Submission to IPART Review of Water Prices

Price increases are necessary to ensure the development of Sydney Water supplies. This submission outlines a socially equitable, market based, economically efficient method to achieve the goal of achieving a sustainable water supply for Sydney. The approach focuses on creating a market in infrastructure to both save water and generate new supplies. The delivery of water is a “natural” monopoly but choosing the ways to supply or save water lends itself to a market based system. This submission outlines how this can be achieved by describing the system, showing why it is economically efficient, socially equitable and leads to a flexible water pricing policy.

The system assumes there is a nominal allocation of water for all Sydney water users. The allocation varies depending on the characteristics of the users but is biased to a per head and most efficient usage allocation. Details of the allocation algorithms will be developed in consultation with Sydney Water and the whole community. The price of water is initially fixed at rates recommended by Sydney Water to achieve the required investment in infrastructure to deliver water, increase supply and in ways to save water. However, instead of the money for these investments going directly to Sydney Water to spend it is given as Rewards to Sydney water users according to their usage and allocation. Rewards must be spent on approved ways of saving or increasing water supply and the income from that infrastructure will go to Rewards recipients. The approved ways will include investing Rewards with Sydney water through infrastructure bonds or some other financial instrument. The system ensures that the total amount as estimated by Sydney Water to build infrastructure is spent on water infrastructure.

However, any other organisation or individual wishing to increase supply or save water will be able to compete with Sydney Water for funds from Rewards holders. The approach creates a market for infrastructure to save or increase water supply. It encourages people to use less water as they will obtain a Reward for consuming less than others but they will have to contribute to the increase in supply by investing their Rewards in water saving and supply infrastructure. The system is equitable as those who consume more pay more, while those who consume less obtain Rewards.

The approach has several benefits. It means that prices can be increased in response to water shortages to allow Sydney Water to use price for demand management of all water. It remains socially equitable because the extra funds are returned to low users who in turn invest in infrastructure. It means that IPART need only consider the appropriate profit to be earned by Sydney Water and need not determine the price increase necessary to control demand and to invest in infrastructure. That is IPART’s role becomes one of determining the profits of Sydney Water and need not concern itself with infrastructure, social equity considerations or many other considerations required in its current deliberations. It means the government can stop costly rebate and education programs as suppliers of these services can be paid with Rewards. It potentially means all water restrictions can be removed and price can be used for demand management.

Rewards are tradeable and can be sold by Rewards holders but Rewards can only be used for approved goods or services and suppliers of those services redeem Rewards. It is noted that the value of Rewards will reflect the marginal cost of supplying new water which is the same result as obtained by creating a water rights trading system where the value of water rights will tend towards the marginal cost of new water. However, the Rewards approach will result in relatively stable prices, allow more flexibility in ways to save water and will require lower overall prices of water because all Rewards will be spent on increasing supply while with trading only a proportion of the funds obtained by trading will be used to increase supply.

Why Water Rewards is a cost effective way to achieve Water Sustainability

Water Rewards is a cost effective way of spending funds on water infrastructure because the system operates at different levels. It is designed to reduce consumption or increase supply through a market in water infrastructure. The buyers in the water infrastructure market are those who hold Rewards. The sellers are organisations (including Sydney Water) who have ways of both saving water and increasing the supply of water. The existing system where all funds raised from customers for infrastructure is left with Sydney Water to spend is that Sydney Water is both the buyer and the seller of water infrastructure and this limits the effectiveness of the infrastructure marketplace. It restricts the ability of other suppliers of infrastructure to compete with Sydney Water. It also means that a market will arise for water because Sydney water will not be the only supplier. It enables a company to invest in ways to recycle water it has purchased from Sydney Water, harvest water falling on its own property, and sell water through its own distribution network to other companies or to Sydney Water.

Water Rewards works to achieve sustainability in three ways.

  1. Consumers are Rewarded for consuming less. The less consumed the greater the Reward.
  2. Consumers are penalised for consuming more. The more consumed the greater the cost.
  3. Rewards recipients must spend their money on ways to reduce consumption or to increase supply and they will choose the most cost effective way for them of spending Rewards on ways to build infrastructure that supplies water. A typical example will be a company who earns Rewards. They can either spend Rewards on ways to recycle water internally, supply recycled water to other companies, or buy infrastructure bonds from Sydney Water.

Recommendation

It is recommended that IPART allow any price increases deemed necessary to control demand and to fund infrastructure provided the money from the increase is redistributed back to consumers via a Water Rewards system. It is recommended that a single independent organisation be established to run Water Rewards. This could be a company under license, a cooperative of Rewards holders, or a statutory authority but it be regulated by IPART and be required to demonstrate its value through showing the cost of saving water and increasing supply. It should be independent of Sydney Water to prevent possible conflicts of interests in the way Rewards are distributed and spent.

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