Today's ESC position paper on water pricing

May 2016

Written by James Garriock, Executive Director Insync.

After 12 years without much change the ESC today announced a major shift in the way it will appraise water plans. In a major speech to industry stakeholders to mark the launch of a Position Paper, Dr Ron Ben-David said that in effect, the old model disenfranchised customers, with the main relationship being between the waterco and the regulator. The new system it is now clear that the main relationship is between the waterco and its customers.

Watercos now have an incentive to vie for excellence in customer consultation.

The ESC has taken advantage of the changes to the WIRO to loosen the level of prescription required and take the lead in Australian regulation.

There was agreement across the industry at the ESC conference in November 2015 that the current regime doesn't give customers enough of a voice; that publishing performance and customer satisfaction data would stimulate the right behaviours, and that there is room for incentives for performance to plan.

Chairs, MDs and executives from almost all the retail water corporations listened intently for 90 minutes, learning that the permitted regulated return on equity will depend on the level of ambition in the waterco's plan. At the bottom end this will just be the cost of debt, at the top end it will be much more; it could range from around 4.1% to 5.3%...and this depends on "ambition". There will be four labels applied to "ambition": Basic, Standard, (where most are today for WP3) Ambitious, and Leading. Watercos will be asked to provide a self-assessment of which category they are in in their proposal.

The ESC will never rate a proposal more highly than the waterco assesses itself. However, if a waterco over rates itself it will be punished, being permitted to recoup a lower return on equity percentage than if it had been more realistic.

In summary, this provides three levers: there is the incentive to be ambitious which we've already talked about. There is an Accuracy incentive, i.e. the best they can do is by accurately rating themselves. The third incentive is Anti bluffing, if a business knows it is a standard submission but tries to bluff then there is a severe financial punishment. Of course if a proposal is below par then the commission reserves all rights, e.g. to make a one year submission. They don't expect any of these, obviously.

"Ambition" refers to the acronym PREMO: performance, risk, engagement, management and outcomes. This is a mechanism for the regulator to encourage watercos to be well run and go above and beyond. Engagement refers to the fact that the ESC will never tell watercos how to engage with customers but will use a set of five principles to assess the quality of consultation.

Price submissions MUST now demonstrate how customer views have been taken into account. However, the board must still make the decisions and is not the slave of customer views.

The Chair then showed us a model of engagement quality similar to that used to assess rate cap variation proposals from local government. It was extremely kind of Ron to acknowledge our contribution to that model. Thanks Ron.

Watercos are now going to be officially encouraged to consult early, deeply and broadly.

We love the fact that the regulator shares its thinking with the industry and is palpably open minded. One thing yet to be decided is whether to allow intra period adjustments, for example when the ESC marks a proposal down but then turns out to be wrong; or when they find out they've been bluffed and want to reserve the right to step in and reduce the allowed return on equity.

Chris Hutchins then talked about flexibility. He acknowledged that businesses are very different but are subjected to the same Appraisal processes. It was noted that the councils which applied for a rate cap variation this year were of vastly different sizes, but that the quality of the submission was not correlated either to the size of the council or the size of the variation sought.

The ESC also foreshadowed more customer metric reporting. For example, each regulated business might nominate half a dozen of the most relevant indicators for them. They are also contemplating an industry wide customer satisfaction survey. These mechanisms are designed to encourage customer focus.

There is also scope to expand the GSL scheme. Businesses are instructed to expand and test their GSL scheme and this should be a key component of customer satisfaction efforts. The ESC wants more revenue to be at risk for breaches.

The ESC will fast track great submissions, it will reserve the right to ask for a re write, and it expects fast tracked businesses to advertise that fact, i.e. it thinks businesses should put a reputational value on being fast tracked.

The review process will have three stages: evaluation, verification, and public consultation. Good submissions can jump from stage one to stage three.

Submissions will be in September 2017. Fast tracked submissions will be announced by December 2017, standard decisions will be in March 2018, and final decisions will be in April be June 2018.

There's no doubt that this new regulatory framework puts the 16 retail businesses into competition with each other.

Here's a summary of the main differences between the old and new framework:

  • More customer consultation
  • More clarity on what service levels each business is changing.
  • More connections between customer preferences and the proposal
  • Greater degree of accountability for outcomes.

You can still have a say in all this, submissions can be made up to the end of July.