Report of the Independent Inquiry into Secure and Sustainable Urban Water Supply and Sewerage Services for Non-Metropolitan NSW

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1 Report of the Independent Inquiry into Secure and Sustainable Urban Water Supply and Sewerage Services for Non- December 2008 The Hon Ian Armstrong OBE Dr. Colin Gellatly AO

2 Addendum The following text has been added to the original version of the Inquiry report on page 182: Riverina Water County Council (2008) Submission to the Inquiry into Secure and Sustainable Water Supply and Sewerage Services for Non-. Retrieved from Department of Water and Energy Local Water Utility Inquiry Report of the Independent Inquiry into Secure and Sustainable Urban Water Supply and Sewerage Services for Non- State of New South Wales, 2009 ISBN DWE 09_002 This work may be freely reproduced and distributed for most purposes, however some restrictions apply. Contact the Department of Water and Energy for copyright information. Disclaimer: While every reasonable effort has been made to ensure that this document is correct at the time of printing, the State of New South Wales, its agents and employees, disclaim any and all liability to any person in respect of anything or the consequences of anything done or omitted to be done in reliance upon the whole or any part of this document.

3 The Hon. Phillip Costa MP Minister for Water Minister for Rural Affairs Minister for Regional Development Level 34 Governor Macquarie Tower SYDNEY NSW 2000 Dear Minister Costa, It is with pleasure that we present to you the final Independent Panel s report on the Inquiry into Secure and Sustainable Urban Water Supply and Sewerage Services for Non-. The Inquiry involved travelling the State extensively, with seventeen day-long hearings during which we heard presentations from more than 115 stakeholders. Additionally, we received more than 140 written submissions from local water utilities, associations and the general public. Almost every local water utility made a submission and/or presentation to the Inquiry. The extent of participation in the Inquiry is testament to the interest in, and importance of, sustainable water supply and sewerage management in NSW. We are an independent panel, and the report enclosed contains our recommendations based on the charter we were given the Terms of Reference for the Inquiry. The recommendations contained within the Report have been informed by submissions and presentations made to us throughout the Inquiry process. The recommendations seek to achieve the outcomes stated in the Terms of Reference, as well as the commitments made by the former Minister for Water, the Hon Nathan Rees that any new governance structure: 1. must protect or enhance councils revenue stream; 2. must protect or enhance councils capital expenditure; 3. must maintain or enhance job opportunities; 4. must provide ongoing access to specialised skills; 5. must adopt an independent and sustainable pricing mechanism; and 6. must have 21 st century governance arrangements in place. It became clear to us early on in the Inquiry process that removal of water and sewerage services from councils would, in many instances, impact detrimentally on general purpose councils. This would largely be as a result of separating staff and resources from shared council functions. i Report December 2008

4 Nevertheless, the poor performance of several local water utilities, and the challenges that lie ahead have confirmed the need for structural change in most instances, to enable local water utilities to better plan for and manage their responsibilities in the face of major challenges such as climate change, skills shortages, demographic changes and increasing human health and environmental standards. The recommendations contained within this report therefore seek to maintain council ownership and management of water supply and sewerage services, whilst centralising the planning and reporting functions and mandating planning requirements and best practice pricing. This should ensure that local water utilities are planning well into the future, and are obtaining the revenue they require to meet future challenges. The recommended increased collaboration between local water utilities is additionally aimed to address significant skills shortages being experienced by local water utilities. Research shows that skills shortages for the water and sewerage services sector are expected to increase dramatically across Australia over coming decades, and our report identifies a number of ways in which this can be managed and mitigated. We hope that this report makes a significant contribution to the consultative process you and the former Minister for Water have established in reviewing local water utilities in non-metropolitan NSW. We thank you for the opportunity to contribute to such critical issues - safe and sustainable water supply and sewerage services - which impact on every person in the NSW community. Sincerely, The Hon Ian Armstrong OBE Dr Colin Gellatly AO ii Report December 2008

