IPART has released its Final Report on the maximum prices Sydney Desalination Plant Pty Ltd (SDP) can charge for its water supply and security services from 1 July 2023. SDP charges Sydney Water for its services. Sydney Water then passes these costs onto its end-use customers across the Greater Sydney region.
SDP is the only significant rainfall-independent source of drinking water in the region. It produces desalinated water and can supply up to 15% of Greater Sydney’s daily water needs.
Under its new Network Operator’s Licence, SDP will be required to operate on a flexible full-time basis from the commencement of the 2023 Determination (i.e. 1 July 2023). We have developed a package we consider reflects the efficient cost of the service levels expected from SDP in its new flexible full-time role and promotes the long run interests of customers.
SDP’s prices will increase to support SDP’s new flexible role
Our final decisions mean that SDP’s prices will increase by around 8% from 1 July 2023. While this increase of 8% is slightly higher than the current inflation rate of 7%, we note that SDP’s prices were held constant in 2022-23 as a result of this price review being deferred from 2021-22 to 2022-23.
Given that Sydney Water passes on the costs it incurs from SDP to its customers, SDP’s prices have an impact on the bills of end-use water customers. The portion of a typical end-use customer’s bill that relates to the costs of SDP’s services is less than 10%. Our decisions will therefore result in a small increase of around $10 per year in end-use customer bills.
We have limited the increase in SDP’s costs and price to what is efficient
We reviewed SDP’s prices (in accordance with the updated Terms of Reference) to ensure prices from 1 July 2023 reflect the efficient cost of the service levels expected from SDP in its new flexible role. The service that SDP will provide to Sydney Water is different to the drought response service we expected during our 2017 review. It is also different to the emergency service that SDP provided to Sydney Water since the floods of 2020.
We agree with SDP’s proposal that its efficient operating costs need to increase to support its new flexible operating role and to reflect higher input costs. We have applied efficiency adjustments to these costs reflecting our expectation that SDP will continue to control costs and improve its efficiency over the 2023 determination period. We also agree with SDP’s proposal to increase depreciation costs but have limited the increase to what we consider to be efficient.
These increases in operating costs and depreciation are almost fully offset by lower capital costs (i.e. the weighted average cost of capital is falling from 4.7% to 3.7%) and other revenue adjustments (i.e. the energy adjustment mechanism and the deferral year true up). The net impact of these changes in costs is around 1% real (i.e. before inflation) increase in SDP’s costs.
SDP will retain risks where it is best placed to manage these risks
Our decisions achieve what we consider is a fair and efficient balance of risk between SDP, Sydney Water and end-use customers.
We decided to not accept most of SDP’s proposed cost pass through and true-up mechanisms as we considered SDP did not demonstrate that these mechanisms are in the long-run interests of customers.
In addition, we decided to consider any energy costs incurred by SDP during the 2023 determination period that are not already included in the benchmark energy price or network energy cost pass-through at our next price review (i.e. UFE, RERT, generator compensation charges and any other new charges that may be introduced by regulators). We encourage SDP to provide justification and evidence for this at the next price review. We expect SDP’s proposal will be developed in consultation with Sydney Water and end-use customers.
We set incentives that are aligned with SDP’s new flexible role
Our decisions aim to provide appropriate incentives to encourage SDP to be more efficient over time. We updated the efficiency carryover and energy adjustment mechanisms that will apply over the 2023 determination period to account for changes in SDP’s operations and service levels under the new licence. This is to encourage SDP to operate efficiently over the 2023 determination period for the benefit of end-use customers.
We did not accept SDP’s proposed service level incentive scheme. SDP’s new licence has penalty provisions to ensure its water deliveries are within 10% of Sydney Water’s requested annual production. Based on this, SDP’s proposal would not add further benefit to Sydney Water or end-use customers.
Thank you to all stakeholders who participated in our review
We are grateful to everyone who attended our public hearing on 21 February 2023 and shared their input with the Tribunal. We also thank everyone who made a submission to our Issues Paper and Draft Report. We listened to the stakeholder’s views and considered all feedback in making our final decisions.