Commission of Inquiry on Water Pricing Bill

Introduction and Second Reading of Commission of Inquiry on Water Pricing Bill.

The Hon. J.M.A. LENSINK ( 16:04 :44 ):Obtained leave and introduced a bill for an act to provide for a commission of inquiry into water pricing; to provide evidentiary powers and immunities in connection with the inquiries; and for other purposes. Read a first time. Second Reading

The Hon. J.M.A. LENSINK ( 16:05 :54 ): I move:

That this bill be now read a second time.

This bill is to introduce a commission of inquiry into water pricing, and it fulfils a Liberal Party commitment to establish an independent inquiry into our state's water pricing. The Liberal leader, the member for Dunstan, Mr Steven Marshall MP, has initiated this. He moved an almost identical bill in the House of Assembly on 4 December 2014. I will just quickly discuss the clauses.

The bill establishes the terms of reference, and the terms of reference have been added to since last year to include investigations about third-party access, which I will refer to in my speech. Its first term of reference is to look at water pricing for consumers and users of water in South Australia, why the charges here are higher than in other jurisdictions, any other economic, legislative or other reform which would promote water pricing to lower charges to consumers and particularly in reference to the Essential Services Commission and the third-party access scheme. The commission of inquiry is established under clause 4, to be appointed by the Governor, and there are standard clauses in relation to the processes.

One of the important matters which relate to commissions is that there is an obligation to provide evidence in a number of inquiries that this parliament may promote from time to time, namely, select committees. We have a number of ministers who refuse to attend and to give evidence; they would have certain obligations under this bill. It is clearly intended to have an independent role because South Australians do not have any confidence in the setting of water prices in this state.

We have all suspected in South Australia that we have been gouged by SA Water's profits for many years, and the figures bear that out. These are not my figures; these are figures which come from Treasury papers. In 2002-03, $164.8 million was the profit taken by the state government as a dividend. In 2012-13, it is $235.8 million, and the forecast for the next four years alone is some $915 million.

The fact that SA Water is being used as a cash cow and its pricing structure is a farce was confirmed in spectacular fashion when The Advertiser published the resignation letter of the former independent regulator, the CEO of the Essential Services Commission, Dr Paul Kerin (now Professor Paul Kerin at Adelaide University), on 27 October 2014, which had to be obtained under freedom of information laws. Dr Kerin joined the commission in 2011 and quit shortly after the 2014 election because of this government's lack of reform of the water industry, lack of concern for water consumers and the stifling of ESCOSA's role as the independent regulator.

The legacy of this Rann/Weatherill government in South Australia, as far as water policy is concerned, is to deliver us the highest capital city prices in Australia. In 2002, the base price for water consumers was 38ȼ a kilolitre. That is now $2.32 and many people pay a higher rate because Labor has changed the threshold for the cheapest water, from 120 kilolitres per year to 30 litres per quarter. There is a range of other tiers, including the highest price which people get bumped up to more

quickly under this changed regime, which has also increased monumentally. The supply charge has gone up from $125, in 2002, to $282.80, in 2014.

We also know—and these are all official figures; I again repeat that I did not make these up—the annual household bill has gone up from $243 to $790 in 2014-15. We expect some increases over time, as we all know that the certainties in life are death, taxes and increases in prices, but certainly not of that magnitude.

As the millennium drought took hold, Labor had scoffed at our proposal to build a 45-gigalitre desalination plant to secure our long-term water needs and kept saying that they were praying for rain. When the need was finally realised and we came close to trucking in our water, Labor caved in but said, 'Our desalination plant is bigger than the Liberal's desalination plant,' so it became 100 gigalitres. It was recommended against by Infrastructure Australia, criticised by the federal Auditor-General, yet Labor still continues to defend this decision. So we now have a $2.2 billion, 100 ‑gigalitre desalination plant.

The Hon. R.L. Brokenshire: Unpaid for.

The Hon. J.M.A. LENSINK: Unpaid for—well, we will pay for it for the next 50 years, Mr Brokenshire.

The Hon. R.L. Brokenshire: You bet we will, and so will our grandkids.

