Online Public Hearing – Our draft report on Central Coast Council’s water prices from 1 July 2022

Why does Central Coast Council have to answer to 2 sets of regulations when councils across NSW manage their water supplies under one Act only?

Central Coast Council is unique in having functions as a council under the Local Government Act 1993 (NSW), like other local councils, and also functions as a Water Supply Authority (CCC Water) under the Water Management Act 2000 (NSW).

CCC Water is a relatively large utility serving about 140,000 customers and supplying about 31,000 megalitres of water (ML) each year. After CCC Water, the next largest local water utility in NSW is Shoalhaven, which is substantially smaller, with about 50,000 customers and supplying about 15,000 ML per year.

By comparison Hunter Water services about 280,000 customers and supplies 64,000 ML per year and Sydney Water services about 2.1 million customers and supplies about 524,000 ML per year. Hunter Water and Sydney Water are regulated under the Hunter Water Act 1991 (NSW) and the Sydney Water Act 1994 (NSW) respectively. Essential Water in Broken Hill is also a Water Supply Authority.

There are large infrastructure and network costs involved in providing water, wastewater and other water-related services. It is generally more efficient for these services to be provided to a specific area by one water utility rather than customers having a choice of service provider. However, this means that the provider has monopoly power and customers have no choice about who supplies their water.

Our role is to independently set prices for certain water businesses to reflect the efficient cost of providing services and ensure fair prices for customers. Our role in setting the maximum prices CCC Water can charge its customers for water, wastewater, and other water-related services is set out by the Independent Pricing and Regulatory Tribunal Act 1992.

Tools used by IPART to monitor and assess performance are not available in the system being discussed, why can these not be implemented so that there is a more fair costings between water authorities can be more equitable?

Operating licensing provisions are in place for Sydney Water, Hunter Water, and WaterNSW.

Operating licences can set, among other things, performance standards and requirements for reporting and auditing. 

The decision whether to put a licensing regime in place does not sit with IPART, this is a matter for the NSW Government to determine.

We also note that, as a local water utility, like other local councils, CCC Water is also subject to some additional regulatory oversight from the Department of Planning and Environment.

Would or could the water charges have been different if there wasn’t an amalgamation?

IPART in the past set maximum prices for water, wastewater and other services for the former Gosford City Council and the former Wyong Shire Council. it did this for the last time in 2013.

In 2019, IPART set prices for the amalgamated CCC Water. In the 2019 Determination, we harmonised water prices between the former councils as we acknowledged that both councils operated a Joint Water Supply System. We decided that the fixed costs of capturing, storing and transporting water should be shared equally among customers. However, we decided to continue charging separate wastewater prices. Our draft decision for the 2022 Determination is to harmonise wastewater prices.

If we continued to set prices for the former Gosford and former Wyong councils, we would have been required to set prices based on pricing proposals submitted to us that would justify the costs for each council’s water services.

However, we expect that a larger consolidated business should have some efficiencies compared to 2 smaller businesses. For instance, 2 smaller businesses would be ‘doubling up’ on some costs compared to a single larger business. A larger business would also have greater purchasing power. Accordingly, it is possible that prices may have been higher under the 2 separate councils.

As individual ratepayers with a limited voice in the operation of our local council, it would be appropriate for IPART to clearly demonstrate their degree of independence from the Central Coast Council and from the NSW State Government, from where their operation is financed and from where the board members and staff remuneration is sourced.

IPART is an independent authority established under the Independent Pricing and Regulatory Tribunal Act 1992 (IPART Act). The IPART Act and several other pieces of legislation, confer our responsibilities and independent decision-making authority. More information is available here.

IPART decisions are made by a Tribunal comprised of 3 permanent members appointed by the NSW Minister for Customer Service. The Tribunal publicly disclose their pecuniary interests here. The Tribunal is supported by an executive leadership and Secretariat. The Organisation chart is available here, and background information on members of the Tribunal is available here.

IPART is funded through the NSW Government budget and other revenue sources. We report each year on our performance to the NSW Parliament, including the work undertaken, organisational structure and financial statements. Our annual reports are publicly available here.

Does ICAC have the ability to investigate IPART and this process or is IPART exempt?

