Part 2: Tariffs and implementing the non-domestic wastewater tariff

Watercare Services Limited: Review of service performance.

In this Part, we describe:

Before 1 November 2010, Watercare was purely a wholesaler in the water and wastewater utility business. Watercare's customers were local councils or water retail customers, which each operated local networks and on-sold Watercare's services to households and businesses in different parts of the Auckland region.

From 1 November 2010, Watercare became a fully integrated water utility provider, with responsibility for supplying all water from source to tap and providing all wastewater services in the Auckland region.3

As part of this transition, Watercare has gradually implemented changes to the way it charges for water and wastewater, and also to its water and wastewater tariffs. These changes include a new non-domestic wastewater tariff. This new tariff will be progressively introduced from 1 July 2014, with the aim of achieving greater equity in Watercare's charging regime.

Tariffs for water and wastewater

Since becoming an integrated water utility provider, Watercare has made significant changes to the structure of its water and wastewater tariffs. Figure 1 summarises the main changes.

Figure 1
Summary – Watercare water and wastewater tariff changes, 1 June 2011 to 30 June 2013

Year Water tariff Wastewater tariff
Basis Change Basis Change
2011/12 A new volumetric tariff introduced for all retail customers. Between -0.6% and -62.9%, depending on former councils' tariffs. Domestic – Various, depending on former councils' charging regimes. 4.5%↑
Non-domestic – Various, depending on former councils' charging regimes. 4.5%↑
2012/13 Volumetric 3.3%↑ Domestic – A new volumetric and fixed charge wastewater tariff introduced in the region. 3.6%↑
Non-domestic – Various, depending on former councils' charging regimes. 3.6%↑
2013/14 Volumetric Zero Domestic – Volumetric and fixed charge. Zero
Non-domestic – Various, depending on former councils' charging regimes. Preparing to introduce a new non-domestic wastewater tariff.

We describe Watercare's tariffs by financial year:

  • 1 July 2011 to 30 June 2012;
  • 1 July 2012 to 30 June 2013;
  • 1 July 2013 to 30 June 2014; and
  • 1 July 2014 to 30 June 2015.

1 July 2011 to 30 June 2012

Before 1 July 2011, a complicated set of water and wastewater charging regimes applied in the Auckland region. Watercare inherited that complicated set of tariff structures.

Figure 2 sets out the different volumetric water tariffs charged by the local councils or their council-controlled organisations (CCOs) in 2010/11. Tariffs varied considerably between the different councils.

Figure 2
Auckland region volumetric water charges, 2010/11

Former council area Charge per 1000 litres
$ (GST-inclusive)
Auckland City 1.62
Manukau City 1.31
Rodney District – Urban 1.96
Rodney District – Rural 3.50
North Shore City 1.52
Waitakere City 1.74
Franklin District 2.00

Source: Watercare.

As well as volumetric charging, some local councils or their CCOs had additional charges for supplying water. For example, Auckland City Council included a fixed annual service charge.

Watercare inherited an even more complicated set of tariff structures for wastewater. These comprised different charging mechanisms (for example, user charges and rates) as well as a number of different charging bases (for example, metered, unmetered, fixed, land value, and a combination of these).

Rationalising water tariffs

From 1 July 2011, Watercare introduced a new water tariff of $1.30 (including GST) for every 1000 litres of water, as the first significant change to its tariffs and tariff structure. The new water tariff:

  • applied to all of Watercare's domestic and non-domestic customers;
  • introduced a single, region-wide charge for urban and rural residents connected to Watercare's water network;
  • replaced all the different water tariff regimes that Watercare inherited, including any fixed service charges; and
  • ensured that all customers paid a single standardised price for water.

The new tariff was lower than the existing water tariffs. Customers had price decreases of between 0.6% (Manukau City) and 62.9% (rural Rodney).

Figure 3 sets out how the new water tariff affected the price of water in the former council areas.