The Hon. J.M.A. LENSINK: Yes, indeed, those of us who have grandkids. In this post-drought period, as our rainfall has returned to normal averages, it has been being mothballed from 1 January 2015 and costs $30 million just to sit on standby.

One of the matters which is often overlooked in the debate these days—it was quite prominent in the lead up to the 2010 election—is the missed opportunities. We have overinvested in desalinated supply and missed out on opportunities to diversify in areas such as stormwater harvesting and aquifer storage and recharge and invest in more opportunities for industrial re-uses for treated wastewater.

This has negative consequences for both volume and quality of wastewater and stormwater which flow into our gulf, and in recent years we have seen the death of dolphins and fish and other species which is linked to poor water quality. We get notifications from the EPA every time there is a rainfall event and we are warned that some beaches are not safe to swim at.

In terms of pricing and the role of ESCOSA, there are a few urban myths that I will discuss, but the structure of our water in South Australia is that SA Water is a vertically integrated monopoly provider of drinking water and sewerage services for metropolitan Adelaide, the majority of industry and a significant number of country customers. Prior to 1 July 2012, cabinet had complete control over water prices and oversaw increases in each component of water bills, that is, usage, sewer and supply charges.

The Water Industry Act 2012 was heralded with great trumpets, and the role of cabinet in setting those prices was moderated (I think, that is probably an understatement, but it is the word I will choose to use), and the Treasurer was able to issue pricing orders, which is code for setting the parameters within which ESCOSA must adhere in terms of its role in water pricing regulation.

As usual, the government overegged expectations about ESCOSA taking on water regulation at the time. In his second reading speech, I note the Hon. Ian Hunter, who is now the water minister—I think he was a backbencher at that stage—made the following claim, and this is from the Hansard of this place of 10 November 2011:

The bill lays an appropriate legislative foundation for an efficient, competitive and innovative water industry —

and we now know it is not—

A key element of this is the introduction of independent economic regulation for the industry, with the appointment of the Essential Services Commission of South Australia (or ESCOSA).

Independent economic regulation provides a transparent means of setting service standards and prices. Ultimately this is about protecting the long-term interests of customers and encouraging efficient investment in infrastructure.

They are nice words which we know are not true. Furthermore, this has not taken place and is one of the key issues which has arisen from Professor Kerin's evidence to the Budget and Finance Committee on 28 November 2014. The Hon. Ian Hunter on 10 November 2011 goes on to say:

ESCOSA will also be empowered to make final price determinations on retail prices for water and sewerage services, with the first determination for SA Water to be applied from 1 July 2013. The Government has heeded the advice of industry and local government on the need to encourage participation by alternative providers and for this reason ESCOSA will have a range of option for regulating prices and service standards.

Bear in mind the frustration that the former ESCOSA chief felt because his role in that was undermined. The water minister at the time, the Hon. Paul Caica, described ESCOSA, in a media release in its new role entitled 'Historic water industry legislation passed' in April 2012, as an 'independent umpire'. He said:

The passage of this legislation which combines and improves several acts of parliament will deliver a more efficient, competitive and innovative water industry in South Australia. This legislation provides an independent umpire, giving the Essential Services Commission of South Australia the power to regulate pricing and standards for water and sewerage services.

Again, it was all a load of nonsense, as we now know. Dr Kerin appeared at the Budget and Finance Committee last year and in his evidence he said that his early advice in 2012-13 pricing included setting water prices and a range of other things to benefit consumers in the long term. However, this led to Treasury's intervention including redrafting of pricing orders to be signed by the Treasurer so that ESCOSA would be limited to only regulating SA Water's revenue caps and would not be able to regulate the regulated asset base (RAB), which is something I will talk about in more detail.

This was the basis of treasurer Snelling and minister Caica making false and misleading statements to the public about ESCOSA's position. They had been saying on radio that ESCOSA wanted to increase supply charges. Professor Kerin believes that the real reason for the intervention was to protect Treasury revenues. He said that Treasury officials were incensed and absolutely appalled that ESCOSA would dare to make suggestions about the RAB.

