Water Services Economic Efficiency and Consumer Protection Bill

Thank you, Mr Bayly. The reason I wasn’t disposed to answer your question was because it didn’t relate to Part 1, but now that leave has been sought and granted to take the matter as one question, I’m at liberty to answer anything on any part of the bill, which makes life a little easier. The fact of the matter is that this isn’t particularly heavy-handed. It’s a well-recognised method of regulating natural monopolies, which, left to their own devices, have a tendency to act in a monopolistic manner, either by poor investment plans or by excess pricing or by poor service.

So this, as I’ve mentioned already in this Chamber in this committee stage, is used in respect of telecommunications and electricity already—a well-proven, right-sized and appropriately scoped regulatory framework.

It’s interesting that the Minister refers to the electricity sector amongst others as being models, but the reality is that those are not equivalent models, because the entities that are running those are commercially orientated companies—the electricity industry, in particular. They are listed on the New Zealand Stock Exchange. They are very large commercial entities and, in fact, they have other operations other than just the regulated part of their business. So I find that example not particularly relevant, because these are, effectively, closed entities. There is no one else with the ability to compete with them, because there is a monopoly over the infrastructure that they have in place.

But the risk of these in terms of shareholder risk, as I’ve said right in my introductory comments before dinner, is that there is no shareholder, there are no accountabilities, there is no maximisation of profit, and you’d have to argue that the maximisation of profit is probably the greatest risk towards needing or requiring a heavy-handed regulation approach. In these situations, we don’t. We have entities that, if anything, are more likely to under-invest rather than over-invest. The pricing aspect of it, which the Minister mentioned, doesn’t really come into play, because there is no issue around profit maximisation or whatever, because that’s not what their purpose is. Their purpose is to deliver the service. Even if they did build up retained earnings, they can’t pay it out to shareholders; they are not accountable to it. Everything would need to be retained within the business and, presumably, be applied to future investments and infrastructure investments.

So, again, I’m trying to understand the concept of competition that the Labour Government is so keen to regulate, because that seems to be the driver. Or is the Minister just saying, “Because they happen to have a monopoly, we need to have a really heavy-handed economic approach to it.”? My experience of regulatory frameworks of water assets around the world, particularly in Australia and the UK, is that you would apply this approach where there are commercial entities, not where they are quasi - Government-controlled closed entities with no real shareholders that will benefit from any additional profit or profit maximisation.

I thank the member for identifying in there that these are, indeed, not-for-profit entities. They won’t be granting dividends. They are there for the benefit of the community. However, having said that, the expression of limiting excessive profits, which is what this legislation is in part about, is entirely appropriate, and that’s why this framework was adopted. Obviously, in any business like this, there is an equity return, directly or indirectly, from the water services entity. It is conceivable that the water services entity could still earn a higher than normal return in the absence of scrutiny, or, conversely, run a lower than normal effective organisation, which would, again, indicate that competition or a similar framework wasn’t working well.

So this economic regulation framework is designed to allow regulated entities to grow and expand to serve more consumers, but not simply grow on the back of excess profits. This is enabled by allowing more investment, which would increase the size and value of an entity’s asset base to accommodate any new investment.

Part 2 of the bill, which we can now debate, allows the commission to specify its price quality path, the maximum revenues that reflect the expected return. So, yes, workable and effective competition—and you’re right, this is a not-for-profit entity—a little bit different than some of the electricity sector. But anywhere where there is an effective monopoly left to itself, the entities won’t deliver best value or value that’s for the long-term benefit of consumers into the market, so regulation is required and that’s exactly what we’ve got here. I’m confident that we’ve got it right and that the Commerce Commission has the skills, the expertise, the knowledge, and the background to implement this regulatory regime.

Thank you, Madam Chair. Minister, if we could just go back to the Commerce Commission’s role as a regulator in this instance. It had been offered to me on the back of conversations with Simon Court that they lack the technical capacity to actually understand the state of the infrastructure as we sit here today. There are projections and statements offered to me by him that perhaps, in some instances, the understanding of the assets’ state of repair or disrepair might not be afforded to the Commerce Commission for the next two or three years. In other words, the state of repair as we sit today. So how will the Commerce Commission seek to regulate an industry when the state of asset management, as it is today, is still an unknown reality?

I thank the member for the comment. It’s an apposite observation that the state of repair of many of our water assets is unknown and that is why, in the initial phase of this regulatory regime, the main power that the Commerce Commission will be exercising—before full regulatory powers come into force—will be information gathering. That will be information gathering on the state of the assets, the pricing regime, the investment required, investment plans in place, and what will be required in future.

So this is a programme which, to be fully rolled out, will take several years, but absolutely right that because of the lack of investment and the diverse nature of these assets being spread around the country—amongst many, many local authorities—we don’t know what we need to know, and that will be one of the first jobs of the commission.