ICAC can investigate IPART. ICAC can investigate conduct affecting public authorities, and IPART is a public authority.

Referencing the preference for a gradual increase and the intent to ensure people retain more money up front - what was the rationale for not having an even phase-in of price increases over the 4 years? 19 in the initial year is not significantly different in impact from a 25% increase upfront in the way that it will impact people.

We made a draft decision on the total amount of revenue that CCC Water needs to collect to run as a Water Supply Authority over the next 4 years. Our draft decision has led to an increase in this revenue as we consider that CCC Water needs to spend more on its services. We then considered how to spread the price increase required to provide CCC Water with that level of revenue. We could increase prices in one step upfront as suggested by CCC Water; increase prices equally in each year; or increase prices more in the first year with smaller increases each year after that.

If we increased prices equally in each year there would be less money collected in the early years of the determination period, and this would result in larger price increases in the later years (so the same total amount of revenue is collected over the 4 years). This would result in higher prices in the fourth year of the determination period than CCC Water proposed (37% higher than current bills).

Our draft decision to increase prices by 19% from 1 July 2022 followed by annual increases of 4% plus inflation, rather than make a larger initial one-off increase is also based on community feedback to our Issues Paper. Increasing prices in this way balances the impact on customers and provides them with more time to manage the impact of higher bills. It also ensures CCC Water can operate efficiently.

Our draft prices result in a larger bill increase (19%) in the first year of the determination period, followed by smaller increases (4%) for three years. Our draft price path allows CCC Water to collect the equivalent amount of money over 4 years as if we had decided to allow a one-off increase of $269 (25%) for 2022-23 with prices then to increase only by inflation from 2023-24.

Compared to increasing prices equally in each year, our draft price path reduces the impact on customers in the fourth year. A larger increase in the first year allows for smaller increases in the following 3 years. Further explanation of our draft prices and bills can be found in our Fact Sheet and Draft Report.

In seeking feedback on our Draft Report we have consulted on whether customers still think phasing in the price increase is the right approach, or whether they would like more gradual phasing, even if that results in higher prices in the final year of the determination.

• Does the increase in fees relate to the projected population on the Central Coast? Are current residents paying for services for future residents?

• As the many of the upgrade cost are related to future development, why should the existing ratepayers and resident bear this cost?

New infrastructure required as a result of population growth is funded by developer contributions. These are upfront charges that water utilities levy on developers to recover part of the infrastructure costs of providing water, wastewater and/or stormwater infrastructure to new developments. They can ensure existing customers do not face higher costs as a result of new development, signal the different costs of providing services to different locations, and enhance the potential for competition in the provision of water and sewerage services to new developments.

In setting prices for CCC Water, we consider the cost of providing water over the next 4 years (the determination period) which includes how much water we expect CCC Water to provide over the period. We consider by how much the demand for water services would increase and this is driven by growth in customer numbers in the Central Coast and changes in water use. Our draft decision was to accept CCC Water's proposed customer growth of about 1% per year.

This customer growth would mean greater customer numbers and higher demand. In our approach for setting prices, greater customer numbers have the effect of reducing water prices, through lower service charges, as costs are spread across more customers. This is because a large proportion of CCC Water’s costs are fixed and do not vary with increases in the number of customers supplied. Our prices take into account both current and future water use over the next 4 years. Current residents and future residents will be subject to the same service and usage charges during the determination period.

Our method of setting prices ensures that costs are paid by the customers that benefit from them. This is because the cost of capital works is recovered over the expected life of the asset. This can range from 5 years (for some information technology), to over 100 years for some assets. Under this model, current prices are also covering the costs of existing assets. In future, as the population increases, the costs will also be divided among more users.

Asset upgrades can increase capacity for future populations. They can also improve service delivery to current customers and may reduce risks and improve environmental outcomes.

It does fairly starkly illustrate the issue with the increase being mostly recovered through fixed service charges which does potentially disproportionately impact lower usage households and significantly reduce people’s ability to control the impact on their bills through their usage. I note that in the Draft IPART indicated this was not in line with the community preference. Is it possible to present an option where a greater proportion of this increase is recovered through usage charges?

In setting the draft water usage and service prices, we have considered and balanced a number of matters. including customer preferences, customer bill impacts, and other matters as required under the IPART Act. We also considered a number of pricing options and the resulting bill impacts.