5 TABLE OF CONTENTS EXECUTIVE SUMMARY 1 SUMMARY OF RECOMMENDATIONS...6 CHAPTER 1: INTRODUCTION 7 RATIONALE FOR THE REVIEW...7 TERMS OF REFERENCE FOR THE INQUIRY...7 APPOINTMENT OF HEADS FOR THE INQUIRY...8 ADDITIONAL PRINCIPLES FOR THE CONDUCT OF THE INQUIRY...8 INQUIRY HEARINGS AND SUBMISSIONS...9 CHAPTER 2: STRUCTURE OF THE WATER AND SEWERAGE SERVICES INDUSTRY 10 HISTORICAL PERSPECTIVE...10 COUNTRY TOWNS WATER SUPPLY AND SEWERAGE PROGRAM...10 CURRENT SERVICE DELIVERY MODELS...11 CURRENT REGULATORY ARRANGEMENTS...12 OVERVIEW OF OTHER JURISDICTIONS STRUCTURE AND REFORM...14 CONCLUSION...17 CHAPTER 3: CURRENT AND FUTURE CHALLENGES FACING THE INDUSTRY AND CAPACITY OF THE INDUSTRY TO ADDRESS THOSE CHALLENGES 18 THE CHALLENGES...18 CURRENT CAPACITY OF THE INDUSTRY TO ADDRESS CHALLENGES...20 MEETING THE CHALLENGES...24 SUMMARY AND CONCLUSION...28 CHAPTER 4: POTENTIAL LOCAL WATER UTILITY AGGREGATIONS 29 INTRODUCTION...29 SUBMISSIONS TO THE INQUIRY...29 AGGREGATION OPTIONS...31 AGGREGATION CRITERIA...31 OPTIONS ANALYSIS...35 CONCLUSION...36 RECOMMENDATION...36 CHAPTER 5: ORGANISATIONAL STRUCTURE MODELS 37 ORGANISATIONAL STRUCTURE MODEL OPTIONS...37 ORGANISATIONAL STRUCTURE MODELS EXCLUDED FROM FURTHER CONSIDERATION...39 ORGANISATIONAL STRUCTURE OPTIONS FOR EVALUATION...39 SUBMISSIONS TO THE INQUIRY...39 CONCLUSION...48 CHAPTER 6: ASSESSMENT OF ORGANISATIONAL STRUCTURE MODELS 49 ORGANISATIONAL STRUCTURE MODELS EVALUATION CRITERIA...49 MODEL ASSESSMENT...50 ASSESSMENT SUMMARY...58 CONCLUSION...59 RECOMMENDATIONS...60 CHAPTER 7: REGULATORY OPTIONS 61 SUBMISSIONS TO THE INQUIRY...61 CURRENT REGULATORY ARRANGEMENTS...62 ARE THE CURRENT ARRANGEMENTS EFFECTIVE?...63 INDUSTRY VIEWS ON EFFECTIVENESS OF CURRENT FRAMEWORK...67 EFFECTIVENESS OF CURRENT FRAMEWORK...68 WHAT NEEDS TO BE REGULATED?...68 iii Report December 2008

6 OTHER REGULATORY ISSUES...70 ALTERNATIVE EXISTING REGULATORY ARRANGEMENTS...71 IDENTIFICATION OF OPTIONS...72 CONSUMER PROTECTION...75 BETTER PRACTICE REGULATION...75 CONCLUSION...76 RECOMMENDATIONS...76 CHAPTER 8: OPTIONS FOR PRICING REGULATION 77 CURRENT PRICING SYSTEM GOVERNING WATER SUPPLY AND SEWERAGE PRICING IN NSW..77 NATIONAL WATER INITIATIVE...79 INDUSTRY SUBMISSIONS TO THE INQUIRY...80 PRICING OPTIONS AND ANALYSIS...81 AFFORDABILITY...86 CONCLUSION...86 RECOMMENDATION...86 CHAPTER 9: SECURING SKILLED HUMAN RESOURCES TO ADEQUATELY PLAN, MAINTAIN AND OPERATE WATER SUPPLY AND SEWERAGE SYSTEMS 87 SKILLS DEVELOPMENT IN THE NSW WATER AND SEWERAGE SECTOR...87 CURRENT SKILLS SHORTAGES...88 FUTURE SKILLS SHORTAGES...89 OPTIONS TO ADDRESS ANTICIPATED SKILLS SHORTAGES...91 CONCLUSION...94 CHAPTER 10: WATER AND SEWERAGE SERVICES FOR ABORIGINAL COMMUNITIES 95 CURRENT SITUATION...95 IMPROVING WATER AND SEWERAGE SERVICES IN ABORIGINAL COMMUNITIES...97 CONCLUSION...98 CHAPTER 11: SUMMARY POTENTIAL AGGREGATIONS OF LOCAL WATER UTILITIES ORGANISATIONAL STRUCTURE ARRANGEMENTS REGULATORY OPTIONS PRICING SKILLS ABORIGINAL COMMUNITIES CONCLUSION APPENDIX LIST 104 APPENDIX 1: OPTIONS FOR LOCAL WATER UTILITY REFORM POTENTIAL AGGREGATIONS 105 APPENDIX 2: BINDING ALLIANCE MODEL 113 APPENDIX 3: INDICATIVE COSTS OF A BINDING ALLIANCE MODEL 117 APPENDIX 4: TRAINING AND EDUCATION PROGRAMS FOR WATER AND SEWERAGE SERVICES STAFF IN NSW 120 APPENDIX 5: SCHEMATIC OF RECOMMENDED REFORMS 122 APPENDIX 6: OPTION 1 REGIONAL AGGREGATION (32 GROUPS) 123 APPENDIX 7: OPTION 2 CATCHMENT AGGREGATION (15 GROUPS) 161 BIBLIOGRAPHY 176 ABBREVIATIONS AND GLOSSARY 185 iv Report December 2008

