installation or alteration of a temporary on site wastewater system— (i) if the system's capacity does not exceed 10 EP $45.25 (ii) if the system's capacity exceeds 10 EP $91.00 plus $22.30 for each 2 EP in excess of 10 EP (b) for the installation or alteration of an on site wastewater system (other than a temporary on site wastewater system)— (i) if the system's capacity does not exceed 10 EP $102.00 (ii) if the system's capacity exceeds 10 EP $102.00 plus $22.30 for each 2 EP in excess of 10 EP (c) for the connection of an on site wastewater system to a community wastewater management system— (i) in the case of an existing on site wastewater system $102.00 (ii) in the case of a new on site wastewater system— • if the system's capacity does not exceed 10 EP $102.00 • if the system's capacity exceeds 10 EP $102.00 plus $22.30 for each 2 EP in excess of 10 EP 3 Application for a wastewater works approval if the relevant authority is the Minister $451.00 4 Application for variation or revocation of a condition of a wastewater works approval— (a) if the relevant authority is a council $102.00 (b) if the relevant authority is the Minister $451.00 5 Application for postponement of expiry of a wastewater works approval $102.00 6 Inspections— (a) fee for an inspection in connection with an application or other matter under these regulations if the relevant authority is a council $112.00 (b) fee for an inspection in connection with an application or other matter under these regulations if the relevant authority is the Minister— (i) for the first inspection nil (ii) for each subsequent inspection $178.00 Schedule 2—Transitional provisions Part 2—Transitional provisions 2—Interpretation In this Part— revoked regulations means the Public and Environmental Health (Waste Control) Regulations 2010. 3—Modification of prescribed code The On site Wastewater Systems Code referred to in regulation 4(1)(a) of these regulations is modified until the second anniversary of the commencement of that regulation as follows: (a) delete clause 12.1.3; (b) delete the following items from clause 12.1.4:



"Copies of certification documentation from an independent product certification agency accredited by JAS/ANZ, confirming certification of the on site wastewater treatment system to the relevant part of AS/NZS 1546 (or other relevant standards) A certification evaluation report prepared by the product certification body detailing the testing methods used, inclusion of all data, comparing performance components with test criteria and security arrangements to ensure testing integrity Documentation that the laboratories used for off site chemical and bacteriological determinations are National Association of Testing Authorities (NATA) registered to carry out analyses for the parameters specified"; (c) delete clause 12.2.3; (d) delete the following items from clause 12.2.4: "Copies of certification documentation from a certification agency accredited by JAS ANZ or other equivalent organisation(s) as agreed by DHA, confirming certification of the on site wastewater treatment system to be in compliance with the relevant standard/guideline A certification evaluation report prepared by the product certification body detailing the testing methods used, inclusion of all data sheets, comparing performance against the test criteria and detailing the security arrangements adopted to ensure testing integrity Documentation that the laboratories used for off site chemical and bacteriological determinations are National Association of Testing Authorities (NATA) registered (or equivalent) to carry out analyses for the parameters specified" 4—Product approvals (1) An approval in force under regulation 10 of the revoked regulations immediately before the commencement of this clause will be taken, on that commencement, to be a product approval under these regulations. (2) The product approval under these regulations is subject to the same conditions as the approval under the revoked regulations and will expire 2 years after the commencement of this clause or on the date on which the approval would have expired under the revoked regulations, whichever is the earlier. 5—Wastewater works approvals (1) An approval in force under the revoked regulations other than under regulation 10 immediately before the commencement of this clause will be taken, on that commencement, to be a wastewater works approval under these regulations. (2) The wastewater works approval under these regulations is subject to the same conditions as the approval under the revoked regulations and will expire in accordance with these regulations. 6—Notices under regulation 24 of revoked regulations (1) A notice issued by a council and in force under regulation 24 of the revoked regulations immediately before the commencement of this clause will be taken, on that commencement, to be a notice issued by the council under regulation 9 of these regulations. (2) The notice under these regulations is subject to the same conditions as the notice under the revoked regulations.



Appendix 4 – National Water Initiative Pricing Principles

1. Principles for the recovery of capital expenditure

Background

1. Capital expenditure constitutes the major proportion of costs recovered through water charges. Capital expenditure includes expenditure: for replacement of existing assets; and to expand the stock of assets to meet increases in demand, meet required service standards, and any increases in regulatory obligations.

2. These principles apply only to capital expenditure incurred to provide water services. They do not cover capital expenditure incurred to provide wastewater services or stormwater services25.

3. The COAG pricing principles, upon which the NWI pricing principles are based provide for the use of a renewals annuity to fund future asset refurbishment/replacement (lower bound pricing), and a return of and on capital to reflect the cost of asset consumption and cost of capital (upper bound pricing). The COAG pricing principles are provided at Appendix A.

