Pricing-of-regulated-water-and-sewerage-services-Review-of-the-regulatory-framework

Background

On 2 April 2014 the ACT Auditor-General released a performance audit report, The Water and

The report assessed the governance and administrative framework surrounding the water and sewerage pricing investigation led by the Independent Competition and Regulatory Commission (ICRC), initiated by the ACT Treasurer's terms of reference in October 2011 The performance audit revealed significant inefficiencies and ineffectiveness in the administrative and communication processes related to this pricing investigation, highlighting inadequate communication and a strained relationship between the ICRC and the regulated utility, ACTEW.

Corporation Limited) The audit also found that there was a lack of clarity in some key aspects of the legislation governing the pricing investigation process, the Independent Competition and

Regulatory Commission Act 1997 (ICRC Act) The report made a series of recommendations designed to address its findings.

In reaction to the Auditor-General's report, the ACT Government has committed to utilizing its findings to conduct a comprehensive reevaluation of the pricing framework for water and sewerage services in the Australian Capital Territory.

The ACT Government is committed to ensuring that the pricing process for water and sewerage services is independent, transparent, and efficient, instilling confidence within the ACT community To achieve this, a comprehensive review of the legislative, governance, and administrative frameworks of the Independent Competition and Regulatory Commission (ICRC) will be conducted, with the aim of implementing necessary improvements to enhance the pricing process.

In discharge of that commitment, the current review was commissioned in November 2014 and announced by the ACT Treasurer on 25 November 2014 3

Terms of Reference

The Terms of Reference outlined in Appendix A mandate a review of the existing framework for pricing water and sewerage services in the ACT, focusing on providing insights and recommendations for improvement.

The governance and administrative framework for independent pricing of regulated water and sewerage services in the Territory is under review, focusing on the existing model as well as exploring alternative options for enhanced efficiency and effectiveness.

• all relevant legislation related to the pricing framework for regulated water and sewerage services, in particular the ICRC Act;

In April 2014, the ACT Auditor-General released Report No 2/2014 on the Water and Sewerage Pricing Process In response, the Independent Competition and Regulatory Commission (ICRC) formally challenged several findings and recommendations outlined in the audit report (see ICRC 2014a, Appendix C).

2 ACT Government Media Release, Release of the Auditor-General’s Performance Audit: The Water and Sewerage

3 ACT Government Media Release, Review of Water and Sewerage Pricing Framework announced, 25 November 2014

• whether the ACT would benefit from a set of principles for conducting pricing investigations for regulated water and sewerage services, and outline the principles to be included; and

• any other matters considered relevant to improving the pricing framework

The Terms of Reference also require a consideration of other possible frameworks for the determination of water and sewerage prices in the Territory.

Objective and focus of the review

The review aims to evaluate the strengths and weaknesses of the existing framework for setting prices for regulated water and sewerage services By identifying practical options for improvement or reform, this assessment will guide the ACT Government in shaping future price determination arrangements.

The review primarily examines the framework used by the Independent Competition and Regulatory Commission (ICRC) to set prices for regulated water and sewerage services in the ACT The ICRC's governing legislation grants it a broad range of responsibilities, including price determination in other regulated sectors, providing government advice on industry issues, managing access disputes, and overseeing competitive neutrality complaints Additionally, under the Utilities Act 2000, the Commission is tasked with licensing utility services and ensuring compliance with licensing conditions Although these additional responsibilities are not the focus of the current review, it is crucial for government decisions to consider the ICRC's broader roles to maintain a viable and coherent regulatory system.

The review focuses on the regulatory framework governing the pricing of regulated water and sewerage services, examining the powers and functions of the ICRC as an independent regulator, the roles of various stakeholders in the price determination process, and the relationships among them It assesses the adequacy of current regulatory governance, the strengths and weaknesses of the legislative framework, the effectiveness of appeal and review mechanisms, and the administrative processes involved in the ICRC’s pricing investigations Notably, the review does not directly address other related matters.

• the actual prices set for the supply of water and sewerage services, or the tariff structures for those services;

• the technical details of the methodology by which prices are determined, or the relative merits of different methodologies;

• governance arrangements for the regulated entity, except to the extent that these bear directly on the performance of the regulatory framework; 4

• the ICRC’s final report 5 and price direction 6 (June 2013) covering the six-year period from

• the draft decision of the Industry Panel 7 appointed by the ACT Treasurer in April 2014 to review the price direction released by the ICRC in June 2013.

It is essential to make clear distinctions in various areas, particularly regarding the regulator's methodological approach Although technical commentary on how prices are determined is not covered in this review, addressing any significant changes to the regulator's methodology is crucial.

The regulatory framework surrounding appeal and review mechanisms is crucial and requires thorough examination, particularly in relation to the ICRC's latest price direction and the ongoing work of the Industry Panel While it is beyond the scope of this review to comment on specific outcomes, it is essential to analyze the processes utilized by the ICRC in making its decisions, as these processes significantly impact the overall regulatory landscape.

As well as providing the impetus for this review, the performance audit conducted by the

The Auditor-General's report includes extensive information pertinent to the review's terms of reference However, the reviewer recognizes that many audit findings and conclusions have faced strong opposition from the ICRC Consequently, it has been crucial to make independent assessments on significant points of dispute, based on the available evidence.

Processes of the review

As first steps in the process of review, a public website on the review was set up and an

On November 24, 2014, an Issues Paper was released outlining key topics for review, inviting comments and submissions by December 12, 2014 The review received three responses: a formal submission from the ICRC as the independent regulator, a submission from Icon Water Limited (formerly ACTEW Corporation Limited) as the regulated utility, and an email from Dr David Denham AM, a concerned citizen suggesting changes to water and sewerage tariff structures All documents, including the Issues Paper and responses, are accessible on the review website.

4 The institutional and governance arrangements for ACTEW Corporation Limited were the subject of a separate review which reported in December 2013 (see Cohen, B, Appendix C)

5 Independent Competition and Regulatory Commission, Final Report: Regulated Water and Sewerage Services,

1 July 2013 to 30 June 2019, Report No 5 of 2013, June 2013

6 Independent Competition and Regulatory Commission, Price Direction: Regulated Water and Sewerage Services,

1 July 2013 to 30 June 2019, Report No 6 of 2013, June 2013

7 Industry Panel, Review of the Independent Competition and Regulatory Commission’s 2013 Price Direction for

Regulated Water and Sewerage Services in the ACT: Draft Report, December 2014

Throughout the review process, consistent communication was upheld with the ICRC and Icon Water, both essential stakeholders in the price determination process Additionally, meetings were conducted with relevant parties to ensure comprehensive engagement.

ACT government officials; the Auditor-General; members of the Industry Panel; and a number of persons with interests in, and knowledgeable of, the operation of the regulatory framework

A workshop on legislative issues relevant to the price determination process was held on

11 December 2014 Details of the various consultations held are provided in Appendix B.

Extensive literature exists on economic regulation in Australia and globally, particularly regarding the water sector Notably, the Productivity Commission undertook a significant inquiry into Australia's urban water sector, examining the effectiveness of regulatory frameworks.

In 2011, significant recommendations were made to enhance governance arrangements for regulators and utilities, alongside major reforms to the price regulation framework The National Water Commission also reviewed pricing reforms in the Australian water sector that same year Various jurisdictions, including Queensland and Victoria, have conducted reviews of economic regulation and pricing principles in this sector To support the Victorian inquiry, Deloitte performed a comparative study on regulatory approaches across Australian States and Territories, as well as an analysis of different regulatory pricing models More recently, Frontier Economics was commissioned by the Water Services Association to further investigate these issues.

Australia to review the operation of economic regulation in Australia’s urban water sector, and to identify improvements which would be in the long-term interests of customers 13

The review has examined and drawn upon the information contained in these and other relevant documents A list of key reference documents is provided at Appendix C.

The review was conducted over a three-month period, concluding with a final report due on February 20, 2015 Administrative and research support for the review was provided by two officers from the Chief Minister, Treasury and Economic Development Directorate.

Terminology

On 28 October 2014 the former ACTEW Corporation Limited (trading as ACTEW Water) registered a change of name to Icon Water Limited (Icon Water) For purposes of this report, the entity is

9 Productivity Commission, Australia’s Urban Water Sector, Report No 55, Final Inquiry Report, Canberra, 2011

10 National Water Commission, Review of pricing reform in the Australian water sector, 2011

11 Queensland Competition Authority, Statement of Regulatory Pricing Principles, August 2013, and Economic regulation, governance and efficiency in the Victorian water sector: Preliminary advice from the Independent Reviewer,

12 Deloitte Touche Tahmatsu, Comparison of water regulatory approaches – Final report, Report prepared for the Essential Services Commission, Victoria, April 2014; also Deloitte Touche Tahmatsu, Regulatory pricing models for the

Victorian Water sector – Final report, Report prepared for the Essential Services Commission, Victoria, April 2014

In August 2014, Frontier Economics Pty Ltd released a report titled "Improving Economic Regulation of Urban Water," prepared for the Water Services Association of Australia The report discusses the transition of the organization to its new brand name, 'Icon Water,' while referencing 'ACTEW' or 'ACTEW Water' solely in a historical context related to events before October 28, 2014.

The Independent Competition and Regulatory Commission, commonly known as the ICRC, oversees competition and regulatory matters Its governing legislation establishes the framework for the Commission's operations and objectives.

Commission Act 1997, is usually referenced as ‘the ICRC Act’, or simply ‘the Act’, where this is clear in context

References to "the regulatory framework" pertain to the current governance, regulatory, and administrative structure governing water and sewerage pricing in the ACT Meanwhile, "the review" refers to the ongoing evaluation of this regulatory framework.

Reference documents cited in subsequent chapters of this report are usually shown in abbreviated form (e.g COAG 2004) Full details are available from the reference documents at Appendix C.

Structure of the report

The remainder of this report is structured as follows:

Chapter 2 explores the significance of economic regulation in determining the pricing of water and sewerage services, analyzing the advantages and disadvantages of the existing price regulation framework in the ACT.

Chapter 3 evaluates the effectiveness of existing governance and accountability structures in facilitating the smooth operation of the regulatory framework Additionally, it investigates the government's role within the regulatory process.

Chapter 4 analyzes the legislative framework that underpins the regulatory system, identifying several weaknesses in the implementation of the ICRC Act It proposes a set of legislative amendments to address these issues and enhance the effectiveness of the framework.

Chapter 5 explores the potential advantages of establishing a set of principles for conducting pricing investigations related to regulated water and sewerage services in the ACT Additionally, it addresses key administrative and procedural concerns highlighted by the Auditor-General.

• Chapter 6 explores a range of possible alternatives to the current regulatory framework, and assesses their likely strengths and weaknesses

Conclusions are summarized at the end of each chapter, highlighting the interconnected nature of the recommendations, which are grouped together for clarity and coherence.

Executive Summary at the front of this report.

Objectives of economic regulation

Economic regulation through independent price oversight has been a crucial aspect of reforms in Australia's urban water sector Following the National Water Initiative commitment in 2004, all Australian governments agreed to employ independent entities for setting or reviewing prices and price-setting processes for water storage and delivery by government service providers This approach is primarily justified by the fact that most water utilities operate as monopolies, necessitating external oversight to ensure fair pricing and service delivery.

Natural monopolies require price regulation to prevent the abuse of market power regarding pricing and service standards, especially in the absence of competitive forces This necessity for regulation applies equally to private companies and government-owned utilities, particularly in the urban water sector.

To effectively prevent the abuse of monopoly powers, it is essential to promote operational efficiency within the utility sector Achieving this objective requires a combination of strong governance structures, a comprehensive performance and accountability framework, and stringent regulatory processes Relying on any one of these strategies alone is unlikely to yield complete success.

The regulator acts as an independent price-setter, establishing prices that cover the prudent and efficient costs of regulated services while ensuring a reasonable return on assets This role necessitates balancing the long-term interests of utility customers with the financial viability of the regulated business The regulator promotes efficient investment and operation of utility assets, maintaining service standards while ensuring the business remains financially sustainable This involves making nuanced judgments to balance the need for reliable supply and service quality with incentives for the utility to enhance efficiency.

