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Sunday, January 13, 2013


Water Businesses
The reported move by the Government to consider consolidating local government water business into a lot fewer entities is to be welcomed, not least as it shows it has not spent its reformist bent in creating Auckland Council.

Watercare is indeed a good model to start with, for it shows the benefits of scale, focus and business-like disciplines, lead by a commercially experienced Board. There are like Australian water businesses that could be compared – some with quite different regulatory settings. Water is a highly capital intensive business and the best results only emerge after decades of good decision making on capital projects – so while there are some immediate gains on offer, the best may only come in a stable regulatory and governance environment where good long term decisions can be made. It is the business environment that needs careful consideration for what has worked so far for Watercare may need some further consideration before being applied elsewhere.

The claimed advantage of the ability of a larger business to pay for the cost of upgrades in neglected areas, or in servicing new areas is a dubious one. Heavily cross-subsidised services ferment poor investments.  Nor would greater use of private capital be a very likely outcome of a new industry structure. It is not precluded now. It is not popular here or in Australia simply because the cost of private capital is higher than public capital and the benefits of competitive design, construction, maintenance, operation and of combinations of these, have already been taken up by the industry with little more a private long term capital provider can add. Nor is this change cost and risk free to local government – they will have legacy costs of shared systems no longer used by the water businesses, like call centres and they will lose the abilities of the transferring staff in application to things like civil defence and other Council services. Some staff who enjoy the wide range of council work and the public interaction resulting may find the change unattractive. Councils too will not welcome service area decisions being separated from themselves, for water services can be a powerful driver of land development which has a myriad of other costs to a council.

The environment then: There is no public appetite for privatisation of this service – it should be excluded. But placing businesses in the ownership of multiple local governments in their service area can lead to weak governance. The owners may well be divided on what the new service area boundaries should be, conflicted on capital investment priorities and little experienced in holding a water business to account on customer service performance.  In this environment customers may be substantially disempowered, for their historic route of complaint through their council will be much less effective. There needs to be a stable expectation on financial performance.   The one applying to Watercare of no dividends and cost moderation is one option but there are others that could be considered. Allowing or requiring a return on new investments, at a modest level aligned to the inherent low risk of the business is worth consideration and it may increase the discipline on boards. The regulatory environment for taking and discharging water is pretty much indifferent to structure so this is no impediment. The health requirements may seem to be similar but local government has been an effective lobbyist in resisting drinking water quality improvements, so removing their direct role here might not be a bad thing.

The sort of settings that have applied elsewhere or in other utilities include state assumption of ownership (surely to be avoided), regulatory setting of a suite of performance measures and public reporting against them, regulatory setting of performance measure targets to be met, these set for each businesses, regulated control of service area boundaries, reporting and vetting of asset management plans (a key investment planning tool), customer charters setting service standards subject to regulatory approval, customer ombudsmen and regulated customer councils to help give customers some voice. Regulated price control is another step. However if one puts all these in place then the environment is exactly aligned to privatisation. That switch should not be made to be too easy. We should simply not regulate to this extent but rather give careful consideration of each of these. Analysis of the natural pressures on business will show some are unnecessary. Alternatively some can be left as threat, for no business welcomes regulation. With prices I believe the pressures on publicly owned businesses will be sufficient that the owner’s community interest will suffice and price regulation can be avoided.  Surely though some of these regulatory roles will be needed and where needed, the Government needs to consider where these powers will lie. There is no obvious current agent.  There are some pretty heavy regulation models available. Too much of that and the businesses will become focussed on their regulators rather than their customers – usually a bad outcome.

There may be a case for allowing inset private reticulation providers say in new development areas to give some competitive pressure but the settings to allow this are more complex again. A general power to place and access pipes would be needed rather than one which currently lies with local government. This would be analogous to other utilities and perhaps would not be a bad thing. The case for price regulation of such a private inset service provider would be strong for the service remains a natural monopoly.  As well the consequences of the performance or financial failure of such a reticulator need to have been established and be fair to the regional public business, which will be the provider of last resort.

The Government has a challenging task of analysing these options and then convincing the public of the answer. Some degree of consultation along the way might in the end speed the process, for there is a reservoir of distrust to be overcome.

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