Not yet time for Tiaki Wai price control – opinion piece by Dr John Small

Let’s start with the obvious, before getting technical – Wellingtonians are concerned and indeed angry about their region’s water services and the actions of Tiaki Wai.

I take these views extremely seriously – times are really tough for households and increased costs can feel even higher when that water bill lands in your letterbox. 

The Commerce Commission is the economic regulator for Tiaki Wai and dozens of other water service providers. We have requested and been given additional powers to oversee and scrutinise Tiaki Wai. I want to lay out, as simply as possible, what we are doing, what may happen in the future and the current lay of the land (including the elephant in the room – prices and bills).

Our nationwide rules require Tiaki Wai to publish information that helps customers understand how well it is doing. As this information arrives, we will publish our analysis of it, which will highlight how Tiaki Wai compares to other water suppliers.

Tiaki Wai has more problems than other water organisations, which is why we are requiring it to provide us – and you – with even more information than others. This will tell us all how good it is at owning and maintaining its assets, how it plans to get better, and how it plans to spend your money. 

These plans will then be scrutinised by an independent expert, and by us, to give Wellingtonians confidence that their money is being spent wisely.

Consequences are important. This is why we asked the Government to give us even stronger powers to impose “performance requirements” on Tiaki Wai. We will use these to push Tiaki Wai to improve its services to you.

Non-delivery does have repercussions, including possible enforcement action. This can result in court-imposed financial penalties of up to $5 million per breach.

Performance requirements are new regulations that haven’t been used in New Zealand before. Our team is working on framing up these requirements right now. 

In our view, the measures outlined above will improve Tiaki Wai’s operational efficiency and force it to make better decisions about investment. It will become a better asset manager and use your money more wisely.

Here’s my commitment to Wellingtonians: We will hold Tiaki Wai accountable and ensure it spends wisely and keeps costs down. 

That leads to the elephant in the room – prices.
Our team is often asked: Why not control the amount Tiaki Wai can bill customers?

The Commission is no stranger to this topic. Since 2008, we have been responsible for enforcing controls on the earnings of the country’s natural monopolies like Tiaki Wai. Over that period, we have disallowed many hundreds of millions of dollars of revenue requests by these utilities, such as energy and telecommunications networks.

Our duty, defined in law, is to the long term interests of consumers, so we are highly aware of the risks of overcharging today’s consumers for some future benefit. On the other hand, we also allow firms to charge for investments needed to maintain reliable service.

Yes, the law does allow for price control, and we have the option to request this power. 

However, our current view is this would not actually reduce prices for Wellingtonians, at least not for the next five years or more.

We reached this conclusion by considering the ongoing costs Tiaki Wai needs to pay, such as the interest on the debt it inherited, repairing faults and leaks, and other operating costs like electricity to treat and transport water and wastewater.

To be blunt: Tiaki Wai is a high-cost business, with very tolerant (publicly funded) bankers that are allowing it to push a lot of cost recovery out into the future. 

Successive authorities in Wellington have underinvested in water assets – Tiaki Wai also now needs to start to make up for this under-investment. 

To be plain about it, the information we have shows Tiaki Wai's costs currently far exceed the revenue it collects from customers. 

In the next five to ten years, it needs to recover enough funds to meet its ongoing obligations to lenders in a more sustainable fashion. 

Due to the above factors, it would be irresponsible for us to set revenues lower than those already forecast by Tiaki Wai.

It might be necessary to regulate the earnings of Tiaki Wai in the future, but our view is it is not helpful just yet.

Under-funding water networks is in no-one’s long term interest – Wellingtonians know this firsthand.