I will quote from his evidence because I think it is quite telling. He described ultimately that due process in all of this was trashed and what he said took place was that, in the misleading of the public by ministers, ESCOSA was given particular parameters where they were told that Treasury wanted to increase prices by 25 per cent overall. ESCOSA, therefore, had no role in recommending that those prices be increased by 25 per cent, but they said 'That is what you are telling us is going to happen then you are going to have to increase usage charges which are already above long run marginal costs and then raise supply charges.' Given those constraints, you would also have to raise tier 1 charges because they seemed to be below SA Water's estimate of long-run marginal cost. They did, and I quote again from Dr Kerin:

However, if you do this, supply charges are already high. In South Australia they are 130 per cent above the average supply of comparable water utilities, which is the top 10 largest water utilities.

He then goes on to talk about the RAB and how critical it is in terms of how it drives up water prices, and I will quote the particular paragraph in relation to that as well:

In that context, ESCOSA's advice to government was that while it hadn't been part of their terms of reference, they should consider reducing RAB values in the long-term interests of consumers—

which is what set the Treasury officials off and resulted in ESCOSA's role being curtailed. So, we had the first pricing order for 2013-16, which was issued by treasurers Snelling and W

eatherill to set revenue caps for SA Water, which is a calculation of a regulatory rate of return on its regulated asset base, operational costs and capital expenditure.

Under the government's current pricing orders that we are in at the moment, SA Water sets its prices based on ESCOSA's set revenue caps. The first pricing order for the period 2013 was signed by treasurer Snelling on 24 September 2012. It limited ESCOSA to regulating revenues rather than prices and a subsequent order for 2013-16 was signed by treasurer Weatherill on 17 May 2013, and this is the one which set the RAB. It set drinking water retail services for $7.77 billion and for sewerage retail services at $3.58 billion.

What is so important about the regulated asset base (RAB)? Well, to quote Professor Kerin in his evidence:

Seventy per cent of the costs that are used to work out prices for SA Water are entirely driven by RAB values. Because it is a capital intensive industry and because RAB values are high, the depreciation charges and the return on capital that must be allowed for SA Water are totally driven by the RAB. Therefore, with one stroke of a pen, setting a RAB value determines 70 per cent of the costs that are taken into account in setting prices.

What Professor Kerin is saying there is that whoever controls the setting of the RAB determines what the prices will be, and it is not a transparent process at all. It takes that role away from the Essential Services Commission, and there were so many lofty words talked about in its role initially.

Professor Kerin also talked about the inflation of the regulated asset base in what I think was quite a disturbing set of circumstances that led to it, and he talked about how the RAB was set. His evidence to the Budget and Finance Committee was that it was automatically increased by $700 million through a process that the current Premier and the current Minister for Transport were complicit in. He talks about the fact that ESCOSA was due to make a final draft determination around about May 2013. He then says, and I am quoting from his evidence:

That process was hijacked after we made our Draft Determination because DTF was incensed by our Draft Determination so they decided that they didn't want us to give any advice on the RAB and they insisted that they were going to take a C abinet paper to C abinet early to get them to se t the RAB. In my view, that was to p re-empt the C ommission doing what it had said it was going to do, which was to provi de advice on RAB values in the C ommission's Final Determination and publish that s o the public could see it.

I t hink about two days before the C ommission was due to make its Draft Final Determination , after the C ommission papers had been sent, I got a call from Stephen Mullighan, the Premier's Deputy Chief o f Staff, asking me, 'Can you consider a few alternative scenarios?' I said, 'Well , C ommission papers have already gone out. What are they?' He said, 'Can you tell us what the revenue caps would be if the RAB is increased by 5 per cent, 10 per cent and 15 per cent ? A n d can you tell us what they' d be if demand is 19 0 versus if demand is what the C ommission thinks it should be and all com binations of those? '

Dr Kerin then replies:

Well, look, if you want it, we'll do our best to do it, but I'm incredibly frustrated because these are very complex things and you tell us now'—I said this in a nice way—'when the Commission papers have already gone out and we're about to make our Draft Final Determination.

Then he says that he took two pages of charts which showed 'the best numbers we could do in 24 hours on what the revenue caps would be under all combinations of those scenarios that the deputy chief of staff had given us'.