Thank you, Madam Chair. I keep labouring this point about what is the basis of this and the reason for why we’ve ended up with such comprehensive oversight—economic regulation—because that is the platform on which everything else follows.

What I find intriguing is the basis for building the platform, and it’s interesting looking at clause 12, “Purpose of this Part”. It says that “The purpose of this Part is to promote the long-term benefit of consumers of water infrastructure services in markets where there is little or no competition, and little or no likelihood of a substantial increase in competition”. Then it goes on to say that the purpose is to provide “incentives to innovate”, to have “incentives to improve efficiency”, “share with consumers the benefits of efficiency gains”, and “are limited in their ability to extract [excess] profits.” It’s that last one I find quite intriguing because the Minister just referred to it. He said we need to regulate, in effect—I’m paraphrasing—if these entities end up achieving higher than their required returns, that might, in some ways, be damaging.

But the point is—and I think the Minister’s acknowledged it—these entities can’t pay out dividends. They can’t pay out any remuneration to shareholders. The benefit sits inside the entity for the benefit of consumers. If that does build up retained earnings, which I presume these entities can, to meet future obligations—in particular infrastructure obligations, which are often 30 years’ life of these assets—then I find the proposition with that is why I just can’t understand why we’ve ended up with such heavy-handed regulations.

Because this is one of the core differences that we have with the Labour Party in terms of oversight of this. We certainly agree that there should be the oversight, but the model that’s been put forward by the Government is one of a heavy-handed nature, and that’s what I’m trying to ascertain from the Minister as to why he has promoted this, and what were the other options. Because there are many other options you could have put in place, but this is the foundation on which this whole bill rests.

Look, this is the fourth time that question’s been asked and now the fourth time it’s been answered, so I don’t propose to engage in any further discussion on it. If the member wants to know what other options were explored, I invited him to go to dia.govt.nz, where all of the options papers can be found.

This approach is one that’s tried and true, not only in New Zealand across other sectors but in respect of publicly held water entities in Scotland—as the member will know well. Indeed, it drove significant cost savings and efficiencies there. So that’s resulted in significant decreases in the cost of water services for customers there.

Well, let’s get specific. Clause 12 that I’ve been referring to, can the Minister define what “excessive profits” means? Just while the Minister’s doing that, can the Minister, again in the same clause, tell me what are the incentives to innovate that’s going to make it and improve efficiency? And what are those sorts of measures?

I think the big issue is actually whether there’s under-investment or over-investment. Under-investment is not meeting the requirements and over-investment is going for gold-plating. I think that’s probably the issue more likely to be of importance when determining the nature of investment spending and ultimately the pricing put forward.

I just want to now turn to clause 15, while the Minister’s contemplating that, hopefully, or should I let the Minister stand? I’m just looking at him there. Turning to clause 15, “Determinations made by Commission under this section”, it talks about “The Commission may make determinations under this section specifying how 1 or more of the following apply to regulated water services providers: (a), information disclosure …: (b) quality regulation: (c) price-quality regulation.”

What I’d quite like, and I think my colleague from ACT was starting to allude to this—what is the linkage and overlap with Taumata Arowai in terms of quality regulation? Because all parties, I think even ACT, supported Taumata Arowai as the regulator in terms of setting standards. What is that interplay between this and the role of the Commerce Commission? Because ultimately it should be for the water services entity to take the instruction from Taumata Arowai and then to put them in place and put the investment frameworks in place to meet those over time. So again, I’ll just leave that question.

I’ll try—I’ve been given advice, if I’ve got this wrong, but my understanding of Taumata Arowai is it is very much a health standard, and that’s one aspect of quality, quite appropriately set by an independent body. But water service delivery quality comes in many forms. For example, the way in which the billing is done so that it’s understandable to consumers is one form of service quality. Another form of service quality would be consistency and pressure. It doesn’t affect the drinkability or usability of the water, but nevertheless is a quality standard. So, yes, Taumata Arowai has a quality function in terms of water being potable, being safe, healthy, and drinkable, as indeed this water is before us. But overall, in general, there are much wider quality standards and the commission will have a role in determining those.

Thank you very much, Madam Chair. Minister, I just want to ask some more questions around this—the purpose of this part and how some of the issues that were identified in the regulatory impact assessment on this are going to be addressed. The problem definition, I suppose, is that there’s been an establishment of four financially and operationally independent water services entities, which are intended to address current problems of poor water quality in some places and customer service, insufficient infrastructure investment, and inefficient pricing practices. But what they also will do is these four new entities will create natural monopolies and there won’t be necessarily these strong members or directors of those monopolies who will have incentives to ensure that these inefficiencies are addressed, that the community voice is expressed, and ultimately that people get good quality service for a reasonable price.

