Focus: Water – ERA inquiries into WA water regulation
13 May 2008
In brief: The Economic Regulation Authority of Western Australia is conducting a range of inquiries into water regulation and licensing in Western Australia. Senior Associate Robyn Glindemann and Research Assistant Caroline Spencer take a look at the more significant reports.
- Developer contributions to the Water Corporation
- Competition in WA's water and wastewater services sector
- Review of water services licences
- Water compliance reporting manual
- Making a submission
How does it affect you?
- While we await the release of new water management legislation in Western Australia, the ERA continues to work on updating and improving the current system. It is important to be aware of these inquiries and consider whether they may ultimately have an impact on your business.
On 14 April 2008, the Economic Regulation Authority of Western Australia (the ERA) released its draft report on Developer Contributions to the Water Corporation of Western Australia.
In October 2007, the ERA was asked to develop a set of principles regarding the setting of 'developer contributions' or 'developer charges'. These are payments from developers to the Water Corporation to help the Corporation recover part of the infrastructure costs associated with new land development. The payments may also cover charges incurred in bringing forward new land developments ahead of schedule. Instead of cash payments, developer contributions may also take the form of transfers of reticulation assets. The aim of this inquiry is to ensure that charges are sufficient to cover the Water Corporation's costs, without unduly influencing developer decision-making.
The ERA was guided by three main objectives when developing principles for setting developer contributions:
Economic efficiency – It is important to ensure that prices are set efficiently, in order to maximise social welfare. To do this, a nexus must be established between the charges faced by the developer and the cost consequences of the development decision (which may be easier to determine for reticulation assets than transmission assets). Importantly, according to the ERA, charges to developers should reflect the longer-term costs of development, as the WA Government believes it is appropriate for the costs of increasing capacity to be passed through to the entity requiring the additional capacity. Developer charges must also cover costs associated with bringing forward new developments ahead of schedule.
Equity – The ERA recognises that charges set on efficiency principles may have to be modified to address equity concerns. The government sometimes subsidises higher-cost developments in rural areas, to ensure that customers have access to affordable water across the state. The ERA expressed concern that this subsidy scheme may not have a net welfare effect for the State, as it does not implement cost-reflective pricing, and suggested that the government's social policy objectives could be met through Community Service Obligation payments and more transparent subsidies. However, any changes based on economic efficiency principles should be phased in over several years to ensure that customers are not subjected to sudden price rises.
Good regulatory practice – This requires developer charges to be based on a transparent, stable, predictable and easily understood methodology. The ERA believes charges should be set only after an effective public consultation process and should be contestable through an appropriate appeals mechanism.
The draft report sets out 17 principles for developer contributions under these three objectives.
The second part of the ERA's inquiry involved establishing developer charges for the Water Corporation.
The Water Corporation currently charges 'standard headworks charges' for water, wastewater and drainage services across the state, where developers are charged an amount per unit of additional demand towards the cost of major infrastructure developments with non-standard and out-of-sequence charges being levied where appropriate. After considering two options put forward by the Water Corporation for setting headworks charges, the ERA has recommended adoption of a modified version of one of the options. Under the ERA's proposal, developers would pay set headworks charges for each individual scheme, with non-standard charges to apply where development costs are above the average distribution cost for that scheme. Adjustments would be made where there is spare capacity. There is also the possibility that development charges could be differentiated, based on the water efficiency of a new development. Finally, the ERA suggested that implementation of a new method of calculating developer charges must be accompanied by an independent review process, public consultation and a mechanism for appeals in accordance with good regulatory practice.
The aim of this inquiry, which was established in July 2007, is to provide advice on possible competitive enhancements for the delivery of water and wastewater services. Key issues include:
- enhancing water source procurement;
- enhancing competition by providing third-party access to existing infrastructure; and
- improving competition through the use of water trading mechanisms.
The ERA released a draft report on 3 December 2007 which, among other things, recommended:
- establishing a new body to identify, rank and procure new water sources, to be owned and operated by the private sector;
- establishing an independent procurement entity (IPE) to oversee the procurement of bulk water supplies; and
- facilitating water trading by taking into account all significant users within a catchment area when developing management plans and allocations.
A further consultation report was released on 16 April 2008 to respond to calls for further discussion in relation to the nature of the IPE.
In the December 2007 draft report, the ERA proposed the introduction of an IPE to be responsible for balancing supply and demand and facilitating competition in the provision of bulk water supply. The further consultation report expands on the IPE concept by detailing how bulk water supplies are currently identified and who has a role in identifying or developing those supplies. The ERA has outlined four main concerns with the current approach. They are:
- a lack of transparency and independence in the assessment of alternative sources;
- an uneven 'playing field' for private sector involvement;
- the uncertainty about factors that impact on commercial decision-making; and
- some potentially unnecessary and counterproductive roles of the Western Australian Department of Water.
Under the ERA's proposal, the IPE would be an independent statutory authority that would:
- be responsible for identifying future supply shortfalls;
- seek proposals from the Water Corporation and the private sector for ways to address those shortfalls;
- seek bids from the private sector on the development of new water sources;
- oversee negotiations between the successful bidder and the Water Corporation in relation to water supply contracts; and
- take over the Water Corporation and Department of Water responsibilities for implementing demand management programs.
Comment is sought on the appropriateness of the ERA's IPE proposal versus the proposal for an independent panel put forward by the Water Corporation.
The ERA is also undertaking a review of all water services licences issued under the Water Services Licensing Act 1995 (WA). The review is considering all licence terms and conditions having regard to best-practice licensing principles.
The ERA released a draft report on 7 April 2008. The executive summary of the report notes that:
- there are inconsistencies between the terms and conditions of water licences and gas and electricity licences;
- the ERA intends to modernise operating licences by making licence terms and conditions consistent with those for electricity and gas (so far as it is practicable); and
- the new licensing regime will also recognise water licensing developments taking place at the federal level.
The draft report makes 60 recommendations regarding water services licences. In general, the recommendations propose that water operating licence terms and conditions are changed to more closely align with licensing schemes for other utilities.
Section five of the report considers each term of a water services licence and considers whether it should be retained, modified or discarded.
The ERA has called for public submissions on the reasonableness of the proposals outlined in the report.
The ERA's Water Compliance Reporting Manual aims to identify each of the compliance and reporting requirements for water supply, sewerage, drainage and irrigation licences. The manual will reflect the changes to water licensing outlined in the Review of Water Licensing Services recommendation report (discussed above), and the National Water Performance Framework.
A draft of the manual was released on 7 April 2008. The manual explains the nature of licensees' reporting obligations and requirements and provides templates for reporting non-compliances with licence conditions. The ERA has called for public submissions on the proposals contained in the draft manual.
If you would like to make a submission (which close on the 16th May 2008) on any of these inquiries, or need some advice on these changes or any other similar matter, please contact us. We will continue to monitor these inquiries and keep you updated.
- Andrew PascoePartner,
Ph: +61 8 9488 3741
- Chris SchulzPartner,
Ph: +61 3 9613 8772
- Bill McCrediePartner,
Ph: +61 7 3334 3049
- Andrew MansourPartner,
Ph: +61 2 9230 4552