Reform progress
Best practice water pricing is a key element of the National Water Initiative (NWI).
NWI pricing reforms are intended to:
- promote economically efficient and sustainable use of water resources, water infrastructure assets and government resources devoted to the management of water
- ensure sufficient revenue streams to allow efficient delivery of the required services
- assist efficient functioning of water markets, including inter-jurisdictional water markets, and in both rural and urban settings
- give effect to the principle of user-pays and achieve pricing transparency in respect of water storage and delivery in irrigation systems and cost recovery for water planning and management
- avoid perverse or unintended pricing outcomes
- provide appropriate mechanisms for the release of unallocated water.
- As the Commission found in 2007, New South Wales and Victoria have the most developed policies for recycled water and stormwater pricing. However, there has been some further progress in other jurisdictions.
Progress
In its 2009 Biennial Assessment of progress against the NWI, the Commission noted that draft NWI pricing principles and pricing for recycled water and stormwater re-use were being developed to promote national consistency and to improve market neutrality for water-based trade and investment. However, the Commission considered that the processes to reach agreement on them had been too slow.
Some other findings included:
- With the exception of the Northern Territory and Queensland, jurisdictions have demonstrated that they have achieved lower-bound pricing and that price setting processes are consistent with, or moving towards being consistent with, upper bound pricing for metropolitan water storage and delivery.
- Government grants for urban water infrastructure projects can frustrate cost-recovery objectives and distort commercial incentives for investment. By reducing the cost of water to urban water customers, government grants can distort consumer responses.
- There has not been sufficient progress in the movement towards consistent urban water pricing policies. However, draft national pricing principles have been developed which apply to both urban and rural water. These principles apply to recovery of capital expenditure, setting urban water tariffs, recovery of costs of water planning and management activities, and pricing for recycled water and stormwater reuse.
- Independent economic regulation is promoting transparency, rigour, and at least broad consistency in price review and price setting processes in Victoria, New South Wales and the ACT. While the Commission acknowledges some progress in other jurisdictions, such as South Australia's announcement that the role of the Essential Services Commission will be extended, South Australia, Tasmania, Western Australia and the Northern Territory do not yet benefit from fully independent economic regulation.
- The Commission has identified a number of pricing reforms that go beyond the requirements of the NWI, which have the potential to improve efficiency.
- Across all jurisdictions, progress has been mixed and slow in developing trade wastes pricing policies that encourage the most cost-effective methods of treating industrial wastes. However, several jurisdictions are in the process of undertaking such reviews, including New South Wales, Victoria, the ACT and Western Australia.
- In a number of states, a water usage charge is not levied directly on all users, who therefore do not receive a price signal providing an incentive to use water prudently. For example in some states, tenants are not billed in full or provided with information on their water usage.
- There is intensive activity in the energy sector to introduce smart metering.
- Some states have moved to more frequent billing cycles to provide improved price signals to urban customers.
- Progress has been made by most states in implementing best practice pricing in rural and regional areas. All jurisdictions have adopted consumption-based charging, and most government-owned rural water service providers have achieved lower-bound pricing or have transparent community service obligations in place to account for any revenue shortfall below the lower revenue bound. However the urban and rural National Performance Reports found that the financial performance of regional and rural water utilities is highly variable and generally below that of metropolitan urban utilities.
- Queensland, Victoria and the Commonwealth have implemented various fixed-charge drought relief measures.
- Some states have implemented or investigated the use of pricing and market-based instruments to address environmental externalities. All states have further work to do to explore the feasibility of such actions.
A note on upper bound pricing
Upper bound pricing is the level at which, to avoid monopoly rents, a water business should not recover more than the operational, maintenance and administrative costs, externalities, taxes or tax equivalent regimes (TERs), provision for the cost of asset consumption and cost of capital, the latter being calculated using a weighted average cost of capital (WACC).