Independent economic regulation of urban water utilities is essential to prevent the politicization of pricing decisions Historically, excessive government involvement in water pricing led to prices being set below cost recovery levels, resulting in inefficient water consumption and neglect of necessary maintenance or capital investment Additionally, as noted by the National Water Commission, governments might view utilities as a convenient source of revenue, further complicating the financial sustainability of water services.

The transmission and distribution networks of water utilities represent a substantial portion of the overall expenses associated with delivering water and wastewater services In many instances, duplicating this infrastructure would not be economically viable, which is why water utilities are frequently described in this manner.

An independent regulator with price-setting authority, functioning independently from the government, helps prevent the establishment of prices above efficient levels, ensuring a fair market environment.

Economic regulation entails both costs and benefits, making it crucial to design regulatory approaches that maximize net benefits The costs associated with regulation include the direct funding required for regulatory agencies and the compliance burdens placed on the entities being regulated.

The national framework

Water pricing and resource management are primarily the responsibility of State and Territory governments However, in the last two decades, economic reform in the water sector has emerged as a critical national concern, driven by issues such as water supply security, drought impacts, resource management, water quality protection, and the need for ecologically sustainable development The Council has played a key role in promoting national action on these reforms.

The 1994 COAG Water Reform Framework established the initial national reforms for the water sector, focusing on pricing and institutional changes It emphasized consumption-based pricing and full cost recovery, aimed to reduce or eliminate cross-subsidies, and advocated for transparency regarding any remaining subsidies.

The COAG Water Reform Framework, along with National Competition Policy reforms, highlighted the necessity for institutional reform due to conflicts arising from government control over pricing in publicly owned water services It advocated for the structural separation of service delivery, policy, and regulatory functions, emphasizing the importance of independent economic regulation for government-owned monopoly water providers This approach aligns with the principles of competition to enhance efficiency and accountability in the water sector.

In 1995, an agreement was established where governments committed to implementing competitive neutrality principles for government-owned businesses, ensuring that these entities do not receive any competitive advantages due to their public ownership.

In 2004, the National Water Initiative (NWI) was signed by Heads of Government, establishing an intergovernmental framework aimed at creating a cohesive system for managing surface and groundwater resources for both rural and urban use, optimizing economic, social, and environmental outcomes The agreement underscored the necessity of best-practice pricing and institutional arrangements to enhance water-use efficiency and foster innovation Notably, Paragraph 77 of the NWI committed governments to engage independent bodies for the setting or reviewing of prices and mandated public reviews and reports on pricing by both government and private water service providers.

17 National Water Commission, Submission to the Productivity Commission Inquiry into Australia’s Urban Water Sector

21 COAG (2004), page 3 providers 22 The agreement also required jurisdictions to report independently and publicly each year on benchmarking of the pricing and service quality of their water service providers.

In November 2008, the COAG meeting led to the agreement on a work program aimed at enhancing urban water security, which included reviewing consumer protection measures for water utility services and finalizing pricing principles under the National Water Initiative (NWI) By April 2010, the Natural Resource Management Ministerial Council endorsed a set of jointly developed pricing principles to help jurisdictions implement NWI commitments consistently These principles encompass four key elements: capital expenditure recovery, urban water tariffs, costs associated with water planning and management, and the reuse of recycled water and stormwater.

Each government holds the responsibility for executing national agreements within its jurisdiction, retaining the autonomy to make independent decisions regarding the issues they address.

Some jurisdictions have hesitated to fully adopt independent bodies for setting or reviewing water service prices, often leaving final decisions to the government, sometimes after considering independent advice The ACT Government has made significant strides in fulfilling national agreements, particularly in pricing reform, compared to other jurisdictions Any modifications to the current price-setting arrangements for water and sewerage services in the ACT must align with the ACT’s commitments under the national framework Ultimately, the ACT, as a sovereign government, must prioritize the best interests of its citizens when making these decisions.

The ACT’s regulatory framework

The ACT Government promptly adopted the national agreements on competition policy and regulatory reform established in the mid-1990s, becoming one of the first regions to establish an independent framework for pricing water, sewerage, and other regulated services This initiative was supported by the predecessor legislation to the current ICRC Act, which was enacted by the ACT Legislative Assembly.

1997, meaning that independent price regulation of water and sewerage services has now been in place for more than 17 years.

Some key features of the current regulatory framework are outlined below Section 2.4 then analyses the strengths and weaknesses of the ACT’s current regulatory arrangements.

The powers and functions of the independent regulator

23 The Independent Pricing and Regulatory Commission Act 1997 Amendments establishing the ICRC in its current form were passed three years later, in 2000.

The ICRC, established under the ICRC Act, functions as a statutory authority comprising one or more standing commissioners and additional commissioners appointed for specific purposes Currently, the Commission includes a Senior Commissioner and a Commissioner, both of whom are statutory appointees The Commission's operations are further supported by a Chief Executive Officer and a dedicated team of staff members, all employed within the Public Sector.

Management Act 1994 The Chief Executive Officer is not a member of the Commission.

The ICRC Act outlines the Commission's objectives, functions, and procedural guidelines for conducting industry references and issuing price directions Specifically, Part 4 grants the Commission the authority to set prices within a regulated industry, adhering to the framework established in section 20A While the ICRC Act, alongside the Utilities Act 2000, assigns various roles to the ICRC, pricing investigations and the issuance of price directions remain its primary focus, utilizing a significant portion of its resources.

The ICRC Act allows for the issuance of terms of reference by the responsible Minister for pricing investigations, without specifying particular industries or sectors These terms outline the relevant industry, the timeline for report submissions, publication dates for price directions, and specific considerations for the Commission during the investigation (section 16 of the ICRC Act) Furthermore, the determination of these terms is classified as a disallowable instrument, meaning they can be scrutinized and debated by the Legislative Assembly if a disallowance motion is proposed (section 16(3)).

A critical feature of the ICRC Act is its conferral of statutory independence upon the Commission Section 10 of the ICRC Act provides that:

The commission operates independently and is not influenced by the Minister or any other referring authority, unless specified by this or any other applicable law in the Territory.

The rationale for this provision is well summarised by the ICRC in its submission:

24 The Utilities Act 2000 prescribes a range of further objects for the ICRC.

The appointment of a Commissioner grants the authority to make crucial judgments on behalf of the community, guided by established legal frameworks It is essential for Commissioners to have the autonomy to determine the community's best interests in their deliberations This statutory independence is vital for the Commission's effective operation, as it allows for accountability regarding the outcomes of their decisions.

Section 20(2) of the ICRC Act outlines key considerations for the Commission when issuing price directions in regulated industries, focusing on consumer protection, economic efficiency, the financial health of regulated entities, and environmental goals The 11 considerations present inherent tensions, necessitating careful balancing, trade-offs, and nuanced judgments Chapter 5 discusses the need for clearer regulatory objectives and enhanced guidance for regulators.

The conduct of a pricing investigation

Part 3 of the ICRC Act outlines the procedural requirements for the ICRC when conducting industry reference investigations Specifically, for price regulation investigations, it mandates the invitation of public submissions and the organization of public hearings, as stated in section 17(4).

The Commission must draft a report on its investigation and make it available for public review and comment for a specified duration; all written feedback received will be considered in the final report preparation (section 18(6)) A simplified diagram outlining the essential steps of a pricing investigation is illustrated in Figure 2.1 below.

Apart from the specific requirements just mentioned, the ICRC Act is not highly prescriptive on how the Commission is to conduct an industry reference investigation: indeed, section 17(6) provides that:

Subject to this Act, the commission may conduct an investigation in any way the commission considers appropriate.

Figure 2.1: Key steps in a pricing investigation

The ICRC, similar to other Australian regulators, employs the 'building blocks' model as its primary method for setting effective cost benchmarks This approach involves calculating a total revenue requirement for the regulated entity by assessing the suitable revenue level for each component involved.

In the building blocks pricing model, prices are established by dividing the revenue requirement by the forecast demand, considering the distribution of demand across various tiers within the pricing structure Regulators evaluate both operating and capital expenditures to ensure that the building blocks and corresponding prices reflect only efficient and prudent spending To aid in these assessments, specialized engineering, financial, and other expert advice is often utilized Additionally, the building blocks model allows for annual price adjustments throughout the regulatory period to ensure that the revenue collected aligns with the efficient revenue requirement.

The building blocks methodology is a recognized regulatory framework known for its transparency, documentation, and broad acceptance This approach typically yields stable and predictable outcomes, ensuring regulated utilities can recover their investment costs Additionally, it encourages operational efficiencies by allowing regulated entities to strive for cost reductions beyond the regulator's efficiency benchmarks, fostering a competitive environment where businesses can benefit from outperforming these standards.

The ACT Government (through the responsible Minister) issues terms of reference for the ICRC to undertake a review of the prices charged for regulated water and sewerage services.

The regulated entity (Icon Water) provides the ICRC with its main submission, detailing key information such as proposed capital and operating expenditure over the regulatory period.

The ICRC produces early documentation, such as a context or issues paper, seeking initial feedback from the community (through written submissions and potentially a public hearing).

The ICRC produces a draft report, which includes a draft price direction for regulated water and sewerage services Submissions are invited in response to the draft report.

Written submissions are received from the community A public hearing is held on the draft report.

The ICRC has published its final report outlining price directions for regulated water and sewerage services for the designated regulatory period To uphold service standards, the ICRC will allow for the retention of efficiency gains, with longer regulatory periods enhancing these incentives, as early efficiency improvements can be preserved for an extended duration.

The building block methodology has notable drawbacks, including its reliance on extensive information and data, which can lead to high costs The requirement for detailed cost forecasts can create a significant burden for both regulators and the entities they oversee Moreover, despite gathering a considerable amount of information, regulators may still face challenges in effectively managing and interpreting the data.

Information asymmetry exists when the regulated entity possesses more comprehensive and current information than the regulator This disparity makes it challenging for the regulator to accurately assess the efficient costs of the regulated entity, as obtaining a thorough understanding of the business can be complex and difficult.

‘regulatory gaming’ on the part of the regulated entity: for example, a regulated business may submit inflated estimates of its revenue requirements in anticipation of a downward adjustment by the regulator 26

Finally, the application of the building block methodology requires a number of fine judgements to be made, and balances struck, by the regulator As the ICRC commented in its submission:

Assessment of the current regulatory framework

Chapter 1 highlights key reports, including those by Deloitte, Frontier Economics, and the National Water Commission, which offer a checklist of criteria for evaluating regulatory systems This section utilizes the assessment frameworks from these reports to analyze the strengths and weaknesses of the current regulatory framework in the ACT.

Strengths of the current framework

It is important to acknowledge at the outset that the ACT’s regulatory framework has a number of notable strengths Among them are the following significant features.

(a) Statutory independence and determinative powers

29 Deloitte Touche Tohmatsu 2014a and Deloitte Touche Tohmatsu 2014b

The ICRC Act grants the Independent Competition and Regulatory Commission (ICRC) statutory independence, safeguarding it from political interference in the price determination process As the independent regulator under the Act, the ICRC establishes the maximum water prices that Icon Water, the regulated utility, can charge In contrast, in several other jurisdictions, regulatory bodies have primarily served an advisory role to the government, which has had the final say in setting or approving prices, or has been involved in reviewing the pricing process.

The combination of statutory independence and decisive powers is essential for successfully reaching the objectives outlined at the beginning of this chapter In its 2011 review of water sector pricing reforms, the National Water Commission recognized the ACT's framework as one of the top three in Australia, alongside Victoria and certain regions.

The ACT's approach to determining water and sewerage prices demonstrates a strong commitment to transparency, as all relevant documents, including discussion papers, submissions, and independent expert reports, are publicly available on the ICRC's website, with confidentiality protections where necessary The ICRC employs a transparent 'building block' methodology, allowing for open challenge and debate regarding its assumptions Furthermore, the Commission meticulously documents its sources and rationale, referencing published data and economic literature Despite some concerns about the adequacy of the ICRC's latest pricing investigation, there is no evidence to undermine its dedication to transparency.

