On 25 June 2026, the Commerce Commission ("Commission") published its Emerging Views Paper ("Paper") on Watercare’s first price-quality path ("PQP"), to apply from 1 July 2028. While directed at Watercare, the Paper is the Commission’s first substantive articulation of how it intends to approach the regulatory accounting treatment for water entities under Part 4 of the Commerce Act 1986. Its emerging positions are therefore relevant to all water service providers regardless of the form of regulation they are currently or may be subject to in the future.
This Insight sets out key themes and issues arising from the Paper.
Propose / respond model
The Paper sets out a "propose/respond model" for setting the PQP. Watercare must submit an independently verified proposal covering forecast expenditure, proposed service quality levels, and any other matters relevant to the PQP. The Commission will assess Watercare's proposal and respond by issuing draft and final PQP decisions.
Input methodologies ("IMs")
The Commission is not required by the Commerce Act 1986 to set IMs for the water sector at this stage – for any form of regulation. While the Commission could set IMs, one of its reasons for not doing so is that it is at an early stage of regulating the water sector and desires greater flexibility to adapt its approaches as experience is gained. The Paper sets out the Commission's preliminary views on the building blocks model (which would normally be set via IMs) it proposes to use to estimate Watercare's costs, for the purposes of establishing allowed revenue. Key building blocks are asset valuation, cost of capital and expenditure assessment.
The positions in the Paper are therefore not set in stone, but they are the clearest indication yet of the Commission’s preferred approach. Further, it seems unlikely that the Commission will materially depart from the fundamental features of the building blocks determined for Watercare's first PQP when it eventually establishes formal input methodologies for Watercare and future regulated suppliers.
Initial regulatory asset base ("RAB") valuation
The Commission is considering two options for establishing Watercare’s initial RAB (the capital already invested to provide services), which is a key input into a price path or when assessing returns on investment:
- Physical initial RAB – the Commission would set the value of initial RAB based on the value of Watercare's physical assets. This would involve rolling forward a deemed value (Watercare’s 2011 post-integration value) to 2028, with adjustments for capital additions, depreciation, disposals, IGCs, vested assets, grants, and revaluations. The initial RAB under this option is estimated at approximately $10–11 billion. This is the Commission’s conditional preference, subject to data reliability.
- Financial initial RAB – the Commission would model an initial RAB which, in combination with projected future capital expenditure, is expected to generate sufficient cash flows to fund long-term investment, maintain revenue and financing sufficiency, and support an investment-grade credit rating for Watercare. The initial RAB under this option is estimated at approximately $8–9 billion.
The Commission observes that Watercare could be unique in having a statutory deemed asset vesting value that is relatively recent but prior to the implementation of regulation. However, that does not appear to preclude arrangements between shareholding councils and new water organisations providing a useful basis for physical asset valuations for new entities.
RAB roll-forward
The Commission's proposed approach is generally consistent with other Part 4 regulated sectors for RAB roll-forward, including asset lives as determined in accordance with GAAP, with straight-line depreciation.
The Commission also proposes that commissioned assets enter the RAB at cost reduced by capital contributions.
IGC revenue would be treated as a "contra asset" – reducing RAB value. It would not be counted as other regulated income. This is intended to achieve the same economic effect as treatment of capital contributions in other sectors to avoid double recovery and tariff shocks.
Approach to cost of capital
The Commission proposes a WACC (the return on the invested capital) approach consistent with other Part 4 sectors:
- The WACC would comprise a cost of equity and cost of debt, with a notional leverage to determine the overall cost of capital.
- Asset beta (and equity beta) is determined using the comparator firm method used for other sectors under Part 4.
- Methods for other parameters such as TAMRP, risk free rate and debt premium are consistent with the Commission's established approaches for other sectors.
- The WACC would be set at the midpoint estimate, with no uplift. The Commission considers an uplift unlikely to materially affect investment incentives for entities that cannot raise external equity and where the investment programme is driven by statutory obligations and other regulatory tools.
Assessment of forecast expenditure
The Commission will assess forecast expenditure against two objectives:
- Expenditure objective: efficient expenditure of a prudent supplier in comparable circumstances, consistent with good water industry practice; and
- Efficiency improvement objective: credible, evidence-based plans for ongoing efficiency gains.
No tax allowance
Watercare is income tax exempt, so no tax building block is proposed.
Risk allocation
- The PQP will cap aggregate revenues Watercare may earn from water and wastewater service use charges (ie excluding IGCs) to recover its costs as calculated using the building blocks above. This means Watercare will not be subject to demand risk.
- IGCs are not subject to the revenue cap, but because they are a contra-asset that reduces the RAB, they reduce the revenue that is allowed to be recovered by use charges.
- The Paper proposes specified price path reopeners for catastrophic events, legislative changes, material errors, and potential financeability issues.
Service quality
The Commission's view is that Watercare’s PQP must include at least one quality standard. The Commission expects a proportionate first-period approach and does not propose financial quality incentive mechanisms at this stage, although performance requirements or service-quality reopeners may be considered.
Next steps
Submissions on the Paper are due to the Commission by 5pm on 30 July 2026.
Please get in touch with our experts below for more information on what the Paper may mean for you.