Introduction
On this page
The Local Government (Water Services Preliminary Arrangements) Act 2024 (Preliminary Arrangements Act) establishes the Local Water Done Well framework and the preliminary arrangements for the new water services system, including a foundational information disclosure regime and a bespoke interim economic regulation regime for Watercare. The Government is now establishing a new economic regulation and consumer protection regime for local government water services suppliers under Local Water Done Well, which will be implemented by the Commission.
Economic regulation is a way of influencing the price and quality of products and services supplied by natural monopolies where consumers have limited choices, such as water services. Issues that are apparent in the water services system include:
- significant long-term underinvestment in water infrastructure, including councils not investing in and planning for growth, urban development, and resilience;
- pricing practices that do not reflect costs, including undercharging leading to inadequate revenue to support necessary investment;
- poor asset and financial management;
- drinking water and wastewater services that do not meet regulatory standards and requirements, or community expectations – in some cases, resulting in poor quality drinking water, unreliable supplies, poor environmental outcomes, and/or a lack of resilience to meet requirements to continue to function in an emergency;
- ineffective transparency and accountability mechanisms.
The Commission has a strong track record of implementing economic regulation regimes in other sectors including certain international airports, gas pipelines services, electricity lines services and fibre networks.
This discussion document has been prepared based on Cabinet’s approvals for the water services economic regulation regime.[1] The Bill will be introduced to the House of Representatives in late 2024. When passed in mid-2025, the Bill will provide the Commission functions and powers to regulate local government water services suppliers (regulated suppliers) under Part 4 of the Commerce Act and enable these regulated suppliers to be levied for these activities. As the Bill progresses through the House of Representatives, amendments are likely to be made which may impact some of the assumptions and analysis in this paper. The Bill provides a risk-based and flexible economic regulatory regime to promote sufficient revenue recovery and investment for the benefit of consumers.
The regime will give New Zealanders peace of mind that revenue collected by local government water services suppliers through rates or water charges is being spent on the level of water infrastructure needed.
The Commission will have a range of tools to promote sufficient revenue recovery, and efficient investment and maintenance so that water services meet regulatory requirements and are delivered at a quality that communities expect.
The tools include:
- Information disclosure: The Commission will set requirements relating to when certain information must be collected and published. All regulated suppliers will be required to disclose this information to inform the need for any further regulatory intervention and promote transparency about their performance. The Commission’s role under information disclosure also includes preparing and publishing reports on regulated suppliers’ performance over time.
- Revenue thresholds: The Commission will be able to set revenue thresholds at their discretion, so that regulated suppliers have a clear understanding about the level of revenue they need to collect and invest in water infrastructure.
- Financial ringfence: The Commission will monitor and enforce the requirement that water services revenue is spent on water services alone.
The Bill will also include a process that enables the following tools to be made available for the Commission (designation):
- Quality regulation: Infrastructure quality standards or quality incentives to improve services.
- Performance requirements: Requirements to perform certain actions or deliver outcomes to improve network service quality. For example: to make specific types of investments.
- Price-quality regulation: Minimum and/or maximum prices that may be charged, and/or minimum and/or maximum revenues. Alongside quality and performance requirements.
The designation process will follow a similar process as other Part 4 regulated sectors, which include making recommendations to the Minister of Commerce and Consumer Affairs, and an Order in Council that declares a type of regulation is applied or removed. However, we propose the process is less onerous to ensure there is flexibility to deal with the specific issues as they arise.
The Bill will provide ways to address any issues that are identified in relation to how consumers are being treated by regulated suppliers, including enabling regulations to be set relating to complaints processes and for the Commission to develop a service quality code. The Commission will also be tasked with monitoring compliance with regulatory requirements and, where necessary, taking enforcement action.
The Commission needs effective engagement with the regulated sector and consumers, sector experience, and skills in data analysis, consumer engagement, behavioural economics, along with the ability to identify where they can deliver the biggest overall benefit to existing and future consumers.
