ERA report urges private competition in water

03/12/2007 - 15:42

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Western Australia's Economic Regulation Authority has called for the establishment of a new government agency to faciltate private sector investment in the development of new water sources.

ERA report urges private competition in water

Western Australia's Economic Regulation Authority has called for the establishment of a new government agency to faciltate private sector investment in the development of new water sources.

The ERA believes its proposed 'options based' approach would make it easier for smaller developments to proceed, which means the government would be able to defer large investments.

"Crucially, the decision to proceed with construction of the second desalination plant, currently set for late 2008, could be postponed until uncertainty regarding future inflows (to dams) is reduced," the report said.

The ERA's draft report on competition in the water industry rejected an alternative proposal by the Water Corporation, which was also designed to facilitate private sector investment but gave the Corporation a central role in evaluating new opportunities.

ERA chairman Lyndon Rowe said the Water Corp proposal created some inherent conflicts that would discourage private sector investment.

"Without that independent body you wouldn't get the private sector investing in new sources," he told WA Business News.

The proposed Independent Procurement Entity would be responsible for ensuring that new water sources were developed in time to meet growing demand.

The level of security thought necessary would be set by Government.

Mr Rowe said the draft recommendations, if implemented, would increase competition by creating greater opportunities for private enterprise to supply water and wastewater services and, so, potentially improve outcomes for consumers.

"Their introduction would not lead to radical reforms that would dramatically alter how these services are currently provided," he said.

"However, in an uncertain climate it is more important than ever to ensure that the water industry is structured in a way that is as innovative as possible."

The inquiry also found that:

- a State-based third-party access regime should be implemented in WA;

- retail contestability was currently inappropriate for small customers but should be considered for large customers;

- on the Gnangara Mound, finalisation of the Statutory Water Management Plan and Gnangara Mound Sustainability Strategy is critical;

- there are synergies between the Corporation's bulk water operations and distribution functions which indicate it may not be appropriate at this time to separate these functions; and

- individual members of irrigation cooperatives should be able to trade with others outside their area if they wish.

The inquiry was carried out in response to a written request to the Authority from the Western Australian Government on 6 July 2007.

 

Extracts from the ERA Draft Report executive summary appear below:

The effect of the draft recommendations would be to increase competition by creating opportunities for private enterprise to supply both sectors and, so, potentially improve outcomes for consumers.

Acceptance of the draft recommendations would not lead to radical reforms that would dramatically alter how the sectors currently provide their services. The changes focus on introducing innovation in the supply of bulk water to Western Australia's water utilities which, in part, is consistent with the approach taken by the State's biggest supplier, the Water Corporation.

In the short term, therefore, it is likely that investment needs to be coordinated by a centralised entity. The Water Corporation has proposed a procurement model that, while centralised in nature, facilitates private sector investment in the water industry by allowing the private ownership of sources. Under the proposed model, the Corporation would continue to 'prove-up' a source by securing the planning and environmental approvals. The private sector would then be free to bid for development and ownership of the source. Alternatively, the private sector could offer other source options. The Corporation has decided not to bid for ownership of future sources because of the potential conflict of interest in being both purchaser and bidder.

The water and wastewater sectors have characteristics that mean the structure of the market will, at least in the short-term, be different to other utility industries such as gas and electricity. A key difference arises from uncertainty regarding water supplies; specifically, the amount of inflow into dams and aquifers.

In the short term, therefore, it is likely that investment needs to be coordinated by a centralised entity. The Water Corporation has proposed a procurement model that, while centralised in nature, facilitates private sector investment in the water industry by allowing the private ownership of sources. Under the proposed model, the Corporation would continue to 'prove-up' a source by securing the planning and environmental approvals. The private sector would then be free to bid for development and ownership of the source. Alternatively, the private sector could offer other source options.

The Corporation's proposed procurement model, while offering greater potential for private sector involvement, suffers from several weaknesses.

An alternative is to place more emphasis on an 'options' approach to planning. If a comprehensive options approach was applied at present, it is possible that the ordering of future sources would change without compromising system security. Greater weighting would be given to a range of smaller, more flexible water source options rather than larger, more inflexible, water source projects.

Crucially, the decision to proceed with construction of the second desalination plant, currently set for late 2008, could be postponed until uncertainty regarding future inflows is reduced.

Placing more emphasis on an options approach to planning would also allow for better information to be gathered on the sustainability of abstractions from the Gnangara Mound, the completion of regional water management plans, and the establishment of an effective water trading regime.

Overall, the Authority has examined the Corporation's proposed procurement model and considers that an alternative arrangement, using a comprehensive options framework, and involving an independent procurement entity (IPE), would be a more effective way of ensuring that the least expected cost of balancing supply and demand is achieved, subject to the constraint of maintaining security of supply under a worst-case scenario.

Importantly, the IPE would clarify the role of government in the procurement process. The Government would provide a set of system security requirements that the IPE would then apply. Independence from government provides certainty for the private sector, transparency in decision making, and consistency in approach.

The IPE would be complemented by an access regime to allow for the private sector to develop projects outside of the formal procurement process, should it be commercial to do so.

The Authority considers that separation of the procurement and planning function is the main reform to the Corporation's South West operations that needs to be considered at this stage. The presence of an IPE would mean that it is not necessary to separate out the bulk water functions from the rest of the Corporation.

The Authority's consultants have advised that there could be significant cost efficiencies from combining the Corporation's operations in its rural and regional areas with Horizon Power's operations (where there is an overlap of operations).

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