(c) Public consultation and community engagement

The ICRC emphasizes that public consultation is essential to its processes, reflecting its commitment to transparency In its recent pricing investigation, the ICRC published an initial context paper and an issues paper to solicit public feedback, receiving seven submissions, four from the public This engagement continued with the release of a community consultation paper, which informed a public forum held on September 27, 2012, resulting in five additional submissions.

Since the release of the National Water Commission report in 2011, various jurisdictions have updated their regulatory frameworks A 2014 Frontier Economics study indicated that regulators in New South Wales, Victoria, South Australia, the ACT, and Tasmania possess the authority to set water prices In contrast, the Economic Regulation Authority in Western Australia can only make recommendations to the Minister The Queensland Competition Authority, under the 1997 Act, oversees water monopoly activities but is limited to advising the government on pricing practices Meanwhile, in the Northern Territory, the Treasurer oversees the regulation of water and sewerage prices and service standards, which are enforced by the Utilities Commission.

The International Committee of the Red Cross (ICRC) actively engaged the public by inviting comments on its draft report released on February 26, 2013 Following this, a public forum and hearing took place in March and April 2013, resulting in 18 submissions, primarily from individuals and community organizations This approach reflects the ICRC's commitment to transparency and public involvement in its reporting process, as noted in their recent publications.

While the ICRC does not have a formal mechanism for community consultation, such as the

The Consumer Challenge Panel plays a vital role in the Australian Energy Regulator’s price determination processes, demonstrating practices that are both reasonable and suitable for the scale of its operations A recent analysis by Deloitte indicates that the ICRC’s arrangements in this area are comparable to those used by similar organizations in other jurisdictions.

Governments need to address a significant issue regarding consumer representation in regulatory forums, as many individuals lack the time, resources, and expertise to effectively voice their opinions The complex language and technicalities involved in price determination processes can deter meaningful engagement with regulators Consequently, decision-makers like the ICRC often operate with limited insights into consumer preferences, including their willingness to pay for services and the value they place on high service standards The Productivity Commission emphasizes the importance of providing financial support to consumer representatives, enabling them to contribute effectively to policy and regulatory discussions.

Providing additional taxpayer resources for consumer advocacy could yield net benefits, provided that measures are in place to ensure the advocacy is representative and serves a substantial number of consumers.

The review suggests that the ACT Government consider the introduction of measures designed to support more effective consumer advocacy, research and engagement in the regulatory decision-making process

Consistent with the principles endorsed in the COAG Water Reform Framework (1994) and the

The National Water Initiative (2004) emphasizes the principle of full cost recovery in water and sewerage pricing, a fundamental public policy that has guided the ACT's pricing since the late 1990s The Independent Competition and Regulatory Commission (ICRC) applies this principle by setting prices that enable regulated entities to recover their full prudent and efficient costs for services provided to customers throughout the regulatory period This approach promotes efficient pricing and ensures the sustainability of water services.

34 http://www.aer.gov.au/about-us/consumer-challenge-panel

The Productivity Commission evaluates the efficiency of costs by initially examining the regulated entity's internal processes to ensure that planned expenditures are both prudent and efficient Subsequently, it utilizes benchmarking and similar methods selectively to offer independent verification that these expenditures align with reasonable industry standards.

These arrangements align with established regulatory practices and principles, ensuring they promote justifiable, efficient, and sustainable pricing structures for the long-term benefit of the ACT community when designed and implemented effectively.

The ACT's regulatory framework includes a mechanism for appealing pricing decisions made by the independent regulator, allowing for a thorough review of the issues raised This effective appeal and review process is essential for a well-designed regulatory system, ensuring that authorities operate within their legal powers, maintain procedural fairness, and provide justifiable reasons for their decisions Furthermore, it helps prevent the abuse of discretionary authority and upholds the integrity of the regulatory system by holding regulators accountable A recent report by Frontier Economics highlights that Victoria and the ACT have the most comprehensive arrangements for the appeal and review of regulatory decisions.

Despite its clear advantages, the review procedures established under the ICRC Act present several significant issues that need to be addressed Key considerations include the suitable format and nature of the review, taking into account proportionality and cost-effectiveness; the criteria for submitting a review application; the eligible parties for filing such applications; and the appropriate authority responsible for conducting the review These topics are explored in Chapter 4.

Areas of weakness or vulnerability

Have the objectives of economic regulation been achieved?

Evaluating whether the current regulatory framework for water and sewerage services has achieved its intended objectives is crucial for future pricing decisions However, this assessment is challenging due to the lack of a counter-factual, making it difficult to determine the pricing outcomes that would have occurred without regulation or under an alternative framework Despite these challenges, it is still possible to make some broad observations and qualified judgments regarding the effectiveness of the existing regulations.

In its 2011 review, the National Water Commission highlighted the significant benefits of water pricing reforms in the Australian water sector initiated in the 1990s These benefits included a reduction in residential water consumption per property due to the implementation of consumption-based charging in urban areas, increased scrutiny of water businesses' expenditures leading to cost savings for customers, and enhanced transparency and accountability among all stakeholders Additionally, the transition to full cost recovery has had a notable impact on many water businesses, particularly in urban settings.

74 National Water Commission 2011, pages 84-85 metropolitan areas) were better placed to fund major new investments than would otherwise have been the case

In the early 2000s, water prices in the ACT surged, leading to Canberra residents paying the highest rates among major Australian cities by 2008 However, from 2008 to 2012-13, the increase in water prices significantly slowed, with typical residential bills rising by less than 20% in real terms over five years Consequently, by 2012-13, ACT water prices were only marginally above the median rates charged by other water utilities.

Assessing the impact of the regulatory framework on utility outcomes remains challenging However, insights can be gained by comparing the prices submitted by regulated utilities to those approved by regulators in their final decisions Table 2.4, derived from a recent Frontier Economics study, illustrates this comparison for six water utilities across Australia, reflecting the latest regulatory decisions for each utility.

In every case the ‘approved revenue’ (the revenue approved by the regulator) is less than the

‘proposed revenue’ (the revenue proposed by the water utility), with the margins varying between

6 per cent and 26 per cent Notably, the ACT recorded the highest margin of 26 per cent.

The significant margin suggests that the ACT's regulatory system is functioning effectively, as customers are benefiting from lower prices while Icon Water maintains financial viability However, this evidence is not conclusive, as it remains uncertain whether the prices proposed by the water utility to the regulator would be the same without regulation.

Table 2.3: Water utilities with 100 000+ connected properties:

Changes in water prices, 2007-08 to 2012-13

(a) Changes in a typical residential bill (based on average residential water supplied)

The recent decrease in water price differences between the ACT and other regions can be partly attributed to significant investments in water supply projects, including desalination plants, made by various states These investments necessitate the recovery of costs through increased water prices.

Table 2.3 (Continued) (b) Changes in the prices charged for 200 kilolitres of water

According to the National Water Commission (NWC), the National Performance Reports for 2011-12 and 2012-13 provide insights into urban water utilities To ensure comparability, the price data from 2007-08, as published by the NWC, have been indexed to align with the figures from 2012-13.

Table 2.4: ‘Proposed’ and ‘approved’ revenues for regulated water utilities

Source: Frontier Economics: Improving economic regulation of urban water, August 2014 (report prepared for the

Water Services Association of Australia) ACT data relate to the ICRC Price Direction for the period 1 July 2013 to

30 June 2019 The data for other jurisdictions are sourced from the most recent regulatory price determinations in each case.

Recent evidence supports a positive view of the regulatory system's impact on service standards in the water and sewerage sectors A Frontier Economics study analyzed the annual performance changes of various utilities from 2007 to 2013 In the ACT, ACTEW achieved a notable 14% annual reduction in water mains breaks and a 4% annual decrease in water interruptions However, there were slight increases in the duration of both water and sewerage interruptions, with rises of 4% and 3% per annum, respectively.

A primary goal of economic regulation is to promote efficient investment by regulated utilities in long-term infrastructure and assets, while also ensuring their operational efficiency This is essential to guarantee that customers receive necessary services at the lowest possible long-term costs.

Quantifying the impact of regulatory activities on a utility's operational efficiency and the quality of its infrastructure investments is notably challenging Nevertheless, the ICRC conducts thorough examinations to assess these effects comprehensively.

ACTEW's expenditure proposals, encompassing both operating and capital costs, have demonstrated a satisfactory level of assurance For instance, the Commission's recent pricing investigation identified three ACTEW projects that were deemed to fulfill community service obligations rather than primarily serving customer needs Consequently, the Commission recommended that the costs of these projects should be funded separately from consolidated revenue, rather than being borne by ACTEW's customers.

The ICRC itself has put the view that the regulatory system is working effectively, and as intended

In its latest Annual Report for example, it commented as follows:

The ACT ensures a safe and dependable supply of water, sewerage services, and electrical energy due to prior investments, competent suppliers, and a robust regulatory framework When setting price directions, the Commission prioritizes consumer protection against monopoly power abuses Additionally, the Commission collaborates with the technical regulator and ACAT to uphold industry and technical codes focused on public safety, network reliability, security, and consumer protection.

The article highlights key initiatives, including the provision of sewerage services to the Uriarra community, the development of the Cotter Discovery Trail and Precinct, and the successful attainment of carbon neutrality for water security projects.

Commission seeks to ensure that these regulations achieve their objectives at minimum cost to the community 81 and again:

The Commission believes, as indicated by public comments from ACTEW, that the price direction is functioning as intended Price increases have remained aligned with inflation, water consumption has risen—though it remains well below pre-drought levels—and ACTEW's profitability has surpassed expectations outlined in the Commission’s Final Report.

The ICRC acknowledged in its review submission that while the current regulatory framework has significant strengths, there is considerable room for improvement in terms of cost-effectiveness.

Should the ACT retain its current system of price regulation?

The ACT Government must consider whether to maintain the existing regulatory framework for setting water and sewerage prices in the Territory This decision is informed by the strengths and weaknesses outlined in the current review.

While the existing regulatory framework may be functioning well, it is essential to recognize that it is not the sole option available; every regulatory system has its limitations and alternatives.

In determining the best approach, the Government must consider various arrangements discussed in Chapter 6, ultimately focusing on which option balances cost-effectiveness and practicality most effectively, as emphasized by the ICRC in its submission.

The decision on establishing a dedicated regulatory agency for the ACT to oversee the pricing of water and sewerage services should be based on careful evaluation of its potential benefits and effectiveness This agency could enhance transparency, ensure fair pricing, and improve service delivery, ultimately leading to better management of water resources in the region.

The ACT has a regulatory agency that currently sets the prices for water and sewerage services A key decision now lies in determining whether this agency should continue to perform this function or if alternative arrangements should be established for pricing these essential services.

To enhance the current arrangements, any identified improvements should be implemented or their potential impact considered when comparing costs with alternative options Prior to making any changes, a comprehensive and feasible alternative must be developed Additionally, any assessment of cost-effectiveness should take into account all ramifications and associated costs related to the alternative solution.

The ACT Government's decision on the pricing of water and sewerage services will have significant consequences that must be carefully managed Each alternative arrangement discussed presents unique risks and challenges, necessitating the development of a clear management strategy before any commitment is made Conversely, if the current regulatory framework is retained, it is crucial to address the identified weaknesses and vulnerabilities Ultimately, the Government must make its decision with a comprehensive understanding of the potential impacts involved.

Conclusions

The ACT's regulatory framework boasts significant strengths, primarily through the ICRC Act, which grants the ICRC statutory independence and safeguards against external interference in price setting Furthermore, the ICRC possesses determinative powers, allowing it to set maximum prices for the regulated utility, Icon Water, rather than simply advising on them This blend of independence and authority is essential for achieving the primary objectives of economic regulation.

The ICRC ensures transparency in setting water and sewerage prices, allowing for meaningful public consultation and input in the pricing process.

The ACT's regulatory framework prioritizes full cost recovery and the evaluation of prudent, efficient costs to encourage optimal pricing It also includes a process for appealing pricing decisions made by the independent regulator, allowing for reviews based on the concerns raised In these aspects, the ACT's framework stands out positively compared to those in many other jurisdictions.