4. The Expert Group that played a role in developing the COAG pricing principles made a number of recommendations in their paper on asset valuation and cost recovery, including:

a) the adoption of the deprival value methodology for asset valuation for charging purposes;

b) that, as far as practicable, provision be made in charging arrangements for the loss of service delivery capacity26 on the basis of full replacement cost;

c) to the extent that it is not practicable to charge on this basis, that, as a minimum, provision be made in charging arrangements for the preservation of the ongoing service delivery capacity based on the infrastructure annuity approach where users desire that the service delivery capacity in the assets continue.

Approaches to providing for capital investment

5. The two main approaches used to calculate the revenue requirement for capital investments are:

a) the annuity approach; and

b) the Regulated Asset Base (RAB), or building blocks approach.

25

Stormwater services refer to the stormwater transportation network as distinct from stormwater reuse as

a water supply option. 26

The Pricing Principles Steering Group interprets “loss of service delivery capacity” to mean

depreciation.



6. The annuity approach forecasts asset replacement and growth costs over a fixed period and converts these to a future annualised charge. The annuity approach is commonly applied to provide the cash requirements needed to renew non-financial assets over a medium to long-term time period.

7. The RAB approach includes an allowance for a return of capital (depreciation) and a return on capital27. Under the RAB approach the ‘building blocks’ equations are as follows:

Revenue requirement = Benchmark operating expenditure (including operations, maintenance, administration costs) + Return on capital (RAB) + Return of capital (RAB) or depreciation.

8. Where a water business is using a RAB approach to recover capital

expenditure, a number of factors have an effect on the revenue requirement: determination of the initial value for the asset base; the process for rolling forward the asset base over time; and the assumptions used to calculate the WACC.

9. There are a number of matters that need to be considered in establishing the initial asset base. These include:

a) the methodology used to value the initial asset base28 (including decisions on whether and where to draw a ‘line in the sand’). In establishing this initial value, consideration is given to the extent to which past capital expenditure is deemed to be excessive for the needs of current users or was contributed by others and therefore excluded from the initial asset base; and

b) the way in which contributed assets are dealt with in the establishment of the initial, and the rolled forward, asset base29.

10. It is common practice for some jurisdictions to draw a ‘line-in-the-sand’ to

differentiate between past (legacy) investment decisions and new investment decisions. Where a line in the sand is drawn, an opening RAB value is set (which essentially locks in the past rate of return on previous investments).

27

The ‘return of capital’ applied to the capital value invested reflects annual consumption of economic benefit or

service capacity and is referred to as depreciation. The ‘return on capital’ reflects the opportunity cost of the

investment.

28 The initial asset base may be valued in a number of ways, including through: Depreciated Replacement Cost

(DRC); Depreciated Optimised Replacement Cost (DORC); Optimised Replacement Cost (ORC); Economic

Valuation; Optimised Deprival Value (ODV); Depreciated Actual Cost (DAC); or using another recognised

asset valuation method. 29

Contributed assets are those assets that are provided/funded by water users, or provided/funded on

behalf of users by a third party (e.g. governments).



The RAB is then updated (or rolled forward) each year to reflect prudent capital additions, disposals and depreciation)30.

11. The principles distinguish between past (legacy) investment decisions made

prior to the legacy date and new investment decisions made after the legacy date.

12. Some jurisdictions have not drawn a ‘line in the sand’ (defined a legacy date)

and therefore do not currently differentiate between legacy investment decisions and new investment decisions.

Principle 1: Cost recovery for new capital expenditure

13. For new or replacement assets, charges will be set to achieve full cost recovery of capital expenditures (net of transparent deductions/offsets for contributed assets and developer charges – refer to principle 6 – and transparent community service obligations)i, ii through either:

a) a return of capital (depreciation of the RAB) and return on capital (generally calculated as rate of return on the depreciated RAB); or

b) a renewals annuityiii and a return on capital (calculated as a rate of return on an undepreciated asset base (ORC)).

14. Where jurisdictions have drawn a ‘line in the sand’, this principle would apply

only to new investment decisions made after the date the line in the sand was drawn (the legacy date). For investment decisions made prior to the legacy date, see principles 3 and 4.

15. The rate of return should be consistent with the Weighted Average Cost of Capital (WACCiv) with the cost of equity derived from the Capital Asset Pricing Model (CAPM).

