Part 1: Levy structure

The preferred option is to set a levy to 100% recover the Commission’s costs

The Bill will be introduced to the House of Representatives late 2024. When passed in mid-2025, the Bill will provide the Commission functions and powers to regulate regulated suppliers under the Commerce Act and enable these regulated suppliers to be levied for these activities.

It is expected that the Bill will enable the levy making power (section 53ZE) to be applied to regulated water services suppliers. This would require regulated water services suppliers to pay to the Minister the levy determined in accordance with regulations.

It is expected that the Bill would 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. Part 2 discusses our proposed approach for specifying a levy method, rather than fixed amounts.

The preferred option is for a levy to commence to fully (ie 100%) recover the costs of the Commission’s new functions from 1 July 2025 onwards from regulated water services suppliers, excluding litigation and Crown Monitor costs for Watercare. Litigation will be funded from the Commission’s major litigation fund, which is a dedicated fund for litigation related to all the legislation that the Commission administers.

Depending on the transitional provisions under the Bill, this levy may include some costs of the Commission’s associated with its role implementing the ‘foundational information disclosure’ regime under the Preliminary Arrangements Act, however this cost is currently estimated at $0.00 as no council or council related water services supplier has been designated as subject to this ‘foundational information disclosure’ regime.

This approach of 100% levy recovery is consistent with other regulated services under Part 4 of the Commerce Act (ie electricity lines, gas pipeline services and specified airport services). It reflects the ‘exacerbator pays’ principle, whereby the regulated suppliers drive the need for the Commission’s functions and should bear the costs. Further discussion around who the ‘regulated suppliers’ are is provided below.

It is proposed that a Crown appropriation would be established from FY2025/2026 onwards, and the levy would fully recover the costs of the appropriation, making it fiscally neutral to the Crown.

A forecast of the Commission’s costs of implementing and administrating the regime for the first five years has been set out in Table 1 below, capped by the appropriation.

Table 1: Forecast of the Commission’s costs of implementing and administrating the economic regulation regime

Regulated water services suppliers

It is anticipated that a ‘regulated supplier’, in relation to water services, will be a local government water service supplier that makes core decisions about water services, which is likely to include capital and operating expenditure on the service and the level of charges or revenue recovery for that service. This means there could be more than one regulated supplier within a geographic location if councils choose a split decision-making model. There may also be flexibility to bring in further suppliers if problems persist in the future.

The levy should reflect the Chatham Islands and Watercare’s specific circumstances 

It is expected that the Bill will exclude the Chatham Islands Council from the economic regulation regime since it receives much of its funding from central government and the benefits associated with economic regulation are unlikely to outweigh the costs. Consistent with the ‘exacerbator pays’ principle, it is proposed that Chatham Islands Council is also excluded from the levy regime.

Watercare is currently subject to a bespoke interim economic regulation regime under the Preliminary Arrangements Act. Under this legislation, the Commission has been appointed as the Crown Monitor, responsible for monitoring Watercare’s compliance with a charter that sets out minimum service quality standards and financial performance objectives. The charter is currently under development and is expected to come into effect mid 2025. The Crown Monitor’s costs are directly recoverable from Watercare and are hypothecated for the Crown Monitor’s functions.

The Crown Monitor may require Watercare to provide any information the Crown Monitor considers may enable it to perform or exercise its functions, duties or powers under the Preliminary Arrangements Act,^[1] and must monitor Watercare’s performance under the Charter.^[2]

It is expected that Watercare will be subject to the economic regulation regime under the Bill once it passes. In practice, this means that Watercare, alongside all other regulated water services suppliers, would be subject to information disclosure requirements and could be subject to other information requiring provisions^[3] under the Bill while the Charter is in effect. This is to reflect the fact that the information requiring provisions under the Preliminary Arrangements Act are more limited and specifically related to the interim regime, but the Commission will need these tools under the Bill to set up its enduring function of regulating Watercare, and other regulated water services suppliers.

It is also expected that at the end of the Charter period, Watercare will transition to a price-quality path under the Bill. The proposed levy is designed so that the direct costs associated with this Watercare price-quality regulation, are recovered from Watercare (see Part 2 – levy design).

Other options considered

Consideration was given to a 100% Crown funded model, but this model would not promote the principle of equity, and the ‘exacerbator pays’ principle, whereby those whose actions give rise to costs and those who benefit from regulation, should pay most of the costs associated with the regulation.

Questions on this section

1. What are your views on the preferred option for a levy to fully recover the costs of the Commission’s new functions from 1 July 2025 onwards from regulated water services suppliers, excluding litigation and Crown Monitor costs for Watercare? Please provide reasons. 

[1] Section 89.

[2] Section 86.

[3] Section 53ZD and 98 of the Commerce Act 1986.

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