Notwithstanding these significant strengths, however, there are also some important areas

85 ibid., page 9 of weakness or potential vulnerability in the current regulatory arrangements

In conclusion, the costs associated with determining the ACT's water and sewerage prices for the regulatory period beginning in July 2013 are a major concern, projected to reach approximately $9 million due to various expenditures, including the independent review of the ICRC's original pricing decision Ultimately, these expenses will be reflected in higher prices for customers.

The total cost of approximately $9 million for the price determination process in the ACT is excessively high, particularly given the context This figure appears to represent the most expensive price determination ever conducted in the urban water sector, calculated on a per million dollars of regulated revenue.

The high costs of the recent pricing investigation in Australia were influenced by various inefficiencies and the necessity for an industry panel review of the ICRC's initial decision Moving forward, it is crucial to contain and manage these costs effectively, assuming the existing regulatory framework remains in place.

The timeliness of the regulatory process raises significant concerns, as highlighted by the ICRC's recent pricing investigation, which took longer to complete than similar reviews conducted by seven other regulators The ICRC has recognized that the prolonged duration of its investigations significantly contributes to overall costs, underscoring the need for streamlining its processes to expedite pricing reviews.

Effective regulatory practice requires consistency and predictability in processes and outcomes, a standard the ICRC failed to uphold in its recent pricing investigation The draft report was released later than expected and included unexpected elements that were not foreshadowed by previous guidance Additionally, the final report introduced significant methodological changes compared to the draft, resulting in notable alterations to the final price direction The concern lies not in the changes themselves but in the lack of sufficient lead-time, consultation, and prior explanation during the process.

The ICRC recognized significant shortcomings in its administrative processes during its latest pricing investigation, admitting to being 'poorly prepared.' Inadequate planning and insufficiently detailed methodological issues hindered the review's effectiveness, leading to delays in the publication of key documents related to the investigation.

Several factors contributed to the challenges faced by the Commission, some of which were beyond its control To ensure effective pricing investigations under the existing regulatory framework, the Commission must enhance its preparedness and resources This includes completing planning and finalizing administrative processes well in advance, ideally several months prior to issuing the terms of reference for the investigation.

The success of the regulatory framework hinges on a robust and professional relationship between the regulator and the regulated entity This relationship necessitates a mutual understanding of roles and responsibilities, a commitment to sharing pertinent information, and a readiness for constructive dialogue However, these essential elements were lacking in the ICRC’s recent pricing investigation, which resulted in an unproductive and costly dispute.

ICRC and ACTEW, as the regulated entity

Disagreements and disputes are inevitable in the future; therefore, it is crucial to establish effective management strategies within the existing regulatory framework Improved planning and clearer guidance during the initial stages of pricing investigations are vital, particularly regarding the information required from regulated entities The goal should be to define the overall framework for pricing investigations as early as possible, minimizing areas of ambiguity and contention to facilitate quicker resolutions.

Since its implementation in 1997, the legislative framework regulating the system in the ACT has functioned effectively; however, recent developments have highlighted several critical weaknesses To address these issues, amendments to the ICRC Act will be necessary, irrespective of the ACT Government's decision regarding the future structure and form of the regulatory framework.

The current funding arrangements for the independent regulator, the ICRC, highlight significant weaknesses and vulnerabilities As a small agency compared to its counterparts in other jurisdictions, the ICRC faces major fluctuations in service demand and shifting functional responsibilities These challenges are exacerbated by a complex funding structure and unstable funding levels To enhance the viability of the existing regulatory model, it is essential to identify solutions that address these issues.

ICRC so that it is not so exposed to the adverse effects of cyclicality in its workload and marked swings in its resourcing base

Cost recovery is essential for the ICRC, promoting transparency in regulatory expenses and fostering a cost-conscious culture within the organization It is crucial to justify and explain the costs that need recovery as relevant, reasonable, and efficient Additionally, the structure of licence fees should be streamlined, with a single budget appropriation replacing the current service level agreement to fund necessary functions that cannot recover costs This includes research into regulatory methods, collaboration with other regulators, meeting accountability requirements, and preparing for future pricing investigations.

The importance of good governance

The Terms of Reference require the review to provide comments and recommendations on:

The governance and administrative framework for independent pricing of regulated water and sewerage services in the Territory is under review, focusing on the effectiveness of the current model and exploring alternative options for improvement.

This chapter primarily addresses governance and accountability issues, while administrative arrangements and procedural matters are explored in detail in other sections, specifically Chapter 2 (Section 2.4) and Chapter 5 (Section 5.2) of the performance audit report by the Auditor-General.

Sound governance and accountability arrangements are critical to the effective operation of a regulatory system As the OECD has argued in a recent report on regulatory governance:

The establishment and governance of regulators play a critical role in fostering trust and ensuring effective regulation This involves the relationships between regulatory decision-makers, political entities, the legislature, executive administration, judicial systems, and the entities being regulated By enhancing the governance structures of regulators, different institutional models can significantly improve their effectiveness, thereby contributing to the achievement of key public policy objectives and benefiting the community at large.

The issues of trust and confidence are paramount As a former CEO of the New South Wales regulatory body (IPART) commented in a recent essay published by the National Water

State and territory governments play multiple roles in the water industry, including ownership, operation, policymaking, and regulation These roles often create tensions due to competing objectives that are desirable yet conflicting While the resolution of these tensions is primarily a political matter, it frequently falls to economic regulators to address them in practice.

For effective regulation, all stakeholders, including governments, must respect the role of regulators in the water and sewerage sectors This respect does not imply the complete removal of politics from these areas; instead, governments should clearly define regulatory objectives while allowing regulators the autonomy to determine the best methods for achieving them Building stakeholder confidence in the regulator's competence and impartiality is essential and should develop over time To foster this trust, regulators must engage in careful, consultative processes and provide transparent justifications for their decisions.

This will help to generate confidence and trust The quality of the individuals appointed to make regulatory decisions is also important 87

The ICRC contended that the ACT’s governance framework for water and sewerage services aligns with recognized best practices both nationally and internationally This assessment is supported by several key aspects of the current framework that reflect best-practice governance principles.

• There is a clear definition, and appropriate separation, of roles and responsibilities Icon Water Limited is constituted under both the Corporations Act 2001 (Cwlth) and the

The Territory-owned Corporations Act 1990 (ACT) establishes that Icon Water operates as a corporatised entity, managing its daily operations independently from the executive government Pricing for water and sewerage services is determined independently by the Independent Competition and Regulatory Commission (ICRC) Both Icon Water and the ICRC are responsible to the Legislative Assembly for their performance.

• The ICRC’s governance arrangements are set out clearly, without undue prescription, in the

The Independent Competition and Regulatory Commission Act of 1997 outlines the Commission's objectives and functions, as well as the procedures for conducting industry investigations and issuing price directions.

The ICRC's Commissioners are appointed based on specific qualifications and experience, serving a fixed term as outlined in the ICRC Act, Schedule 2 They are expected to exercise independent judgment in fulfilling their duties Additionally, the ICRC Act mandates that any pricing investigation report must include dissenting opinions from Commissioners, as specified in subsections 18(5)(c) and 21(1)(e).

The ICRC Act ensures the statutory independence of the Independent Commission for Regulation of Communications (ICRC), safeguarding it from political interference in its price determination authority (section 10 and subsection 16(2)(c)) Additionally, the Act empowers the ICRC to issue binding regulatory decisions (section 20).

• An industry reference for the conduct of a pricing investigation is initiated by the relevant Minister The terms of reference for a pricing investigation (or other industry reference) are

87 Cox J, Water Utilities and state government budgets, essay published in National Water Commission 2014, Chapter 3

The governance arrangements of Icon Water Limited, previously known as ACTEW Corporation Limited, were reviewed separately in December 2013, highlighting that the efficiency of utility operations is significantly influenced by the quality of governance Some experts argue that enhancing governance may be a more effective means of improving efficiency than solely relying on regulatory price-setting The Productivity Commission has recommended transitioning to a price monitoring regime alongside reforms in the governance of government-owned urban water utilities, emphasizing the importance of governance in achieving regulatory objectives Additionally, disallowable instruments related to these governance reforms are subject to scrutiny and public debate within the Legislative Assembly and are accessible on the ACT’s legislation register.

The ICRC ensures transparency in its processes by publishing all documents related to pricing investigations on its website, while safeguarding any confidential information The methodologies used by the ICRC are based on transparent assumptions that invite scrutiny and discussion Additionally, the Commission meticulously documents its sources and clearly outlines the rationale behind its decisions in its reports.

An effective governance framework is essential, but it alone does not guarantee trust and confidence in a regulatory system Significant weaknesses can exist between the potential and actual performance of such systems, underscoring the need for regulators to actively earn trust through effective consultative arrangements, strong management of key relationships, rigorous analysis, transparent processes, and high-quality decisions As highlighted by the Productivity Commission in its report on Australia’s urban water sector, the credibility of a regulator hinges on its actions and engagement with stakeholders.

To ensure effective performance by utilities and regulators after establishing independence and clear objectives, it is crucial to create incentives that promote accountability Implementing open and transparent decision-making processes fosters accountability, while measures such as public consultations, regular reporting of decisions, and performance monitoring enhance transparency Additionally, imposing sanctions for underperformance is essential to maintain high standards in service delivery.

To enhance governance arrangements, it is crucial to consider inserting an overarching objects clause into the ICRC Act, emphasizing economic efficiency while ensuring the financial viability of regulated entities This addition would guide the ICRC in balancing various considerations and making necessary trade-offs Additionally, reforming the ICRC's resourcing, strengthening its information-gathering powers, and streamlining legislative and administrative processes are essential steps Ultimately, the priority should be to strengthen accountability arrangements to foster greater confidence and trust in the regulatory system and respect for the regulator’s role.

Strengthening accountability arrangements

The OECD emphasizes that accountability and transparency are essential counterparts to independence, necessitating a balanced approach Effective accountability and transparency measures foster good conduct and performance among regulators by enabling their actions to be evaluated by the legislature or other relevant authorities.

An effective accountability system must explicitly outline the responsibilities of the regulator, the expected conduct, and the assessment methods Establishing clear expectations and shared understandings is crucial for the success of any accountability framework.

Under the arrangements applying in the ACT, the ICRC is accountable to the Legislative Assembly through the responsible Minister, currently the Treasurer As required under the Annual Reports

Under the Government Agencies Act 2004, the ICRC is mandated to produce an annual report detailing its activities, performance, financial status, and adherence to legislative and government-wide requirements from the preceding financial year This report is essential for ensuring transparency and accountability in the agency's operations.

Under the Management Act 1996, the Commission is required to prepare an annual Statement of Intent that outlines plans for the upcoming year and the subsequent three years In accordance with Section 61 of the Financial Management Act 1996, this statement must encompass various essential elements.

• a statement of the objectives of the authority for the (coming) year, and each of the next 3 financial years;

• a statement of the nature and scope of the activities to be carried out by the authority during the year, and each of the next 3 financial years;

The performance criteria and metrics used to evaluate the authority's effectiveness in meeting its annual objectives, along with projections for the subsequent three financial years, are essential for assessing its overall performance.

• an assessment of the performance (or estimated performance) of the authority in the previous financial year against its objectives for that year.

The Financial Management Act 1996 mandates that the Commission consult with the responsible Minister while preparing its statement of intent, as outlined in section 61(2) Additionally, the Commission must consider any feedback from the Minister before finalizing the statement, according to section 61(3).

The ICRC has made efforts to meet these requirements to the best of its ability, considering the uncertainties associated with its projected work program over the next four years.

Statement of Intent, for 2014-15 and beyond, was signed in May 2014 by the ICRC’s Senior

Commissioner and the Treasurer, as the responsible Minister.

