Australia: First Access Pricing Decision In Water And Wastewater Industry Made By ACCC

Last Updated: 5 October 2007
Article by Kirsten Webb

On 19 July 2007, the Australian Competition and Consumer Commission ("ACCC") issued an arbitration report on its determination of an access dispute between Services Sydney Pty Ltd and Sydney Water Corporation.

That dispute concerned the methodology by which the access price for declared sewage transportation services supplied by Sydney Water by means of North Head, Bondi and Malabar sewerage reticulation networks is to be determined.

This is the first access pricing decision in the water and wastewater industry in Australia.

The third party access regime

There has been much consideration of the role third party access might play in addressing Australia's water shortages and encouraging private sector participation in the delivery of water and wastewater services. Recently, there have been moves by some states towards establishing state-based, industry specific third party access regimes: for example, NSW has introduced the Water Industry Competition Act and the Economic Regulation Authority in WA is currently conducting an inquiry into private sector participation in the provision of water and wastewater services.

The ACCC's determination has been made under the general access provisions contained in Part IIIA of the Trade Practices Act 1974 (Cth) ("TPA"). Part IIIA is not specific to the water, wastewater or any other industry (compared with the telecommunications regime in Part XIC of the TPA and the national gas and electricity regimes). The Part IIIA declaration and negotiate-arbitrate provisions can apply to any services provided by natural monopoly infrastructure. Once services are declared under Part IIIA, third parties have the right to negotiate the terms and conditions of access to the declared services. If the parties are unable to agree on these terms, they have the right to have the dispute arbitrated by the ACCC.

Background to the determination

In 2005, the Australian Competition Tribunal declared the sewage transportation and interconnection services provided by Sydney Water's Malabar, Bondi and North Head sewage reticulation networks under the declaration provisions of Part IIIA. The Australian Competition Tribunal considered (amongst other things) that declaration of those services would promote competition in sewage collection and recycled water markets.

It also considered that third party access to the declared services would not be contrary to the public interest:

  • a new entrant would be subject to planning, health and environmental regulations and licensing requirements in relation to its own activities
  • issues such as dealing with overflows and the regulation of trade waste should be capable of resolution through the terms and conditions of access; and
  • access could be provided at an access price which was compatible with the geographically uniform retail pricing of sewerage services in Sydney.

In 2006, Services Sydney lodged a dispute notice with the ACCC, notifying the ACCC that it considered that Services Sydney and Sydney Water were unable to agree on the methodology by which the access prices for the declared services should be determined. This triggered an ACCC determination under Part IIIA.

Determination of methodology

In the arbitration, Services Sydney proposed a bottom-up building-block methodology whereas Sydney Water proposed a retail-minus methodology (with avoidable costs calculated using a building-block approach).

The ACCC determined that that access price that Services Sydney is to pay for the declared transportation services is to be determined by deducting from Sydney Water's regulated retail price for sewerage services Sydney Water's avoidable costs of the contestable services (retailing, treatment and disposal) plus any facilitation costs associated with providing access.

By avoidable costs, the ACCC means costs that a vertically integrated access provider would otherwise incur in the provision of a good or service that could be avoided if it ceased provision of the relevant contestable services completely in respect of the good or service in question. This is in contrast to costs that the access provider would actually avoid if it no longer directly supplied sewerage services to customers of a new entrant such as Services Sydney (if these costs were used, rather than avoidable costs, the access price would be higher).

The ACCC then determined the appropriate methodology for calculating Sydney Water's avoidable costs associated with retailing and sewage treatment and disposal - the contestable elements of sewerage services. It determined that a building block methodology should be used, under which avoidable costs would include the operating expenditure and capital costs (return of and return on capital) associated with Sydney Water's provision of the contestable service elements.

In making its determination, the ACCC had regard to the structural features of the sector, including that Sydney Water is a vertically integrated supplier subject to a range of legislative and regulatory requirements and the regulation of its retail prices by IPART. Of particular importance was the requirement that Sydney Water charge a fixed retail "postage stamp price" for sewerage services (which means that customers located within Sydney Water's area of operations pay the same price for sewerage services, regardless of their location).

The ACCC considered that the introduction of an access price structure that was inconsistent with the retail price structure determined by IPART could distort competition between Sydney Water and Services Sydney (that is, it could result in Services Sydney and Sydney Water not competing for customers on relative merit) and concluded that any inconsistency between the access price structure and the retail price structure would not promote effective competition in the downstream market for sewage and would be contrary to the legitimate interests of Sydney Water and the interests of all persons who have the rights to use the declared services.

A significant issue was whether the access price should include a contribution to postage stamp pricing. In 2005, the Australian Competition Tribunal considered the impact of third party access on postage stamp pricing and expressed the view that maintenance of postage stamp pricing would not be incompatible with declaration, as long as access prices were constructed in a way that did not provide for cream-skimming entry (noting that if an access price created conditions for cream-skimming entry, whereby a new entrant targeted low cost customers, leaving Sydney Water to supply high cost customers, this would be unsustainable and would likely result in the unwinding of postage stamp pricing).

The ACCC considered that the timing and nature of any change to the retail prices of sewerage services provided by Sydney Water was uncertain, particularly in the short term. In the context of the existing regulation and uncertainty as to when and how it might change, the ACCC considered that access prices that do not include a contribution to postage stamp pricing would have adverse implications for efficient entry and competition in the downstream sewage treatment market, whereas access prices that do include a contribution to postage stamp pricing would not have any adverse implication for competition in the downstream recycled water market.

The ACCC concluded that its access pricing methodology "promotes effective competition because it provides a scope for an access seeker that is more efficient than Sydney Water in undertaking the contestable activities associated with providing sewerage services to enter and compete with Sydney Water".

What next?

The ACCC determination establishes the methodology by which the access price for the declared transportation services should be determined. The ACCC did not determine the access price, which will depend on the calculation of the avoidable costs of the contestable services in accordance with the methodology. The ACCC's determination does not cover interconnection services, nor any non-price terms and conditions of access.

The term of the determination is 20 years, a duration the ACCC considered would provide an appropriate timeframe for Services Sydney to undertaking the significant investment involved with entry into the sewage treatment market and factoring in that actual access might not occur for some time. Mindful of the possibility that circumstances might change during that time (including the current retail price regulation of Sydney Water), the ACCC noted the mechanisms contained in the Act to enable a determination to be varied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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