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Focus: Reforming Sydney's water industry

21 September 2005

In brief: The NSW Independent Pricing and Regulatory Tribunal is investigating alternative arrangements for delivering water and wastewater services to the greater Sydney region. Lawyer Sarah Birrell and Partner Andrew Mansour (view CV) outline the Tribunal's key recommendations. 

Background

The New South Wales Independent Pricing and Regulatory Tribunal recently published its Draft Report, Investigation into Water and Wastewater Service Provision in the Greater Sydney Region.

The Tribunal's investigation follows the release of the NSW Government's Metropolitan Water Plan for Sydney in October last year. The plan identifies population growth, drought, climate change and the health of the Hawkesbury-Nepean river system as the major issues facing Sydney in planning for future water management. It also describes actions that need to be taken to ensure people in the greater Sydney region have enough water to meet their needs over the next 25 years and to restore the health of river systems around Sydney.

In its terms of reference, the Tribunal has been asked by the Government to investigate alternative arrangements for delivering water and wastewater services in the greater Sydney region and to make recommendations regarding the most efficient, effective and sustainable way of providing these services.

The Draft Report

In its Draft Report, the Tribunal considers three main approaches for reforming Sydney's water and wastewater industry. The first two involve increasing competition, private sector involvement and innovation by making better use of competitive procurement and by allowing third party access to water and wastewater infrastructure. The third involves restructuring the entire industry by disaggregating Sydney Water Corporation.

The Tribunal prefers the first two approaches on the basis that they will help to create 'a more dynamic market in which private sector participants compete to identify opportunities to provide innovative water and wastewater services that meet customers' needs.'  The Tribunal considers that restructuring the entire industry is not required to create such a market and should not be undertaken, at least initially.

Below is a summary of the Tribunal's key recommendations.

  • Making better use of competitive procurement practices – Sydney Water and other water authorities in the greater Sydney region should extend their current competitive procurement practices to include 'outcomes based' sourcing of additional water supplies and other services, such as wastewater management. This would involve the relevant water authority identifying services required, but not the method to be used to deliver them. The water authority would then request proposals for their delivery from potential providers. This would help to create a more dynamic market by allowing greater scope for innovation and encouraging new parties to become involved in the water industry.
  • Introducing open access to infrastructure – Third parties should be allowed to seek access to water infrastructure for the purposes of injecting water, competing in retail services, extracting wastewater for treatment, and providing wastewater services. Initially, the provision of such services should be limited to large customers. The access regime should be state-based, as this would enable the appointment of a single regulator (the Tribunal) to oversee access prices, terms and conditions. Also, initially, the regime should be based on a negotiate-arbitrate model to allow open access to be introduced in a 'progressive and evolutionary' way.
  • Pricing infrastructure access – The Tribunal considered a number of pricing models for these services, including long-run marginal cost and the average cost allocation method. It concludes that the 'Efficient Component Pricing Rule' should be used to determine access prices. This would involve setting access charges by taking Sydney Water's retail tariff, adding the incremental costs it would incur by providing access, and subtracting the costs it would avoid by providing access. The Tribunal prefers this method because it allows the current 'postage stamp' approach to retail pricing to be preserved (that is, charging uniform prices despite differences in the cost of providing services throughout the greater Sydney region). In addition, the Tribunal considers that the administrative costs of using this method would be relatively low if only a small amount of new entry is anticipated.
  • Removing barriers to competition, private sector participation and innovation – The following changes need to be made to open up Sydney's water and wastewater industry to competition:
    • removal of statutory impediments to private sector involvement and competition in the industry;
    • improvement of arrangements for the collection and dissemination of information about the industry, to support private sector participation and innovation;
    • establishment of property rights for all water resources, including alternative water resources (for example, stormwater and sewage) and alternative storage facilities (for example, aquifers and urban lakes), to encourage investment and avoid the potential for future disputes;
    • ensuring guidelines and rules are in place for recycled water, to optimise the use of alternative water resources and to make sure the quality of water is appropriate for its end use; and
    • ensuring the environmental costs of providing water services are adequately factored into the production decisions of water services providers and the consumption decisions of consumers.
  • Ensuring continued protection of consumers and the broader public interest – Certain protective measures should be taken if the Government adopts the Tribunal's recommendations regarding competitive sourcing and an open access regime. Given state-owned water authorities will continue to have significant market power, these measures include ongoing price regulation of services until an infrastructure access framework and competition in the provision of services are established. They also include the imposition of appropriate regulatory obligations on existing and new participants in the water industry to ensure security of supply and water quality.
  • Implementing regulatory change – An 'adaptive management approach' to regulatory change is likely to be most effective, given the paucity of experience of competition in the water and wastewater industry. This would involve establishing a set of basic principles and features of the revised legal and regulatory framework, then using those principles and features:
    • to guide short-term decisions on the water and wastewater industry made under the existing framework; and
    • to guide and direct a comprehensive review of the existing framework and develop a revised framework.

The Draft Report sets out basic principles to guide short-term decision making and a review of the existing framework, as well as additional principles to be used to develop a revised regulatory framework.

The Tribunal suggests that the Government establish a central agency, initially for one year, which would report to a Cabinet committee and be accountable for coordinating the implementation of reforms and reviewing and monitoring progress. The Tribunal also recommends that the Government develop an implementation plan that includes a vision for reform, an outline of the immediate next steps and appropriate sequencing for subsequent areas of work.

The Final Report

The Tribunal expects to release the Final Report on its investigation by 31 October 2005. In the meantime, submissions concerning issues raised in the Draft Report may be made to the Tribunal by the end of this month.

For further information, please contact:

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