7 TABLES AND FIGURES Number Title Figure 1 Best Practice Compliance, 2006/07 Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Compliance with Best Practice Management Guidelines for Water Supply Compliance with Best Practice Management Guidelines for Sewage Management Organisational Structure Models Indicated in Submissions to the Inquiry Explanation of codes used in Maps nine and ten Organisational Structure Evaluation Criteria Summary of Assessment Criteria Against Governance Models Compliance with Requirements of Best-Practice Management Guidelines Compliance for Microbiological Water Quality NSW Local Water Utilities Compliance with Australian Drinking Water Guidelines (ADWG) 2006/07 Options for Price Regulation Regime Table 11 Anticipated Gaps In Water and Sewerage Sector Jobs By 2017 v Report December 2008

8 EXECUTIVE SUMMARY In September 2007 the then Minister for Water, the Hon Nathan Rees MP, announced an Independent Inquiry into Secure and Sustainable Urban Water Supply and Sewerage Services for Non-. The Minister appointed the Hon Ian Armstrong OBE and Dr Colin Gellatly AO to head the Inquiry. The Inquiry invited public submissions and held public hearings in 17 locations across New South Wales. The public hearings held by the Inquiry attracted almost 500 attendees and it received over 140 written submissions. The Inquiry is part of an evolving process of reform for the provision of water supply and sewerage services to non-metropolitan NSW and builds on the reform agenda of the National Water Initiative that is currently being implemented through the Best Practice Management of Water Supply and Sewerage Guidelines and the $1.1 billion Country Towns Water Supply and Sewerage Program. The Inquiry examined the performance of local water utilities and the challenges that are facing them. The 2006/07 NSW Water Supply and Sewerage Performance Monitoring Report, produced by the Department of Water and Energy from the results reported by each local water utility, indicates that there are local water utilities that perform well against most indicators and local water utilities that perform poorly. The under-performance by a number of local water utilities is a concern for economic, environmental and public health reasons. The provision of safe, reliable, efficient and affordable water supply and sewerage services is an essential component for the sustainability of towns in regional NSW. Many, particularly the smaller utilities, perform poorly in implementing the Best-Practice Management of Water Supply and Sewerage Guidelines. The Guidelines define best practice management principles for the provision of water supply and sewerage services. Local water utilities are provided with incentives and advice to enable them to achieve the required outcomes. Local water utilities should comply with these guidelines to ensure that they are able to provide quality water supply and sewerage services. Of great concern to the Inquiry is the failure of 17 local water utilities to meet the microbiological water quality requirements of the Australian Drinking Water Guidelines, 2004 and the occurrence of 22 boil water alerts over the 25 months to June There are a number of related factors that could contribute to the unsatisfactory performance of many local water utilities. These factors are: the difficulties in attracting and retaining skilled staff - many areas of NSW are unable to attract skilled staff owing to declining populations and the associated reduction in the provision of community services; lack of effective regulatory incentives and sanctions to achieve a high level of compliance with standards and guidelines and to encourage innovation and continuous improvement; an absence of functional separation water supply and sewerage are two of many functions performed by councils and compete with other functions for attention and resources; and lack of commercial focus the multifunctional structure of councils may tend to inhibit the establishment of commercially focused business units. 1 Report December 2008

9 Against this background of performance, local water utilities are facing significant challenges that will require substantial investment over the next 30 years to ensure water supply and sewerage services are sustainable. These challenges include: reductions in the yields of local water utilities traditional water sources as a result of increased allocations of water to the environment and greater variability of rainfall and climate change; demographic shifts including high population growth in coastal regions and static or declining populations in parts of western NSW; asset replacements, augmentations and new works; and declining availability of skilled resources arising from ageing of the labour force. Many councils in their submissions and in presentations at Inquiry hearings acknowledge that change is necessary to the way services are planned and delivered. This report examines the suggestions put forward by councils and other stakeholders on utility aggregations, alternative organisational structures and alternative regulatory arrangements including pricing. Small local water utilities generally have lower compliance with the Best Practice Management of Water Supply and Sewerage Guidelines than larger utilities. The larger utilities tend to have greater access to specialist skills and financial resources to implement the Guidelines. Many submissions to the Inquiry suggest regional sharing of professional resources amongst local water utilities as well as local water utility aggregations that would facilitate resource sharing. The report presents two aggregation options The first option is broadly based on submissions provided by local councils, county councils and others, aggregates the 104 existing local water utilities into 32 groups. This option of aggregations is depicted on Map 5 of this report. The second option, developed on a catchment basis, is also informed by submissions to the Inquiry, and aggregates the 104 existing local water utilities into 15 groups (Map 6). In general, each group in both options: 1. has approximately 10,000 or more connected properties; 2. is able to generate annual revenue of approximately $10 million or more; 3. is sensitive to catchment boundaries; 4. builds on existing alliances; 5. has a regional centre located in each potential new entity; and 6. is based on council submissions made to the Inquiry. The first option of 32 groups has a greater alignment with the groupings suggested by local water utilities and builds on existing alliances to a greater extent than the second option of 15 groups. It is recommended that the first option be adopted as a guide for future local water utility aggregations. Four organisational structure models for the aggregated entities have been put forward by councils in their submissions. These are: binding alliance; county council; council-owned regional water corporation; and status quo. 2 Report December 2008

