New Watercare Charter will deliver good deal for Aucklanders and keep water services affordable - Opinion

THREE KEY FACTS

• The Government has approved the Watercare Charter to keep Auckland’s water services affordable, saving households an estimated $900 million over four years
• The charter is designed to ensure improved service quality and record infrastructure investment to unlock housing growth.
• Auckland Mayor Wayne Brown says the initiative means Watercare will deliver better for residents and the city’s drinking water and wastewater infrastructure.

Watercare will soon become financially independent from Auckland Council as New Zealand’s first water utility to be subject to a form of economic regulation.

Under the deal agreed between the Government and Auckland Council to financially separate Watercare from the council, Watercare will become subject to interim economic regulation from April 1 this year.

That regulation comes in the form of the Watercare Charter and the appointment of the Commerce Commission to oversee and enforce Watercare’s performance against the charter’s requirements.

The charter is a great deal for Aucklanders because, before this financial separation deal, Auckland Council had proposed to hike water charges by 25.8% from July 1 last year, to be followed by several years of double-digit price increases.

Fairer prices for Watercare customers

Instead, Watercare increased prices to customers by 7.2% and will be subject to maximum revenue allowances from July 1.

These revenue caps effectively limit the future rates of increase in Watercare’s charges, with the estimated savings totalling around $900 million over four years.

The charter will deliver fairer prices for Watercare’s existing customers, who currently subsidise the costs of expanding the network’s capacity to meet new housing growth. It aims to ensure that “growth pays for growth” in two ways: first, by setting minimum rates of increase on infrastructure growth charges, which Watercare collects from developers who connect new houses to its network; and second by requiring Watercare to review the fundamentals of its approach to setting growth charges.

A baseline performance report prepared by the Department of Internal Affairs identified several areas for improvement at Watercare.

In recent years Watercare’s customers have faced significant price increases, resulting from ballooning costs and constraints on how much it can borrow. There have been significant asset failures, including the Parnell sewer collapse, which resulted in millions of litres of sewage spilling into the Waitematā Harbour, closing beaches.

Housing development in parts of the city is at risk of slowing down because of delays in upgrading the network. This includes developments at Milldale and the Hibiscus Coast, with capacity at the Army Bay Wastewater Treatment Plant expected to be reached by 2027. Upgrades to the plant are not scheduled to be completed until 2031.

Targeting higher service quality and improved asset management

The charter targets improvements in these areas and ups the ante on Watercare by requiring it to meet minimum service-quality standards relating to fault response times, unplanned supply water interruptions, water leakage, and wastewater overflows.

It also requires Watercare to front up to the Commerce Commission with its plans to improve capital delivery, asset management, and operating efficiency and to report publicly against these plans, targets, and minimum service-quality standards.

The interim regime is designed to provide Watercare with more certainty about its revenue, giving banks and capital markets confidence to lend the large sums that Watercare needs to deliver its infrastructure programme.

Shifting to a more efficient capital structure will enable Watercare to lift annual capital expenditure from around $1 billion to an average of $1.3b per year, while spreading the burden of that investment over current and future generations of customers.

Auckland Council also benefits from the deal: it gains significantly more financial flexibility due to no longer having to finance Watercare’s borrowing from its own balance sheet. Under the deal, the council will be prevented by legislation from financially supporting Watercare, requiring the company to stand on its own feet.

With the Government and Auckland having collaborated on developing the charter, the focus now shifts to Watercare, which will start to operate under the watchful eye of the Commerce Commission.

The aim is that Watercare will have stronger incentives to invest in its assets, improve service quality and share the benefits of efficiency gains with consumers through lower prices.