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.