Desalination may trigger water price hike

But cost confusion rife if dams overflow: In the long term, however, the supply of water should adjust to maintain the supply/demand balance. In this context, it may be more appropriate for usage prices to reflect the LRMC of supply, rather than the short term scarcity of water. Further, setting prices to reflect the short term changes in supply of water may result in perverse outcomes, for example, very low usage prices may be required when the dams are overflowing such that usage prices do not inform customers about the costs of providing them with water in the long term.

Reflecting costs of desalination plant in prices: There were a wide range of issues relating to how best to reflect the costs of the desalination plant in prices. The first issue that the Tribunal would need to consider was whether the costs of the desalination plant, or a proportion of these costs, should be recovered through developer charges rather than the periodic charges.

Depends on desal future demand outlook: This largely depended on whether the plant had been constructed to meet the likely future demands placed on Sydney’s water supply due to new growth or whether it is constructed to ensure security of water supply for existing customers. If the plant, for example, had been constructed to meet future demand from new growth areas then it may be consistent with existing pricing policies to recover part of these costs through the upfront developer charges. If the costs of the desalination plant were to be recovered through the periodic charge, the Tribunal will need to consider whether the costs should be reflected in the fixed component of the two-part tariff or whether it should be reflected also in the usage component of the charge. This would, in part, relate to the operating rules of the plant.

When should desal payoff start? Another issue related to the desalination plant was the point in the price path that these costs should begin to be reflected in water prices. One option, for example, was to allow the capital costs related to the construction of the plant to be recovered from users prior to the plant commencing operation. This may mean a fixed charge being levied on users prior to the commencement of the plant with the usage component of the charge only commencing once the plant is operated. The Tribunal will consider these timing issues for the desalination plant as part of its inquiry processes.

Tell IPART which system to choose: IPART sought comment on whether the costs of the desalination plant should be:

• incorporated in upfront developer charges or Sydney Water’s periodic prices or a combination of both;

• recovered through the fixed component of the two-part tariff or a mix of fixed and usage components;

• reflected in Sydney Water’s prices prior to the plant being operational.

Reference: Independent Pricing and Regulatory Tribunal, Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and recycled water from 1 July 2008.Water – Issues Paper DP92, August 2007. Inquiries regarding this document should be directed to a staff member: Richard Warner: (02) 9290 8406; Nigel Rajaratnam: (02) 9290 8467 Website: http://www.ipart.nsw.gov.au

Erisk Net, 21/8/2007

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