I’ll just read a little bit of this regulatory assessment. It says “Without economic regulation, the monopoly nature of the entities, combined with the lack of equity market and local government oversight, will likely be detrimental to consumer welfare. This is because the entities will have the ability and incentive to charge higher prices and provide services that are lower quality and less efficient and innovative than what would be seen in a workably competitive market. There is also an inherent power imbalance between large, vertically integrated monopoly suppliers and the consumers they service, creating a risk that customers of the four new entities will suffer unsatisfactory outcomes.”

So if I look to the purpose of this part, which is to promote the long-term benefit of consumers of water infrastructure services in markets where there’s little or no competition and little or no likelihood of a substantial increase in competition, I’d be curious about how this will address these issues raised of a natural lack of competition, or will actually reduce the competition potentially that’s available with these four large monopolies which would have a natural incentive to charge higher prices, offer lower services and less investment.

If I think about my region, I mean, my electorate alone is bigger than Belgium. That’s just one small part of the lower half of the South Island, and we have these large areas where there are very many, many hundreds of kilometres between different settlements, in some cases, across the lower South Island. How will there be the ability to ensure that those areas actually have better investment? Because obviously there will need to be decisions made about where to invest. There won’t necessarily be sufficient capital available for investment in all things. And if I just look at, say, Gore—like, how will the needs of Gore, in terms of this, be expressed in a monopoly that’s also concerned with, say, the needs of Christchurch? So just how are you going to deliver on this issue that’s identified with the natural monopolies that these entities will establish?

Before I call the Minister, if I could just say to members, there’s been quite a number of questions just about this particular part, clause 12, “Purpose of this Part”. It’s beginning to be a bit repetitive, but I will call on the Minister if he wants to address this again.

Thank you, Madam Chair. Good to see it comes back down to the interests of Gore. I would invite the member to catch up. There’s now 10 entities, so Gore won’t be part of the same entity as, say, Christchurch, and that was in fact one of the drivers of that under Minister McAnulty, which was indeed to ensure there was a better local voice.

One of the changes there—a separate bill, but happy to just comment on it briefly—was to ensure that each local body would have a voice in the governance structure of those entities. And, of course, ensuring the long-term benefit of consumers, which is this bill—the regulatory aspect of this bill includes all consumers. I note that one of the very good improvements of the Finance and Expenditure Committee was to identify vulnerable customers. Now, that might identify as perhaps people on low incomes, but I think it also identifies people in rural locations who might not otherwise get good access to water services. So those things have been addressed and I think we’re in a good space in that regard.

Thank you, Madam Chair. Minister, If I could draw your attention back to some remarks you made earlier about the primary role of the Commerce Commission in terms of information gathering, I think you said, and it may take—I’m paraphrasing because I apologise, I can’t remember your exact wording—several years to source the needed information over the state of the assets, their repair or state of disrepair before subsequent regulations came into effect. What sort of cost-benefit analysis has been done as a counterfactual, if any at all, that you want to speak to or are aware of, in terms of how it would stifle investment in infrastructure asset management, water infrastructure asset management, in the interim period, if you’ve used the words “several years”, and what does several years ultimately look like whilst we’re going through this theorised information-gathering preamble to the regulations that follow it?

If the member wants to see a cost-benefit analysis, they’re all available on the Department of Internal Affairs website, and this debate is not the place for that. In terms of time lines, there are two slightly different time lines, one for Entity A which is the Auckland - Northland entity, which is more prepared to embark on this journey, and the second time line is for the other nine entities.

By way of example, rather than going into every minute detail, up until the middle of 2024, information gathering will go on for Entity A. Then the pre-regulatory period, taking that information and developing input methodologies, models, and so on, so that we can understand how it will roll out—that will occur in 2024 through to June 2026. The first regulatory period for Entity A will start on 1 July 2027, and that’s when the quality regulation will be in place. Then if we’re looking at price quality regulation, that would be the second regulatory period which would begin on 1 July 2030.

You made the comment about—something about we’re a bit repetitive, but, unfortunately, I just would note that we’ve agreed that we’re going to do it all at once, all parts, but we’re obviously working our way logically through the bill. I have asked some very specific questions and I’m yet to get a response on them, and I don’t want to keep going back to them, but they have been asked for a reason, namely: what is the definition of excess profit? It’s not a stupid question. What is the return that would be expected of these entities, and above that, what does that mean, “excessive”? Because it does have a play in terms of pricing or the conversation we’re about to have around quality pricing framework, all that sort of stuff. So I would urge the Minister to address some of the specific questions, otherwise I will keep going back to the question.

Now, I want to just move on in terms of the next question around moving into the timing and nature of the input methodologies. Obviously, those are going to be determined by the commission during the initial period—I’m referring to clause 18 here. Can the Minister provide us, provide the committee and, hopefully, some of the listeners with some information on what would be the nature of those import methodologies? Can you give us some examples? Again, I’m seeking specific questions rather than just trying to stand up and give a speech.

