Commission of Inquiry on Water Pricing Bill

Second Reading

Adjourned debate on second reading.

(Continued from 11 February 2015.)

The Hon. G.A. KANDELAARS (17:30): Today, I will set out the government's reason for opposing this bill.

Members interjecting:

The Hon. G.A. KANDELAARS: In response to the extraordinary drought, this government undertook a wide—

Members interjecting:

The Hon. G.A. KANDELAARS: —if you want, I will start again.

The PRESIDENT: Order! The Hon. Mr Kandelaars has the floor.

The Hon. G.A. KANDELAARS: In response to the extraordinary drought that we had, this government undertook a wideranging review to ensure South Australia's water security. The result was the Water for Good plan which sets out a range of actions to ensure our water future. These actions include developing a state-based access regime and subjecting monopoly water and wastewater service suppliers to independent economic regulation.

The Legislative Council has before it another bill which will establish a state-based access regime; one that is consistent with the requirement of the National Competition Policy for certification. There is no need for this bill to establish another review on the merits of third-party access. The government accepts the merits and the recommendations that were contained in Water for Good.

Consistent with Water for Good, the government subjected SA Water to independent economic regulation by the Essential Services Commission of South Australia in 2013. The first price determination was made in May 2013, and the second is scheduled for 2016. ESCOSA (as it is commonly known) has applied the regulatory rules that form part of the National Water Initiative. That means the allowable revenue is determined by assessing 'building blocks' that make up the cost of SA Water drinking water and sewerage services.

ESCOSA has a very important job that it has undertaken rigorously and independently. ESCOSA considered in its first determination $1.4 billion of proposed operating expenditure and $1.1 billion of new capital expenditure. In its May 2013 determination, ESCOSA reduced SA Water's capital expenditure allowance by $165 million, or 14.4 per cent, and reduced SA Water's operating expenditure allowance by $145 million to 10.3 per cent.

There is no need for an inquiry about institutional arrangements that have served, and will continue to serve, South Australia well. There are two regulatory building blocks that could be considered further. These are the regulatory asset base for infrastructure in existence before ESCOSA became the independent economic regulator, and the regulatory rate of return.

Indeed, it is the regulatory asset base for existing infrastructure that has been the subject of much public comment. However, this government has followed the regulatory rule book for managing a transition from government price setting to independent economic regulation. Consistent with regulatory practice in other jurisdictions, the government has set the regulatory asset base and let ESCOSA be free to determine the regulatory rate of return. Consistent with the regulatory rule book and the practices in other jurisdictions it is standard practice for transitioning to independent economic regulation to involve an element of back-solving.

The outcome that the government was targeting was set out in the 2012-13 regulatory statement. It stated that CPI-like price increases for SA Water's drinking water services are expected from 2013-14. The government also took the view that at the time the benefits from reducing operating and capital expenditure should be passed on fully to consumers.

It is true the government's expectation was that this approach would lead to a reduction in the regulatory asset base, but the time between the draft and final determination saw significant reductions in observable rates of return which meant applying this approach actually led to an increase in the regulatory asset base. It was appropriate for the government at the time to ask ESCOSA to identify the impact of a range of different scenarios. Further, it was the government's role to consider these scenarios and balance the impact on customers and the budget.

The ultimate outcome of this process is that ESCOSA identified efficiencies that could be achieved in SA Water and the regulatory asset base was set in a way to ensure that customers benefit from these efficiencies through lower prices. In 2013-14, water prices fell by 6.4 per cent with CPI increases in 2014-15 and 2015-16. But consideration must be given as to what would be the impact of this bill on an investment environment in South Australia. It would signal to investors a willingness of the parliament to overturn key regulatory parameters which underpin investment in regulated utilities.

I understand such an approach is unprecedented in Australian regulatory practice and, as such, its impact would not be limited to the water sector. To competitors, it would signal that the cost structure of SA Water is uncertain, substantially increase the risk to new market entrants, and potentially discourage them. This runs counter to the government's policy intentions and objectives of the Water Industry Act of encouraging new entrants into the water industry.

In such a risky and uncertain environment, investors in the water industry and perhaps other industries would avoid South Australia unless higher rates of returns were available I urge the parliament to be careful in considering the impacts on investment from embarking on a path that potentially increases investors' perception of sovereign risk in South Australia.

My final point is that ultimately the inquiry contemplated by this bill is futile. What the commentators have neglected to identify is that ESCOSA's decision, which is influenced by the regulatory asset base, is one of the factors that influences the final price charged by SA Water. Another factor is that SA Water continues to receive substantial community service obligation payments from the budget amounting to over $650 million over the forward estimates. If the regulatory asset base is reduced, then the return to government will be reduced.

In conclusion, the institutional structure adopted by the government is based on sound regulatory precedent and is serving South Australia well. As I have demonstrated, ESCOSA has been successful in lowering South Australia's water and sewerage service prices. Whilst writing down the regulatory asset base appears attractive to some commentators, it would have serious impacts on the investment environment in South Australia and would materially challenge the ability of the government to fund water community service obligations and concessions. The best way to achieve a continued downward pressure on prices is to allow for ESCOSA to do its job.

The Hon. R.L. BROKENSHIRE (17:40): I was intending to be reasonably brief, and after the nonsense and trash in the contribution from the government I will be even more brief, because clearly we need to support this bill. Frankly, for a moment when I was listening to that I thought it was next Wednesday, 1 April. That is when I thought it was, but, sadly, it is actually 25 May, and therefore the government believe their own rhetoric and nonsense.

I will just say a couple of things. ESCOSA has never been independent. The community has been hit from left, right and centre on exorbitant price increases in water and sewerage costs over a significant period of time. The government saw fit to try and make their own direct balance sheet look better by flicking over $2 billion of core debt to SA Water in recent times. Tomorrow, we will probably debate third-party access, which is something I have heard being discussed in this parliament for over a decade.

They are not serious about any of this. This bill is an opportunity to actually open up long-term opportunity scrutiny and, hopefully, a better direction for South Australians on one of the exorbitant utility costs that they pay on a quarterly basis. I commend the member for moving the bill, and we will be supporting it. If there is a division, we will be voting with the opposition.

Bill read a second time.

Committee Stage

Bill taken through committee without amendment.

Third Reading

The Hon. J.M.A. LENSINK (17:43): I move:

That this bill be read a third time.

Bill read a third time and passed.