They took those charts to the Treasurer, who was the Hon. Jay Weatherill, and he apparently said, 'Which combination of RAB increase and demand will I choose?' This is the menu option. So after ESCOSA goes through a whole range of complex calculations and takes several months to formulate its advice, it is given 24 hours to come up with a set of charts. It does its best and provides the table to the Treasurer and he looks at the menu and says, 'I'll have that one, thanks.'

I find this incredibly disturbing. Professor Kerin then went on to describe the fact that DTF wanted to micromanage everything the commission did. He said that basically DTF and SA Water decide what the RAB was. He also said that the RAB process was 'not decided on any sensible basis.' So that, ladies and gentlemen, is how your water prices are set in South Australia.

The RAB is also overvalued because it includes a range of things that ESCOSA does not think should be there, including what is described as 'contributed assets' (those which have already been paid for), and has been over indexed above CPI over successive years. So conservatively, at least, it has been overestimated by some $2 billion, and lots of costs have been included against the judgement of ESCOSA.

The pricing order for 2016-20 is pretty much the same as it is for the period we are in currently. I note that the government gave the distinct impression that pricing order parameters for 2016 were a transitionary measure and in future there would be more independence provided to ESCOSA. The Premier himself said, on FIVEaa on 28 May 2013 on the Leon Byner show, when Leon Byner asked, 'Are you going to give ESCOSA the true independence to set the price of water, not SA Water, and when are you going to do this?' that, 'I think that's contemplated for the next pricing round.' However, the pricing order that he himself signed on 2 May 2014, as then Acting Treasurer, has the same parameters.

We have had an inquiry into drinking water and sewerage retail prices reform conducted by ESCOSA, initiated in September 2012 by treasurer Snelling to examine the mix of pricing, but it is within the existing revenue envelope. Basically what they are saying is, 'Don't touch the revenue, business as usual.' But how can you change the structure of what the pricing is within that set revenue?

It is really just asking ESCOSA to come up with a set of winners and losers, because we know that we all look at our water bills. One of the first things I did when I became a homeowner was to examine what relationship there was between usage and trying to be efficient and actually reducing your water bill, like it is with most things. Indeed, I note that we had this as the subject of a question during question time, so it is clearly an irritant to a lot of people.

The National Water Initiative has recommended that all water utilities try to push water prices towards actual usage charges. We know there will be winners and losers, particularly for those people who are asset rich and income poor and for people in the country. I think the minister was talking about social policy considerations, and I certainly agree that those need to be taken into consideration. However, you give this job to ESCOSA and make it run a whole set of calculations and churn out a set of recommendations at the end, so it is really kind of a pointless exercise.

The initial report was released in September 2013 and a final one earlier this year, and I note the government rejected the initial report's recommendations out of hand because, clearly, with winners and losers, that was going to be a political hot potato. But I do note that ESCOSA had its hands tied. Professor Kerin used the word 'sham' to describe this inquiry because it excludes consideration of the value of the RAB and it reports for the 2016-20 period, so I think it is probably an exercise in trying to be seen to be doing something but actually having no intention of doing anything at all.

Our criticism of the inquiry is that it is considering options for improving the efficiency of SA Water's pricing structures but not the efficiency of SA Water's prices. The questions that you would think would be asked would be, firstly, what is the cost of providing services and, therefore, what revenues are required to achieve cost recovery (which is what Water for Good said we should do); and, secondly, how should prices be structured and collected in order to obtain the required revenues? However, ESCOSA's inquiry really only addresses the second point and we believe that an inquiry needs to consider the following matters:

1.What the process should be for determining economically efficient costs and, therefore, revenues of providing these services, including the RAB;

2.What the prices for providing these services should be, having established the economically efficient cost of providing the services; and

3.Which regulatory and legislative changes are needed in order to implement the revenue and price-setting process that achieves an economically efficient

outcome while having due regard to equity and environmental objectives?

Third-party access is one of the areas that people in the industry tell me is absolutely critical to start some process that will keep future water prices as low as possible. Theoretically, bulk water has been able to be purchased through trade since the liberation of water licensing. However, this government, in particular, has been dragging its feet on providing a third-party access regime to SA Water's customers.

