Government consults on a Water Commissioner to regulate the prices and provision of big and unresponsive drinking water and wastewater services
Analysis: A paper published this week expresses some of the worries about the Government's four big new regional water authorities more succinctly than any tub-thumbing mayor: as monopoly providers, there's a risk they will charge higher prices, deliver poorer and less efficient services than in a competitive market, and pay little regard to the concerns of the households and businesses who depend on them.
"There is a risk that the entities become less responsive to consumer needs as a result of their increased scale," the paper says.
It identifies problems in the water sector with poor quality information, large infrastructure deficits, immature asset management, and the significant need to realise operating and capital efficiencies.
"The Water Services Entities will have natural monopoly characteristics and could therefore have the ability to charge prices that are higher, or provide services that are of a lower quality and less efficient, than would be expected in a workably competitive market, and complex and novel governance arrangements that are likely to result in some stakeholders questioning the incentives of Water Services Entities to be responsive to consumer demands."
The paper reads like a succinct summary of the concerns raised by most of the country's 67 city and district councils, forcing the Government to announce a new working group to design more satisfactory governance and accountability arrangements.
But it's not.
In fact, this is the argument for an economic regulator to act as a watchdog on the new drinking water, wastewater and stormwater authorities. And it's made in a paper that Commerce and Consumer Affairs Minister Dr David Clark presented to Cabinet last week.
Clark understands the importance of water regulation better than most.
He had just been sworn in as health minister in 2017, when he was delivered the report of an inquiry into the campylobacteriosis outbreak in Havelock North that had killed four people and sickened 5,500 more. It identified serious failings in the provision of safe drinking water by New Zealand's councils, and in the regulation by the Ministry of Health. One in five New Zealanders didn't have access to safe drinking water, it found.
"If we eat a piece of chicken and feel crap the next day, we blame the chicken. But that report highlighted that tens of thousands of people were getting sick from preventable causes in the water, and that's a pretty major public health issue in a first world country." – David Clark, consumer affairs minister
With the easy outrage of a newly-appointed minister who knew he couldn't yet be blamed for the failings, Clark vowed to address the "serious concerns" about infrastructure and oversight. "All New Zealanders should expect to have access to clean drinking water and, following this report, some will ask whether their water is safe."
Four years later, Clark recalls just how little oversight there was. "I think there were 2.5 FTEs in the Ministry of Health responsible for healthy water in New Zealand, at the time that I arrived as Minister of Health," he tells Newsroom.
"We're so conditioned to believe in New Zealand that when we pick up a glass, it's fine. If we eat a piece of chicken and feel crap the next day, we blame the chicken.
"But that report highlighted that tens of thousands of people were getting sick from preventable causes in the water, and that's a pretty major public health issue in a first world country."
Responsibility for regulating water quality has now been moved from a forgotten, dysfunctional corner of the Ministry of Health to the new standalone agency Taumata Arowai. And David Clark's ministerial oversight for health has also been removed; now, he has responsibility for economic regulation instead.
It's in that capacity that he has published a discussion document on protecting consumer interests, just a few hours after Local Government Minister Nanaia Mahuta confirmed the Government would mandate the amalgamation of all 67 councils' Three Waters networks.
Each of the four new water authorities will be natural monopolies, he acknowledges, so consumers still won't have any choice about where they get their drinking water, or who pipes away their waste. But they will no longer be democratically accountable so that means a regulator is needed, to prevent them abusing their power.
"To my mind, it's similar to a restaurant has to be licensed. There's accountability around it. If you cook yourself food at home, you don't have to be licensed to do that. And you do pretty quickly bear the consequences if you get it wrong." – David Clark
That's especially the case because (as worried councils have warned) the new entities will have "complex and novel governance arrangements" that will make them far less accountable to their owners, the ratepayers of New Zealand. And nor will they be accountable to Government.
This seemingly inexplicable lack of democratic oversight is justified, by Mahuta and the Department of Internal Affairs, as being forced upon them by Standard & Poor's. They say that without this balance sheet separation, the credit agency will refuse the new authorities and councils the good credit ratings that they need to borrow more money to upgrade their sometimes tired and broken infrastructure.
What that means is that unless the mayors and iwi leaders on the new governance working group can persuade Mahuta to soften her stance, David Clark's new economic regulator will provide the only protection against the new water authorities going rogue. It will be the only watchdog to rein in their borrowing, or their rates increases, or to champion consumers when there are shortages and outages and nobody at their water authority's call centre is picking up the phone.
Without predetermining the outcome of the eight-week consultation, Clark does offer some early views on what this regulator might look like.
1 / It could be a standalone regulator, or it could sit within the water quality regulator Taumata Arowai – but Clark has told the Cabinet, and Newsroom, that he would prefer it to be incorporated into the responsibilities of the Commerce Commission. The commission has already set in place new economic regulation regimes like those for the dairy and fuel sectors, and he'd rather see New Zealand's scarce expertise in economic regulation consolidated in a "centre of excellence", rather than diffused across several regulators.
"Broadening the Commerce Commission’s mandate to include the three waters sector would allow the deep expertise of the Commerce Commission to be applied to the water sector in a way that realises synergies, and delivers value for money through economies of scope and scale," he argues.
2 / The regulator – or Water Commissioner, as it might be constituted – would cover the new water services entities, but not the community schemes, private schemes and home tank and bores. This is partly because those who supply their own water are expected to take on some of the risk, but mainly because of the cost, plain and simple. When the Government first began the water reforms there were thought to be 5000-10,000 private supplies; there are now believed to be 75,000 to 100,000.
"To my mind, it's similar to a restaurant that has to be licensed," Clark says. "There's accountability around it. If you cook yourself food at home, you don't have to be licensed to do that. And you do pretty quickly bear the consequences if you get it wrong."
3 / The four water suppliers would likely be required to comply with minimum service level requirements prescribed in a water consumer code, much like the grocery code that the Commerce Commission is proposing for the supermarkets sector in hearings this week. "Providing such codes are developed with strong input from consumers, and complemented by an enforcement regime, they are likely to lead to significant short and medium term improvements in consumer welfare," Clark says.
4 / It will come as no surprise that the costs of the regulator would be borne by levies on the four new water authorities, which would of course pass on those costs to consumers through water rates or volumetric charging. To be fair, the cost of setting up and running a water regulator will pale in comparison to the costs of the actual Three Waters infrastructure. As a useful reference point, the cost of the electricity sector regulator comprises just 0.5 percent of the average household power bill.
Provision of the Three Waters is different from the telecommunications market, where if Vodafone delivers shonky service, you can switch to Spark or 2 Degrees. And it's different from electricity retail, where you can switch provider every week if that gets you a better price and service.
But Clark does compare it to the natural monopoly held by national power grid operator Transpower, or local lines companies. Transmission and distribution costs make up 37.5 percent of an average household power bill, but consumers can't choose whose power lines to use.
The comparison to Transpower is probably not helpful to his cause, at this time. The Electricity Authority (that sector's regulator) has just reported back on communications breakdowns between Transpower and the other power companies that left 34,000 homes without power on August 9, the coldest night of the year.
The test for that regulator will be not just to identify the causes of the problem, and to divvy out the accountability between Transpower and the other companies, but critically to set in place changes to ensure such needless black-outs don't happen again next winter.
The performance of the Electricity Authority in protecting power consumers will be watched with interest by businesses and communities as they respond to David Clark's discussion paper on water regulation.
