Cost allocation modelling and pricing advice – Toowoomba to Warwick Pipeline

The Issue

In June 2022, the Queensland Government confirmed the allocation of over $300 million of capital funding to the Toowoomba to Warwick Pipeline (T2W Pipeline). The pipeline is to provide drought contingency supply to the Southern Downs Regional Council in addition to a permanent water supply for four communities within the Toowoomba Regional Council. The pipeline is to be operated and maintained by Seqwater, noting that water to be supplied to TRC and SDRC will be sourced from Wivenhoe Dam.

While the capital cost of the pipeline is to be met by the Queensland Government, the ongoing costs, including fixed operating and maintenance costs, are to be met by the two local councils. The operating arrangements for the pipeline – i.e. continued supply to Toowoomba and drought contingency supply to Southern Downs – represents a challenge in terms of identifying the appropriate allocation of these ongoing costs between the local councils.

Synergies was engaged by the Department to develop a detailed cost allocation model, comprised of all ongoing fixed and variable operating and maintenance costs for each segment of the pipeline. The purpose of the model was to produce, for a 20-year period, nominal cashflow profiles, firstly for the entire T2W Pipeline, and secondly for the costs allocated to each council.

The outputs from the cost allocation model were provided to the Department and informed broader negotiations with the Councils.

The Solution

A principles paper was developed and provided to the Department, Seqwater, and the two local councils to form the basis of the cost allocation modelling. The purpose of the principles paper was to set out the approach and underlying principles to be applied in allocating the costs for the four distinct segments of the T2W Pipeline between the two councils.

The key principles applied in developing the cost allocation model were as follows:

• Costs specific to individual pipeline segments were directly allocated accordingly;
• Costs that were not directly allocable – i.e. joint or common costs – the appropriate allocators were identified to derive fully distributed cost profiles for each pipeline segment. Cost allocators included pipeline capacity, direct labour costs, and length of pipeline segments;
• Fully distributed costs for each pipeline segment allocated between the Councils based on respective capacity shared for each pipeline segment; and
• Indicative allocations of variable operating costs were developed based on cost-reflective variable cost estimates and forecasts for utilisation for the two Councils.

Synergies presented the cost allocation model, including the model outputs, to the Department and two Councils. Synergies also applied the model to assess total ongoing costs and cost allocations under a range of different sensitivities and scenarios.

Synergies subsequently provided further advice to the Department in relation to the appropriate charging arrangements between the Toowoomba and Southern Downs Regional Councils, noting that during drought periods, Southern Downs would be reliant on the operation of existing Toowoomba Regional Council water supply infrastructure to facilitate the supply of water from Wivenhoe Dam to Warwick and other communities in the Southern Downs region. This advice was informed by a detailed review of relevant regulatory precedent and principles, including the directly relevant pricing review for the Broken Hill water pipeline, previously undertaken by IPART.

The Benefits

A comprehensive cost allocation model was provided to the Department and the Councils. In addition to informing the Department in terms of the appropriate allocation of ongoing costs between the Councils, the model provided the Department and Seqwater with a tool that can be applied as cost estimates are updated. Furthermore, the model provided the Councils with valuable information regarding their future costs and ongoing funding requirements in relation to the T2W Pipeline, in addition to providing the Councils with certainty that the cost allocations had been developed in accordance with best practice cost allocation principles and regulatory precedent.

Contact

To find out more about this project and how Synergies can assist you, send an email to: contactus@synergies.com.au