The scheme, which is often lauded, is Barossa Infrastructure Limited (BIL), which provides approximately 6 gigalitres to irrigate wine grapes from the Warren reservoir, supplemented with water supplied by the Mannum-Adelaide pipeline and the Warren transfer main, from the River Murray. But this scheme was initiated by John Olsen when he was the water minister, which is some time ago, and it would not have happened if he had not driven it through SA Water, which was very reluctant.

The Hon. R.L. Brokenshire: He was a hands-on minister.

The Hon. J.M.A. LENSINK: Indeed, he was. The Salisbury council's world-renowned wetlands (which often receive a lot of gongs) and aquifer storage and recharge scheme were actually rejected by SA Water, so they had to establish their own pipe network scheme, which was a very costly exercise.

As far as third-party access is concerned, we have a bill, which I think is about to be retabled for the third time. It was supposed to be initially released by mid-2013 for public discussion, but it was introduced into parliament in September 2013 and tabled too late prior to the election for any progress to be made. It has now been another year. Well, 2014 came and went. I think it was tabled on the last sitting day last year and the minister is about to retable it tomorrow. So it has been nearly three years and we still do not have a third-party access regime.

The Hon. R.L. Brokenshire: Slower than a snail.

The Hon. J.M.A. LENSINK: Well, these things take time, Mr Brokenshire. We all need to be patient—and we might be dead before it happens. Other issues: Labor's secret plan to sell SA Water. This was confirmed by Professor Kerin's evidence to the Budget and Finance Committee. In here, we can only take it that the minister doth protest too much with his constant accusations of the Liberal Party having a secret plan. It was actually his government. Treasury paid KPMG for advice and they consulted ESCOSA, and I suppose if you have a monopoly you can expect to get more for your utility.

We also had the issue of bullying behaviour by Treasury officials and the current Treasurer's attempts to character assassinate Professor Kerin on radio, which I think was an absolute disgrace. We have seen similar behaviour with the Gillman issue, where learned people's opinions are dismissed—but I will not digress.

We have lack of competition in the SA water market, which is clearly a critical issue. I do not have a crystal ball, but I anticipate what the government will say in response to this bill—that it is a stunt—to which I say it is independent. The government gets to appoint the commissioner and, in that instance, what are they afraid of?

The minister was on radio recently and in his comments he defended the Adelaide desalination plant and drew comparisons with Western Australia. We often refer to the 45-gigalitre Kwinana plant, which was completed in 2006, at a cost of $387 million. I think they probably got themselves a bargain. The minister then went on to refer to their second desalination plant which was, as he says 'at huge extra cost'. The Binningup desalination plant is 100 gigalitres and was completed in 2012 at a cost $1.4 billion, which is $400 million shy of the Adelaide desalination plant which was completed with the same volume (100 gigalitres) and in the same year (2012). In other words, Adelaide's desalination plant cost 30 per cent more than Binningup and that is not even throwing in the $400 million interconnector which takes ours to $2.2 billion.

The minister also said that the desal plant only costs $30 per customer. Well, for 773,500 customers—

The Hon. I.K. Hunter: That's not what I said; do not mislead this house.

The Hon. J.M.A. LENSINK: You will get your chance.

The Hon. I.K. Hunter: Don't mislead this house.

The Hon. J.M.A. LENSINK: You do it all the time, give me a break! I will look forward to the minster's contribution delivered by him, I hope. So it is an extra $30 for those customers—that is $23 million per annum. We have calculated that there is some $100 million a year that the government is ripping off consumers because it is a regulated asset base, and there is also the other issue of the renewable energy that they intransigently continue to force customers to pay for.

The plant has been mothballed from 1 January. We now have some process where, having been running at various volumes for the last two years, it is now being tested for another three months to see whether it will be shut down completely and refired up at some point in the future when we have our next inevitable drought.

For all the reasons that I have outlined, I urge honourable colleagues to support this bill. It is high time we had an independent look. If the government tries to refer to ESCOSA in its rebuttal my answer to that is, 'Well, the inquiry that's just been had is a sham.' The cat has been belled and it is time that we had a proper look at why South Australian consumers are paying more than everybody else in Australia.