1. Laws 8505 Regulation UWA March 09

2. K Peter Kolf General Manager & CEO Economic Regulation Authority 9 March 2009 Regulation Laws 8505 UWA

3. Overview Economic Regulation Authority Some Economics Water Industry Issues

4. Part 1: The Economic Regulation Authority Established 1 January 2004 Functions: Administers Access to Monopoly Infrastructure Licenses Service Providers Monitors & Regulates Markets Conducts inquiries (Referred by Government)

5. The Economic Regulation Authority Key Features Independence Transparency Consultation

6. Key responsibilities ElectricityGasWaterRail Access √√√ Licensing √√√ Monitoring √√√√ Market arrangements √√ Inquiries √√√√

7. Objective & Matters to be Taken into Account No overriding objective Key matters which the Authority must have regard to: Promoting outcomes that are in the public interest The interests of consumers, investors & service providers Encouraging investment in relevant markets Promoting competition & fair market conduct Preventing abuse of monopoly power Promoting transparency and public consultation

8. Economic Regulation Authority Governing Body Lyndon Rowe – Chairman Steve Edwell – Member Peter Panegyres - Member General Manager CEO Peter Kolf Planning & Executive Support Director References & Research Greg Watkinson Executive Director Licensing, Monitoring & Customer Protection Paul Kelly Director Gas & Rail Access Russell Dumas Manager Finance & Administration Pam Herbener Executive Director Competition Markets & Electricity Robert Pullella

9. Completed Inquiries - Mostly in the Water Industry 1.Pricing of Recycled Water March 2008 2.Review of the Grain Marketing Act 2002 June 2008 3.Developer Contributions to the Water Corporation June 2008 4.Competition in the Water & Wastewater Services Sector June 2008 5.Annual Inquiry Bunbury and Busselton Water Boards’ Tariffs Feb 2008 6.Annual Inquiry Water Corporation’s Tariffs Jan 2008 7.School Bus Operators’ Charter Bus Operations Jul 2007 8.Annual Urban Water & Wastewater Pricing May 2007 9.Harvey Bulk Water Pricing May 2007 10.Country Water & Wastewater Pricing July 2006 11.Esperance – Kalgoorlie Bulk Water Supply Nov 2005 12.Urban Water & Wastewater Pricing Nov 2005

10. Current Inquiries Tariffs of the Water Corporation, Aqwest & Busselton Water

11. Benefits of Independent Economic Regulation Facilitate private sector provision of services Make best use of monopoly infrastructure Enhanced competition upstream/downstream Consumer protection and fair trading

12. Part 2: Some Economics Economic Efficiency Productive efficiency Allocative efficiency Dynamic efficiency (long run) Singularity Inefficient markets waste resources Does not address the distribution of income or wealth

13. Electricity All other commodities Interests of Consumers Optimum

14. Objective Function Maximise: Long term interests of consumers Subject to: Social advancement Environmental protection Economic prosperity Interests of investors & service providers Re-elect Minister

15. Objective Function Maximise: Re-elect Minister Subject to: Social advancement Environmental protection Economic prosperity Interests of investors & service providers Long term interests of consumers

16. Electricity All other commodities Election of Minister Long Term Interests of Consumers Interests of Investors Continuous voting by consumers through market

17. Physical Properties - Economic Activity Public vs Private goods Excludability Economies of scale Economies of scope Side effects (externalities) –economic, environmental, social & technical –complementary or substitution Barriers to entry –infrastructure –legislative (legal) –financial

18. Supply of Goods & Services Private Goods Bread, Butter etc Mixed Goods Pipelines, Wires etc Public Goods Free to air, Defence etc Common Property Fisheries, Water resources etc

19. Normative Properties - Economic Activity Self interest Public interest Preferences Cultural traditions Beliefs Social standards Teachings

20. No Proof of Hypothesis “The great difficulty in the social sciences (if we may presume to call them so) of applying scientific method, is that we have not yet established an agreed standard for the disproof of an hypothesis. Without the possibility of controlled experiment, we have to rely on the interpretation of evidence, and interpretation involves judgement; we can never get a knock-down answer. But because the subject is necessarily soaked in moral feelings, judgement is coloured by prejudice.” (Joan Robinson, Economic Philosophy, 1962, p26)

21. Prejudice “Anyone who says to you: ‘Believe me, I have no prejudices,’ is either succeeding in deceiving himself or trying to deceive you.” (Joan Robinson, Economic Philosophy, 1962, p26)

22. Economics vs Law Economics is not necessarily fair Economics is not necessarily equitable Precedent does not count Indifferent to individual circumstances

23. Part 3: Water Industry Issues Should water be treated differently to other commodities? Is water too valuable to be provided by the private sector? Should water be privatised? Why not break up the water utility and introduce competition? Should water entitlements be tradable? Should water & wastewater systems be open to third party access? ERA recommended an IPE It also recommended open access particularly at wholesale level It did not recommend Full Retail Contestability at this time

24. How Should Water be Priced? Should water charges be cost reflective? Should water charges reflect scarcity? Should water be rationed? Should the price of essential use water be discounted? Should ability to pay be built into tariffs? ERA recommended that price should reflect LRMC

25. How Should Water be Priced? Minimise: TC = f(C, E, Q, P, …) Subject to: Specified level of security Min service standards Min Return on Investment Max long term interests of consumers C: New connections pa E: Total existing connections Q: Total demand for water P: Peak load requirement

26. Total Revenue TR = p 1 C + p 2 E + p 3 Q + p 4 P Residential Tariff AR = f(E, Q, P) C: New connections pa E: Total existing connections Q: Total demand for water P: Peak load requirement

27. Residential Tariff Average Price Quantity kL per annum $/kL Matters to Consider Total Revenue Price elasticities Price signals Equity %

28. Target Residential Tariff

29. How Should Wastewater be Priced? Should wastewater charges reflect ability to pay? Should wastewater be recycled? Is there scope for competition in recycling? Who owns wastewater in the sewage system? Should private sector have access to wastewater resource? ERA recommended that private sector be given access to wastewater resource

30. Conclusions Strive for continuous improvement Consult widely Be open and transparent Listen and take advice Respect independence Seek solutions to mitigate disputes Be firm but fair

31. Independent Regulation and Advice