10 All of these models were assessed against criteria defined by the Terms of Reference relating to council viability, efficiency, water supply security, employment, community impacts and impacts on the financial sustainability of councils. All models are assessed as being able to meet the criteria to some degree. However, not all models are suitable for all areas and this is consistent with submissions received in the course of the Inquiry that state a one size fits all solution is impractical because of the great diversity in geographic and socioeconomic conditions across NSW. All council submissions support the continued ownership of water supply and sewerage assets by local government. In addition, the vast majority of council submissions support the continuing direct responsibility for the operation and management of water supply and sewerage services by local government. Only a very few councils recommend a transfer of water supply and sewerage functions and assets to a single local government-owned entity such as a county council or a local council-owned regional water corporation. Councils submit that the removal of direct responsibility for the operation and management of water supply and sewerage services will: result in the loss of 30% to 40% of a council s total revenue, thus making the residual operations of many small councils unviable. In particular, several shared services, such as governance, management, billing, IT and plant and equipment services, would be adversely affected by the resulting reduction in economies of scope; impact adversely on employment because the aggregation of councils water supply and sewerage functions will result in redundant staff who would need to be redeployed or retrained; and have a detrimental socio-economic impact on towns due to redundancies and staff transfers. Consequently, most councils support the binding alliance and status quo models. Both of these models retain direct responsibility for the operation and management of water supply and sewerage services with councils, thereby avoiding any perceived adverse impacts on councils, employment and communities. The Inquiry Panel is of the opinion that the status quo model (that is direct council ownership and operation of assets by existing independent local water utilities) should only be considered for large utilities that not only have a strong and viable commercialised business unit providing water supply and sewerage services but also are capable of meeting the complex challenges lying ahead. However, all local water utilities are subject to the recommended regulatory changes outlined in this report. The binding alliance model is a new organisational concept for local water utilities. A binding alliance establishes a distinct legal entity (the Alliance Entity) that has responsibility for the strategic and financial planning function of member councils and for providing specialist technical skills to the member councils. Assets and the responsibility for service delivery are retained by member councils. However, asset management is directed by the Alliance Entity and service delivery is provided by the member councils in accordance with the asset management plan developed by the Alliance Entity. Service levels are agreed to between the Alliance Entity and member councils. Member councils are compelled to remain members of the alliance and implement the directions of the Alliance Entity. The establishment of council-owned regional water corporations or asset owning county councils would involve transferring asset ownership and operating responsibility from the existing 96 general purpose councils to these entities. There will be impacts on employment and council revenues which can be partly mitigated through transitional employment protection provisions and receipt of dividends. To date, existing county councils have not paid dividends to constituent councils, but they have the power to do so. There could also be significant socio-economic impacts on small communities that need to be considered if these models are adopted. However, of the two models, the council-owned regional water 3 Report December 2008

11 corporation should be preferable to county councils because the commercial drivers inherent in a corporation structure better complements the delivery of commercial services. It is recommended that three organisational structure options be considered for the future delivery of water supply and sewerage services. The options are: 1. binding alliance; 2. council-owned regional water corporation; and 3. current structure arrangements for certain existing large water utilities, county councils and water supply authorities. Two groupings of utilities have already been proposed by councils and could be progressed early in the reform process. The 18 councils of the Riverina and Murray Regional Organisation of Councils are seeking to establish a binding alliance and six councils are seeking to establish an alliance in the lower Macquarie Valley area. The Inquiry suggests that these alliances could be progressed quickly following agreement between the proponents and the Minister on the structure of the alliances. The model should, after a period of two years, be evaluated in terms of its efficiency and effectiveness in achieving the required outcomes, including consistent compliance with water quality and environmental standards, higher incidence of integrated water cycle management planning amongst local water utilities and improved financial position to fund future capital works. A third aggregation involving three councils seeking to form a council-owned regional water corporation on the north coast of NSW could also be progressed early. This group includes the councils of Port-Macquarie Hastings, Kempsey and Nambucca. Local water utilities have a responsibility to protect public health and safety, protect the environment and deliver a sustainable, cost effective service to meet the needs of customers. The principal regulatory instrument driving local water utilities performance in these areas is the Best Practice Management of Water Supply and Sewerage Guidelines. The Guidelines are not mandatory and this has been identified as a factor in the variability of local water utilities performance overall. Options for a more robust regulatory framework have been identified by the Inquiry to ensure the Government s principal objectives of protecting public health, the environment and provision of cost effective customer service are achieved. The options identified by the Inquiry to replace the current regulatory framework are: mandating the Best Practice Management of Water Supply and Sewerage Guidelines; prescribing regulatory requirements and standards in legislation to replace the Guidelines; and issuing an operating licence to local water utilities that would specify compliance with guidelines, standards and legislation and establish key performance indicators. All options would require increased resources from the Government to ensure that any new regulatory approach is properly implemented. It is recommended that the regulation of local water utilities be strengthened to require utilities to implement all relevant plans, guidelines and standards. This must be complemented by an adequate reporting and monitoring framework and the designation of a regulator with adequate enforcement powers. Appropriate pricing is vital in order to ensure that services are delivered safely, efficiently and sustainably, and that utilities achieve full cost recovery and provide appropriate pricing signals to encourage efficient use of their water services. Pricing is currently undertaken in accordance with Independent Pricing and Regulatory Tribunal pricing principles and established by local water utilities in consultation with their customers. These principles are set in the Department of Water and Energy s Best Practice Management Guidelines (2007) and support is provided by the Department for local water utilities to implement them. 4 Report December 2008