Thank you. I am not an expert in input methodologies, nor am I an expert on what profits are excessive. The experts in that are the Commerce Commission. So the reason why I won’t be standing up and telling you an economic definition of what an excessive profit looks like is because that job has been given to the Commerce Commission, who will develop models and methods based on the information they gather to do that. So I won’t be designing input methodologies here, nor will I be determining what an excess profit looks like, because those are the very questions we’re asking the Commerce Commission to look into.

Thank you, Madam Chair. And thank you, Madam Chair, for that clarification of the number of entities. I have to say, I did think it was 10, but I picked up the regulatory impact statement from the Table which said it was four. Ha, ha! So it seems there’s some difficulties—and this is prepared by one of the Government agencies, obviously, so there’s some challenges on keeping up with the fast-moving nature of the changes. And maybe we’ve also got this 102-page Supplementary Order Paper that we’ll need to work our way through as well, which brings a number of changes. I’m just going to ask a question—

💬 Dr Tracey McLellan: Enjoy the reading.

Pardon?

💬 Dr Tracey McLellan: Enjoy the reading.

“Enjoy the reading.” Oh, thank you. Yes, it’s 102 pages of reading of this new Supplementary Order Paper that we’ve got here, which has got fairly chunky things in it. But one of the points that was raised, actually—and also in the departmental disclosure statement it also talks about four entities, interestingly, but I’ll leave that for another day. But one of the issues that it raises is that there’s a risk of uncertainty in terms of the economic regulation, which the industry hasn’t been subject to before, which could lead to some water entities acting too cautiously, focusing on compliance with little regard to efficiency in an effort to avoid any risk of contravening the provisions of the Act. And I do note, when I have a quick flick through this 102-page Supplementary Order Paper, that there are some pretty significant penalties in here for individuals—say, $500,000 or $5 million in some cases. So I can certainly see that there’ll be some caution being exercised by those who have decision-making responsibilities in terms of this Act. It may mean they will be focusing on this issue identified here, on compliance rather than efficiencies. And I would be interested in the Minister’s view on how that balance has been struck and what has been done to try to address that concern that was raised in the departmental disclosure statement.

Just in terms of input methodologies, you might want to have a quick look at clause 27, which does give some framework around what kind of things might be in that, and I probably should have referred to that earlier. In terms of the point that this might stifle innovation or be inflexible, that is something that must be held in mind by the regulator. That’s why it’s important that this regulatory regime needs to be flexible to allow for different forms of economic regulation. That’s why we haven’t imposed it. It’s still being designed and applied in a staged approach so as to be able to adapt to the changes as they emerge. So that’s why this bill contains the flexible level of economic regulation to essentially shift up and down as to what’s needed. If the market or the entities operate well, very light-handed regulation would be needed. If it’s clear that consumers aren’t getting a fair deal, then perhaps more will be needed.

But the bill also allows other water services providers such as community and private water schemes to be designated into this regime as well and to the consumer protection provisions if a Minister deems that necessary—so that’s in clauses 139E and 139L. So if a water provider started ripping off its customers and wasn’t regulated, they could indeed be brought in. That’s really just an example of how this is a flexible regime that can be scaled up and down and entities can be brought into it as required to address the concerns that the member no doubt has for his community.

Thank you. I love that expression “ripping off customers” that the Minister’s just used. Well, that was my point. Why would they rip off their customers? Because they’re owned by the customers that control them. There is no commercial incentive to rip your customers off. So that was my point earlier, but we didn’t get a definition on that.

In terms of timing, the regulatory period—obviously we have this information-gathering period which, basically, takes three years, and then we move into the next period, which can’t be any longer than six years. Why is the information-gathering process expected to take so long? Because obviously that’s delaying some of the other types of regulation that you might expect to come into play, but it seems to be a very long period of time to capture the information. I take the point—and the Minister is going to stand up, I have no doubt, and say, “Oh, they’re brand new entities, blah, blah, blah.” But all councils have been required to have asset management plans. They’ll have all that sort of stuff that they can pass across. I’m just intrigued why the Government thought that the information disclosure component—the first part of the regulations—is going to take so long. So it’d be helpful for some insight on that.

Thank you, Madam Chair. Minister Webb, could I please bring your attention to Part 1, clause 8, and, reading verbatim, if I may: “In [the] Act, unless context otherwise requires, drinking water infrastructure services—(a) means … [abstract] storage, treatment, transmission, or transportation”. I’m trying to square away in my mind, in the sphere of the Commerce Commission after the early preliminary information gathering period of time and the state of the assets, quite how transportation plays out in terms of the role of the Commerce Commission in its capacity as a regulator to determine the health—and I’m trying to figure out the right wording here: the health of the infrastructure in transportation of drinking water. Now, what does that look like? How wide will that be in terms of what the role of the Commerce Commission is—means, obviously, and we can canvass it: “treatment, transmission, or transportation”. Well, how wide is the scope going to be in terms of the transportation of mechanised infrastructure, in terms of water infrastructure that’s to do with transportation? I mean, how wide do you want to go?

