Opinion Simplicity in water regulation a worthy goal

Australia needs to rethink ownership of water assets if consumers are to avoid a rapid rise in water bills, writes Andrew Blyth.


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OPINION: The ability of Australia's water authorities to finance their future activities without driving up water bills is forcing an urgent rethink on the need for institutional and regulatory reform of our water industry, including, the prospect of further private ownership of water assets. 

Infrastructure Australia has estimated that the potential proceeds from the sale of public water assets are valued at $54 billion to $61 billion for bulk water assets and $32 billion to $35 billion for distribution assets, however, with unclear roles and responsibilities of governments, water utilities and regulators leading to the inefficient allocation of water resources, misdirected investment, undue reliance on water restrictions, and costly water conservation programs these assets could end up being less attractive. 

Australia's urban water industry is characterised by natural monopoly networks providing services to a large diversified customer base. The current debate on best-practice water regulation is focused on addressing the shortcomings in current economic regulatory arrangements; and of the need for economic regulation to encourage water businesses to integrate more effectively within the broader policy and regulatory framework. Experience shows that economic regulation works best when an independent economic regulator and a strong and active shareholder are functioning alongside each other to deliver efficiency gains. One option is to consider creating a regulatory framework that provides direct financial rewards to incentivise businesses to engage more closely with their customers, and to develop the best targets and business plans; while, equally, penalising water businesses for low-quality business plans. 

Further, a strong argument exists for a framework within which the economic regulator does not preclude the adoption of new thinking to achieve regulatory objectives, and an approach that actually minimises the level of prescription and regulatory burden. While there are significant benefits associated with economic regulation, an opportunity exists for  changes to the current framework to ensure a more light-handed regulatory approach resulting in cost-savings flowing to customers, including households and small business. For example, a regulatory regime designed to better deliver outcomes incorporating broader community benefits and costs – rather than processes centred on just financial costs and benefits to individual water corporations. In addition, a regulatory environment that actually recognises the current lack of incentives that limit water businesses from fully capturing the gains of investments in productivity, nor provide for increased service standards or allow for unanticipated events. The recently released Competition Policy Review recommends competition policies, laws and institutions that promote the long-term interests of consumers and that independent authorities should set and oversee prices for natural monopoly infrastructure providers, including water regulation being the responsibility of the proposed national Access and Pricing Regulator.

The key to privatising water assets is ensuring that the business model and market conditions are right for attracting global capital. As Woolston (2015) highlights, in Australia, privatised water assets have generally been those that do not provide services directly to household customers, but that does not mean they can't. The Australian energy market provides one ready model for where water arrangements may need to go. Since 2005, the energy market has benefited from a strong single national regulatory regime, presided over by the Australian Energy Regulator, the Australian Energy Market Commission and a national market operator. Each of these important bodies has accountability to a state and federal ministerial council, charged with protecting the long-term interests of energy consumers. These bodies represent a set of interlocking checks and balances that drives generally robust policy and regulatory outcomes. This model has created transparency for private investors and consumers over the "road rules" of regulation, and provided a capability for these rules to adapt and improve over time, to remain relevant as competition and technology evolves. This is the type of framework that is required to create opportunities for greater reliance by water businesses on private sector capital funding, taking pressure off state and territory budgets affected by competing priorities for schools, hospitals and roads. 

Australia's water sector lacks a national focus, despite recognition by the Productivity Commission that national urban water reforms hold out the prospect of significant gains to consumers in terms of price and reliability of supply. In short, the water sector is at the beginning of a long journey from a traditional government-owned utility function to a dynamic, customer-responsive sector. For that reform to succeed it will require leadership and the right incentive-based framework to attract the long-term capital required to maintain and grow water networks, and deliver to customers a level of service they value. The privatisation of the water industry in Britain has attracted some £100 billion ($192 billion) of investment over the last two decades, including investment from Australian superannuation funds. Fixing the regulatory "hole in the bucket" in the water sector could benefit consumers and Australian investors. 

Andrew Blyth is an adjunct lecturer at the UNSW Canberra.

This opinion piece was first published in the Canberra Times.