The review regards these current accountability arrangements as reasonable and appropriate, but considers that they could be significantly improved and strengthened The ICRC currently prepares

The ICRC's 2013-14 Annual Report, released in September 2014, lacked clear guidance from the responsible Minister, who, despite co-signing the statement, did not actively influence its content or priorities Moving forward, it is essential for the government to be more proactive in outlining its expectations for the ICRC while respecting the Commission's statutory independence The OECD's recent report on regulatory governance, informed by the Australian Uhrig Review, provides valuable insights on how to effectively implement this collaborative framework.

To establish clear expectations, ministers should provide each regulator, including independent and ministerial units, with a statement of expectations that details government policies and objectives relevant to the regulator This statement must align with the independence of decision-making as outlined in the regulator's enabling legislation In response, the regulator should articulate its plan to meet these expectations in its corporate plan or a similar document, such as a statement of intent, which should also include agreed-upon key performance indicators with the minister Additionally, when faced with competing priorities, the corporate plan should delineate principles for prioritization.

The regulator's website must publish the statement of expectations and corporate plan, which includes key outcomes, outputs, and agreed performance indicators related to quality and timeliness Additionally, the regulator's performance should be directly aligned with the government's policy objectives to ensure accountability and transparency.

The regulator's objectives and accountability are clarified for all stakeholders through this process It is essential for the minister and regulator to review the statement of expectations and corporate plan whenever there is a significant shift in government policies, changes in the operational environment, or the appointment of a new minister.

Involving relevant stakeholders, where appropriate, in defining the expectations will improve the extent of stakeholder buy-in of the regulatory activity and the outcome.

Government arrangements would enable clear communication of requirements and expectations to the ICRC, independent of specific pricing investigations This approach allows the government to offer constructive feedback on the Commission's recent performance, address concerns regarding past investigations, outline expectations for future inquiries, and express priorities for various aspects of the Commission's work.

93 Uhrig J, Review of the Corporate Governance of Statutory Authorities and Office Holders, Commonwealth of

In June 2003, Australia’s Commission outlined a forward work program aimed at providing clarity on government expectations, which would reduce uncertainty for the International Committee of the Red Cross (ICRC) This initiative allows the Commission to respond effectively to the government's statements and consult with the Minister, as mandated by legislation Ultimately, this effort is expected to establish clearer expectations and foster a more unified understanding, enhancing the overall effectiveness of the regulatory framework.

The role of government

The ACT Government plays a crucial role in ensuring the safe and efficient supply of water and sewerage services to residents, managing the policy framework for water security and availability It oversees Icon Water Limited, the sole provider of these services, and the independent regulator, the ICRC The government is responsible for appointing board members for Icon Water and commissioners for the ICRC, which is vital for their effective performance Additionally, it protects the interests of low-income consumers and funds community service obligations, highlighting its commitment to equitable water management in the ACT.

Achieving a harmonious balance among various governmental roles is essential, particularly in aligning distributional and equity objectives with efficiency goals Additionally, it is crucial to reconcile consumer interests with budgetary constraints Recognizing and effectively managing the inherent conflicts arising from these multiple roles is vital for optimal governance.

The government should honor the roles and authority of the Icon Water Board and the independent regulator, ensuring they are held accountable while also being ready to intervene when necessary, all while avoiding any unwarranted interference.

The main functions of government with respect to the operation of the regulatory framework specifically are summarised in Table 3.1 below

Table 3.1: Economic regulation of government-owned entities:

Some key roles of government

• Determine the objectives, form and structure of the regulatory system Review and amend the legislative framework as necessary.

• Put in place effective governance structures and arrangements, both for the independent regulator and the regulated entity

As a shareholder, it is essential to establish a transparent performance and accountability framework for the regulated entity, ensuring consistent monitoring of its performance against this framework This includes setting clear dividend policies and target rates of return, while also holding the regulated entity accountable for its overall performance.

To ensure the independent regulator operates effectively and efficiently, it is essential to establish a clear performance and accountability framework that maintains its statutory independence This framework should empower the regulator to fulfill its statutory functions while also holding it accountable for its performance.

• Set the high-level framework for a pricing review (via formal terms of reference), leaving the independent regulator to conduct its work within that framework.

To ensure the regulatory system functions effectively, it is essential to clearly communicate expectations to both regulators and regulated entities regarding the significance of maintaining a constructive and professional working relationship.

• Identify and fund separately any community service obligations (CSOs) performed by the regulated entity.

• Appoint a body to conduct a review of a price direction, in the event that an application is lodged for such a review.

• Periodically review the performance of the regulatory framework, making changes as necessary to improve its efficiency and effectiveness.

The review indicates that the government should take a more direct and active role in supporting the regulatory system's operations, which has not been the case recently This perspective aligns with the inquiries and recommendations presented by Dr David Cousins to the Auditor-General.

This raises important questions about the regulatory framework for setting maximum prices First, can the work on the regulatory framework be separated from the actual determination of maximum prices, potentially allowing for quicker and more certain price reviews? Second, should the responsibility for creating this framework rest primarily with the regulator, or should the Government play a significant role in its development, informed by input from the regulator and other stakeholders?

The review does not advocate for a significant change in the government's role regarding price determination, particularly in relation to water and sewerage pricing However, it does support a more proactive government involvement in certain areas, especially in making informed decisions about the overarching framework for pricing investigations.

94 Dr David Cousins, as quoted in ACT Auditor-General, page 70

To ensure clarity and structure in the investigation process, it is essential for the government to establish the terms of reference at the beginning, rather than relying on representations or submissions during the review As discussed in Chapter 4, the government should typically determine the duration for which a price direction is applicable, unless there is a compelling reason to assign that authority to the ICRC Furthermore, the government must also specify the deadlines for the release of both the draft and final reports from the ICRC.

The government must enhance governance and accountability within the regulatory framework by clearly outlining its expectations for the Independent Commission for Regulatory Compliance (ICRC) while respecting its independence It should hold both the ICRC and the regulated utility accountable for their performance To maintain the current regulatory framework, the government needs to improve the ICRC's resources, ensuring it is adequately prepared for upcoming pricing investigations This includes finalizing planning and streamlining administrative processes.

‘framework’ issues resolved at least several months before the terms of reference for the pricing investigation are issued.

Other governance issues

The performance audit report from the Auditor-General highlighted conflicts of interest concerning the Treasurer's dual roles in setting water and sewerage prices in the ACT The Treasurer served as both a voting shareholder of ACTEW and the Minister responsible for water and sewerage pricing policy, having established the terms of reference for the ICRC's pricing investigation in October 2011 and submitted responses on behalf of the ACT Government Despite some mitigating practices in place, the report concluded that conflicts of interest persisted and recommended addressing these issues.

The ACT Government needs to reassess the responsibilities of the Treasurer and establish measures to reduce, or ideally eliminate, conflicts of interest in the water and sewerage pricing process.

In response to the recommendation, the ACT Government emphasized that the Treasurer's responsibilities regarding water and sewerage pricing were clearly defined and executed appropriately It noted that in a smaller jurisdiction like the ACT, a Minister must often balance multiple interests while fulfilling various roles The Government also highlighted existing strategies designed to mitigate potential conflicts of interest, suggesting that no further measures were necessary.

96 ACT Auditor-General, Recommendation 1, page 17

Voting shareholders do not directly manage ACTEW, and Government submissions to the ICRC are accessible to the public, with terms of reference classified as a Disallowable Instrument, ensuring the Legislative Assembly's involvement Furthermore, any Government submission is reviewed by the collective view of Cabinet before being provided by the Treasurer, in line with standard Government procedures Lastly, to mitigate potential conflicts of interest, the pricing process is conducted independently of the Government.

The review supports the ACT Government's position regarding the management of potential conflicts of interest, emphasizing the importance of effective mitigation strategies The Government's response outlines substantial measures that are likely to work in practice Notably, the terms of reference for pricing investigations are classified as a disallowable instrument, which subjects them to scrutiny by the Legislative Assembly, serving as a strong deterrent against any inappropriate influence on the ICRC's pricing decisions Additionally, the Commission's statutory independence ensures that the Minister cannot direct its actions, further safeguarding the integrity of the pricing determination process.

Commission in its conduct of a pricing investigation, constitute other important safeguards against inappropriate intervention in the price-setting process

In its submission to the review the ICRC drew attention to another, if somewhat related, conflict of interest issue:

The Treasurer appoints members to the Industry Panel when an application for a review of a price direction is submitted, which may lead to conflicts of interest As a shareholder of ACTEW, the Treasurer might favor a price direction that maximizes profits for ACTEW, potentially compromising impartiality This issue is exacerbated by the lack of legislative oversight to address such conflicts.

The review suggests that if the existing regulatory framework remains in place, the appointment process for industry panel members should be reviewed by the Legislative Assembly This could be implemented by modifying section 24M(3) of the ICRC Act, which currently allows for these appointments to bypass legislative scrutiny.

The Legislation Act 2001 (Division 19.3.3) mandates that statutory appointments undergo scrutiny by the Legislative Assembly, requiring the Minister to consider recommendations from a standing committee before proceeding with appointments This stipulation, which applies to the appointment of a Commissioner to the ICRC, should also extend to the selection of industry panel members, ensuring a consistent and transparent appointment process.

The current provisions of the ICRC Act are overly restrictive as they limit the review process to a specific industry panel It is recommended that the Act be amended to empower the Minister to establish or appoint a review body upon receiving a review application, allowing for greater flexibility beyond the existing industry panel option This change could include the possibility of appointing an established organization, such as the Australian.

Competition Tribunal, would substantially reduce (if not eliminate entirely) the concern raised by the ICRC about the conflict implicit in current arrangements.

Conclusions

Effective governance and accountability are crucial for the successful functioning of a regulatory system While the existing regulatory framework for water and sewerage pricing aligns with best-practice governance principles, it is inadequate by itself Additional reforms are necessary to enhance the governance framework, particularly in reinforcing accountability measures.

Conclusion 3.2 : A careful balance needs to be struck between respect for the statutory independence of the ICRC and an appropriate system of accountability, by which the

An effective accountability framework for the Commission must clearly outline its responsibilities, conduct, and assessment methods Establishing clear expectations and shared understandings is crucial for the success of this framework, ensuring that the regulator is held accountable for its performance.

Conclusion 3.3 : The ICRC is accountable to the Legislative Assembly through the responsible

The Treasurer is responsible for preparing an annual report detailing activities, performance, finances, and compliance with legislative and government requirements from the previous financial year Additionally, an annual Statement of Intent is co-signed with the responsible Minister, outlining plans for the upcoming year and the following three years While these accountability measures are reasonable, there is substantial potential for improvement and enhancement, particularly in the context of the ACT.

Government to be more forthcoming and proactive in making clear its requirements and expectations of the ICRC, without impinging on the statutory independence of the

In conclusion, the government should adopt a more proactive role in supporting the regulatory system, particularly in the context of pricing investigations It is essential for the government to establish the high-level framework and terms of reference at the beginning of the investigation, rather than intervening later through submissions or representations Additionally, the government should determine the duration for which a price direction will be effective and set deadlines for the release of both draft and final reports related to the pricing investigation.

The government must enhance governance and accountability measures within the regulatory framework to ensure effective oversight of both the Independent Competition and Regulatory Commission (ICRC) and the regulated utility It is crucial to hold these entities accountable for their performance To maintain the current regulatory framework, the government should also improve the ICRC’s funding and resources, enabling the Commission to effectively conduct future pricing investigations.

The Treasurer's multiple roles in determining water and sewerage service prices present a potential conflict of interest; however, effective mitigation strategies are in place to address these concerns The disallowable nature of the pricing investigation's terms of reference, which can be scrutinized by the Legislative Assembly, acts as a strong deterrent against any improper influence on the Independent Competition and Regulatory Commission (ICRC)'s pricing decisions Additionally, the ICRC's statutory independence and the Minister's inability to direct the Commission during pricing investigations serve as crucial safeguards to prevent inappropriate interventions in the price-setting process.

Conclusion 3.6 : There is a potential conflict of interest in connection with the Treasurer’s role in appointing the members of an industry panel to conduct a review of a price direction

To enhance the current regulatory framework, it is essential to amend section 24M(3) of the ICRC Act to ensure that the appointment of industry panel members undergoes scrutiny by the Legislative Assembly Additionally, there is a need to expand the review options for price direction beyond the existing industry panel arrangement outlined in the ICRC Act.

