Urban water regulation reform

A report prepared for Infrastructure Australia

9 Dec 2017

Infrastructure Australia (IA) plays a key role in providing advice, and advocating for, reforms to improve the financing, delivery and operation of infrastructure. IA has commissioned Frontier Economics and Arup to prepare this report to inform IA’s views on the optimal settings required for economic, environmental and health regulation in the Australian urban water sector, and the opportunities for regulatory improvement.

It is important to recognise that jurisdictions have made significant progress in implementing far-reaching reforms to the economic, environmental and health regulatory frameworks governing urban water over several decades. The National Water Initiative and related measures were key drivers of change, although national approaches to health regulation pre-dated these microeconomic reforms.

The way in which States and Territories have implemented these reforms has also varied considerably, reflecting different views by State Governments on appropriate policy settings and other factors.

In order to assess progress to date and identify what more needs to be done, this report identifies the elements of minimum standard and best practice economic, environmental and public health regulation of the urban water sector. It then assesses the extent to which each jurisdiction meets these standards.

In doing so, we have interpreted ‘minimum standards’ as being the minimum acceptable regulatory framework to address the objectives of economic, environmental and public health regulation respectively. Most fundamentally this requires that a regulatory framework exists and applies to the urban water sector across each jurisdiction, and is effectively enforced in practice.

In contrast, a ‘best practice’ regulatory framework sets a higher (and evolving) bar—it represents an ideal regulatory framework encompassing all of the features which are considered to reflect current best practice. In this regard, ‘best practice’ regulation does not necessarily mean a regulatory framework which require the highest possible service standards, if attaining these standards would cost more than the value of the benefits these higher standards would generate for society. Rather best practice regulation should mean more effective and effective regulation that results in more flexible, customer-orientated and lower cost outcomes for the community.

As shown in Figure 1, while many of the jurisdictions are generally achieving key elements of the minimum standard for economic, environmental and public health regulation, there is significant variability within and between the jurisdictions. In addition, while the minimum standards are generally being achieved with respect to environmental regulation, there are some instances where economic and health regulation is not deemed to meet minimum standards—for example, the complete absence of urban retail water price regulation in Queensland and the absence of independent economic regulation in regional urban centres in NSW (i.e. IPART's remit does not include regulation of regional urban water suppliers) means there are opportunities for improvements to ensure economic regulation in these states meet minimum standards.

As best practice represents a higher bar, fewer regulatory frameworks have been assessed as meeting best practice in most respects. This highlights that even where many regulatory frameworks have improved over time to meet minimum standards, there is considerable scope for further improvement.

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