Regulatory Alert – 22 November 2018
On Tuesday the Minister of Local Government, Hon Nanaia Mahuta, released a Cabinet paper titled Future state of the three waters system: regulation and service delivery (Cabinet paper) – the latest development in the Department of Internal Affairs' review of the regulation and service delivery arrangements for drinking water, wastewater and storm water (three waters).
The review commenced in 2017, on the back of the Havelock North Inquiry into the campylobacter outbreak in 2016, which revealed several shortcomings in the effectiveness of the regulatory regime for the three waters, and the capability and sustainability of water service providers.
The Cabinet paper sets out the Government's plans to initiate a strategic conversation with local government and other stakeholders about its vision for the future of the three waters, and its proposals to overhaul existing regulation.
This alert summarises the Government's proposals and the high-level timeline for future reform.
Overview of the problem
The Cabinet paper highlights a number of problems with the status quo arrangements:
- Many councils struggle to fund the infrastructure required to meet applicable standards and the needs of local communities. Funding challenges grow more acute as population size decreases, with smaller councils having to draw on a declining rate-paying base to fund new infrastructure.
- Hand in hand with funding difficulties are capability challenges, with smaller provincial councils in particular finding themselves unable to source and retain a specialised workforce to operate and maintain new infrastructure.
- The current regulatory framework places relatively weak obligations on suppliers to provide demonstrably safe drinking water, and allows suppliers to rely on affordability as a defence for non-compliance with drinking water standards. These weaknesses, together with the absence of formal enforcement action, have resulted in persistent non-compliance across the sector.
- Environmental regulation is unfit for purpose, particularly with respect to wastewater systems where sewage overflows are occurring at an unacceptable frequency to the detriment of freshwater and coastal water quality.
- There is a case for a formal system of economic regulation to ensure that consumer welfare is appropriately protected.
Options for reform
The Cabinet paper outlines three potential options to address the shortcomings identified above:
Reforms to existing regulatory framework
- Outcome-focused reforms to the existing three waters regime, with a focus on voluntary, sector-led changes to service delivery arrangements.
- This light-touch option reflects views from local government that reform should be a local government decision and that voluntary reform is already in motion, with some councils already discussing the development of collaborative arrangements and shared service organisations.
Establishing a "three waters fund" to support sector-led improvements in service delivery
- Creation of a national, long-term fund, as a mechanism for supporting improvements to current service delivery arrangements, and to incentivise the sector-led reform discussed above.
- The prevailing uncertainty over the source and security of revenue for the fund and the potential cost and bureaucracy involved in its administration will be challenges.
Aggregated system of publicly owned drinking water and wastewater providers
- The creation of statutory, aggregated, self-funding water utilities. Watercare is cited as a positive example of the funding and capability benefits that can flow from aggregation of service delivery. By owning its assets and having direct contractual relationships with customers, Watercare is able to set standard charges across the entire region and invest where need is greatest. This structure has enabled Watercare to upgrade infrastructure in areas that historically have otherwise been unable to afford it.
- This aggregation approach, if adopted, would see providers configured on either a regional basis (with approximately 12 providers) or on a multi-regional basis (with approximately three to five providers).
- Supplementary to these broad proposals is a strong appetite, discussed in the Cabinet paper, to bring the environmental performance of wastewater within the existing framework of the Resource Management Act 1991 and to establish new regulatory bodies that would give effect to the above reforms.
The Cabinet paper notes that the regulation and service provision of the three waters are complex and interdependent. As a result, consultation and policy development of the proposals outlined above will follow a staged approach, set out as follows.
- Ministers of Local Government, Health, and Environment will report back to Cabinet with detailed policy proposals for regulation of the three waters. The Cabinet paper comments that any future regulation should recognise that public health, environmental and economic regulation of the three waters have cross-impacts and are synergistic.
- The Minister of Local Government will report back to Cabinet with detailed policy proposals for service delivery arrangements. The Cabinet paper highlights the need to treat reticulated council drinking water and wastewater services as a single network in any such proposals.
- The Minister of Commerce and Consumer Affairs and the Minister of Local Government will report back to Cabinet with any desired policy proposals for the economic regulation of three waters services. These proposals will be contingent on decisions about service delivery arrangements, so as to give local government and other stakeholders the opportunity to engage on the options in light of the proposed new regulatory environment.
- Ministers of Local Government, Health, Environment, and Commerce and Consumer Affairs will report to Cabinet on proposals to improve oversight and stewardship across the three waters system. These proposals will take account of decisions on service delivery arrangements and economic regulation.
This staggered timeline suggests that any legislation resulting from the review will not be introduced before 2020. The Minister's recent announcement on the progress of the review can be found here, while the full Cabinet paper can be accessed here.