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Focus: Victorian ESC issues first water price determination

9 August 2005

In brief: In July, the first price determination issued by the Victorian Essential Services Commission for the water industry came into effect. Senior Associate Julie Freeman and Partner Anna Collyer(view CV) look at the determination.

The price determination

From 1 July 2005, new prices apply for water, sewerage and related services in Melbourne and most of regional Victoria. These prices, or the method for determining them, are detailed in the first price determination issued by the Essential Services Commission since it became the economic regulator of the Victorian water industry on 1 January 2004. The determination covers all metropolitan and most regional water businesses and it affects both residential and commercial water users.

The determination allows for real price increases of between 0.5 and 8.4 per cent each year for the next three years. An important reason for the price increases espoused by the Commission is to provide enough funding for water infrastructure that will be required over the next few years.

Some of the key infrastructure projects include:

  • the expansion and improvement of water and sewerage networks to cope with increased usage and to cover previously unserviced areas;
  • an upgrade of older infrastructure to improve service reliability and meet regulatory obligations;
  • improved environmental outcomes and drinking water quality; and
  • increased water recycling initiatives.

The prices are designed to ensure that the businesses derive sufficient revenue to deliver their services and maintain and improve infrastructure.

In the final decision relating to the determination, the Commission also looks at the service standards and targets applicable to the businesses. The Commission has issued a separate Water Customer Service Code that sets out minimum service level requirements and standards for all of the businesses except Melbourne Water. The price determination also sets out guaranteed service levels for five of the water businesses. Customers of these businesses may receive compensation payments for certain breaches of the stipulated service levels. At this stage, there are no direct financial consequences for a failure by the other businesses to meet their service standard targets. Over the next three years, the Commission will consider whether to introduce guaranteed service level schemes for all water businesses.

The review process

The process for regulating the pricing in the water industry began last year, with each water business submitting water plans to the Commission in September. These water plans included proposed charges for water, sewerage and related services. The plans also included information about proposed initiatives for the three years from 1 July 2005. The prices contained in a water plan must comply with the regulatory principles contained in the Water Industry Regulatory Order (WIRO) made under the Water Industry Act 1994 (Vic). The regulatory principles cover financial issues, as well as the interests of customers, sustainable water use and efficiency. They also require the water businesses to take into account a timeframe greater than the three years covered by the price determination.

The Commission reviewed all of the water plans in light of the regulatory principles contained in the WIRO. The Commission also consulted experts and conducted public forums. A draft decision on proposed pricing was released in March of this year. Following the draft decision, the water businesses had an opportunity to submit revised pricing proposals. Other interested parties also made submissions.

The final decision was released on 15 June 2005. In its final decision, the Commission did not approve the proposals put forward by the water businesses because they did not comply with all of the regulatory principles in the WIRO. The Commission released a determination for each water business, setting out the prices to apply or the method of establishing the prices to apply over the next three years, as well as the approved service standards for that business.

What next?

The Essential Services Commission is now working with the water businesses on the following regulatory initiatives:

  • The Commission now plans to release a code dealing with how water businesses should prepare and report financial information that forms the basis of the prices subject to the price determination.
  • Under the Water Customer Service Code, each metropolitan and regional business must prepare a Customer Charter explaining the rights and responsibilities of the business and its customers and outlining the service standards set for that business.
  • The process for determining prices for the rural water businesses has now begun. Each rural water authority is to submit a water plan by 1 September 2005. The price determination for the rural businesses will cover a two-year period from 1 July 2006.

We will continue to monitor these changes in the Victorian water industry. If you have questions relating to this particular issue, or any other query, please contact us.

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