The Commerce Commission needs to be resourced carry out its functions
In Budget 2024, the Commission received transitional funding of $2.232 million for FY2024/2025 to implement the foundational information disclosure regime under the Preliminary Arrangements Act. The Commission has also been appointed as the Crown Monitor for Watercare under the Preliminary Arrangements Act, which is subject to separate funding arrangements (discussed further in Part 1 – Levy structure). This funding arrangement is dedicated to the Crown Monitor functions.
A Crown appropriation from FY2025/2026 onwards will be set up to fund the Commission’s functions under the Bill. This appropriation will cap the Commission’s costs.
The Government is proposing to implement a levy to fully recover the costs of the Commission’s new functions from 1 July 2025 onwards, excluding litigation and Crown Monitor costs for Watercare. It is proposed that this approach best promotes the principles of equity, efficiency (which includes simplicity), justifiability, and transparency.
This proposed levy model is used to recover the Commission’s costs of performing their relevant functions, powers and duties under the Commerce Act, and for this to be fiscally neutral for the Crown. Under this model, the Commission would have incentives to operate efficiently and effectively within the appropriation, and it would return any unspent funds to the Crown. A levy wash-up process would ensure the regulated suppliers only pay the Commission’s actual costs, promoting equity, efficiency and justifiability.
Who the levy will apply to and when it will apply
It is expected that the Bill will enable the levy making power (section 53ZE of the Commerce Act) to be applied to regulated water services suppliers (discussed further in Part 1 – levy structure). This would require regulated water services suppliers to pay to the levy determined in accordance with regulations. The Ministry of Business, Innovation and Employment (MBIE) administers the levy on behalf of the Minister.
Levy regulations may be made (or amended) on the recommendation of the Minister, after the Minister consults with the suppliers of regulated goods or services, or representatives of those suppliers (section 53ZE(4)).
It is expected that Bill 3 will provide transitional provisions to enable the water services economic regulation regime to be set up. This could include the ability to treat consultation on this discussion document as sufficient for the purposes of meeting the requirement for the Minister to consult before recommending regulations be made setting levies on water services suppliers under section 53ZE(4).
It is expected that the Bill will also enable regulations to be made specifying the amount of levies, or method of calculating the amount of levies on the basis that the estimated costs for an appropriation period of performing the Commission’s functions, powers, and duties, and of collecting the levy money, should be met fully out of levies. The proposed levy structure and design is discussed further in Parts 1 and 2.
If the levy regulations come into force after 1 July 2025, the levy making power includes provisions that allow for the recovery of the Commission’s costs incurred before the regulations were made and/or before regulated suppliers became subject to Part 4. These provisions will ensure the Commission’s costs for the full 2025/26 financial year may be recovered (section 53ZE(2)(g) of the Commerce Act).
Your feedback will help shape the structure and implementation of the levy
We welcome feedback on the proposals contained in this discussion document, which will help shape the levy structure, design, apportionment and implementation.
Once submissions have been received and analysed, a final levy proposal will be developed for the Minister’s consideration.
Water Services Authority consultation on levies
As part of Local Water Done Well, the Water Services Authority – Taumata Arowai (the Authority) will play a critical role in regulating drinking water suppliers to ensure they meet quality standards and providing oversight of the environment performance of water services networks (including wastewater and stormwater). The Authority is also consulting on levy funding for the Authority’s functions for FY 25/26 and beyond. Local water services suppliers should plan for those proposed costs alongside those covered in this discussion document. Information about the Authority’s consultation may be found here:
Consultation on Water Services Authority – Taumata Arowai levy for 2025 - 2028(external link) — Taumata Arowai
[1] Cabinet Committee Paper and Minute record the approval of the second of three proposals to progress the third stage of the Local Water Done Well programme [PDF, 1.5MB](external link) — Te Tari Taiwhenua | Department of Internal Affairs