Background

The terms of reference mandate a review of all pertinent legislation concerning the pricing framework for regulated water and sewerage services The Issues Paper identifies key ACT legislation that directly or indirectly impacts the existing regulatory framework for setting prices for these services.

• The Independent Competition and Regulatory Commission Act 1997;

• The Freedom of Information Act 1989;

• The Public Interest Disclosure Act 2012; and

The ICRC Act serves as the primary legislation governing the regulatory framework, granting the ICRC authority to regulate service pricing in designated 'regulated industries' as identified by the Minister, along with various other functions outlined in section 8 Additionally, the Utilities Act 2000 complements this framework by empowering the ICRC to license and oversee a variety of utility services, including those related to water and sewerage, although it does not directly address pricing issues.

The Water Resources Act 2007 focuses on the sustainable management of water resources in the ACT, prioritizing environmental stewardship over pricing and regulation.

Auditor-General Act 1996, the Freedom of Information Act 1989, the Public Interest Disclosure Act

The ICRC, as a statutory authority, and Icon Water Limited, as a Territory-owned corporation, are bound by the responsibilities outlined in the 2012 and Territory Records Act 2002, akin to those of government departments and agencies Additionally, ICRC staff must be employed in accordance with the ACT’s Public Sector Management Act 1994, as specified in section 11 of the ICRC Act, and are governed by its provisions.

As noted in Chapter 2, the ICRC Act has served the ACT well since its enactment in 1997

The ICRC Act lays a solid foundation for the establishment of the Independent Competition and Regulatory Commission (ICRC), allowing it to operate independently of ministerial influence It outlines a flexible framework for issuing price directions without restricting specific industries, enabling the identification of sectors subject to the Commission's price determination powers The process for initiating price determinations begins with a reference from the responsible Minister, currently the Treasurer, who specifies the relevant industry, the regulatory period's duration, the publication date for the price direction, and any additional matters for the Commission's consideration during its investigation.

While many reports and price directions have been produced under this general framework since

1997, a review of the ICRC Act is both timely and necessary on a number of grounds Over the

Over the past 17 years, competition policy and practice have evolved significantly, leading to a notable shift in the Commission's activities In 2005, the Australian Energy Regulator (AER) took over the responsibility for setting network charges for the ACT's electricity and gas distribution, diminishing the relevance of the ICRC's goals of promoting effective competition and ensuring non-discriminatory access By 2012, additional functions were also transferred to the AER, resulting in the ICRC's primary ongoing responsibility being the determination of prices for water and sewerage services under the current arrangements.

A review of the ICRC Act is warranted due to various amendments that have been made over time, often in response to unrelated legislation, leading to inconsistencies with the original provisions of the Act The Auditor-General’s report has identified significant ambiguities and weaknesses within the current legislation, which have become increasingly apparent Additionally, the ongoing review of the ICRC’s price direction for 2013-2019, the first under the current regulatory framework, has raised concerns regarding the adequacy of Part 4C of the ICRC Act These issues will be further explored in section 4.3.

Significant changes to the ICRC Act are necessary, even if the current regulatory framework is maintained While the ongoing review focuses on pricing for water and sewerage services, it is crucial to also evaluate the ICRC's other functions and its relationship with the Utilities Act 2000, which grants additional powers As emphasized in the ICRC's submission, any proposed changes, particularly regarding pricing, must be carefully crafted to ensure the Commission can effectively perform its broader responsibilities.

Section 2.2 of the report highlights two key legislative issues identified in the Auditor-General's performance audit Following this, Section 2.3 delves into the specifics of Part 4C of the ICRC Act, which pertains to the review process for price directions Lastly, Section 2.4 provides a brief overview of additional legislative matters.

100 ICRC 2014e, page 31 which have arisen in the course of this review In addition, some further issues which may require legislative change are examined in Chapter 5.

Legislative issues raised by the Auditor-General

The period over which a price direction is to apply

The Auditor-General's report emphasizes the ambiguity surrounding the connection between Parts 3 and 4 of the ICRC Act regarding the duration of price directions, known as the 'regulatory period.' A critical issue raised is whether the ICRC possesses the authority to establish the regulatory period when the terms of reference for a pricing investigation do not explicitly mention it.

The ICRC Act presents ambiguity regarding the duration of price directions, as it sends conflicting signals While Section 16(2) outlines various matters for an investigation's terms of reference, it notably excludes any mention of the applicable time period for price directions In contrast, Section 20(1) suggests that the terms of reference may indeed specify the time frame for which the pricing investigation's outcomes will be relevant.

The legal authority of the Independent Competition and Regulatory Commission (ICRC) to set a regulatory period for pricing investigations has been debated, particularly regarding the absence of a specified timeframe in the Government's Terms of Reference for the ICRC's examination of water and sewerage prices starting 1 July 2013 While the ICRC established a six-year regulatory period from 1 July 2013 to 30 June 2019, some legal opinions, including advice from the Auditor-General, questioned the validity of this decision In contrast, the ACT Government Solicitor supported the ICRC's discretion to determine the regulatory period within reasonable administrative limits To clarify the legitimacy of the ICRC's price direction, the ACT Legislative Assembly later enacted legislation confirming its authority.

Competition and Regulatory Commission (Water and Sewerage Price Direction) Act 2014, which confirmed the validity of both the Terms of Reference and the ICRC’s price direction

The confusion regarding the ICRC Act stems from the 2000 amendments, which repealed the original provision that allowed the Independent Pricing and Regulatory Commission to specify the duration of a price direction This change, part of a broader set of amendments, has contributed to the current misunderstandings surrounding the legislation.

102 ibid., page 46 the Utilities Act 2000 Regardless of the history, however, the current situation is clearly unsatisfactory, and greater clarity is needed for the future

The key consideration is determining who should decide the duration for which a price direction is applicable: should it be the "referring authority," specifically the responsible Minister, or the Independent Competition and Regulatory Commission (ICRC) itself?

To ensure the Minister's sole responsibility in pricing decisions, it is essential to amend section 16(2) of the ICRC Act This amendment should mandate that the terms of reference for any price investigation explicitly reflect this responsibility, following the acquisition of relevant advice.

To ensure that the ICRC has the authority to determine the regulatory period, it is essential to amend the ICRC Act to explicitly grant this power to the Commission Additionally, the existing reference in section 20(1) to "the period specified in the reference" should be eliminated for clarity.

The review recommends that the responsible Minister, after consulting with the ICRC and relevant parties, should generally determine the length of the regulatory period and outline it in the Government’s pricing investigation terms of reference However, there may be instances where the Minister decides that the ICRC should make the final decision, depending on the Commission's early findings To accommodate this, the review proposes a third option.

• Amend section 16(2) of the ICRC Act to make it clear that the ‘referring authority’ (i.e., the Minister) may specify a regulatory period in the terms of reference for a pricing investigation.

• Make a further amendment to give the ICRC a power to determine a regulatory period in circumstances where no such period has been specified in the terms of reference.

• Amend the current reference in section 20(1) to refer to “the level of prices for services in relation to any period specified in the reference”.

An alternative approach would be to empower the Minister to determine the regulatory period while also allowing the option to delegate this authority to the ICRC, achieving the same outcome more efficiently.

The requirements attaching to a draft report and proposed price direction

The Auditor-General's report highlighted the ambiguity in the ICRC Act regarding the requirements for a draft report and proposed price direction in Part 3, and whether they should align with the standards set forth in Parts 4 and 4A, which pertain to final reports and price directions.

The ICRC Act outlines specific requirements for industry reference investigations, including those for draft reports detailed in section 18 (Part 3), final reports in section 21 (Part 4A), and price directions resulting from investigations in section 20 (Part 4) Notably, section 20(4) mandates that the Commission must specify how it has considered the factors mentioned in section 20(2) of the ICRC Act.

In commenting on the most recent water and sewerage pricing process, the Auditor-General concluded that there was:

The ICRC and ACTEW had fundamentally different expectations regarding the Draft Report and proposed price direction The ICRC believed that the Draft Report (February 2013) did not need to adhere to the legislative requirements applicable to a final report and price direction, while ACTEW anticipated that it would reflect the ICRC's conclusions and show compliance with the ICRC Act's requirements.

The confusion surrounding the ICRC Act is compounded by its current structure and language, particularly regarding whether the Commission must clarify its consideration of the factors listed under section 20(2) when issuing a proposed price direction alongside a draft report The Act's ambiguity is evident, as section 20(4) does not differentiate between draft and final price directions, leaving the requirements unclear.

In a price direction, the commission must indicate to what extent it has had regard to the matters referred to in subsection (2).

Part 4 discusses price directions, with section 20(1) indicating that certain language may be interpreted as pertaining solely to the final price direction.

At the end of an investigation regarding a reference that empowers the commission to establish price directions within a regulated industry, the commission is required to determine the appropriate pricing levels for services Subsequently, it must issue a price direction to each provider of regulated services that falls under the scope of this directive.

Appeal and review arrangements

Part 4C of the ICRC Act allows for the review of price directions issued by the ICRC, initiated by either the responsible Minister or the utility service provider This review process is conducted by an industry panel of three members appointed by the Minister, as outlined in section 24M The panel can dismiss an application only if it is deemed frivolous or vexatious, according to section 24R.

If an application for review is accepted, the industry panel has the authority to either replace the original price direction with a new one or uphold the existing direction, as outlined in section 24N The panel must base its decision on the merits of the case and adhere to the general requirements for establishing a price direction Section 24O grants the panel investigative powers equivalent to those of the ICRC, effectively positioning it as an independent regulator responsible for making fresh pricing decisions if it chooses not to support the ICRC's original ruling Additionally, the ICRC is obligated to assist the panel as needed and to implement the panel's decision upon the review's conclusion, as specified in section 24U.

The ICRC's pricing guidelines for regulated water and sewerage services from 2013 to 2019 are undergoing an industry panel review, initiated by ACTEW's application in September 2013 under section 24K of the ICRC Act This marks the inaugural instance of an industry panel review being conducted.

An effective appeal and review mechanism is crucial for a well-designed regulatory system, ensuring that regulatory authorities operate within their legal powers, demonstrate procedural fairness, and provide justifiable reasons for their decisions This process not only holds regulators accountable but also prevents the abuse of discretionary authority The ICRC recognizes that, given its quasi-judicial role in price direction, implementing a review process is generally appropriate.

Part 4C of the ICRC Act presents several important issues that need to be addressed in this review Key considerations include the suitable form and type of review, focusing on proportionality and cost-effectiveness, the criteria for lodging a review application, and the involved parties.

107 ICRC 2014c, page 7 which should be able to lodge an application for review; and the body which should be responsible for conducting a review These and other matters are considered below

The activation of Part 4C of the ICRC Act has highlighted several previously overlooked issues; however, it is crucial to clarify that the following comments do not pertain to the actions of the current industry panel This review refrains from commenting on the panel's conduct but acknowledges that certain general issues have emerged during the process, which may impact the overall regulatory framework and future reviews.

(a) Form of a review: the need for proportionality

A crucial aspect of any review is ensuring it is appropriately structured and proportional to the issues at hand The review process should align with the scale, significance, and complexity of the concerns raised For straightforward issues, the review should be limited and uncomplicated A comprehensive review is only warranted when there is a compelling need to entirely reassess the regulator's initial decision.

The current provisions of Part 4C of the ICRC Act are insufficient for effective reviews, as they complicate and prolong processes even for straightforward matters Section 24O mandates industry panels to solicit public submissions and conduct hearings, which should not be a requirement for all cases Additionally, section 24N necessitates consideration of all criteria in section 20(2) for price directions, even when some are irrelevant to the review topic Furthermore, section 24V allows the panel to determine review costs, potentially leading to unnecessarily elaborate processes and high expenses Overall, the existing review processes and costs are overly flexible, necessitating a more tailored approach for future reviews.