Notes:

i. Charges may be set to achieve up to full cost recovery of capital expenditures in the rural and regional sector where it is demonstrated that it is not practicable to move towards upper bound pricing as per the terms identified in clause 66 (v) of the NWI.

ii. See also Principles 4 and 5. iii. To ensure revenue outcomes generally consistent with option (a), the renewals

annuity should be structured as a sinking fund to include a provision on a forward-looking basis for the cost of replacing the relevant asset and/or asset components. In calculating the undepreciated asset base, the ORC should not include the renewals reserve.

iv. The WACC return sought should be tuned to the RAB valuation methodology adopted. The WACC used should be consistent with the form of asset valuation methodology used (e.g. a nominal WACC applies to a historical cost valuation,

30

This approach is also known as the financial capital maintenance approach and is an application of the

deprival value approach to establishing and updating the RAB. The deprival value approach was

recommended by the Expert Group.



and a real WACC applies to a current cost valuation). The use of replacement cost valuations can give rise to capital gains and losses measured against the Consumer Price Index (CPI). Where an asset value is used to determine revenue requirements, a systematic escalation in the value of assets above the increase in the CPI will give rise to a capital gain in real terms, all other things being equal. Where an asset on revaluation is subject to a systematic decrement in real terms, a capital loss will result. Where replacement cost valuations methods are used, the WACC will need to be adjusted to cater for systematic capital gains or losses.

Principle 2: Valuation of new assets 16. New and replacement assetsi should be initially valued at efficient actual costii. Notes:

i. A new asset refers to any investment (be it on a new asset or a replacement asset) that occurs after the legacy date.

ii. To avoid circularity in price setting the amount included in the RAB should not be based on the net present value of cash flows.

Principle 3: Valuation of legacy assets 17. Legacy assetsi that are to be retained should be valued at Depreciated

Replacement Cost (DRC); Depreciated Optimised Replacement Cost (DORC); Optimised Replacement Cost (ORC), indexed actual cost, Optimised Deprival Value (ODV)ii or using another recognised valuation method.

Notes:

i. Legacy assets are those which existed as at the legacy date (see iii for a definition of the legacy date).

ii. This is consistent with the findings of the expert group on asset valuation methods which stated that the deprival value approach to asset valuation should be adopted31.

iii. The legacy date equates to the date where a line in the sand has been drawn. Where jurisdictions have not drawn a line in the sand, the legacy date will be no later than 1 January 2007 and may be in accordance with earlier dates as determined by governments or economic regulators.

Principle 4: Recovery of legacy capital expenditure 18. In respect of legacyi investment decisions, and on the assumption that assets

are to be retained, charges will achieve cost recovery by way of a depreciation charge or annuity charge and a positive returnii on an asset value used for price

31

The deprival value is the value of future economic benefits that would be foregone if the entity is deprived of

an asset. If the asset to be lost is to be replaced, it can be valued at its market value, replacement cost or

reproduction cost, depending on the circumstances. If the asset is not to be replaced, then it should be valued at

its economic value, which is the greater of either the net present value of the income expected to be earned

from the asset, or the fair market value. The optimised deprival value is the lesser of the DORC and the

economic value of the asset.



setting purposes as at the legacy dateiii. If assets are to be sold then they are to be valued at their net realisable value.

Notes:

i. Legacy investment decisions are decisions made prior to the legacy date (refer to iii below for a definition of the legacy date).

ii. The return earned should be no less than the return being achieved at the legacy date, and, if the return being earned before the legacy date is above the current WACC return, no more than the return being achieved at the legacy date.

iii. The legacy date will be no later than 1 January 2007 and may be in accordance with earlier dates determined by governments or economic regulators. Once set, the legacy date should not change. Costs funded by governments after the legacy date should be reported through a transparent subsidy.

Principle 5: Rolling forward asset values after the legacy date 19. The RAB comprising prudent new investments and legacy investments should

be rolled forward each year in accordance with the following formula, which can be expressed in nominal or real termsi:

RAB t = (RABt-1 + Prudent Capital Expenditure t – Depreciation t – Disposal t

(discarded assets)). (Where t = the year under consideration).

20. Where assets are optimisedii, they should not be subject to further optimisation unless there are relevant changes in market circumstances.

21. Where DRC or DORC is used as a basis for asset values, the RAB comprising new investments and legacy investments should be re-valued through an independent appraisal on a rolling basis in accordance with Accounting Policy Standards.

22. Where a renewals annuity is used, asset values should not be depreciated. Notes:

i. When applicable, CPI or other relevant indexation factor may be used. ii. The RAB should be adjusted for ‘unplanned’ excess capacity through

optimisation (that is, delivery of an equivalent service that reflects least cost planning reflecting prudent engineering and technological advancements), where ‘unplanned’ excess capacity is capacity which is not the result of a planned level of utilisation.

Principle 6: Contributed assets

23. New contributed assetsi,ii,iii (i.e. grants/gifts from governments and contributions

from customers (e.g. developer charges)) should be excluded or deducted from the RAB or offset using other mechanisms so that a return on and of the contributed capital is not recovered from customersiv. If a renewals annuity is used, it should include provision for replacement of contributed assets.