Just to note, Mr Bayly talked about ripping off customers, and it’s not impossible, for example, that an entity might, sort of, gold-plate infrastructure or even gold-plate—and may well over-invest or, in fact, invest in their own office premises, or otherwise use their assets in an ineffective manner.

In terms of why does information gathering take so long, I think Mr Bayly is over-optimistic about the quality of the information that’s out there already. If anything, this process has shown that one of the critical failures across some local bodies is that they don’t actually know the quality of their own infrastructure and, essentially, the extent and nature of it.

In terms of transportation, now, that’s an example of the drafter being rightly flexible in their approach, trying to make sure that they’re not constraining the entity in the way they move water from one place to another. Transportation could conceivably be through pipes; it could also be perhaps captured by transmission. There are other situations where water might be transported, in fact, by a motor vehicle. But the fact of the matter is it’s a definition which is seeking to capture the movement of water, however that entity might choose to achieve it.

Thank you, Madam Chair. Well, yes, OK, just carrying on with input methodologies—I’m just wondering whether I’ll rebut some of that, but I won’t. It’s interesting the Minister made the aspersion around the quality of assets, the water and waste-water assets of the councils, and said, “Oh, well, maybe, you know, you’d be surprised.” Actually, when I look at clause 27, at the actual requirements, they’re quite specific. The first one says, “methodologies for evaluating or determining the following”, “cost of capital”—well, that’s not a hard job. If you went to an economist, they could probably do that in a week, because cost of capital for these types of entities, it’s standard practice, very easy. Capital asset pricing model, betas, whatever—they’re all readily available.

The second point, “valuation of assets, including depreciation, and treatment of revaluations”, presumably, that is going to take place anyway, because, as I understand it, these new entities have been set up, they’ll have to set up with new assets, and there will have to be a transfer of value back to the councils as well as an assignment of debt. So, before you can set them up, that would’ve already taken place, I presume, to establish values—otherwise, we really would be ripping off the councils, wouldn’t we, and, ultimately, the residents of those areas.

Third one, “allocation of common costs”, well, yeah, OK, that’s pretty easy. They’re going to be brand-new operations. And “treatment of taxation”, well, I didn’t think there was taxation on these entities. Maybe the Minister can elaborate on what the taxation is. Are these entities subject to tax, and, if so, what’s the nature of that? Are they paying at a corporate rate? Are they paying at a different rate than that?

So there we are—we’ve got four. Maybe I’ll let the Minister respond to those before I’m moving on to the next lot.

Thank you, Madam Chair. Minister, going back to this transportation issue, leaving aside reticulation, which we can understand going through conduits, pipes, etc., etc., treatment facilities—transportation: would this, yes or no, include trucks? Now, I live in rural New Zealand. Quite often, drinking water is taken via the supplier to households. I mean, we’re on tank water, as you can well imagine. Transportation is, again, very subjective; it’s a very wide definition here. Would it include the regulatory oversight from the Commerce Commission for those transporting drinking water, i.e., on a road network in trucks, quite specifically, or quite separate from a reticulated system? Yes or no, please, sir.

I’m just hoping the Minister of Commerce and Consumer Affairs is going to respond to my questions on clause 27. But, anyway, let’s carry on—clause 27(1)(c), because they’re all relevant. So this is the other part of the input methodologies, “methodologies for capital expenditure projects”. So these entities need to provide the following: “(i) requirements that the regulated water services provider must meet, including the scope and specificity of information required, the extent of independent verification and audit,”—so while it’s a lot of words, it’s not that difficult—“and the extent of consultation and agreement with other parties;”. Mm-hmm! OK. And “(ii) the criteria the Commission will use to evaluate capital expenditure proposals;”. So that’s the Commerce Commission actually doing some work. Again, investment in infrastructure projects are pretty standard, sort of, criteria that are used to do it. And “(iii) time frames and processes for evaluating capital expenditure proposals,”. So that’s another major part of the input methodology. Again, that doesn’t seem long.

What I do find fascinating, and I would have thought we might have included in this list, is probably the biggest driver in terms of getting value for money for from infrastructure investment: what the procurement model is. What is the model that these entities are going to use to procure? Do you take the approach that Watercare’s adopted in the last couple of years, to form long-term agreements with a number of large entities and say to them we will commit to doing all our infrastructure with you over the next 10 years? As an example, one of those partners is Downer, and I think Fletcher Construction are in there as well. Or are they going to go down Auckland Transport piece by piece, breaking down motorways into subparts and trying to compete and procure badly, as they do it, down the southern motorways that we’ve observed? But each one of them will have a different outcome. They will be measured differently in terms of what the long-term cost has been—not the short term, the first-up all-up cost, because there will be a maintenance element to it. And so that’s why I’m surprised, also, that the issue around the procurement model wouldn’t have been part of these input methodologies.