Section 24N(2) of the ICRC Act mandates that an industry panel must evaluate an application for review based on the merits of the case, categorizing it as a merits-based review This legal framework entails specific consequences derived from case law, emphasizing that the panel's decision should reflect a thorough assessment of the substantive issues at hand.

To effectively evaluate a decision, one must adopt the perspective of the original decision-maker, allowing for a fresh assessment of all pertinent factors This approach enables a broad discretion in examining relevant evidence and forming informed opinions, with the primary goal of reaching the most accurate or preferable outcome.

108 Bowen CJ and Deane J, in Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60

The key takeaway is that when faced with a variety of potential decisions, each deemed 'correct,' the industry panel is authorized to select the option it considers not only 'correct' but also 'preferable' based on the specific circumstances of the case.

Section 24N(3) of the ICRC Act imposes a technical restriction on the review process, stating that an industry panel cannot consider issues not raised by the applicant during the initial pricing investigation However, this limitation may have little practical impact, as the intricate relationships within the pricing mechanism could require a broader review based on concerns about a seemingly minor issue Ultimately, the industry panel is tasked with determining the appropriate scope of the review, which may range from a narrow examination resulting in minimal changes to a comprehensive review that allows for significant modifications to the original decision.

The ICRC Act allows for a comprehensive merits-based review of price direction decisions made by the regulator, enabling an industry panel to either substitute a new price direction or confirm the original one (section 24N(1)) However, there are instances where the industry panel might find it more effective to assess the issues raised in a review application and refer the matter back to the ICRC for a fresh decision, particularly if new information needs to be considered or errors need correction Currently, the legislative framework does not permit this option, as the industry panel's decision is final and cannot be appealed, requiring the ICRC to implement any necessary actions based on the panel's ruling (section 24(U)(3)).

This discussion leads naturally to the question, discussed below, of the grounds on which an application may be made for a review of a price direction.

(b) The grounds for an appeal

The ICRC Act allows both the Minister and regulated entities to apply for a review of a price direction without any specific limitations on the grounds for the application This must be done within three months following the final pricing investigation report submitted to the Legislative Assembly (section 24K(2)) The industry panel can only dismiss an application if it considers it frivolous or vexatious (section 24R); otherwise, the review process will continue as outlined in Part 4C.

This review argues that the current arrangements for pricing investigations are excessively open-ended As outlined in Chapter 2, pricing investigations rely heavily on experienced judgment rather than precise methods When a significant error—such as a factual, legal, or calculation mistake—is identified in the initial decision-making, it warrants an appeal and subsequent review However, the grounds for appeal become less clear when the issue is based solely on judgment An expert consulted during the recent performance audit suggested that appeals should only be permitted if a "fundamental error" in the initial decision-making process can be proven.

Other legislative issues

This section deals briefly with a number of other suggestions for legislative amendment which have been raised in the course of this review.

Objectives and functions of the ICRC

Sections 7 and 8 of the ICRC Act outline the objectives and functions of the ICRC, while Section 3 of the Utilities Act 2000 clarifies the Commission's goals under the ICRC Act Notably, there are significant overlaps in these objectives, particularly in their shared focus on promoting competition and safeguarding consumer interests.

The ICRC has recommended a review and update of the ICRC Act to reflect recent changes in its responsibilities, including the potential integration of the Utilities Act 2000 objectives A proposed high-level objective is to enhance the welfare of the ACT community by ensuring the delivery of efficient, reliable, and safe infrastructure services.

These are reasonable suggestions which should be considered again and taken up, as appropriate, once the ACT Government has taken its final decisions on this review.

Timing of the terms of reference for a pricing investigation

Icon Water proposed that the ICRC Act should be amended to mandate the Minister to issue the terms of reference for a pricing investigation a set number of months before the expiration of the current price direction This change aims to facilitate the timely conclusion of pricing investigations.

The review sees merit, and no obvious downsides, in this suggestion, and recommends that the ICRC Act be amended accordingly.

Icon Water proposed amendments to the ICRC Act to clearly define the objectives and permissible expenditures in regulatory proposals.

The National Electricity Rules offer guidance on regulating electricity distribution networks, indicating that incorporating a similar provision in the ICRC Act could enhance investment efficiency by ensuring clearer regulatory treatment of expenditures Icon Water proposed that the objectives should encompass these considerations.

• meeting or managing expected demand for services;

• complying with all applicable regulatory (including technical) obligations;

• where no applicable obligations exist, maintaining the quality, reliability and security of supply;

• maintaining the safety of the water and sewerage system;

• complying with applicable ACT Government policies; and

• having regard to any transition required when there are material changes in obligations or expenditure levels

Icon Water's concerns highlight significant issues regarding the interpretation and judgment of expenditure items, which could lead to uncertainty and debate While the proposed list of expenditure objectives may seem reasonable, it lacks practical guidance for distinguishing between community service obligations and customer-focused projects Instead of broad objectives in the ICRC Act, specific pricing investigations could benefit from the Minister outlining particular issues in the terms of reference, offering necessary guidance while preserving the ICRC's independence.

Requirement on an industry panel to transfer its information

When an industry panel is designated to review a price direction, it possesses the same authority as the Independent Competition and Regulatory Commission (ICRC) during its review process This authority encompasses the ability to collect information, as outlined in Part 7 of the ICRC Act, which may involve acquiring new or supplementary data beyond what the Commission gathered in its initial pricing investigation.

If an industry panel establishes a new price direction, the ICRC will be responsible for its implementation and management To effectively carry out this role, the ICRC must have access to all pertinent information that informs the new price direction Therefore, it is essential to amend the ICRC Act to mandate that the industry panel or review body provides the Commission with all relevant information collected during the review process, ensuring the Commission can fulfill its responsibilities effectively.

Other recommended changes to the ICRC Act

In Chapter 5, three significant amendments to the ICRC Act are proposed First, an overarching objects clause should be added to clarify that the primary aim of the regulatory framework is to enhance economic efficiency while ensuring the financial viability of the regulated entity (Recommendation 3(a)) Second, the ICRC Act should be amended to mandate the ICRC to publish an early statement outlining its information requirements, obligating the regulated entity and other relevant parties to provide the necessary information within a reasonable timeframe.

The proposed change would empower the Minister to initiate a dispute resolution process for procedural matters upon receiving a written request from either party This approach allows the Minister to determine if this method is the most effective and efficient means of resolving the dispute.

Conclusions

The ICRC Act, effective since 1997, has been beneficial for the ACT; however, a timely review is essential due to evolving competition policies and significant shifts in the Commission's activities over the past 17 years The Auditor-General's report has identified ambiguities and weaknesses in the legislation that warrant attention Even if the existing regulatory framework is maintained, substantial changes to the ICRC Act are necessary Additionally, any comprehensive review should address the ICRC's broader functions and its relationship with the Utilities Act 2000.

Conclusion 4.2 emphasizes the need for clarity regarding the decision-maker for the duration of price direction—whether it should be the responsible Minister or the ICRC The review suggests that the Minister, after consulting with the ICRC and relevant stakeholders, should typically determine the regulatory period and outline it in the Government’s terms of reference for pricing investigations However, there may be instances where the Minister might deem it more appropriate for the ICRC to make the final decision To address this, amendments to the ICRC Act should be considered to empower the ICRC in such situations.

Minister the power to determine the period over which a price direction is to apply, but with an option to delegate this decision to the ICRC.

The ICRC Act should be revised to ensure that the stipulations outlined in section 20(4) are applicable to both proposed and final price directions In either scenario, the Commission must clearly demonstrate how it has considered the factors specified in section 20(2).

The ICRC Act should be revised to include provisions that allow the terms of reference for a pricing investigation to establish a specific deadline for the public availability of a draft report and proposed price direction.

Part 4C of the ICRC Act outlines the process for reviewing price directions issued by the ICRC, emphasizing the importance of an effective appeal and review mechanism in a well-structured regulatory system This mechanism ensures that regulatory authorities operate within their legal powers, maintain procedural fairness, and provide justifiable reasoning for their decisions Moreover, a robust review process promotes accountability and helps prevent the misuse of discretionary authority However, there are significant deficiencies in the current provisions of Part 4C of the ICRC Act that warrant a thorough review.

In conclusion, any review process must be appropriately tailored to its purpose, ensuring that the scale and methods employed align with the number, significance, and complexity of the issues at hand For straightforward or simple matters, the review should be limited and uncomplicated A comprehensive review should only be initiated when there is a clear necessity for a complete reassessment of the regulator's initial decision.

The existing regulations in Part 4C of the ICRC Act fail to effectively address the necessary requirements, leading to complications and delays in the review process, even for straightforward issues To ensure efficiency and cost-effectiveness in future reviews, it is essential that these processes are customized to meet specific needs.

The ICRC Act allows for a comprehensive merits-based review of price direction decisions by the regulator, which is essential in certain circumstances It empowers an industry panel to either substitute a new price direction or uphold the original one However, there are instances where the panel should assess the issues raised in a review application and refer the matter back to the ICRC for a fresh decision Currently, this option is not available under the existing legislative framework, highlighting the need for amendments to the ICRC Act to enable this process.

The ICRC Act currently allows applications for price direction reviews without specific limitations, granting industry panels the authority to dismiss applications deemed frivolous or vexatious This open-ended approach raises concerns, as pricing investigations rely heavily on experienced judgment rather than precise science If a significant error—such as a mistake in fact, law, or calculation—occurs in the initial decision-making, this should warrant a review However, appeals based solely on subjective judgment are less clearly justified.

Conclusion 4.9 : The ICRC Act should be amended to provide that, in future, any application for a review must be accompanied by evidence that that one or more of the following failings has occurred in the initial price determination process:

• a significant error in the application of law;

• a material error in calculation or methodology; or

• a significant failure in due process, procedural fairness or natural justice.

The Act should also require that an industry panel (or other review body) should provide the ICRC with an opportunity to respond to the issues and arguments raised in an application for review and give its views on their merits It would then be for the industry panel, or other review body, to assess the evidence before it and determine whether a review should proceed The review body should be required to dismiss an application if it considered that the evidence presented in the application could not be sustained, or was not sufficiently strong for a review to proceed.

Conclusion 4.10 : The ICRC Act provides that the only parties eligible to apply for a review of a price direction are the responsible Minister and the utility providing the regulated services This limitation is unduly restrictive, given the obvious interests of consumers in the pricing decisions made by the independent regulator The ICRC Act should be amended to provide that an individual consumer, group of consumers or any other body with a relevant interest should be able to make an application for a review of a price direction by the regulator As is currently the case, each party to a review should be required to bear its own costs.

The ICRC Act requires that applications for the review of price directions be evaluated by a three-member industry panel However, this requirement appears overly restrictive, as there are few organizations that possess the necessary independence, technical expertise, and availability to perform such reviews Consequently, limiting the options to a specific panel composition seems unnecessary and unnecessarily constraining.

The ICRC Act needs to be revised to empower the Minister to create or appoint a review body upon receiving a review application, allowing for flexibility beyond just the 'industry panel' option.

The objectives and functions of the ICRC, outlined in the ICRC Act and the Utilities Act 2000, require a thorough review and timely updates to ensure their relevance and effectiveness.

ACT Government has taken its final decisions on this review.

Conclusion 4.13 : In the interests of timeliness and better planning, the ICRC Act should be amended to require that the terms of reference for a pricing investigation be issued by the

Minister a specified number of months before the expiry of a current price direction.

Background

The Terms of Reference require the review to consider:

whether the ACT would benefit from a set of principles for conducting pricing investigations for regulated water and sewerage services, and outline the principles to be included.

This element of the terms of reference stems largely from Recommendation 5 of the Auditor- General’s report, which proposed that:

The ACT Government should collaborate with key stakeholders to establish principles guiding water and sewerage pricing investigations These principles must ensure clarity in stakeholder consultation documents from the ICRC, mandating that draft reports align with final reports and price directions Additionally, the principles should prioritize objectives of the investigation, outline administrative processes for transparent communication of findings, detail information requirements from ACTEW, and set protocols for resolving disputes between the regulator and the utility regarding administrative matters during the investigation.