12 However, there is no legislation to compel utilities to follow these principles and there is no independent oversight of prices, costs and revenues. Nevertheless, most local water utilities are achieving full cost recovery even if many do not achieve a commercial rate of return. Three pricing regulation options are put forward by the Inquiry: current pricing regime; mandatory best pricing principles with independent oversight; and pricing regulation by the Independent Pricing and Regulatory Tribunal. While the current system appears to be working reasonably well there are still 18 local water utilities setting prices in the absence of strategic business plans. Mandatory pricing regulation would ensure pricing is cost reflective on the basis of efficient costs and that customers are not over charged or under charged, no hidden subsidies are flowing from the water supply and sewerage functions to councils general funds and costs generally are efficient costs. Fully independent price regulation, as provided by the Independent Pricing and Regulatory Tribunal process, is a resource intensive process and, while offering the most rigorous assessment of competitive costs and prices, may not deliver more than a marginally better outcome than Mandatory Best-Practice Pricing - and at far greater cost to both the industry and the State Government. Increased pricing oversight would also require additional resources from State Government. It is recommended that the regulation of local water utilities pricing be strengthened to require utilities to establish prices in accordance with approved business plans and financial plans. Local water utility prices must be approved by an independent body. This body could be a government agency such as the Department of Water and Energy. A number of submissions referred to the burden of reporting to Government and the number of agencies that local water utilities have to deal with on urban water matters. It is recommended that the reporting and regulatory roles undertaken by State Government agencies be reviewed with a view to streamlining these requirements and to ensure a consistent approach across these agencies. Metropolitan water, electricity and natural gas utilities in NSW are required to be members of the Energy and Water Ombudsman NSW (EWON) scheme and to establish customer contracts for services provided. It is recommended that the EWON scheme be adopted by local water utilities as a mandatory requirement, provided it can be demonstrated that there are net benefits in doing so. Skills shortages are apparent in many local water utilities, and projections of future skills shortages are of concern in NSW, and across Australia. To address these current and future skills shortages it is recommended that a suite of measures be implemented in coordination with one another. These include incentives to communities of small local water utilities to undertake training in areas identified as skills needs, pooling human resource needs amongst local water utilities, increasing size of local water utilities, providing skills development opportunities for local water utilities staff, outsourcing skills needs to the private sector, and increasing the capacity of training and development organisations. 5 Report December 2008

13 SUMMARY OF RECOMMENDATIONS This Independent Panel s report recommends that: 1. Good Governance The current 104 local water utilities be aggregated into 32 regional groups that are broadly based on submissions provided by stakeholders. 2. Improving Organisational Structures Three organisational structure options be considered for the regional groups of local water utilities. The models are: binding alliance; council-owned regional water corporation; and current structural arrangements for some large general purpose councils and county councils. 3. Improving Regulation The regulation of local water utilities be strengthened to require utilities to implement all relevant plans, guidelines and standards. This must be complemented by an adequate reporting and monitoring framework and the designation of a regulator with adequate enforcement powers. 4. Improving Pricing The regulation of local water utilities pricing be strengthened to require utilities to establish prices in accordance with approved business plans and financial plans. Local water utility prices must be approved by an independent body. This body could be a government agency such as the Department of Water and Energy. 5. Cutting Red Tape The reporting and regulatory roles undertaken by State Government agencies be reviewed with a view to streamlining these requirements and to ensure a consistent approach across these agencies. 6. Consumer Protection The Energy and Water Ombudsman NSW scheme be adopted by local water utilities as a mandatory requirement, provided it can be demonstrated that there are net benefits in doing so. 7. Skills Shortages Several options could be implemented simultaneously to manage and mitigate future skills shortages: 1. offer incentives to communities of small local water utilities to undertake training in areas identified as skills needs (e.g. engineering and planning); 2. pool human resource needs amongst local water utilities; 3. increase size of local water utilities; 4. provide skill development opportunities for local water utilities staff; 5. outsource skills needs to the private sector; and 6. increase the capacity of training and development organisations. 6 Report December 2008