But there we are, we got two key sets of import methodologies. I’m really keen to understand what the Minister thinks about them and why it takes so long to get a response.

It took quite a long time to get to a question there, Mr Bayly. Procurement practices are not part of this bill. That’s part of the Water Services—

💬 Andrew Bayly: Why not?

Because it’s part of the Water Services Entity Amendment Act 2023. So catch up on that one. In respect of cost of capital, given that he’s—at least on his web page, it says he was a merchant banker, I think he’d know better than most that the valuation of cost of capital is a much fought-over question and there are many methodologies, and exactly how you look at it is highly sensitive And so that’s exactly why we want an effective input methodology to do that. Other than that, good reading of clause 27.

Mr Cameron, yes, look, water transported by truck—if it’s part of the operations of the entity, it could become a part of the model. But it’s about the regulation of the entity itself and the costs that it has, not third parties who might be doing it in a different manner.

Yeah, well, thank you. That was a great response from a professor of laws, but, actually, working out the cost of capital is a very simple exercise. It’s called capital asset price model. It has about four variables: risk-free rate, beta—and it’s a pretty easy model to work it out. The issue is just working out what those inputs are. To a large extent, they remain steady over time in terms of the risk-free rate, and then applying that to the risk factor of the industry—which is, again, a low-risk industry. It has norms, very easy norms—lesson one. So, obviously, the Minister of Commerce and Consumer Affairs doesn’t have much expertise in that area.

I just want to return now to the issue of this duration. So, I presume, because the Minister hasn’t actually answered, from his answers, that he thinks this is all going to take a long period of time. Procurement does actually drive costs of infrastructure and, ultimately, to the price—I make that difference with the Minister. But just turning now to this issue around clause 23 and how it relates to clause 22(1)(a), and determining the duration of subsequent periods. This is, of course from, 1 July 2027, which cannot be any longer than six years—well, that’s what it says in Subpart 2. But in clause 20(2A), it says that this “Commission may set out different periods for different regulated water services providers as the Commission sees fit.” It goes on in clause 23 to talk about the Minister making that determination. Let’s just start with an easy question: under what circumstances or reasons would the Minister contemplate delaying that or changing the date that’s not currently within the three-year periods that are set out in the bill? What would be likely scenarios in which the Minister would contemplate where he might choose to make that change?

After receiving and considering a recommendation from the Commission under section 139H; and as satisfied of the matter, set out in section 139H(1)(a); and in relation to a regulated water services provider that services the Auckland and Northland area, which is set out in the bill, of course. Look, in terms of what would I need to do as Minister, or any future Minister, to make a decision, I must say, Mr Bayly, it’s really not helpful to set it out in this forum, because that is a matter of discretion, as bound by the bill, for a future Minister. It would be exceedingly unhelpful to constrain that in any way by, essentially, my reckons on what I think I would do. The basis upon what can be exercised at law is set out in the legislation, but it needs to be those rules which determine that, rather than my opinion of when that might be appropriate.

I did ask specifically about taxation. This is clause 27(1)(a)(iv), because it specifically mentions treatment of taxation. Hopefully, he can turn to his advisers and might get a little bit of advice on: what is the nature of taxation; are these entities subject to some form of corporate tax or what form of tax are they subject to? And I see them just turning over a few pages there, that would be great just to give them a bit of time before they brief you, Minister.

I just want to move on now to Subpart 4, new clause 34(2A): “in relation to [the] statutory water … [entities], information required to be disclosed must include information about how the entity is fulfilling its objective to support and enable planning processes, growth, and housing and urban development and, in particular, the entity’s level of responsiveness in relation to those issues”.

Now I’m going back under principal stuff, which I think the Minister might be a bit more comfortable dealing with rather than specifics; what is the Minister’s view around what these water entities must do to fulfil and support those objectives? Is it proactive? Is it reactive? Is it when the conflict comes between whether an entity is going to fund new developments for new housing, let’s say in a greenfields area as opposed to a brownfields infill or as opposed to repairing the pipes by putting plastic down the middle of them to meet the higher pressure standards which the Minister specifically referred to as part of the quality standards—what is the role of the water services entity and how does it balance those competing demands? Because, sure as eggs, those are competing demands.

CHAIRPERSON (Hon Jenny Salesa): I call on the Minister, the Hon Dr Duncan Webb.

Tax, tax, tax!