Figure 3
Comparison with former councils' water prices

Former council area Old price for 1000 litres, pre-July 2011 (GST-inclusive) Watercare price for 1000 litres, post-July 2011 (GST-inclusive) Percentage change
Rodney District – Rural $3.50 $1.30 -62.9%
Rodney District – Urban $1.96 -33.7%
North Shore City $1.52 -14.5%
Waitakere City $1.74 -25.2%
Auckland City (ex-Metrowater) $1.62 -19.7%
Manukau City (ex-Manukau Water) $1.31 -0.6%
Franklin District $2.00 -35.0%

Source: Watercare.

The new water tariff of $1.30 for 1000 litres of water reduced the price of water for all areas. Watercare told us that it was able to reduce the tariff for water because of regional cost efficiencies available through integration. Watercare calculated that these efficiencies were more than $100 million in 2011.

However, in at least one instance, Watercare's specific communication of the effect of its price changes differed from the information contained in its Annual Report 2011.

For example, Watercare made a presentation to Auckland Council's Business Advisory Panel on 3 December 2012. This presentation included information about the effect of the water tariff changes. Here, Watercare reported that the decrease for Auckland was 28% (compared to 19.7% in its annual report), 46% for urban Rodney (33.7% in its annual report), and 72% for rural Rodney (62.9% in its annual report).

We asked Watercare to explain these differences.

Watercare told us that the different figures arose from Watercare including the volumetric charge plus any fixed service charges applying to the supply of water in the figures presented to the Council. Accordingly, there were valid reasons for the figures differing.

Nevertheless, the extent of the effect of the tariff changes might have been difficult for customers to understand. Watercare would better enable its customers to properly understand and assess the extent of the changes if it were to ensure that its public communications about changing water tariffs are consistent.

Rationalising wastewater tariffs

The charging regime for the provision of wastewater services for 2011/12 was complex because of the different tariff regimes and billing arrangements in place.

Tariffs for Watercare's wastewater services were determined by the previous tariff regimes set by the former councils and their CCOs. There were 44 different tariff regimes in total. This meant that the different tariff-charging regimes continued to apply to the areas of the former councils.

Different billing arrangements applied to the different areas. For example, for the previous Franklin District Council, North Shore City Council, Rodney District Council, and Waitakere City Council areas, wastewater charges were collected by Auckland Council as part of property rates and transferred to Watercare. Watercare billed its Manukau City Council and Auckland City Council customers directly. It was not until 2012/13 that Watercare began directly charging all of its customers for wastewater services.

For 2011/12, all wastewater tariffs were increased by 4.5%, regardless of how the former councils determined their individual tariffs. At the time of the increase, Watercare said that it was significantly lower than increases forecast by the former councils.

1 July 2012 to 30 June 2013

From 1 July 2012, Watercare increased the water tariff by 3.3% to $1.343 for every 1000 litres. This increase applied to all of Watercare's domestic and non-domestic customers. Watercare did not publicly explain the reasons for the tariff increase.

The 2012/13 year saw Watercare's second significant change to its tariffs and tariff structure, when it introduced a standard wastewater tariff for its domestic wastewater customers. The new tariff addressed inconsistent charging in the former council areas.

Watercare began a project in July 2011 to standardise its domestic and non-domestic wastewater tariffs throughout Auckland. In early 2012, Watercare consulted on its proposed domestic and non-domestic wastewater tariffs as part of Auckland Council's Draft Long-term Plan 2012-2022.

Watercare proposed:

  • a single wastewater tariff for domestic customers – an annual fixed charge of $190, plus a volumetric charge of $2.28 for every 1000 litres of wastewater; and
  • a single wastewater tariff for non-domestic customers – an annual fixed charge of $313, plus a volumetric charge of $3.64 for every 1000 litres of wastewater.

Although the domestic wastewater tariff was approved through this process and came into effect on 1 July 2012, confirming the non-domestic tariff was deferred until Watercare carried out further consultation. We discuss the introduction of the non-domestic wastewater tariff in paragraphs 2.47-2.60.

As well as changing the structure of its tariff for domestic wastewater, Watercare built in an overall increase in wastewater tariffs, calculated to produce 3.6% more wastewater revenue from domestic customers in 2012/13 than in 2011/12. However, depending on the way individual domestic customers were charged for wastewater in 2011/12, their 2012/13 wastewater tariff might have increased or decreased.

