The ICRC has a public forum on its tariff review on Tuesday 6th December 2016. http://www.icrc.act.gov.au/wp-content/uploads/2016/09/Tariff-Review-Public-Forum-Notice-6-12-2016-vFinal-1.pdf
I have previously made submissions to this review
and to a previous review in 2014
At the public forum I will present the following.
The ICRC says its tariff review recommendations are to make ICONWater economically efficient. One definition of economic efficiency is:
“Economic efficiency implies an economic state in which every resource is optimally allocated to serve individual and entities in the best way while minimising waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another.”
The ICRC recommendations, in a regulated environment, do not achieve the stated goal of economic efficiency as reducing the price of water to large users of water at the expense of increasing the price to households harms households.
The ICRC has difficulty using market principles to establish prices as there is no market and the price elasticity of water is low. The price of water has little effect on demand. ACT residents reduced consumption of water, not due to price increases, but because they “did the right thing” by the community. To now increase the price of water because they have changed their behaviour during the drought and not reverted to their previous patterns of consumption is perverse. If the objective of the ICRC is for ICONWater to increase sales of water then dropping the price to households and encouraging Canberrans to consume water is another way to achieve higher consumption. But that would work against the idea of having a long-term sustainable water supply.
ACT residents have come to terms with the current price structure, but they should gain some benefit from the extra profits made by ICONWater. It could take the form of lower prices, or, as with Water Rewards it takes the form of a secure investment for household savings while increasing ICONWater profits.
In a regulated market, another measure of economic efficiency is to supply the same amount of water at a lower cost.
If we look at the costs of ICONWater for 2016 we have
Income from water and sewerage of $319M
Employment and Operating Costs $134M
Interest Expense of $72M
Depreciation and Interest charges are $120M or 38% of income and are close to employment and operating costs.
If we reduce financial costs, we can make ICONWater economically efficient. In my submission on Water Rewards, I outline how we can reduce these costs to near zero. Reducing these costs increases economic efficiency without any change to prices.
I am on a community consultative forum run by ICONWater. We have sat through two long sessions where ICONWater presented variations on the ICRC Proposals and asked for our comments and what we thought were the best variations. No variations on the ICRC recommendations are acceptable as the ICRC recommendations are not economically efficient.
Water Rewards is a radical proposal, and so ICONWater made a suggestion that we try to gauge community support for Water Rewards.
Accordingly, along with SEE-Change, we are forming ACT Water Rewards Co-op to propose to the ACT government that they replace bank loans with Water Rewards loans from the ACT Water Rewards Co-op. To deploy Water Rewards the ACT government only needs to give permission for the ACT Water Reward Co-op to provide loan money to ICON Water and for ICON Water to give discounts to water users when they pay their water invoices using Water Rewards.
ACT Water Rewards Co-op recommends that Water Rewards loans replace existing ICONWater interest bearing debt. Doing this will increase ICONWater profits by $120M in the first full year of operation.
The approach requires no change to ICON Water. It can be built and operate with no cost to the ACT government or ICON Water. A small transaction fee on all money transactions will cover all ACT Water Rewards Co-op costs. Membership of ACT Water Rewards Co-op is open to all people who consume ICON Water. Each member will, on average, initially receive a free Right to Buy Water Rewards of an estimated cash value of $1,000.
The cost of the discount to Water Rewards holders is whatever makes Water Rewards an attractive investment. The reason is that cost of the discount is born by the same group who obtain the benefit from Water Rewards. We have set it at an inflation-adjusted 10% discount per annum, as that discount rate makes it an attractive investment.
It is recommended the ICRC support the introduction of Water Rewards as it also provides a way for ICON Water to fund alternative sources of water for large water customers. That way ICON Water can retain large customers and still derive income from their use of non-potable water and so achieve the ICRC objectives.
At 5 pm on the 13th of December at Entry29, we will hold an information session to explain and answer questions about Water Rewards and what it will take to get the system operational. Please let us know you are coming by registering here. https://www.eventbrite.com.au/e/act-waterrewards-co-op-information-tickets-29695360623
Further information on Water Rewards is available at http://wp.me/p19qG-pM
A FAQ on Water Rewards is at http://wp.me/p19qG-pQ
You can join the ACT Water Rewards Co-op by subscribing to the mailing list. http://eepurl.com/crfT0j