14 CHAPTER 1: INTRODUCTION In an address to the annual Local Government and Shires Associations Water Management Conference in Inverell in August 2007, the then Minister for Water Utilities, the Hon Nathan Rees MP, announced an Independent Inquiry into the institutional and regulatory arrangements by which town water supply and sewerage services are provided in country NSW. RATIONALE FOR THE REVIEW The Department of Water and Energy s discussion paper, Inquiry into Secure and Sustainable Urban Water Supply and Sewerage Services for Non-, identified five major challenges to the ability of local water utilities to continue providing safe and environmentally sustainable water supply and sewerage services on a reliable, efficient and affordable basis. The challenges are: requirements for increased water sharing with the environment; forecasts of reduced long term rainfall and increased incidence and severity of droughts as a consequence of climate change; the replacement of ageing assets; the growing shortage of skilled labour; and demographic shifts with high population growth in coastal areas and low population growth in many inland NSW areas. These challenges are likely to have the effect of: reducing the secure yield of current urban water supply systems; requiring significant capital investment to augment water supply and sewerage systems; impeding the ability of utilities to operate water supply and sewerage systems effectively and efficiently; impeding the ability of utilities to provide safe, healthy drinking water and adequately treat wastewater; and increasing water supply and sewerage bills due to increased capital and operating costs. The annual NSW Water Supply and Sewerage Performance Monitoring Report documents local water utilities performance on a wide range of indicators. Although many utilities are performing well, others are performing poorly. All utilities need to be in a strong position to face the challenges outlined above to ensure all communities served by these utilities benefit from a secure water supply, professionalism, cost effective service standards and regulatory safeguards in the provision of water supply and sewerage services. TERMS OF REFERENCE FOR THE INQUIRY Objective To identify the most effective institutional, regulatory and governance arrangements for the long term provision of water supply and sewerage services in country NSW; and Ensure these arrangements are cost-effective, financially viable, sustainable, optimise whole-of-community outcomes, and achieve integrated water cycle management. 7 Report December 2008

15 The Task The State s 107 local water utilities are facing growing challenges, posed by drought, climate change, environmental water allocations, demographic shifts, technological advances and skill shortages. In view of the challenges facing the utilities, the Inquiry is to identify the most appropriate institutional and regulatory arrangements for the water supply and sewerage industry in NSW in order to ensure that services are efficient, reliable, affordable and safe. In particular, the Inquiry should identify arrangements that will enable customers of water utilities in regional NSW to benefit from a secure water supply, professionalism, cost effective service standards and regulatory safeguards in the provision of water supply and sewerage services. As a minimum, the Government expects water supply and sewerage service providers to: respond and plan in advance to the challenges facing the industry; be financially self sufficient; be able to comply with appropriate stringent environmental and public health standards; and implement cost-effective service standards. In considering the merits of any new industry arrangements, the Inquiry should take into account: the historical structure of the industry and its performance record to date; the current and future challenges facing the industry; the present capacity of the industry to address those challenges; alternative industry arrangements used in other states; the impact of any changes on the financial sustainability of councils; the socio-economic impacts on the community, including indigenous communities, of any new institutional and regulatory arrangements; the relative performance of other states and their experience with industry reform; the institutional and regulatory options available, including the relative merits and drawbacks of each; and the role local, state and federal governments should play in further improving services. The Inquiry is to focus on the provision of urban water supply and sewerage in rural and regional NSW. Sydney Water, Hunter Water, Gosford City Council water supply authority and Wyong Shire Council water supply authority are excluded from the Inquiry. APPOINTMENT OF HEADS FOR THE INQUIRY In January 2008, the then Minister for Water, The Hon Nathan Rees appointed the Hon Ian Armstrong OBE, former Deputy Premier of NSW, and Dr. Colin Gellatly AO, former Director- General of the Premier s Department, to head the Inquiry. ADDITIONAL PRINCIPLES FOR THE CONDUCT OF THE INQUIRY Following the release of the Terms of Reference for the Inquiry, the Minister attended public meetings throughout the State to discuss the review. The Minister outlined the challenges facing the industry and referred to the mixed performance of local water utilities in delivering water supply and sewerage services. His statements at these meetings bear significant relevance to the deliberations of the Inquiry. 8 Report December 2008

16 Key statements made by the Minister were: the current model for water supply and sewerage service delivery in non-metropolitan NSW is no longer adequate and other more contemporary and effective models need to be considered; a Macquarie Street solution will not be imposed and it is a matter for communities and their councils to propose viable organisational structure models that would best meet local needs; a single one size fits all model would not be appropriate; and state-ownership and privatisation models will not be considered. In addition, the Minister announced six criteria that each suggested model must satisfy. The criteria are that any new model: 1. must protect or enhance councils revenue stream; 2. must protect or enhance councils capital expenditure; 3. must maintain or enhance job opportunities; 4. must provide ongoing access to specialised skills; 5. must adopt an independent and sustainable pricing mechanism; and 6. must have best practice governance, that is, the structure must be appropriate to meet the organisation s objectives. INQUIRY HEARINGS AND SUBMISSIONS Written submissions were invited from interested parties, and the closing date for submissions was 30 April Over 140 written submissions were received. The majority of submissions were provided by councils. Submissions were also received from industry associations, community groups, commercial entities, the United Services Union, community and environmental advocacy organisations and individuals. Submissions are posted on the Department of Water and Energy s website Dr Gellatly and Mr Armstrong conducted 17 hearings across NSW between 1 April 2008 and 20 May The location of the hearings were Albury, Bourke, Broken Hill, Coffs Harbour, Cooma, Cowra, Dubbo, Forbes, Griffith, Inverell, Nowra, Orange, Sydney, Tamworth, Temora, Tweed Heads and Wagga Wagga. The hearings were preceded by advertisements in local media informing the community of the date, time and location of the Inquiry hearing. 117 people made presentations at these hearings. 487 people attended the hearings as observers. The secretariat for the Inquiry was provided by the Department of Water and Energy. 9 Report December 2008