In response to our Issues Paper, some people raised concerns over the balance of water usage prices and fixed service prices, arguing that water usage prices should be increased, and service prices reduced to encourage water conservation and give customers greater control over their bill.

We accepted CCC Water’s proposed water usage price increase and made a draft decision to increase the water usage charge to $2.27/kL. This would lead to a comparatively:

• smaller percentage increase in bills for household customers with lower usage, for example, a pensioner living on their own

• larger percentage increase in bills for household customers that need to use more water, such as large families.

While further increases to the water usage price may further reduce the percentage increase in bills for household customers with lower usage, it would make the increase in bills for other customers even larger.

We generally try to ensure that we set prices:

• to recover enough revenue to cover the efficient costs of CCC Water delivering its services

• that are cost-reflective and are structured to match CCC Water’s cost structures so that they send appropriate price signals to customers and CCC Water.

Our draft decision was to set the variable water usage price based on CCC Water’s estimate of the long-term cost of supplying water, also known as the long run marginal cost (LRMC) of water supply. This helps to send signals to customers about water consumption and encourages CCC Water to adequately invest in its water supply infrastructure to be able to meet the needs of its customers now and in the future. The amount of water used by a household tends to be driven by the number of people living in the household. Therefore, large households may use less water per person but still pay higher bills if too much emphasis is put on the variable charge.

The fixed water service prices we set under our draft decision recover the remaining costs (or the fixed costs of providing the service). The draft price increases to the fixed service price from 1 July 2023 are largely driven by increases in operating and capital costs. These higher fixed prices reflect that most of the higher costs CCC Water expects to incur are fixed and do not vary with the amount of water its customers use.

As outlined in our Draft Report, we also used an alternative method to calculate the LRMC for CCC Water which we consider is likely to provide more stable and accurate estimates. We consider CCC Water’s modelling leads to the LRMC being overestimated, with our alternative modelling suggesting that CCC Water’s LRMC of water supply is likely to be lower than CCC Water’s estimate, at about $1.50/kL However, CCC Water’s estimates are comparable to recent LRMC estimates for Sydney Water and Hunter Water.

If we were to reduce the water usage price to better align with our estimate of LRMC, the resulting increase in service prices would be substantial (tripling from 1 July 2022), with water bills for customers that use small amounts of water and pensioners likely to be most affected.

Our draft decision was therefore to accept CCC Water’s proposal to increase the water usage price slightly, rather than reduce it in line with our alternative modelling. This helps to ensure customers that use less water save more money and prevent even larger increases in water service prices.

What scrutiny did IPART undertake regarding the percentage of corporate overheads of general council being charged to council water business as it is a significant operating cost?

We reviewed the level of overheads as part of our cost review to ensure that the overheads customers pay for through water prices are not excessive.

As part of IPART’s role in determining prices, we consider the efficient operating costs and then how much can be recovered over the next 4 years. CCC Water is responsible for allocating this money between different cost categories.

To assess efficient operating costs, we calculated an efficient benchmark for the base expenditure. We then identified genuine changes that require additional spending compared to the benchmark. Finally, we considered factors such as growth, demand and the cost of inputs. Our draft decisions do not provide a line by line budget for CCC Water.

Our Draft Information Paper – Operating and capital costs provides further detail (pages 9-11).

In terms of environmental consequences, has IPART considered council's water security plan and the proposal to bring forward substantial expenditure on desalination substantially sooner than demand projections indicate necessary?

As part of IPART’s role in determining prices, we consider efficient costs and then how much can be recovered over the next 4 years. CCC Water is responsible for allocating this money between different cost categories.

To determine efficient capital expenditure, we assessed a group of proposed capital projects to help us form a view on how much CCC Water can collect through prices.

A desalination plant has not been part of this assessment and has not been factored into our draft prices because the council’s Water Security Plan indicates that such a project is still many years away from the delivery and commissioning stages. If CCC water proposed a desalination plant in the future, we would consider the merits of the proposed project at that stage. We would expect CCC Water to provide evidence of community consultation as part of developing its plans for this type of investment if it was proposed.

In making our draft decisions, we considered the need to maintain ecologically sustainable development.

