Water Industry Draft Regulatory Accounting Code

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Water Industry Draft Regulatory Accounting Code

• Workshop 11 October 2005

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Overview

• Background
• Regulatory framework
• Role of regulatory accounts
• General arrangements
• Information requirements and allocation
  principles
• Review of regulatory accounts
• Adjustment of regulatory accounts
• Next steps

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Background

• Price Review Final Decision released in June 2005
• ESC noted intention to collect regulatory
  accounting information from water businesses
• Regulatory accounts also obtained from
• energy distribution businesses in Victoria
• water and sewerage businesses by OFWAT in the UK.
• Consultation paper and Draft Regulatory
  Accounting Code (including templates) released on
  28 September.

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Regulatory framework

• Explicit power under the Water Industry Act 1994
  to make a Code requiring water businesses to
• maintain specified accounting records
• prepare accounts according to specified
  principles.
• Function under the WIRO to conduct audits,
  including
• reliability and quality of information reported
  by water businesses to the Commission
• conformity of information with any specification
  issued by the Commission.

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Role of regulatory accounts

• Provides basis for assessing expenditure and
  revenue forecasts (on which prices are approved)
  in future price reviews.
• Why is specific information required?
• Need to separate prescribed and non-prescribed
  services.
• Items related to each prescribed service (e.g.
  water and sewerage) need to be separately
  identified.
• Some items are treated differently for regulatory
  purposes (depreciation, non-cash items).
• Disaggregated information is required to
  effectively identify trends in expenditure and
  revenue.

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Role of regulatory accounts

• How will the regulatory accounting information be
  used?
• Aggregate information will be used to roll
  forward regulatory asset values and assist in
  forecasting future operating expenditure.
• Information disaggregated by service will provide
  scope to further unbundle prices in future.
• Information disaggregated by activity area/cost
  driver/asset category/customer type will enable
  trends in expenditure and revenue to be
  identified.

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General arrangements

• Regulatory accounts must be submitted after each
  financial year.
• Submissions must contain the following items
• Regulatory accounting statements (templates
  completed according to Code requirements)
• Statutory accounts
• Chart of accounts
• Directors responsibility statement
• Statement of regulatory accounting principles and
  policies.
• Regulatory accounts to be submitted within four
  months of the end of each financial year.

• Is the timeframe for submitting regulatory
  accounts appropriate?

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General arrangements

• Submission of first regulatory accounts
• Metropolitan and regional businesses to submit
  regulatory accounts from and including the
  2005-06 financial year.
• Rural water businesses to submit from 2006-07.
• Some judgment and estimation may be required for
  the first year.
• A more rigorous review of regulatory accounts is
  likely for the first year to identify and resolve
  any issues.

What are the issues with collecting regulatory
accounts from and including the 2005-06 financial
year? How can these issues be resolved?
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General arrangements

• Confidentiality
• Regulatory accounting information may be
  disclosed in future decision papers or in annual
  performance reports

Are there issues of confidentiality or commercial
sensitivity that the Commission needs to consider
in deciding to make regulatory accounting
information publicly available?
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General arrangements

• Level of prescription
• Code drafted at a higher level compared to the
  electricity and gas industry guidelines
• Preference for lower level of prescription
• ESC to consider providing more guidance in Code
  if required, particularly after review of first
  years regulatory accounts.

Is the level of prescription in the Draft Code
appropriate? Are there particular matters where
further clarity may be warranted?
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Allocation principles and other information
requirements

• Regulatory accounts to be based on audited
  statutory accounts.
• Statutory accounts to act as base accounts for
  the purposes of the Code.

Are statutory accounts the most appropriate basis
for regulatory accounts? Are there alternatives
to basing regulatory accounts on statutory
accounts?
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Allocation principles and other information
requirements

• General principles (clause 3.4)
• Base account items to be allocated between
• prescribed and non-prescribed services
• water business segments
• activity areas (operating expenditure)
• asset category and reasons (capital expenditure)
• customer types (revenue)

Is the nature and level of aggregation under the
Draft Code appropriate?
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Allocation principles and other information
requirements
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Allocation principles and other information
requirements

• In the first instance, base account amounts are
  to be allocated on a directly attributable basis.
• Items not directly attributable to a water
  business segment (activity area, asset category,
  etc) are to be allocated on a causation basis.
• Items may be allocated on a non-causal basis
  provided certain conditions are met.
• Special case recycled water.

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Allocation principles and other information
requirements

• Specific information requirements
• Capital expenditure
• Included works in progress
• Excludes interest during construction and similar
  allowances
• Contributions
• Recycled water
• Additional information requirements for Melbourne
  Water drainage services.
• Related party and third party transactions
• Provisions

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Review of regulatory accounts

• Regulatory accounts submitted by each business to
  be reviewed.
• Commission will appoint a single firm to review
  regulatory accounts.
• Review to primarily focus on
• whether Code principles are applied consistently
• identifying cases of inconsistent application
  between businesses
• areas that may require further regulatory
  specification .
• Commission may review regulatory accounts
  annually or less frequently where appropriate.

Is the approach proposed by the Commission for
the review of regulatory accounts appropriate?
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Adjustment of regulatory accounts

• Firm engaged to review regulatory accounts will
  provide report to the Commission and to each
  business.
• Reports to identify aspects of the regulatory
  accounts
• that do not comply with the Code
• where principles are incorrectly or not
  consistently applied.
• Commission to discuss report findings with each
  business.
• After considering recommendations of review firm
  and any discussions with the business, the
  Commission may request a business to adjust its
  regulatory accounts.

Are there any other options for adjusting
regulatory accounts?
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Next steps

• Summary of comments received at this workshop
  will posted on website by Friday 14 October.
• Written submissions due Friday 28 October.
• Commission to liaise with VicWater on need and
  role for possible working group to further refine
  Code requirements and templates.
• Final Regulatory Accounting Code to be released
  in December 2005.