Funding for the water and sewerage sector is predominantly based on a user pays system. However, charges do not always recover the full costs of services delivered to the community. Water utilities are primarily state-owned corporations, and water and wastewater transmission infrastructure exhibits strong natural monopoly characteristics, although recent legislative changes in some jurisdictions have enabled entry by private sector providers into contestable sections of the network.
Economic regulation of the water sector is carried out by state regulators (e.g. Independent Pricing and Regulatory Tribunal in NSW and the Queensland Competition Authority). At a Federal level, the ACCC maintains a role in enforcing certain water market rules and providing advice on the Murray-Darling Basin.
The Audit has identified that pricing of water supply and wastewater services across regions and sectors is not consistent or equitable. Water pricing is influenced by historical policies and subsidies that led to under-pricing and inefficient pricing structures. There is a need for more transparent and competitive pricing of water and sewerage services.
This issue was recognised in 1994 by the COAG through the Water Reform Framework. Through this agreement, governments committed to best practice in water pricing to:
■ promote efficient and sustainable use of resources and assets;
■ ensure sufficient revenue streams to allow efficient delivery of services; and
■ achieve user pays and pricing transparency in irrigation systems.260
This was reinforced through the NWI in 2004, which sought to set in place consumption based pricing and full cost recovery for water services.261
A key principle of the COAG reforms was to establish a system of independent pricing regulation. Independent economic regulators generally have some role in regulating charges for water storage and delivery and wastewater provision, although the nature and geographic coverage of the regulator's role varies across jurisdictions.
In urban areas, governments agreed to move from 'lower bound' pricing towards 'upper bound' pricing. Upper bound pricing involves setting prices that recover the full costs of operating, maintenance and administration, depreciation, and a return on capital.
The 2010 NWI Pricing Principles made clear that this commitment to upper bound pricing applied only to assets constructed through new capital expenditure.262 For existing assets, the NWI Pricing Principles allow under-valuation but require a renewals annuity on future replacement expenditures as a minimum. As a consequence, the movement towards upper bound pricing for all assets occurs only as assets are replaced.
Despite these measures, the ongoing pricing issues in the water and wastewater services sectors are in need of reform. The Plan will need to investigate measures to improve cost recovery, implement national standards for economic regulation and introduce more flexible pricing models.
Audit finding 76. There is a need for more transparent and competitive pricing of water supply and wastewater treatment services, across urban and regional areas. In encouraging greater competition, careful consideration of the appropriate market structure(s) is required. |
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260. Council of Australian Governments (1994)
261. Council of Australian Governments (2004)
262. National Water Initiative Committee Steering Group on Water Charges (2010)