17 CHAPTER 2: STRUCTURE OF THE WATER AND SEWERAGE SERVICES INDUSTRY HISTORICAL PERSPECTIVE In the 1980s, 126 local water utilities (mostly general purpose local governments) provided water supply and sewerage services in non-metropolitan NSW. Following a number of council amalgamations, the number of utilities was reduced to 107 in June With the transfer of the water and sewerage functions of Dungog Council to Hunter Water Corporation in July 2008, the number of local water utilities is now In the 2006/07 financial year, these utilities had revenue of $880 million, supplied 296,000 million litres of water and the current replacement cost of system assets was $17 billion. Collectively, they are the third largest water supply and sewerage operation in Australia after Sydney and Melbourne. Through the NSW Government s Country Towns Water Supply and Sewerage Program, sections 283 to 322 of the Water Management Act 2000, and sections 56 to 66 of the Local Government Act 1993, the Minister for Water is responsible for overseeing the performance of local water utilities in: Providing appropriate, affordable and cost-effective water supply and sewerage services in urban areas of non-metropolitan NSW which meet community needs, protect public health and the environment and make best use of regional resources (program goal) The Department of Water and Energy manages the Country Towns Water Supply and Sewerage Program which has been in place for over 100 years and has been instrumental in providing piped water supply services to 1.8 million people (97.8% coverage) and sewerage services to 1.68 million people (94.6% coverage) in NSW country towns. The high level of public health protection resulting from sound water supply and sewerage services is universally recognised and is the driver for investment in such infrastructure by many governments. The Program is a major State Government reform program and its aim is for the nonmetropolitan local water utilities in NSW to achieve appropriate, affordable, cost-effective and sustainable water supply and sewerage services. Country Towns Water Supply and Sewerage Program The Country Towns Water Supply and Sewerage Program has provided leadership and guidance to local water utilities to assist them to develop and operate sound and affordable water supply and sewerage services in country NSW, together with financial assistance towards the capital cost of required backlog infrastructure. In addition to overseeing and monitoring the performance of local water utilities, the Program has worked to build local water utility capacity to achieve best-practice through statutory approvals, provision of guidelines, manuals, software, expert advice, technical assistance, inspections and training, together with financial assistance towards the capital cost of backlog water supply and sewerage infrastructure non-metropolitan water utilities includes Gosford and Wyong councils which are not subject to this Inquiry. 10 Report December 2008

18 Following a performance reporting trial by about 50 utilities in 1985, the benefits of annual performance reporting were recognised and supported by the utilities and Local Government and Shires Associations. The utilities reported their performance which was published in the 1986 NSW Performance Report, which predates performance reporting elsewhere in Australia by over 5 years. Over many years the Country Towns Water Supply and Sewerage Program has provided guidance to local water utilities in the strategic areas of planning and managing water supply and sewerage including pricing, demand management, drought management and regulation of sewerage and trade waste. In 1993, comprehensive guidelines for strategic business planning and financial planning were developed by the Department of Water and Energy in conjunction with the utilities and the Local Government Association & Shires Association. In 1996, the Country Towns Water Supply and Sewerage Program was reformed to restrict financial assistance to part of the capital cost of backlog infrastructure. Works to serve growth and renewals were required to be funded fully by the utilities. In addition, completion of a sound strategic business plan and financial plan was made a pre-requisite for eligibility for financial assistance. In 2004, the Best-Practice Management of Water Supply and Sewerage Guidelines were released. The guidelines set out 6 key criteria for local water utilities and compliance was a pre-requisite for access to financial assistance and for payment of a dividend from the surplus of the water supply and sewerage businesses to a Council s general revenue. In 2007, the Best-Practice Guidelines were updated and revised to include the statement that All local water utilities are expected to substantially comply with the guidelines by June CURRENT SERVICE DELIVERY MODELS Urban water supply and sewerage services in non-metropolitan NSW are provided by: 96 general purpose local government councils; four water supply county councils; one water supply and sewerage county council; and five water supply authorities. The obligations of general purpose council and county council owned water utilities are set out in the Local Government Act The obligations of water supply authorities are set out in the Water Management Act Water utilities operating under these Acts are generally referred to as local water utilities. General purpose councils perform a range of functions including roads, waste disposal, rates, childcare and supplementary health services. Local water utilities operated by general purpose councils are not separate legal entities. The operations of water and sewerage functions are the responsibility of the local council. In some councils, the water supply and sewerage function is a distinct business unit operating on a commercial basis. For example, Shoalhaven City Council established Shoalhaven Water as a distinct business unit to manage the harvesting, treatment and distribution of water and the collection and treatment of sewage in the Shoalhaven City local government area. The unit is also responsible for treating and recycling wastewater. In many other councils, the operational distinction between water related functions and other functions are not as distinct in terms of identity, management and resources. However, the Local Government Act requires that the water supply and sewerage operations of all councils are financially ring-fenced from their other activities. 11 Report December 2008

