Local Government (Water Services Preliminary Arrangements) Bill

Members, we now come to Part 4. This is the debate on clauses 59A to 98, “Watercare Services Limited”. The question is that Part 4 stand part.

Thank you, Mr Chair. The purpose of this part is to ensure the financial separation of Watercare and Auckland Council, to enable Watercare to be able to provide water services to Auckland in a financially sustainable way. This has been negotiated as part of the deal announced in May between the—

💬 Hon Dr Deborah Russell: Point of order. We just can’t quite hear the Minister, because of the mike. Thank you.

Sorry. I apologise, this has become a recurring theme in relation to this microphone.

💬 Hon Member: For once, we want to hear you and we can’t!

I know, I know.

CHAIRPERSON (Teanau Tuiono): Could somebody who controls the mike turn his volume up?

It’s unfortunate. I will attempt to speak with my question time voice again.

This part was part of the negotiation between Auckland Council and the Government in relation to the Local Water Done Well deal, announced in May, between the mayor and the Prime Minister. It relates to a number of elements of that plan in relation to financial separation, putting in place a Crown monitor, a charter, and in relation to the financial separation.

Thank you, Mr Chair. Starting at the start of Part 4, is clause 59A, “Purposes of this Part”. We read that they are “(a) to promote the long-term benefit of consumers”, etc. What I’m interested in asking the Minister about is, at clause 59A(2)(c), this comment that it “is limited in its ability to extract excessive profits.” This is to do with “(2) … promoting outcomes that are consistent with outcomes produced in competitive markets such that Watercare … (c) is limited in its ability to extract excessive profits.” What I’m interested in—and I’ll come to it in another point as well—is how this relates to stormwater, because, of course, the purpose of this part, in clause 59A(1)(a), is “to promote the long-term benefit of consumers of water services”. As we know, that definition of “water services” includes stormwater. Does this limit “in its ability to extract excessive profits” apply to stormwater, and, if so, how? How does that work? That’s what I’m interested in there.

Then we’ve got, over the page, still on clause 59A, that “(3) This Part relates only to delivering the purpose of this Act under section 3(2)(e).”, which is the section about providing a financially sustainable model for Auckland. That makes sense, but then we go to clause 59B, which is the “Application of this Part”, and it says, “This Part applies to water services provided by Watercare in circumstances if there is”—and these are the words I’m interested in, “if there is”; I presume it means that if there is not, then this part does not apply, which seems a little bit odd. I mean, it is all to do with competition, but if we go back to the purposes of the part, it did seem to be about the long-term benefit of consumers. Clause 59B is saying that it only applies if there is “(a) little or no competition in providing those services; and (b) little or no likelihood of a substantial increase in the level of competition.”

I’d really like some clarification from the Minister about the breadth of this part of the bill. Is it only supposed to be where there is little or no competition? Presumably, again, that would always be around stormwater. I can’t imagine a circumstance where there’d be competition for stormwater, but I’m happy to hear an explanation of how I might be wrong on that and should be more imaginative—or if, in fact, that’s a mistake, and the part applies to water services generally by Watercare and it’s not limited to those areas where there’s no competition. As we’ve heard, the purpose of the part in clause 59A is to promote the long-term benefit of consumers and water services, and then, at subclause (3) there, we’ve got that reference back to the start of the bill, at what will be section 3(2)(e), which is the specific provision around Watercare, which I think is what the Minister was referring to when he was saying that there was this deal done in May with Auckland.

My final question, for now, is: given the Minister’s statements about this as the deal for Auckland, what happens to Northland? Is there any ability for Northland to enter this arrangement or not? Of course, we all know that Northland has a number of councils with very small ratepayer bases that have had huge problems, historically, with water treatment in particular. I am interested in the Minister’s answers on that, and across—really, when answering, it would be very helpful to know what services are being talked about when we’re talking about drinking water, when we’re talking about waste water, and when we’re talking about stormwater. The way this is written, it really seems to be focused on drinking water that you’re charging for water usage—you’ve got your water meters in there. And that’s what already happens, is my understanding, with Watercare—that people are charged for their water use. But “water services” is defined to be much broader than just the drinking water. Drinking water’s very important—I don’t mean “just” in any derogatory way—but so is waste water and so is stormwater.

