Water Ways: Inquiry Into Reform of the Metropolitan Retail Water Sector
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Water Ways: Inquiry into Reform of the Metropolitan Retail Water Sector A draft report for further consultation and input December 2007 © State of Victoria 2007 This draft report is copyright. No part may be reproduced by any process except in accordance with the provisions of the Copyright Act 1968 (Cwlth), without prior written permission from the Victorian Competition and Efficiency Commission. Cover images reproduced with the permission of Melbourne Water. ISBN 978-1-921337-16-1 Disclaimer The views expressed herein are those of the Victorian Competition and Efficiency Commission and do not purport to represent the position of the Victorian Government. The content of this draft report is provided for information purposes only. Neither the Victorian Competition and Efficiency Commission nor the Victorian Government accepts any liability to any person for the information (or the use of such information) which is provided in this draft report or incorporated into it by reference. The information in this draft report is provided on the basis that all persons having access to this draft report undertake responsibility for assessing the relevance and accuracy of its content. Victorian Competition and Efficiency Commission GPO Box 4379 MELBOURNE VICTORIA 3001 AUSTRALIA Telephone: (03) 9092 5800 Facsimile: (03) 9092 5845 Website: www.vcec.vic.gov.au An appropriate citation for this publication is: Victorian Competition and Efficiency Commission 2007, Water Ways: Inquiry into Reform of the Metropolitan Retail Water Sector, draft report, December. About the Victorian Competition and Efficiency Commission The Victorian Competition and Efficiency Commission, which is supported by a secretariat, provides the Victorian Government with independent advice on business regulation reform and opportunities for improving Victoria’s competitive position. VCEC has three core functions: • reviewing regulatory impact statements, measurements of the administrative burden of regulation and business impact assessments of significant new legislation • undertaking inquiries referred to it by the Treasurer, and • operating Victoria’s Competitive Neutrality Unit. For more information on the Victorian Competition and Efficiency Commission, visit our website at: www.vcec.vic.gov.au Opportunity for further comment You are invited to examine this draft report and provide comment on it within the Commission’s public inquiry process. The Commission will be accepting submissions commenting on this report and will be undertaking further consultation before delivering a final report to the Government. Submissions may be sent by mail, fax, audio cassette or email. By mail: Water Inquiry Victorian Competition and Efficiency Commission GPO Box 4379 MELBOURNE VICTORIA 3001 AUSTRALIA By facsimile: (03) 9092 5845 By email: [email protected] The Commission should receive all submissions by close of business Friday 18 January 2008. Terms of reference Reform of the Metropolitan Retail Water Sector I, John Lenders MP, pursuant to section 4 of the State Owned Enterprises (State Body – Victorian Competition and Efficiency Commission) Order, hereby direct the Victorian Competition and Efficiency Commission to conduct a review of the metropolitan retail water sector. Objective To review and recommend to the Victorian Government options to improve the structure of the metropolitan retail water sector to ensure it continues to provide secure and reliable water services at least cost to the community. This should include recommendations regarding: • the best structure to allow for the efficient and least cost provision of Melbourne’s water supply upgrades, as well as ongoing safe, reliable and sustainable water and sewerage services to Melbourne; • options to reduce costs of the metropolitan sector whilst maintaining and improving the level of service over time and ensuring it remains innovative and financially viable; • the broad staging and timing of any proposed structural reforms to the metropolitan water sector; and • any related improvements to governance and industry structure in the context of the Government’s Water Plan and climate change. Context The Next Stage of the Government’s Water Plan announced major supply projects to diversify and boost water supplies for Melbourne. These projects include reconnecting Tarago reservoir (15GL), the Sugarloaf Interconnector (75GL) and Australia’s largest desalination plant (150GL). The Government ’s Plan indicated that as a result of these projects, along with continued investments to maintain and improve water services, the average Melbourne Water bill was expected to double (in real terms) by 2012. The metropolitan water authorities – Melbourne Water as the wholesale supplier and three retail water companies, City West Water, South East Water and Yarra Valley Water – have now finalised their draft pricing proposals for the next pricing period and have advised Government of average real prices increases of between 100 per cent and 140 per cent. iv Given the potential size of the price increases, the unprecedented capital investment and the fact that the structure of metropolitan water sector has not been reviewed since it was established in 1995, the Government intends to review the current three retailer structure to determine whether costs could be reduced and capital structures reconsidered to ensure the major projects and ongoing services will continue to be delivered at least cost to the community. The review should also closely consider the impact of demand reduction on high fixed-cost water businesses. Significant efficiency and performance gains have been extracted by the retail companies in the past decade. The most effective means of maintaining and improving service performance should be considered in the course of the review. Process of the Review • The Victorian Competition and Efficiency Commission (VCEC) will undertake the review and provide a final report for Government consideration. • The review will identify and evaluate all available options to improve the efficiency, operation and performance of the sector, including through reforming the structure and/or reducing costs of the sector, and recommend a preferred option and possible next steps in its final report. • The review will be completed upon presentation of the final report to Government. Specific Issues to be Addressed The review will: • assess the extent to which the current structure and operation of three retail authorities and competition by comparison between those retailers are the best arrangements to address the new challenges facing the sector; • identify the options available to reform the current arrangements including potential structural reforms, and whether, and to what extent, additional benefits could be harnessed through the introduction of further reforms, such as retail contestability, development of competitive urban water markets etc; • assess the implications of demand variations for both pricing strategies and capital investment; • evaluate the costs and benefits of these options and recommend a preferred option for Government consideration; • identify any related improvements to governance and industry structure in the context of Our Water Our Future, The Next Stage of the Government’s Water Plan and climate change; and v • identify the timeframe and next steps for implementing any recommended reforms to the sector, including the appropriate period for an independent price determination. Outcomes/Outputs A report that provides clear recommendations on achieving: • a new water delivery structure that provides a least cost, effective and efficient service to Melbourne households and industry for the future; • fair and equitable apportionment of costs; and • means in which improvements can be made to ensure that Melbourne’s future water supplies are managed within the Government’s announced price increases. Timeframes The review will be finalised with a report to Government by the end of February 2008, with an interim report in December 2007. JOHN LENDERS MP Treasurer 21 August 2007 vi Preface The release of this draft report gives interested participants the opportunity to comment on the Commission’s analysis of reforms of the metropolitan retail water sector prior to the presentation of the final report to government. In preparing this draft report, the Commission has consulted widely with a range of businesses, government departments, local governments and individuals with an interest in the metropolitan retail water sector. Stakeholder input has greatly assisted the Commission in preparing its draft recommendations on ways to improve the structure of the metropolitan retail water sector to ensure it continues to provide secure and reliable water services at least cost to the community. The Commission invites written submissions on the draft report, especially regarding the recommendations and information requests. These submissions may address any of the issues covered. At the conclusion of consultation on the draft report, the Commission will produce a final report to be presented to the Victorian Government. The Order in Council establishing the Commission says that the Treasurer should publicly release the final report within six months of receiving it and that the Victorian Government should publicly release a response to the final report within six months of the Treasurer receiving it. The Commission looks forward to receiving feedback on the draft report. The Commissioners have declared to the Victorian Government