Non-domestic wastewater customers continued to be charged on the basis applied in previous years, with a 3.6% increase. As with other tariff increases, Watercare did not publicly explain the reasons for the tariff increase.

1 July 2013 to 30 June 2014

For 2013/14, Watercare did not increase water or wastewater tariffs. Watercare said that it was able to make a "zero price increase" possible through a combination of savings and efficiency.4

1 July 2014 to 30 June 2015

For 2014/15, Watercare proposes to introduce a new non-domestic wastewater tariff comprising a volumetric and fixed charge. We discuss this in paragraphs 2.47-2.60. At the time of writing, Watercare had not yet set its domestic wastewater tariff.

Providing better information to customers about tariffs

Watercare sets out its various charges in two brochures: Residential water and wastewater charges and Non-residential water and wastewater charges. It also provides some information about the affordability of its water supply services in its annual report. However, we consider that Watercare could significantly improve the information it provides about its tariffs to help customers understand them.

For example, Watercare could provide information that would allow customers to see what is happening to Watercare's tariffs and their bills over a number of years. It could include:

  • trend information showing increases/decreases in Watercare's tariffs; and
  • trend information showing the annual average bill for a customer, based on different water usages and different customer profiles.

Doing so would provide customers with important information on Watercare's tariffs, their trends, and how they compare with other integrated water suppliers. This information could be provided in Watercare's annual report or a stand-alone "tariff report".

Watercare includes a water affordability measure in its annual report. The measure shows the percentage of spending on water supply services relative to the average household income. It aims to show that Watercare's charges for its services are affordable, while providing enough income for Watercare to both effectively deliver its current services and provide for infrastructure developments in the future.

For 2012/13, the target percentage of spending was 1.5% of the average household income. Watercare achieved 0.86%, which is well below the target. Watercare notes that the percentage increased from 0.72% in the previous year, because it included wastewater charges for those customers who were formerly billed for this through council rates.

Watercare has expanded the reporting in its Global Reporting Initiative report to cover the six previous local council areas, to demonstrate affordability for a range of communities in the Auckland region.

We consider that a water affordability measure is useful. However, it is unclear how Watercare developed the measure and whether the target of 1.5% is the right one.

In our view, Watercare could usefully review its water affordability measure to ensure that it is relevant and meaningful. It might also be useful to customers for Watercare to set out how any affordability measure has been determined. This is currently not clear.

Finally, although Watercare notifies its customers about tariff increases, it does not provide reasons for the increases. We consider that Watercare should explain why tariffs are being increased so that its customers can understand the reasons for the increases.

A new non-domestic wastewater tariff

Historically, charging for wastewater varied significantly throughout the Auckland region.

Watercare developed a proposal for a single wastewater tariff as part of Auckland Council's draft long-term (2012-22) planning process. After consulting the public as part of this process, Auckland Council and Watercare agreed to introduce a single wastewater tariff for domestic customers from 1 July 2012, but to defer implementing a single wastewater tariff for non-domestic customers until further consultation could be carried out.

Watercare's consultation was comprehensive

Watercare consulted its non-domestic customers between November 2012 and March 2013, to ensure that they had the opportunity to fully participate in the review of the non-domestic wastewater tariff. Watercare did this in response to concerns expressed by customers during the long-term planning consultation process and the resulting recommendation from Auckland Council to consult with all of its non-domestic customers.

Watercare's extended consultation included the following activities:

  • An online customer survey invited customers to provide feedback to Watercare. Watercare received 824 responses to this survey.
  • Watercare sent two individual letters to all non-domestic wastewater customers, advising them of the review, the process, and the options. The letters invited them to provide feedback through the online surveys, to attend 10 "town hall" public meetings throughout the region to discuss any issues they might have, and to provide a written submission to Watercare.
  • Watercare placed advertisements in newspapers, advising customers of the public meetings.
  • Watercare held 44 one-to-one customer meetings – mainly with customers who use a significant amount of water, but also with industry and business groups – to explain tariff proposals and to seek feedback.
  • Watercare asked business associations to inform their members about the review.
  • Watercare provided a detailed projection of the financial implications of the four tariff proposals to all the customers that it visited and to other customers who requested details on how the proposals might affect their business.
  • All customers were invited to provide a formal written submission on the tariff proposals and to attend and present their submission in person to a hearings panel appointed by the Board of Watercare. Watercare received 465 submissions.

