Australia: Productivity Commission recommends reform to urban water sector

Last Updated: 28 October 2011
Article by Kirsten Webb

Most Read Contributor in Australia, November 2016

Key Points:

If governments commit to the recommendations and roadmap set by the Productivity Commission, expect a significant urban water sector reform program to commence at all levels of government during 2012.

There have been state-based reviews of the urban water sector in the past, for example, IPART's 2005 report on water and wastewater service provision in the greater Sydney metropolitan area.

The Productivity Commission has now produced a comprehensive review of the urban water sector nationally and has made a substantial number of recommendations which involve reform at the Commonwealth, State and local government levels.

While those recommended reforms, if adopted, would be implemented by different governments, they are to be underpinned by a common overarching objective of delivering water, waste water and stormwater services in an economically efficient manner, which should guide policy development and regulation relating to public health and the environment.

Urban water sector inefficiencies

On 12 October 2011, the Commonwealth Government released the Productivity Commission's Inquiry Report on Australia's Urban Water Sector.

The Productivity Commission concluded:

"conflicting objectives and unclear roles and responsibilities of governments, water utilities and regulators have led to inefficient allocation of water resources, misdirected investment, undue reliance on water restrictions and costly water conservation programs."

Recommended reforms

To address these inefficiencies, the Productivity Commission recommended a number of reforms (37 in total). It considers that "Implementation of the reform package, with commitment by governments, will provide consumers with greater reliability of supply, greater choice of services at lower cost than otherwise and reduce the likelihood of costly and inconvenient restrictions."

The Productivity Commission has not recommended attempting to create a competitive market such as that established in the electricity sector. Rather, it has recommended reforms that it describes as seeking to "establish clear objectives, improve the performance of institutions with respect to roles and responsibilities, governance, regulation, competitive procurement of supply, and pricing."

These include uniformly applicable high priority reforms. Examples include:

  • setting a clear overarching policy objective for the development and implementation of urban water sector policy;
  • ensuring the policy frameworks and principles for public health, environmental protection and service delivery are consistent with the overarching objective; and
  • putting in place best practice institutional regulatory and governance arrangements for economic, public health and environmental regulation.

The recommendations include freeing up retail water pricing by encouraging retailers to have multiple tariffs. That pricing would be subject to a default vanilla two-part tariff, policy guidelines and the normal application of competition and consumer protection laws. There is no role for formal price setting by economic regulators. Instead, utilities would be subject to price monitoring (with a review after five years). The scheduled independent review of the National Access Regime should proceed, (to commence no later than 31 December 2012) with terms of reference to include an examination of the interaction between the national and state-based regimes, including those for the urban water sector.

The recommendations also include structural reform in metropolitan and regional urban areas on the basis of case-by-case assessment. The Productivity Commission has set out four structural options for large metropolitan urban water systems and three options for small stand-alone regional systems.

For metropolitan areas, the options cover:

  • vertically integrated water utilities providing water and waste water services at lowest expected cost;
  • contestable bulk water supply through vertical and horizontal separation;
  • contestability in bulk water supply and wastewater treatment, through vertical separation of wastewater treatment and horizontal separation of wastewater treatment service providers; and
  • contestability in bulk water supply and wastewater treatment, and yardstick competition (and trade) in retail–distribution.

For regional urban areas in NSW and Qld (outside of south east Qld), the options include aggregating utilities to exploit economies of scale and retaining the existing structure but providing some services centrally (eg. by establishing a regional alliance of utilities).

For regional urban areas in SA, WA and the NT, the Productivity Commission recommends disaggregation of jurisdiction-wide utilities and notes that options include multiple regional water corporations and retaining a jurisdiction-wide utility but pricing according to geographic boundaries.

How will these reforms be achieved?

To implement the proposed reforms, the Productivity Commission considers there is a role for COAG but recommends that governments should:

  • clarify that the overarching objective for policy in the sector is the efficient provision of water, wastewater and stormwater services so as to maximise net benefits to the community;
  • ensure that procurement, pricing and regulatory frameworks are aligned with the overarching objective and assigned to the appropriate organisation;
  • put in place best practice arrangements for policy-making, regulatory agencies, and water utilities; and
  • put in place performance monitoring of utilities and monitor progress on reform.

Conclusion

The Productivity Commission has set out a roadmap for reform in the period from 2012 until 2017 which specifies actions to be taken by COAG, State and Territory governments, and the Australian Government.

The recommendations to be implemented in 2012 include:

  • COAG: formulate a new intergovernmental agreement; commission a review of concession arrangements and progress implementation of 2008 Review of Australia's Consumer Policy Framework
  • State and Territory governments: set overarching objective and restrict provision of subsidies and assess case for structural reform;
  • Australian Government: set overarching objective and restrict provision of subsidies; commission a review of National Access Regime.

If governments commit to the recommendations and roadmap set by the Productivity Commission, expect a significant urban water sector reform program to commence at all levels of government during 2012.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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