Thank you, Mr Chair—a confined set of questions to the Minister on clause 62A(1) and (2). There will be a number of issues to discuss in the Watercare charter, but I want to just offer the Minister an opportunity to comment on proposed amendments to this section here. As he has said, this is an arrangement that has been reached by his Government and the Auckland Council. But the issue here is that the powers belong to the secretary to prepare the Watercare charter, and not to Aucklanders. I know that he is committed, as Minister, to delivering localism under this plan; in fact, he used his call in answer to my question to remind me of that.

If he’s going to remind this committee of his commitment to localism, is it then a mistake in clause 62A(1) that it’s the secretary preparing the Watercare charter, and, at clause 62A(2), that it’s consultation with Auckland Council rather than development by Auckland Council? Should clause 62A not read, “Auckland Council to prepare the Watercare charter”, and clause 62A(2)(a) read that Auckland Council, Watercare, and Taumata Arowai would develop, under the commission’s regulation, the draft charter? Those words would do what he has said he would do, which is restore localism in this way and protect local ownership of those assets and local provision of local services. There are flow-on effects of the secretary preparing the charter here, for a number of things, which then are given effect to by that clause 62A.

Given that that’s the new provision which he’s introduced, I want him to be able to comment to this committee on that particular section now. I guess the question to him is: would it be appropriate for Auckland Council to develop that charter and to have the power to do so under this part, given that Auckland Council is the decision maker up until this point and could continue to be the decision maker about the values and about the protections that are in place under his legislation that he has proposed? Thank you, Mr Chair.

I thank the members for their questions. What happens to Northland? Part 4 deals with services for Watercare in the Auckland region—it does not apply to Northland—but it does not prevent Auckland Council from entering into joint arrangements with other councils if they wish. How does it apply to stormwater? Auckland Council will continue to retain stormwater. The arrangement set out in Part 4 is mutually beneficial for both Auckland Council and Watercare, and, ultimately, consumers, because it enables them both to borrow independently of each other.

In relation to the issue in clauses 59A and 59B, these clauses are here because, ultimately, Watercare is a monopoly provider and so this is about clarifying that they are a monopoly provider. Of course, then the point of having a Crown monitor and in terms of having a charter is to ensure that there are consumer protections in place to protect consumers and to ensure that, as it says in the purpose section, clause 59A(1)(c), “Watercare manages its operations efficiently with a view to keeping the overall costs of delivering water services at the minimum levels consistent with the effective conduct of its undertakings and the maintenance of the long-term integrity of its assets.” That is what those clauses are to do with.

In relation to the question asked by Arena Williams, this is a point that was discussed between the Government and the Crown. In relation to the preparation of the charter, it was agreed that the secretary would prepare it, but that would, obviously, be done in consultation with Auckland Council. That is, ultimately, due to the fact that the arrangement here needs to ensure that the financial separation which is articulated works to the benefit of both the Crown and the council.

Members, the time has come for me to leave the Chair for the dinner break. The committee will resume at 7.30 p.m.

Sitting suspended from 5.57 p.m. to 7.30 p.m.

OK, members, just before the dinner break, when the committee adjourned for dinner, we were on Part 4. This is the debate on clauses 59A to 98, “Watercare Services Limited”. The question is still that Part 4 stand part.

Thank you, Madam Chair. For Part 4, there are a number of things we would like to speak on, but I want to start by discussing clauses 61 and 62, which are around Crown monitors. We have seen a similar layout and format previously, under clauses 21 and 24, but in this case there are different elements, compared to previous clauses where similar phrasing has appeared.

The first question that we have is a question that my colleague Francisco Hernandez asked previously when we were discussing clauses 21 and 24: when a Crown monitor in this particular case is appointed, what are some of the criteria that the Minister will be looking for when he comes to the appointment of the Crown monitor?