In terms of environmental consequences and water security, we expect CCC Water to consult with the Environment Protection Agency and Department of Planning and Infrastructure as needed. We also consult with these agencies during our review.

Is IPART convinced (or rather, all but convinced), CCC’s request for a 34% increase in total over the subsequent years, is genuinely, justified?

We do not consider all of CCC Water’s requested increase has been justified. Our draft decisions on costs and prices are lower than CCC Water proposed because we did identify opportunities for cost savings and improvements in efficiency.

We consider that costs need to increase to ensure CCC Water can provide safe, secure, and reliable services to its customers – now and in the future.

CCC Water’s pricing proposal from September 2021 requested $209 million per year over the next 4 years to cover its forecast operating and capital costs. This is 28% higher than the costs we allowed when we last set prices in 2019 and would have resulted in a 35% increase in the average bill for a typical household.

We reviewed CCC Water’s proposed spending over the next 4 years and considered advice from our independent expert consultants. Our draft decision is that CCC Water’s efficient costs are $194 million per year over the next 4 years. This is 17% higher than the costs we allowed in 2019, but 7% lower than CCC Water proposed. Our draft decisions would result in the equivalent of a 25% increase in the average bill for a typical household. More information on draft prices and bills is available in our Fact Sheet

https://www.yourvoiceourcoast.com/WSGosfordCBD.  

How come CCC hasn’t brought this funding for water and sewer upgrades to light sooner instead of pushing for rate rises consistently to the community?

In our expenditure review and assessment of revenue requirements, we have taken into account grant money that CCC Water receives and expects to receive. Where capital projects are funded from other sources such as grants, these costs are not included in prices.

Has IPART come to the realisation that Central Coast Council and its people are incapable of providing water services to the CCC region and giving them more money is a waste of time and an unreasonable impost on ratepayers.? This so called 2 years review is just kicking the can down the road while ratepayers are slugged by this incompetent and corrupt council. When does IPART realise that enough is enough and what is the long term option?

We have set prices to allow CCC Water to recover its efficient costs. Our proposed review after 2 years would help to hold CCC Water to account for improving its performance for its customers. Our assessment of changes in performance would inform decisions on the need for any longer-term approaches, to ensure service levels that meet the communities’ expectations.

We expect we would make our recommendations to the Minister for Local Government to take further action.

Question about the declared drainage area and who has an exemption and why?

The current stormwater charge, set under the Water Management Act 2000 (NSW), may only be levied in declared drainage areas. These areas must be declared by the NSW Minister for Lands and Water.

The area west of the M1 in the former Wyong LGA is not part of a declared drainage area, and properties in this area are not levied the stormwater charge. This was a decision by the former Wyong Shire Council at the time it sought the declaration to be made. The former Gosford LGA was entirely declared a drainage area.

Central Coast Council currently levies an annual stormwater drainage charge on household and business customers in the declared drainage area within the council’s boundaries. A map of the declared drainage area is available here (on page 29).

As outlined in our Draft Report, in IPART’s view, all of CCC Water’s and the council’s stormwater services should be funded from local government rates. These services provide benefits to the whole community not just the individuals who pay stormwater bills. Stormwater services allow people to move around after heavy rain, for example, to go to the shops and do errands. Therefore, we think they should be funded through local government rates like other services that benefit the whole community

Concern that it will reverse to an area-based charge for all properties over one hectare.

Our recommendation is that stormwater costs be recovered through the local government rates or charges. The form and structure of local government rates or charges is ultimately a matter for the council to determine in consultation with its ratepayers (subject to the requirements of the Local Government Act 1993).

Are we setting a possible precedent for stormwater charges to be used in other local government areas in NSW? I’ve tried to find out whether I know they pay water rates in other areas, but I’m not sure whether farms in rural areas in other LGAs in NSW actually pays stormwater rates.

Councils may recover the costs of providing stormwater services in several ways including through ordinary rates or an annual charge for stormwater management services. There are different requirements that apply depending on how the council recovers the costs.

This is ultimately a matter for each council to determine in consultation with their ratepayers (and subject to the requirements of the Local Government Act 1993).