Notes: i. For contributed assets other than developer charges, funding should be

recognised as an asset contribution only where there is clear contractual or policy evidence that this funding was meant to be used to lower long-term prices.

ii. For the purposes of principle 6, contributed assets exclude gifts or grants where there is clear contractual or policy evidence that charges be set to achieve full cost recovery, inclusive of the value of the gift or grant.

iii. Equity injections should be distinguished from grants /gifts /contributions. iv. It is acceptable for principle 6 to apply to legacy contributed assets if adequate

information is available to identify them.

2. Principles for urban water tariffs

Background

1. These principles are developed for a situation where there are large monopoly water providers and an absence of water trading and associated competitive pressures to bring about efficient levels of cost recovery and associated tariff structures.

2. When water is traded as a commodity, the value (price) of water is set in

the market, determined by the consumers’ willingness to pay. The willingness of water users to pay for water is determined either by the profitability of the output derived from its use, whether agricultural or industrial, or from the value derived from household use, or by the value derived from its environmental use.

3. For a range of reasons, the operation of water trading in an urban context

is limited, and in some cases, is likely to remain so due to physical limitations. When water cannot be traded, the water service availability and usage charges determine the cost of water to users. Throughout the principles the term ‘service availability charge’ is used to describe the access/connection/fixed charge and ‘water usage charge’ to describe the variable charge.

4. As urban water markets become subject to greater contestability it is likely

that competitive pressures will have a greater role in determining water charges.

5. These principles apply only to charges levied to provide water services to

urban users. They do not apply to charges levied to provide wastewater services or stormwater services32.

32

Stormwater services refer to the stormwater transportation network as distinct from stormwater reuse as a

water supply option.



Approaches to setting urban water tariffs

6. Charging structures adopted by urban water businesses generally comprised a service availability charge and a water usage charge, with the service availability charge determined as the residual component to be recovered to meet the revenue requirement after the revenue from water usage charges has been estimated. The usage component of the charge is generally set with reference to the long run marginal cost of supply, and may comprise of more than one tier (often referred to as an ‘inclining block tariff’).

7. Water charges in the urban water sector may be differentiated by supply

nodes (nodal based pricing) or may be uniform across a supply network or geographical area (‘postage stamp’ based pricing). A nodal pricing approach identifies the cost of service delivery to individual customers, or groups of customers, within a given geographical area or supply node.

8. Water charges may also include up-front developer charges – to signal the

infrastructure cost of servicing new developments or additions/changes to existing developments.

Principle 1: Cost recovery

9. Water businesses should be moving to recover efficient costs consistent with the National Water Initiative (NWI) definition of the upper revenue bound: ‘to avoid monopoly rents, a water business should not recover more than the operational, maintenance and administrative costs, externalities, taxes or tax equivalent regimes, provision for the cost of asset consumption and cost of capital, the latter being calculated using a Weighted Average Cost of Capital (WACC)’i.

Notes: i. Application of this principle would be in the context of commitments to full cost

recovery in accordance with paragraph 66 of the NWI. Principle 4: Setting the service availability charge

12. The revenue recovered through the service availability charge should be calculated as the difference between the total revenue requirement as determined in accordance with Principle 1 and the revenue recovered through water usage charges and developer charges.

13. The service availability charge could vary between customers or customer

classes, depending on service demands and equity considerations. Unattributable joint costs should be allocated such that total charges to a customer must not exceed stand-alone cost or be less than avoidable cost where it is practicable to do so.

Principle 5: Pricing transparency



14. Urban water tariffs should be set using a transparent methodology, through a process which seeks and takes into account public comment, or which is subject to public scrutiny.

Principle 6: Over recovery of revenue

15. Where water usage charges lead to revenue recovery in excess of upper bound revenue requirements in respect of new investments, jurisdictions are to address the over recovery. In addressing the over recovery, revenues should be redistributed to customers as soon as practicable.

Notes:

i. This principle recognises that in some cases, long run marginal cost may exceed average cost.

Principle 7: Differential water charges

16. Water charges should be differentiated by the cost of servicing different customers (for example, on the basis of location and service standards) where there are benefits in doing so and where it can be shown that these benefits outweigh the costs of identifying differences and the equity advantages of alternativesi.

Notes:

i. Differential pricing may be achieved by upfront contributions, including developer charges.

Principle 8: Setting developer charges

17. Developer charges should reflect the investment in both new and existing assets required to serve a new developmenti and have regard to the manner in which ongoing water usage and service availability charges are set.

Notes:

i. Where there are benefits beyond the boundary of the development, the developer charge should have regard to the share of capacity required to serve the development.

Principle 9: Capping developer charges

18. Developer charges should not exceed the costs of serving new developments which includes investment in both new and existing assets required to serve a new development.

Principle 10: Revenue from developer charges

19. To avoid over-recovery, revenue from developer charges should be offset against the total revenue requirement either by excluding or deducting the contributed assets from the RAB or by offsetting the revenue recovered using other mechanisms.

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