I would be particularly interested in one of the possibilities for a Crown monitor, which is in clause 60A, when it is an individual. I think there might be—and other people may feel free to speak on this—some sorts of guarantee or consistency when we are looking at clause 60(b) and (c), around a Crown entity or a company named in Schedule 4A of the Public Finance Act, but when it is an individual who is being appointed, what are some of the criteria for that appointment, as alluded to in clause 61? In terms of clause 62, in terms of the role of a Crown monitor—a similar thing to what we’re seeing here, although we’re talking about a monitoring function—what are some of the criteria when it comes to ensuring that an individual meets the requirement when they’re being appointed to that? So the first question is around criteria.

The second question I have for the Minister is around clause 74, and, again, it’s to do with the Crown monitor—in this case, in terms of the Crown monitor’s expenses. In clauses 21(2)(da) and 24(2)(da) previously, it was very specific. When you’re looking at recovering remuneration expenses from a Crown facilitator or a Crown water services specialist, it specifically mentions a fees framework; however, we’re not seeing that particular fees framework being suggested in clause 74. So I want to know from the Minister why there is no fees framework that is being used in clause 74 when it comes to the expenses that are recoverable from Watercare for the usage of a Crown monitor.

Again—correct me if I’m wrong—is the reason why a fees framework isn’t being used purely on the basis that we’re looking at the financial separation between Auckland Council and Watercare? But then, again, previously when we were looking at the fees framework that is being used to recover other forms of Crown-appointed individuals, they use the Crown fees framework—whereas, again, it’s not really mentioned here. So I would really be interested to hear from the Minister why that fees framework isn’t being used in this case.

The two questions to the Minister are: the first one is around the criteria for appointing a Crown monitor, and the second one is in terms of the expenses incurred by the Crown monitor. Why is there no fees framework? Thank you.

We’d really only just started on this part of the bill before the dinner break. I’m aware you will have been watching.

CHAIRPERSON (Barbara Kuriger): I have. It’s not a big part, though, I have to say.

But it is a very significant part. And it’s a very significant part because it concerns the water services for a third of the population of the country and the biggest city in the country. It concerns quite a unique structure in the country around Watercare Services.

I think we need to understand, from the Minister, the nature of the deal that has been struck with Auckland Council, because we know that a special deal was struck with Auckland Council. Auckland-based as I am, I think it’s important for people in the rest of the country to understand why Watercare is getting some special treatment here. I think there are some particularly important issues around what is to be done with water in Northland. Northland has been left isolated by this treatment for Watercare.

CHAIRPERSON (Barbara Kuriger): I believe I heard, when I was listening earlier, the question come up about Northland and the Minister in the chair at the time did answer that.

It wasn’t a particularly satisfactory answer, Madam Chair, I take it, but as I was saying, we’ve got all these sets of issues that matter in this part of the bill. What I am particularly concerned about is—it’s right up in the purposes part of the bill, and it’s in clause 59A(2)(b). We want to promote outcomes that would be similar to those in competitive markets so that Watercare “shares with consumers the benefits of efficiency gains in supplying water services, including through lower prices;”. However, interestingly, in the advice that was given to the Minister around this bill and Auckland Council, there was a finding from Standard & Poor’s that, in fact, the debt-servicing costs for Watercare would go up under this arrangement and that, in fact, the cost to run Watercare would increase.

Now, this was reported, obviously, in the advice of the Minister, but it was also reported—I think I read it in The Post—in July. It was an article by Thomas Manch. It’s well recorded that one of the impacts is that, in fact, some of the costs associated with Watercare are going to increase under this arrangement. In actual fact, we know that water rates in Auckland will actually go up—I think the projection is by about 8 percent. I’ve just lost that detail. So it is quite interesting, then, that this particular part of this bill around Watercare Services says that one of the objectives is to share “with consumers the benefits of efficiency gains”, including sharing those benefits “through lower prices”. Yet we know the costs associated with Watercare are going to go up. I don’t understand how the arrangements that the Minister is putting in place can possibly achieve this part of the purpose, and I would like the Minister to speak to the costs that are going to be incurred by Watercare.

