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IPART decision could spell the end of water innovation in NSW

One Central Park. Image: Murray Fredericks

Private water service providers and the development industry are up in arms over proposed changes to water pricing that could spell the end for innovation and competition in the recycled water market.

NSW has become a leader in precinct-based water recycling infrastructure since the Water Industry Competition Act was passed in 2006 in response to ongoing drought. The legislation created a new licensing regime for private potable, recycled and sewerage services, encouraging competition and investment in innovative water recycling businesses in order to increase non-rainfall dependent water supply.

Since WICA has been in force, developments such as Central Park and Barangaroo have dramatically cut potable water use. Barangaroo South, for example, has plans to become water positive – exporting more recycled water to surrounding areas than the amount of drinkable water consumed there. Central Park’s wastewater recycling plant saves up to 50 per cent of drinking water.

But all this could be under threat if a proposed change by the Independent Pricing and Regulatory Tribunal – pushed by incumbent state-owned water utility Sydney Water – is realised.

At the moment, drinking water is required to be purchased from a water utility – such as Sydney Water or Hunter Water – at a rate determined by IPART.

IPART’s pricing proposal would involve changing the tariff structure to a “retail-minus” approach. Under this approach the costs involved in delivering the water service from the wholesale connection to the end user would be calculated and subtracted from the retail price to give the wholesale price the private operator must pay.

According to Lisa McLean, executive manager of corporate affairs at Flow Systems, the proposed pricing changes would stifle competition.

“That tariff has proven to be in other markets anti-competitive,” she told The Fifth Estate. “In calculating the ‘minus’ component, regulators have failed to reflect the commercial realities, and therefore the tariff structure is anti-competitive.”

McLean says there are a number of international examples where retail-minus methodologies have been rejected.

“We argue that it protects the incumbent. It doesn’t work for competition.”

Due to price ring-fencing in regulations, operators like Sydney Water are unable to use drinking water revenue to progress innovation in water recycling and wastewater treatment infrastructure, making it difficult for it to make water recycling economically viable.

WICA operators, meanwhile, have managed to make it an attractive commercial proposition, which has been crucial to the sustainability outcomes of many major developments.

“We’re taking high water using communities and actually making them lower water users,” McLean says. “That’s about innovation and sustainability. And we do that because we’re harvesting every drop of water from those buildings.”

She says the potential is for water use to be reduced by up to 70 per cent in developments on lots with gardens.

Her concern is that areas like Western Sydney will be unable to benefit from the innovation made in inner-city developments if the changes go ahead, “and that we’re going to push back a decade of advancements in water innovation”.

“NSW is a global leader in water innovation, and WICA has resulted in Barangaroo and Central Park, which are these incredible water sustainable communities.”

In IPART’s view, the changes have been made to “create a level playing field”. One concern is that private operators could potentially shrink the customer base of operators such as Sydney Water, meaning that charges would need to increase to cover these losses.

It’s a position McLean refutes.

“We completely reject that. It’s one of the fundamental assumptions behind this. Because there is specific government legislation for WICA to promote this sector, why should Sydney Water count our customers as theirs? Our customers are not part of their revenue base. Our customers are WICA customers. They should be removed from Sydney Water and Hunter Water’s revenue base.

She believes the WICA market is also too small to warrant such a “heavy-handed response”.

“We’ve only got 1500 customers. At Barangaroo, there will be around 5000 customers over the next two-to-five years. It’s a tiny number of people. And it’s a fraction of Sydney Water’s revenue base.”

Developers are also concerned about the outcome of the review, and it’s easy to see why.

According to McLean, WICA providers can speed up land release by 12-18 months as they don’t need expensive and time-consuming centralised infrastructure, while having the benefit of sustainability outcomes.

The Urban Development Institute of Australia agrees, and in a submission on the proposed pricing changes, chief executive Stephen Albin said IPART’s proposed changes would have a “negative impact on affordability, liveability and connectivity”.

“The retail-minus approach is at cross purposes to the original objectives of WICA, being the creation of a contestable market in the provision of water and sewerage services, encouragement of innovation in the sector and increased efficiencies and reduction in retail prices,” Mr Albin said.

Both Flow and UDIA are pushing for a broader, holistic review of the water industry to look at the future provision of water infrastructure and the broader benefits of the WICA market to the economy, and how Sydney Water could become more flexible to encourage its own investment in innovative water solutions.

“What we want is a win-win for everyone,” McLean says.

Comments

4 Responses to “IPART decision could spell the end of water innovation in NSW”

  • This is very disappointing to hear. I am sure in areas of limited water infrastructure, distributed water reuse systems save money for all consumers in place of development and maintaining new assets. Accepting in some cases, there may be enough spare capacity to service new developments without expensive augmentation.

    Overall, it would be interesting to hear the actual figure calculated for increased costs for water customers driving this change.

    Water reuse is very important for resilient cities in times of drought.

    Supporting or even just allowing such innovation is important so new models can be proven, and used where centralised supply is cost prohibitive. There is even potential for providing such expertise internationally from Australia, as water will be a key challenge of future cities globally.

  • John Chant says:

    And more importantly, why is the irrational NSW state government supporting this anti-community-good approach by a business entity it owns and a regulator it appoints and obviously directs.
    Just another example of its lack of vision for its people. Big words – small deeds!

  • Ian Cleland says:

    The Sydney Water Board have always been the fly in the ointment when it comes to innovation and having a vision for the future.

    How many years did the board fight against rain water harvesting in your home.

    The Board controls approx 200,000 km some approaching 120 plus years old. Repair and replacement through Sewer Fix was happening at 200km/y. So a 1000 years not going to cut it. We have to have more innovation and local infrastructure of best practice. Not what what the Board sees as appropriate

  • The government owned regulator acts to increase the monopoly power of the government owned water monopolies. This is no surprise and should be apparent to any economist. The highly successful rainwater harvesting innovations (such as BASIX), which the are second largest source of water in Australia (Yes it keeps raining in cities), are encountering similar rent seeking behaviors. All sources of water are important and the synergies with society (such as waterway health, flood management, urban amenity, reduction of greenhouse gasses and so on) are vitally important (but not counted by price regulators or undervalued or dismissed). There is a pressing need for independent assessment to create modern economic structures and regulation for the benefit for whole of society. Such a process will ultimately assist all in the industry but is unlikely.

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