Well, you are the party of “tax, tax, tax” and thank you for yelling that out, Mr Bayly.

So it would be expected that these not-for-profit entities would be unlikely to be paying income tax, for obvious reasons, but given how they are being structured it’s likely that they will have residual tax obligations which will feed into the model. So that’s really making sure that the input methodologies are fit for purpose in terms of taking these entities as they come so that the regulated water services providers may have some tax obligations—for example, income derived from regulated water services provided as a trustee—and that’s why there’s the treatment of tax under clause 27(1)(a)(iv). It will allow the commission to specify methodologies which allow it to recognise the impact of tax in its price-quality path determinations.

In respect of the material around the obligation to support and enable planning processes, the member should be well aware, because I think it was after a robust discussion at committee that those provisions were put into this—and I thank the member for his input into that, I believe, on the Finance and Expenditure Committee—and it is appropriate that that is part of the thinking around any role of the commission in regulating the entities to make sure they are discharging the function of supporting and enabling planning processes, growth, and housing and urban development and the entity’s responsiveness in relation to those issues. And then that refers back to the other legislation which is entirely appropriate.

I move, That the question be now put.

I know our Labour members on the other side—we’re at only clause 37 and this bill goes to 146, so I would encourage members on the other side, rather than sitting there passively waiting to go and celebrate and do other things tonight, to actually join in the conversation and actually provide some input.

So I think that was a revelation of the night from the Minister. So I just want to be very, very clear because, you know, I’ve asked this many times of the officials during the process: what is the nature of the ownership and what is the nature of the entity that we’re talking about here with these four-cum-10 water services entities? That, as I understand it, is they are not companies, but they have a special meaning. So I just want to be very, very clear, and I’m looking at the officials here. I presume these entities have to account for GST, but can the Minister just give a straight answer: are these entities required to pay tax on their activities—first of all, in their regulated activities as set out in this bill, and their non-regulated activities which I am about to get in to? But I just want to a very clear answer from you Minister, hopefully, from your officials, and I see they are still debating back there—OK. So I hasten to carry on, unless they are ready to talk?

💬 Dr Liz Craig: No, carry on!

OK, I’ll carry on. So this gives rise to clause 35 about goods and services. The reason I was just asking this about non-regulated is: “If the regulated water services provider provides goods or services that are not subject to regulation under this Part … the provider may be required to” provide a whole lot of stuff to the Commerce Commission—consolidated financial statements, reconciliation of information provided, information on the financing of all businesses. Can the Minister help the committee in terms of saying we all understand what the role is of regulated services under the water services: to provide water, waste water and stormwater. So, obviously, the contentious third, but what are the activities that a water company or water services entity is permitted, under this, to be able to do? What would be the nature of those activities—therefore subject to this very specific clause, clause 35? So two big questions, about tax and then secondly about this, and, hopefully, those officials of yours at the back there are going to answer this question.

Wow—I’ve got to keep going do I? Well, a good thing we’re looking ahead, because I just want to give the Minister plenty of time to give us the right answer to this.

Now, I want to turn to clause 38, in terms of monitoring compliance for this section, and this is about the entity providing a quality path which is—as you know, the Minister used one example, pressure. Another one might be water colour, which is a normal one—might be some other stuff. I just would really be keen to understand this overlap with Taumata Arowai, as I’ve talked about earlier, in terms of what that means—because where it says in clause 38(2)(a) “a written statement that states whether the provider has complied with the quality paths applying to that provider”.

So there’s two issues: one has got to comply with Taumata Arowai because that’s the one that sets the standard, and the second one, I presume, is meaning it’s got to comply with the requirements of the Commerce Commission. Maybe the Minister can be clear about that. Then it goes on to say, “a report on the written statement referred to [just above] that is signed by an auditor”. So here we go. We are going to have a written statement done by the company which complies with an independent entity called Taumata Arowai, then it’s got to get an auditor to do it. First question: what’s the nature of that auditor? Is it financial auditor defining on a quality standard, or is it some other auditor? What is the nature of that auditor?

There we are; we have got a couple of questions in there. I can carry on, but, hopefully, now you’ve got some answers to those tax questions, Minister.

Thank you for your wide-ranging discourse there. Ownership structure issues, which you’ve asked on a number of occasions, are simply not part of this legislation, so I won’t be addressing that. Similarly, the general tax structures are also part of the Water Services Entities Act 2022 and whilst I have addressed it in respect of the input methodologies, the wider tax issues are not.

Clause 35 is simply about disaggregating unregulated from regulated services and sets out exactly how that is to be done. In terms of your questions around clause 38, you’re, essentially, putting, I would say, the cart before the horse because the very question is what those quality standards are. That is the question that is for the regulator to decide, not for me to give my reckon here today.