Some of those costs are quite substantial. Now, we’ve had a major project going on in Auckland for as long as I’ve lived there—the construction of the central interceptor, a huge underground project to improve the waste-water and the stormwater discharge so that when it rains, we do not get faeces in the harbours anymore. In terms of providing water services that are quality, we know that the population of Auckland is on the increase, and we know that there is increasing pressure on the water infrastructure services. I want to understand how, in the long term, this arrangement is going to ensure that one-third of the country—the 1.5 million of us projected to grow to 2 million of us—who live in Auckland can be sure that this arrangement will guarantee us water of the quality we want and we deserve, and that we get the waste-water disposal in a way that does not pollute our harbours. How is this arrangement going to be any better? So I want to understand that from the Minister.

This is speaking, really, to these two purpose parts of the bill. How does this serve ordinary people in Auckland, who want to know, when they turn on the tap, that the water is safe to drink; who want to know, when it rains, that their harbours will not be polluted; and who want to know that they are going to get water services of the quality they deserve? I’m challenging the Minister to move and tell us how this serves Auckland.

Thank you, Madam Chair. To answer Deborah Russell’s questions about why Watercare is getting special treatment, I think that they were quite quick off the blocks, so their proposed arrangement is expected to deliver lower prices than would have otherwise been the case prior to the deal being struck. Auckland Council was proposing to increase water charges by 25.8 percent from 1 July. With the financial separation, the price increase will be around about 7.2 percent, and future charges are also expected to be lower than they would have been. It is a substantial decrease in what was expected, from 25.8 percent down to 7.2 percent.

Going to the previous questions about “When a monitor is appointed, what are the criteria?”, the Crown monitor will require, as you would expect, a range of skills, expertise, and experience in, for example, the regulation of a monopoly business, and will have familiarity with the water industry and the economic and financial skills which you might expect of a monitor. So we’re anticipating that that sort of criteria would be applied in the appointment process.

With regard to the fees framework that was mentioned for the Crown facilitator and Crown water services specialist, that is based on arrangements under Part 10 of the Local Government Act. The Crown facilitator and Crown water services specialist are appointed by the Minister in a similar manner to how Crown managers or other assistance and intervention roles are, as in Part 10 of the Local Government Act. I hope that covers the questions.

I am going to call the Hon David Parker, but what I want to hear from here on in—because we have been on this bill for a long time; this is a smallish part—I want to hear questions rather than speeches, so I know that a skilled previous Minister will be able to home in on that.

I hope so. Thank you, Madam Chair. The history of the regulation of monopolies in the water space is an illustration of why you actually need it. Theoretically, if you have a community-owned monopoly, you would think the incentives for excessive profit-taking are not as strong as if you have a private sector owner of a monopoly. But you can still have the problem of under-investment by the monopoly, and we’ve seen that up and down the country in the water and sewage space for a long space, which is why we have the problem in New Zealand of poor water quality delivered by some of our councils and inadequate treatment of their sewage. So I accept that history in New Zealand shows we need a regulatory model around the monopoly services that councils provide for water and sewage.

My question, though, is: what should be the pricing model that we apply to that monopoly? There’s been quite a long-time controversy—or not so much controversy but divided views within the economist communities in New Zealand as to whether we’ve got the right regulatory oversight model and pricing model for our monopolies, whether it’s water, like this case; sewage; electricity transmission; or some of the other monopolies. And there’s a very capable economist—Geoff Bertram—who points out that we run a different regulatory model for monopolies in New Zealand than they do in the United States. In New Zealand, we tend to try and value the overall asset base and give a fair return on the overall asset base, with some incentive for new investment. In the United States, they tend to give a greater incentive to the next investment, because you need the next investment in the new piece of infrastructure. So they’ll allow a high rate of return on the new investment, but they don’t increase the value of the existing asset base by inflation, they, effectively, only allow a decent rate of return on that historic cost. So they incentivise the new investment very strongly, but they don’t allow the old assets to be constantly revalued upwards.

