Part 3: Levy apportionment

Levy apportioned based on population in regulated supplier district (preferred option)

The levy regulations may specify a method of calculating how the Commission’s costs should be apportioned to individual regulated suppliers. We propose that each regulated supplier should pay a portion of the total cost of the activities attributable to them based on its share of the population normally residing within the district areas of all regulated suppliers subject to those activities. The population normally residing within the district area of each regulated supplier shall be based on the latest census data, currently the 2023 Census.

This would require the levy to be determined based on the following:

• Step 1: determine the costs of regulation for each activity by allocating the estimated Commission costs for that financial year (including indirect costs) between the relevant activities.
• Step 2: determine the total population of regulated suppliers subject to each activity by adding up the population within the district of each of the regulated suppliers who must pay that sub-levy for that financial year.
• Step 3: calculate each levy for each regulated supplier by using the following formula:
  
  (costs of regulation for activity) * (regulated supplier's normally residing population within district area [divided by] total population within district of regulated suppliers subject to activity) = levy for the activity

• Step 4: obtain the total levy amount for each regulated supplier by adding together the activities that the regulated supplier must pay.

The total costs of regulation must not exceed the appropriation or proposed appropriation for the Commission.

As discussed in Part 1, there could be more than one regulated supplier within a geographic location if councils choose a split decision-making model. If two regulated suppliers serve the same normally residing population within the district area, this will be reflected in the levy apportionment.

The Appendix includes an indication of apportionment of levies to councils based on the Commission’s current estimate of costs for the first two years of the economic regulation regime.

As the Commission’s costs in the first two years are expected to relate to ‘core regulation of water services’, the cost per person in each regulated suppliers’ district area in each year will be the same (as outlined in the table below):

This method of apportionment is preferred because:

• Allocating costs proportional to each regulated supplier’s share of the total population normally residing within the related district areas means the amount of levy payable by each regulated supplier reflects the size of population each regulated supplier serves. Regulated suppliers serving larger population districts will pay a greater share of the costs of regulation, but also the relative proportion of those people who benefit from the regulation.
• The method of apportionment is consistent and verifiable, being based on the latest census data. Being standardised will allow for populations within each regulated supplier’s district to be recalculated as regulated suppliers merge or form new service organisations. For example, Wellington Water serves populations in Lower Hutt, Porirua, Upper Hutt and Wellington cities. We note that as census data is collected every five years, this method will result in some inaccuracies, such as people moving from one district to another in between census periods. However, we are advised that historical rates of population growth suggest these inaccuracies should not be significant.
• The method is relatively transparent and administratively simple.

Other options considered

Alternatives to the proposed option (and the reasons these methods are not preferred currently) include:

• A charge based on serviced population of each regulated supplier – under this option the population data for each district area would be adjusted to reflect the population that receives water services from the regulated supplier. This adjustment would exclude that portion of the population within the district that are not connected, such as due to being on self-supply. However, this option is not supported due to lack of accurate data and administrative complexity.
• The number of connections each regulated supplier is responsible for – this option is not supported at this time. The available data is inaccurate and methods of counting connections are not standardised.
• The value of regulated asset base of each regulated supplier – this method is used to apportion Commission costs in the calculation of the levy for regulation of electricity lines, gas pipelines and specified airfield activities. Therefore, it would have the benefit of consistency. However, it will be some years before valuations of regulatory assets are standardised, verifiable, and has Commission oversight.
• Annual gross revenue of each regulated supplier – similar to the option above for the value of the regulated asset base, we expect it will be some years before revenue for each regulated supplier is collected and verifiable. This method would be administratively complex to apply if councils transfer responsibilities for all or some water services to service organisations.
• A flat charge for each regulated supplier– this method results in a higher charge per consumer of smaller regulated suppliers. It can be argued that this is unfair to consumers in smaller networks, as they are paying more for the costs of regulation relative to other consumers. It may also impact on the financial viability of some smaller regulated suppliers.
• Costs allocated based on time spent by the Commission on regulation of each regulated supplier – this method would be administratively difficult for the Commission to assign costs. It would lead to costs of regulation varying significantly for regulated suppliers year by year depending on the action taken by the Commission in relation to regulation. The first water service suppliers to be regulated or investigated under the economic regulatory regime could also pay a disproportionately higher share of the costs, from which other regulated suppliers subject to the same regulation may also benefit.
• A combination of methods – For example, levying for information disclosure regulation on a flat rate, and levying for price-quality regulation based on share of value of regulated asset base, or some other method. This would be complex to administer.

The merits of any of these options may change over time as more data is collected, standardised and verified. The options could be considered again in any future review.

Exemptions or waivers of levy not proposed

Section 53ZE(2)(i) of the Commerce Act provides that the levy regulations may specify exemptions or waivers from all or any part of the levy for any case or class of cases. No exemptions or waivers are proposed, as this would likely result in other regulated suppliers paying a disproportionate share of the Commission’s costs (or the taxpayer). An exemption or waiver would conflict with the principles of equity and simplicity. As discussed in Part 1, it is expected that the Bill will exclude the Chatham Islands Council from the economic regulation regime therefore it is proposed that Chatham Islands Council is also excluded from the levy from the outset.

Questions on this section

5. Do you have any comments on the preferred option for apportionment of the levy to each regulated supplier?

6. How would the proposed method of apportionment impact on your organisation (whether now or in the future)? Please provide your assessment of the nature and extent of these impacts.

7. Do you have any comments on alternative options to apportion the levy? If another option is preferred, please provide reasons.

[1] Family and household projections: 2018(base)–2043(external link) — Stats NZ Tatauranga Aotearoa

< Part 2: Levy design | Part 4: Levy implementation >