Auckland Council officers said that "Watercare conducted a comprehensive analysis and consultation process". We also consider that the consultation process was comprehensive.

The new non-domestic wastewater tariff

After the extended consultation, Watercare's Board approved the proposed new tariff for non-domestic wastewater on 2 May 2013 and Auckland Council endorsed it on 9 May 2013.

The new tariff structure consists of four pricing plans, each suited to a different level of wastewater discharge. Figure 4 sets out the new tariff, which is a combination of fixed and volumetric charges.

Figure 4
New non-domestic wastewater tariff

Pricing plan Annual fixed charge for each water meter
Volumetric charge for every kL
Suited to approximate annual
wastewater volume
A – low-user plan $197 $4.44 under 1320 kL
B – moderate-user plan $500 $4.21 1320 kL to 10,000 kL
C – high-user plan $7,000 $3.56 10,000 kL to 88,310 kL
D – industry plan $75,000 $2.79 over 88,310 kL

Source: Watercare.

The new tariff structure, applicable from 1 July 2014, is not intended to generate additional revenue. Rather, by standardising the wastewater tariff, Watercare seeks to remove anomalies and bring greater fairness to its wastewater charging.

Watercare has 22,291 non-domestic wastewater customers. Of these, we understand that:

  • 10,277 customers will pay less – 9.8% of customers will have a decrease of more than $1,400 (including one who will pay $1.1 million less), with 17.9% of customers having decreases of 40% or more.
  • 12,014 customers will pay more – 8.1% of customers will have increases of more than $1,400, with 18% facing increases of more than 43%.

Implementing the new tariff

The new tariff will be implemented over a three-year transition period:

  • Year 1: 1 July 2013 to 30 June 2014. There was to be no change to the existing tariff. This was to allow time for customers to prepare for the new tariff.
  • Year 2: 1 July 2014 to 30 June 2015. A non-domestic customer's tariff will be based on two-thirds of their existing tariff and one-third of their new tariff.
  • Year 3: 1 July 2015 to 30 June 2016. A non-domestic customer's tariff will be based on one-third of their existing tariff and two-thirds of their new tariff.

From 1 July 2016, a non-domestic customer's tariff will be based on their new tariff.

The transition period will help those non-domestic customers whose charges will increase after the tariff's introduction, but will delay the cost savings for customers who will benefit from the new tariff structure.

Implementing the new tariff could cause confusion when customers receive their first bills under the new structure. These bills will be based on a combination of tariffs. It is important that Watercare's invoices clearly set out the different amounts charged for wastewater services and the basis of those charges.

In our view, Watercare could help customers' understanding by including some relevant information with each invoice, explaining the implementation of the different pricing plans and the transition process.

Watercare is working with customers to ensure a smooth transition

Watercare is currently working with its non-domestic customers to ensure that the new tariff structure is implemented smoothly.

Two matters are particularly important. First, the volumetric charge is applied to the percentage of water that a customer uses. Watercare estimates this to be 95% of water consumed, but it can be less when the nature of a customer's business generates less wastewater.

Watercare has written to customers seeking details of the nature of their business, which Watercare will use, with other customer and sector information, to determine a customer's wastewater percentage. If a customer disagrees with their wastewater percentage, they can request a wastewater audit (which the customer will have to pay for).

Secondly, customers must choose the pricing plan that best applies to them. We understand that Watercare provided customers with a recommended wastewater pricing plan in February 2014. This will be based on information that Watercare has requested about the customer's historical consumption.

If a customer wishes to opt for a different pricing plan than the plan recommended, they will be able to request that an alternative plan be assigned.

Recommendation 1

We recommend that Watercare Services Limited better explain to customers the reasons for increases to water or wastewater tariffs.

3: This does not include water and wastewater supplied by United Water under a franchise agreement entered into with Papakura District Council.

4: Watercare press release, 8 May 2013.

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