• Considering IPART is concurrently reviewing CCC rate variation request and CCC water pricing decision, and that IPART have decided it is more appropriate for stormwater charges to be recovered through rates, I am interested to know why IPART has not decided to implement the change to recover stormwater charges through rates during this decision (particularly as it would mitigate bill impacts on water, which are significant)?

• Stormwater used to be in charged in general rates. then it moved into the water rates. what makes you think that our inefficient council won’t transfer it straight back into normal rates?

The cost of providing all future stormwater services is not included in the special variation rate increase IPART is currently considering. If the council considered in the future that it could not meet the cost of stormwater from its rates, it would need to consult with the community and one option might be to put a case to the Tribunal for a special variation.

We decided to set draft prices for the 2022 determination period to provide sufficient time for CCC Water to consult with its customers, develop a new rates system for funding stormwater services through local government rates and consider the need for applying for a special variation to IPART. We also made a draft decision to set stormwater prices to $0, should the 2022 Determination be extended beyond 30 June 2026.

In November 2021, the council also passed a resolution to demonstrate its commitment to fund all stormwater services through local government rates from the next determination period, which the council proposed commence on 1 July 2026. By this time, the council intends to transfer the stormwater drainage charge (that IPART currently sets for CCC Water) to a stormwater drainage special rate variation or equivalent under the Local Government Act. For its next pricing proposal CCC Water would need to justify why stormwater charges should not be zero if it proposes that IPART set stormwater charges again.

Will the change to stormwater billing from 2026 mean a further rate increase from that year? Will that rate increase need to be another SRV (i.e. over the peg) because it is a change to the way CCC rates that has not been taken into Mr Hart's planning to repay commercial loans? Or will it require more asset sales and service cuts to the local government side of the CCC 'business'?

While transferring the funding of all stormwater services to be through local government rates would mitigate water bill impacts, customers would potentially pay higher local government rates from 1 July 2026.

To cover its stormwater costs the council would need develop a new system for funding stormwater services through local government rates or charges and consider the need for applying for a special variation to IPART. The council may also consider whether to raise funds for stormwater services by reducing the costs of other local government services.

If the council decides to apply for a special variation, it would be required to consult with its ratepayers.

Why are the valid issued raised by the person at the beginning of the Zoom, but before the recording commenced, not properly addressed? Though residents will all have different approaches to expressing their valid concerns about proposed collective increases in rates and charges, and these should be addressed, and not just shut down.

We had a stakeholder join us prior to the commencement of the public hearing. We had not begun recording the hearing at this stage, so unfortunately this was not captured in our video recordings or transcripts. The stakeholder expressed dissatisfaction, concern and frustration about our draft decisions, draft price increases, customer affordability, as well as CCC Water’s poor financial performance and lack of accountability, and questioned IPART’s independence. Shortly after expressing their view, the stakeholder chose to leave the public hearing. We have separately responded to this individual. The stakeholder also commented that IPART had not returned phone calls or answered emails. We have responded to the individual and we are looking at our processes to determine whether they could be improved going forward.

IPART carefully considers all submissions and stakeholder input in weighing up its decisions. We are conscious of the potential impact on customers arising from our draft decisions on CCC Water’s maximum water prices. We have set prices to allow CCC Water to recover its efficient costs. Our role is to ensure customers pay no more than necessary to provide water, wastewater and other water-related services. We understand that the draft price increases are large. However, this reflects the costs that are required to provide these services, and we have also been told by customers that these services need to improve.

Stakeholder feedback is critical to our process. We consider every submission and all information provided to us by CCC Water, customers, ratepayers and other interested parties. In making our draft decisions, we carefully weighed up the evidence, feedback and advice from our expert consultants. Our decisions may not satisfy all stakeholders in every respect, but we are committed to setting prices that are in the best long-term interest of customers. We will carefully consider all public hearing comments, feedback and written submissions on our Draft Report before releasing our final decisions in May 2022.

While a significant increase over current prices, our draft prices are lower than those proposed by CCC Water. We set the draft prices to recover the efficient costs that a well-run utility should incur in delivering sound, sustainable water and wastewater services into the future.

Both the draft prices and the efficient costs they are set to recover are lower than proposed by CCC Water. In today’s dollars, the typical customer would pay around $370 less over the next 4 years than CCC Water proposed in July 2021. We entered this process with impartiality and at no stage was this pre-determined.