And as for audit, it’s well recognised that audit is simply a function of accreditation and ascertaining the meeting of standards, and despite your background, there are plenty of auditors out there who are not financial auditors but are quality auditors, and I’m sure the commission will be well placed to identify an appropriate auditor or auditors for the task.

Thank you, Madam Chair. I’d like to go to Part 2, clause 39(3), where it actually talks about the “quality path may include—(a) incentives for … regulated water services [providers] to maintain or improve its quality of supply, and those incentives may include (without limitation) either of the following:” and it goes on to talk about compensation schemes that set a minimum standard. I think having targets—I would presume quality targets—is actually a good thing. Quality standards are good things. Service performance is actually having a target to make sure that they perform. I’m trying to find out if the Minister could actually elucidate whether that compensation actually goes out to the customers; if the service targets are actually not met, whether that compensation is indeed to customers who actually pay a price for their water, for example. If the Minister could actually find out in what form that might be in, if that is a case.

The ranking system, I quite like. You know, can we rank the Government in terms of the performance? But I think having a ranking and a rating system is actually a good one, I think, for customers, because I think when the water services are actually not performing well—perhaps if they don’t reach a particular rating or ranking—that maybe the customers don’t actually pay any money for that. Is that how it actually works? I’m trying to actually understand how that all pans out.

Well, I must admit I’ve got to compliment the Minister for getting very professional at brushing off questions. I am staggered that the Minister does not know the answer about whether these entities are going to pay tax or not. It’s a pretty fundamental question. Anyway, I am intrigued.

I still want to return to clause 38 because I think this is a classic case of over-regulation. So we’re talking about quality standards, right? About quality or quality regulation. So “For the purpose of monitoring compliance with this section, the Commission may, in addition to exercising…powers under section 98 of the Commerce Act”. This is “in addition”. OK, all right, we’re in the light-handed regulation process here, really. Yeah right. First thing: the company—or the entity; no, it can’t be company because it doesn’t pay tax—the so-called “whatever it is”. Not a Government entity; it can’t be a Government entity. It can’t be a Crown, because the Crown doesn’t own it. It can’t be a TLA—a territorial local authority. It’s something in between there but, you know, we’ll get there. Maybe a Schedule 27 company? I don’t know.

Anyway we’re at that point, right? So doing quality, first thing—I love this—the first thing it’s got to do is provide “a written statement that states whether the [water services entity] has complied with the quality paths applying to that provider:”. OK, cool, cool. So that’s a fair sting. Right, good, got that? Secondly, “a report on the written statement referred to [just above] that is signed by an auditor”—an auditor; an auditor! OK, so the Minister’s sort of implied—well, it doesn’t need to be financial. There’s lots of auditors, but it is an auditor. So it’s got to be an auditor of something “in accordance with any form [prescribed] by the Commerce Commission:” OK, that’s the number two thing they’ve got to do. The number three thing they’ve got to do around their quality: “sufficient information to enable the Commission to properly determine whether a quality path has been complied with:”.

So I think all that means is maybe the commission would say, “Well I know you’ve done the written statement and you had it audited, but you still might have to give us a bit more.” OK, all right, get that. And then (d)—fourth thing—“a certificate, in the form specified by the Commission and signed by at least 1 board member…or, if there is no board, the person who operates the provider,”. All right? Now, wow, that is one hell of a lot of bloody forms, reports, oversight, monitoring. This is what I was trying to say and to ask the Minister at the start. Why are we so heavy handed? Why are there these layers and layers? Why does a board member need to be involved in signing off a quality thing? What is the driver behind this? This is the trouble with—and it just pervades its way through this legislation—these overwritten, over-proscribed, over-egged regulations and controls when you’re talking about, basically, some entity that is not competing with others; it has no incentive. Even if it charges too much, the so-called profits can only be retained and invested in future infrastructure. There’s nothing else it can do with it. It can’t pay a dividend. So, hopefully, the Minister can help us with that.

I move, That the question be now put.

The question is that the question will be now put. All those in favour will say Aye, to the contrary No—

💬 Andrew Bayly: Point of order, Madam Chairperson. I thought that one person couldn’t make multiple requests to close the debate—the same person could not make multiple requests to close the debate.

CHAIRPERSON (Hon Jenny Salesa): Yes, people can make unlimited requests to close the debate.

💬 Andrew Bayly: That’s outrageous.

CHAIRPERSON (Hon Jenny Salesa): The question is—that is actually correct. I was in the process of closure. The question is that the question be now put.

The question is that the Minister’s amendments set out on Supplementary Order Paper 417 be agreed to.

The question is that Parts 1 to 5, Schedules 1 and 2, and clauses 1 and 2 as amended stand part.

Mr Speaker, the committee has considered the Water Services Economic Efficiency and Consumer Protection Bill and reports it with amendment. I move, That the report be adopted.

The bill is set down for third reading immediately.

Third Reading