19 Economies of scope are an important consideration for general purpose councils. Overhead costs are able to be spread across all functions and this generates cost efficiencies. The water supply and sewerage functions of councils are deeply interwoven with the other functions of councils. Billing, customer interface, accounting and finance, human resource management services and other such services are shared by all council functions and the water and sewerage function as a revenue generating arm contributes substantially to the cost of these functions. Councils reported that their water and supply and sewerage revenue can represent up to 35% of total revenue. Five county councils provide water supply and/or sewerage services to 21 local government areas. The county councils are single-purpose organisations that operate independently of local councils. County councils boards of management (councillors) are appointed by the constituent councils that are the recipients of the water supply and sewerage services provided by the county councils. The county councils operate a vertically integrated business providing storage, treatment, distribution and retail services and own, operate and maintain all water supply and/or sewerage assets needed to meet their service obligations. Entities such as local government councils, Corporation Law companies, statutory authorities and state-owned corporations can be designated a water supply authority under the Water Management Act The current water supply authorities are: Gosford City Council a general purpose council Wyong Shire Council a general purpose council Country Energy a State-owned corporation Fish River Water Scheme (State Water) a State-owned corporation Cobar Water Board a board established by the Act comprising membership from three mining companies and Cobar Shire Council with responsibility for ensuring water supply to each member of the Board. CURRENT REGULATORY ARRANGEMENTS In its Pricing Principles for Local Water Authorities,1996 the NSW Independent Pricing and Regulatory Tribunal (IPART) sets out the overall framework for pricing and cost-recovery for water supply and sewerage services by the non-metropolitan local water utilities in NSW. These principles are set out in the Department of Water and Energy s Best-Practice Management Guidelines (2007) and support is provided by the Department for local water utilities to implement them. The IPART principles address the requirements of the Council of Australian Governments Strategic Framework for Water Reform, and strongly endorse the following NSW Government initiatives for local water utilities: Annual performance reporting for water supply and sewerage, which has been in place since Strategic business planning and financial planning by local water utilities in accordance with guidelines and software issued by the Department of Water and Energy in These guidelines require each local water utility to consult its community on the levels of service to be provided for water supply and sewerage services. Local water utility services need to comply with regulatory requirements (eg. environment, health, occupational health and safety, dam safety etc.) and provide the levels of service the community wants and is willing to pay for. The strategic business plan and associated financial plan document the local water utility s proposed asset management, including a capital works plan, operation plan and maintenance plan and determine the annual revenue required to achieve full cost-recovery over the next 30 years. 12 Report December 2008

20 The existing light handed regulatory framework in non-metropolitan NSW is based on the Best-Practice Management of Water Supply and Sewerage Guidelines, which build on the IPART Pricing Principles. The Guidelines consolidate earlier initiatives 2 to promote bestpractice planning and management practices by local water utilities and set out 6 key criteria which local water utilities should meet to achieve best-practice: 1. Strategic Business Planning and Financial Planning; 2. Water Supply, Sewerage and Trade Waste Pricing, Developer Charges and Liquid Trade Waste Regulation; 3. Water conservation; 4. Drought Management; 5. Performance Monitoring; and 6. Integrated Water Cycle Management. The Guidelines were gazetted in May 2004 pursuant to section 409(6) of the Local Government Act and were revised in August The revised Guidelines stipulate that all local water utilities are expected to have substantially complied with the Guidelines by June Local water utilities complying with the Best-Practice Guidelines will have demonstrated effective, affordable and sustainable water supply and sewerage services and compliance with National Water Initiative requirements. Although the guidelines are not mandatory, if local water utilities comply with the guidelines (six best practice criteria) they are: able to pay themselves a dividend from the water and sewerage business to their general revenue; and eligible for financial assistance towards the capital cost of backlog infrastructure. As the guidelines are not mandatory, there is limited recourse in the event of failure to comply with the guidelines. The only recourse the Minister has for poorly performing utilities is that a council will be unable to deduct a dividend if, in the opinion of the Minister, the utility has not substantially complied with the guidelines. The Minister can also direct the council to comply with any particular aspect of the guideline before making any further deduction. To date, there has not been a need to make use of this clause of the Local Government Act. Unlike the larger metropolitan utilities where water and sewerage pricing is regulated by IPART, local water utilities determine their own prices in accordance with the Best-Practice Management of Water Supply and Sewerage Guidelines. The Department of Water and Energy provides utilities with financial planning and pricing guidelines and software, based on IPART principles, to assist with their price setting. Regulation of pricing is discussed in Chapter 8. 2 Comprehensive Guidelines, tools and software provided to assist local water utilities include Strategic Business Planning, Financial Planning, Water Supply, Sewerage and Trade Waste Pricing, Developer Charges, Asset Management, Asset Valuation, Community Involvement, Demand Management, Integrated Water Cycle Management, Operation of Water Treatment Works, Operation of Sewage Treatment Works, Dam Safety Inspection, Trade Waste Regulation and Affordable Water Supply and Sewerage for Small Communities. 13 Report December 2008