Thursday, 7 October 2021

Reinventing the wheel?

In the armoury of regulatory interventions you might reach for to fix a market problem, I'd normally rank the Part 4 regime in our Commerce Act just above dosing with ivermectin and roughly on a par with sacrificing goats to Baal. I'd try everything else first.

But to my own surprise I'm beginning to wonder if it mightn't be a better answer to the Three Waters hoohah than the current "take the water assets away from councils and give them to four bigger entities with a convoluted governance structure".

There are various things going on in the water policy space, and no doubt conservation and Māori perspectives are at play, too. But if the big policy problem in water is (and I think it is) what economists like to call dynamic inefficiency - councils aren't minded, and/or able, to invest enough to keep the water assets in serviceable nick over the longer haul, hence iffy reservoir capacity (Auckland), poisonous water (Havelock North), pipes bursting in the CBD (Wellington) - then maybe it's time to deploy Part 4, or at least part of it, before creating whole new superstructures.

The bit of Part 4 that looks particularly fit for purpose is the 'information disclosure' regime. It's already been applied, for example, to electricity lines businesses: for lines businesses owned by local consumer trusts, who are in the same governance ballpark as water assets owned by councils, it's the only bit of Part 4 that typically applies (the rest of the lines businesses are required to disclose, too, but are also subject to a revenue control regime). Information disclosure can be a great way to surface whether an incumbent utility is not investing enough to keep the lights on, or the water flowing, over the long haul.

Here's an example of what's disclosed: it shows some of the 2020 data for Vector, which happens to be the lines network where we live. If you're interested in your own locality, head to this page, and click on your local network on the map. It'll bring up the option of downloading a pdf with all the data for your place. There's a lot more beyond the graphs shown below, and you'll also find that each lines company is compared with its peers.

Vector's lines and cables are in good nick. Only a very small proportion is 'Over generic age', and in any event Vector's planned spending on replacement is well above the minimum required to keep the network in good shape.

Some of its switching gear is getting a bit long in the tooth, but again Vector has it in hand and plans to spend well above the minimum required to keep them chugging along. From a dynamic efficiency point of view it's all good. 

You could easily imagine requiring all the water entities being asked to provide the corresponding data, which would stand a very good chance of zeroing in on the problem areas. Some of the councils, for example, are declining to join the proposed new four-entity regime because they say they're managing just fine, and that's a perfectly fair point to make: an information disclosure regime along these lines would prove their case.

And if there's a problem how would you go about fixing it? As it happens, we've got a worked example of that, too. It's  Aurora, which to give it its due is in the process of fixing things, but which was starting from a very bad place as far as maintenance of its lines network went. 

Aurora is the Dunedin Council owned network that serves Dunedin, central Otago, and Queenstown Lakes. As the Commerce Commission said here (p7) in March, "Aurora’s ageing network has been inadequately maintained due to underinvestment going back many years. As a result, it is providing an increasingly less reliable service to consumers. The average number and duration of outages has risen significantly over the past 10 years and would continue to worsen if action is not taken". Sound like the water problem? It does, doesn't it.

And the answer is a form of revenue control (Aurora is council owned, rather than consumer trust owned, so falls under the revenue control regime). The Commerce Commission has approved a 'customised price path' or CPP for Aurora, which will allow it to raise $563 million over the next five years to spend on bringing its network up to scratch. 

As the Commission said (p5), "Our decision on Aurora’s capital spending reflects our view that it has largely made the case for the increased investment". Because it's such a big ask starting from where they were, the price increases will be phased in (p5): "To help mitigate the impact of increased bills on consumers we have decided to cap Aurora’s total line charge revenue over the five-year CPP period. Annual increases will be limited to approximately 10% per year plus or minus any changes from the Consumer Price Index (CPI) forecasts we have used". Something similar might well be needed for the water entities most behind with their upkeep.

My question is: if we've already got a policy regime that looks pretty useful at diagnosis (information disclosure) and treatment (a costed and funded remediation programme) for electricity lines businesses (and gas pipelines, plus airports are under info disclosure), who do we need to re-invent the wheel for water?