My question of the Minister in the chair, Hon Penny Simmonds, is whether, in these arrangements that we are setting for the oversight of the revenue model, which, of course, is associated with the services that are to be supplied by Watercare, we are leaving open policy space for that debate to continue in the future. I, for one, think that the experience in New Zealand suggests that our under-investment in infrastructure might suggest that it is worthy for New Zealand to have the policy space to be considering whether we should be reconfiguring the incentives based on the pricing mechanisms that apply, or the oversight mechanisms that apply, to these providers of monopoly services, so that we really incentivise the new investments that we need, but we don’t unnecessarily lift the value of the asset base and inflate the rate of return that is given on the historic investments.

Just to be clear, again, my question of the Minister is: do we have the policy space in this regulatory framework to allow both of those options going forward, or are we, effectively, putting in place a regulatory regime that entrenches the status quo model that we’ve seen in New Zealand, which doesn’t take the same approach as in America?

I move, That debate on this question now close.

I’m going to take a call from Camilla Belich, who has been vigorously trying to get a question. But I really would ask that we come pretty close to honing in on the questions now, because we’ve had quite a bit of time on some of these. Thank you.

Thank you very much for the call, Madam Chair. As an Auckland-based MP, I am really pleased to be able to have a call on the Watercare section of this bill. I do have a number of questions which I don’t think have been addressed yet by the Minister—and I just note that for the purposes of this section, the Minister for Auckland has been replaced by the Minister for Invercargill. But that’s an aside.

The questions I have are in relation to the charter for Watercare. The charter for Watercare is set out in quite a bit of detail in this bill and it forms quite a big part of this bill. In clause 62A, it states that the secretary—which is the Secretary for the Department of Internal Affairs—must prepare a charter for Watercare. The question I have for the Minister is: we’ve heard a lot of rhetoric around this bill making sure that local services and local people are in control of local affairs, how does that work with this proposal for the Secretary of the Department of Internal Affairs to create this new charter for Watercare? It’s quite detailed on this. I do note that it also outlines that there should be consultation with other groups that are located in Auckland, but the final decision does rest with the secretary. I just wanted to know: has the Minister considered putting more local control into this particular part in relation to the charter, which I think is quite important?

In relation to the charter, I just had a question around—and I did have a bit of a research; I’m not on the select committee that was considering this bill—to try and see if there was an existing charter that it was replacing. I could see that Watercare had a promise that they made that they’ve outlined on their website. I wanted to ask the Minister the intersection between the Watercare promise, which is, essentially, as far as I can ascertain, to treat water, to provide safe drinking water, to not allow pollution. Now, that promise, as a resident of Auckland, I can tell you, is sometimes not upheld by Watercare. A group I’ve been working with for quite a period of time in Hobson Bay, Hapua Thrive—there’s a huge amount of sewage going into the harbour there. It’s very difficult for the residents there. There’s a significant need for additional infrastructure in this area.

I wanted to know, with the focus on Watercare and with this—in the charter, there’s a lot of requirements for Watercare to meet certain objectives. What I wanted to know is can the Minister guarantee that under these changes, the people—like the people of Hapua Thrive who live near Hobson Bay—will they be able to, or can the Minister make some kind of commitment that these new provisions around Watercare will actually produce better results for them in terms of the outgoing sewage into the harbour that they can smell on their walks, that makes it difficult to let their dog off a lead, that means that they can’t enjoy going kayaking in the Waitematā?

I would like the Minister to address that, but also just to go back to my initial question: can she let us know about the charter and exactly the local elements of the charter and how this will actually ensure local control of local affairs? I think there are a lot of people in Auckland who will find it unusual to have a fully council-owned organisation like Watercare having a piece of extremely detailed legislation in relation to its performance. They’re almost like key performance indicators in this section of the bill, and how is that actually going to deliver better water quality for Aucklanders? I do think that there are some important questions, and I see the Minister is taking some advice, so I hope that she’s in a position to be able to answer those.

I’m just waiting for a moment. The Minister’s taking some advice.

I move, That debate on this question now close.

The question is that the Minister’s amendments to Part 4 set out on Amendment Paper 65 be agreed to.