The Auditor-General’s recommendations primarily address administrative and procedural issues related to the ICRC's pricing investigations for water and sewerage services Additionally, there is a consideration of whether the ACT could benefit from implementing more formal pricing principles to enhance the price determination process, which is further explored in section 5.3.

The Frontier Economics report outlines nine key principles that embody the essential features of best-practice economic regulatory regimes, highlighting the abundance of regulatory principles available.

Icon Water proposed that the ICRC Act be revised to include a framework of principles guiding the ICRC's regulatory authority, aimed at ensuring clarity and direction in its operations.

• the process incorporates the principles of procedural fairness and natural justice;

• the regulatory process is transparent;

• the regulator is accessible to stakeholders;

• the process is cost effective; and

• there is no retrospective application of decisions nor expropriation that might undermine incentives for efficient investment in long lived assets 116

At the international level, the OECD has suggested eight broad principles which make for good regulation These are that an effective regulatory system should:

• serve clearly identified policy goals, and be effective in achieving those goals;

• have a sound legal and empirical basis;

• produce benefits that justify costs, considering the distribution of effects across society and taking economic, environmental and social effects into account;

• minimise costs and market distortions;

• promote innovation through market incentives and goal-based approaches;

• be clear, simple and practical for users;

• be consistent with other regulations and policies; and

• be compatible as far as possible with competition, trade and investment-facilitating principles at domestic and international levels 117

The significance of these requirements and general attributes is widely acknowledged; however, the key question is whether formalizing these attributes into high-level principles will meaningfully impact behaviors or outcomes within an institution Just as no regulator would reject a framework for accountability, the effectiveness of codifying these principles remains to be seen.

The OECD Guiding Principles for Regulatory Quality and Performance emphasize the importance of transparency and procedural fairness; however, no set of principles can ensure that these essential attributes will consistently be upheld, as noted in the Frontier Economics report.

To establish a 'best practice' regulatory model for urban water in Australia, it is essential to translate useful guiding principles into specific practical elements of economic regulation.

To move away from relying solely on a statement of principles, it is crucial to directly address specific deficiencies and concerns, ensuring clarity and assurance in a cost-effective manner A key takeaway from Chapter 2 emphasizes the necessity for improved planning and clearer guidance at the onset of pricing investigations, particularly regarding the information that regulated entities must provide To prevent past issues from recurring, it is essential to tackle resource limitations that have hindered the ICRC's planning for prior investigations Additionally, introducing a provision in the ICRC Act that mandates the Commission to promptly issue a statement of its information requirements upon receiving the terms of reference for a pricing investigation will further enhance future processes.

Accountability is also an important consideration here Chapter 3 proposed that the

The ACT Government needs to clarify its expectations and requirements for the ICRC, which should be incorporated into the Commission's Statement of Intent This approach would provide a more reliable and transparent method for holding the Commission accountable, surpassing the effectiveness of general high-level principles Additionally, it would enable the Government to specify the exact standards the ICRC is expected to achieve in its annual work program.

The balance between prescription and discretion in the regulatory role of the ICRC is crucial, as it raises questions about the extent to which government guidelines should dictate actions versus allowing regulators to exercise their judgment While the ICRC's statutory independence is an essential factor, relying heavily on detailed prescriptions can lead to unintended consequences, such as reduced flexibility and increased costs associated with updating regulations Ultimately, determining the appropriate balance between strict guidelines and discretionary power requires careful judgment, particularly when the government identifies specific requirements as essential.

The most recent edition of the National Electricity Rules, known as Version 66, encompasses nearly 1,500 pages It is essential that this extensive documentation continually aligns with the legislative requirements that govern the regulatory framework's operation.

Within the general framework just discussed, the next section examines the particular issues raised by Recommendation 5 of the Auditor-General’s report.

Administrative and procedural issues

The nature and purpose of stakeholder consultation documents

Administrative processes in a pricing investigation

Addressing these two issues together is efficient, as they both highlight the necessity of effective planning for conducting a pricing investigation and ensuring adherence to good process standards throughout the investigation.

The Auditor-General’s report drew attention to the different expectations of the ICRC and ACTEW with regard to the status of the ICRC’s draft report and proposed price direction

In February 2013, it was highlighted that the ambiguity in the ICRC Act concerning the status and requirements for draft reports and proposed price directions is a significant issue To ensure clarity within the existing regulatory framework, legislative changes are essential to eliminate this ambiguity, particularly by defining the relationship between Parts 3 and 4 of the ICRC Act.

The Auditor-General's report recommends that the ICRC should be mandated to clearly define the nature and purpose of stakeholder consultation documents during pricing investigations Currently, the ICRC is only required to produce a draft and final report, but it has typically issued various preliminary documents, such as background and technical papers, to inform stakeholders of its approach and findings These documents facilitate consultation and feedback before the draft report is released The key question is whether legislation should require the production of these documents and their clear identification, or if such decisions should remain at the ICRC's discretion.

120 ACT Auditor-General, Recommendation 5(a), page 53

121 For purposes of its latest investigation of water and sewerage prices the ICRC released a context paper

(November 2011) and an issues paper (21 February 2012) A ‘working conclusions report’ was also planned for release in May 2012, but this did not occur.

Icon Water proposed that the price inquiry processes could be enhanced by amending legislation to mandate an early Approach Paper specific to the inquiry, in addition to the current requirement for a draft report They recommended that this draft Approach Paper serve as a foundation for a public forum and stakeholder submissions prior to its finalization, well ahead of the regulatory proposal from the utility, outlining key content for effective stakeholder engagement.

• the proposed control mechanism (for example, a price cap or a revenue cap mechanism);

• the information that must be provided by the utility in its regulatory proposal;

• the formulae proposed to give effect to the control mechanism;

• the proposed length of the regulatory period;

• the planned timetable for the review;

• proposed arrangements for consultation, submissions and public forums; and

Icon Water argued that arrangements along these lines, similar to the ‘framework and approach paper’ required under the National Electricity Rules, would:

enhance procedural fairness in relation to fundamental constituent decisions and provide all stakeholders with a better understanding of the responsibilities of the respective parties at the outset of the process 124

Perhaps not surprisingly, the ICRC took a different view in its submission:

Mandating the ICRC to produce technical papers and guidelines may not necessarily lead to improved outcomes for the ACT community, as each investigation is unique and what works for one may not work for another The National Electricity Rules require the Australian Energy Regulatory (AER) to develop guidelines for rule application, aimed at assisting a diverse range of businesses, each with their own perspectives However, in the case of the ACT water utility, the ICRC is focused on a single entity, which may limit the applicability of broad guidelines.

The ICRC recognizes the importance of producing guidelines and technical papers, as these documents can provide significant value However, it is essential that they are developed prior to the initiation of price investigations Their primary benefit lies in validating existing practices and procedures, which facilitates more effective future investigations.

124 ibid. undertaken on a more streamlined and cost effective basis Consideration needs to be given to how the Commission might resource these activities outside of the formal investigation process 125

The review acknowledges the validity of both perspectives regarding pricing investigations It emphasizes the need for the ICRC to provide clearer guidance and improve communication early in the process, ensuring all stakeholders, as noted by Icon Water, are well-informed of the ICRC's plans and their responsibilities Conversely, the ICRC's point that each investigation is unique holds merit, suggesting that a one-size-fits-all approach may not be effective The review warns that overly prescriptive legislation could result in a detrimental loss of flexibility in handling diverse cases over time.

While early release of an 'approach paper' as suggested by Icon Water has merit, the review does not support making it a legislative requirement, especially with a fixed list of topics A more flexible solution would be for the responsible Minister to include this requirement in the terms of reference for specific pricing investigations as deemed necessary Alternatively, the ICRC could proactively implement this requirement, demonstrating its commitment to improved planning procedures.

The Auditor-General's performance audit highlighted significant deficiencies in the ICRC's administrative processes during its recent pricing investigation Key criticisms included the absence of detailed procedural guidance, perceived weaknesses in communication and consultation with stakeholders, and a lack of comprehensive project planning documentation To address these issues, the audit report recommended that the ICRC develop and implement detailed internal procedural guidance, particularly for stakeholder engagement, and establish rigorous project planning, monitoring, and reporting procedures for future water and sewerage pricing investigations.

The ICRC acknowledged the recommendation and revealed that, after releasing its draft report on water and sewerage services, it had evaluated its internal processes for report production and implemented changes to enhance management efficiency.

127 ibid., Recommendation 6, page 79 production of the final report It had also continued to develop and document its project management procedures for the efficient and effective operation of the Commission 128

This review examines whether specific principles should be established to ensure the Commission's administrative processes for pricing investigations meet high standards However, there is insufficient justification for embedding such requirements into legislation, as it would likely result in stating the obvious The Minister has the authority to specify any necessary administrative processes when approving the terms of reference for an investigation, although this approach is uncommon Ultimately, the responsibility lies with the Commission to maintain high standards in its administrative processes and project management, as emphasized by the Auditor-General Accountability for these standards should be enforced through the governance arrangements outlined in Chapter 3.

The Auditor-General's report highlights a critical issue regarding the prioritization of objectives in pricing investigations, referencing insights from the Productivity Commission in its performance audit findings.

To maintain that elected representatives, rather than regulators, determine the public interest, governments must avoid conflicting objectives in regulatory acts In instances where such conflicts are unavoidable, it is essential for regulators to receive explicit guidance from the government on prioritizing these objectives.

Chapter 2, section 20(2) of the ICRC Act outlines various considerations that the Commission must consider when making price directions in regulated industries, including consumer protection, economic efficiency, financial viability, and environmental objectives The Auditor-General highlighted potential conflicts among these considerations, necessitating careful balancing and trade-offs by the ICRC This raises the question of whether the Government should offer clearer guidance to the Commission on prioritizing these objectives in its policymaking role, as suggested by ACTEW Corporation in its 2011 submission to the Productivity Commission inquiry.

129 Productivity Commission 2011a, page 268 (quoted by ACT Auditor-General, page 65)

The existing water regulation framework in the ACT requires the regulator to balance a variety of factors, creating a challenging task that leads to substantial discretion and regulatory risk for utilities.

Pricing principles

The Issues Paper for the review questioned the potential benefits of introducing formal pricing principles in the ACT's price determination process It highlighted key considerations, including the detail of these principles, the authority responsible for their establishment, the implications for the independence of the ICRC, and whether the principles would be codified in legislation or applied during specific pricing investigations.

The ACT is a signatory to national water pricing principles established under the National Water Initiative (NWI) in 2004, where all Australian governments committed to best practice water pricing A 2007 stocktake by a Steering Group on Water Charges led to revised pricing principles, which were endorsed by all jurisdictions in 2010 These principles serve as the foundation for setting water prices and charges, with the understanding that any deviations from these principles must be justified and presented in parliament.

The NWI pricing principles consist of four key elements: capital expenditure recovery, urban water tariffs, water planning and management costs, and the reuse of recycled water and stormwater Although a review of these principles was scheduled for completion by the end of 2014, it has yet to occur.

The Productivity Commission's 2011 urban water inquiry report highlighted significant shortcomings in the National Water Initiative (NWI) pricing principles, indicating they were inconsistent with efficient pricing commitments The National Water Commission echoed these concerns, noting a lack of commitment to pricing reform in certain jurisdictions and a tendency towards a 'lowest common denominator' approach, with some NWI-required actions being diluted during implementation As the ACT Government prepares for the upcoming review of the NWI pricing principles, it must evaluate its stance on these issues and consider the potential implementation of additional pricing principles within its jurisdiction.

Icon Water has suggested that the ICRC Act be revised to mandate the regulator to create and publish consistent guidelines regarding the methodology for essential decisions in the price-setting process Furthermore, the regulator would be required to explain any deviations from these guidelines when determining prices This proposal emphasizes the importance of transparency in regulatory practices.

144 Review of the ACT’s Water and Sewerage Pricing Framework: Issues Paper, November 2014, pages 12-14

145 National Water Initiative Pricing Principles, April 2010, paragraph 10, page 3

146 Standing Committee on Environment and Water, Next Steps in National Water Reform: Preparation for the

Future, Report to the Council of Australian Governments, 2013

148 National Water Commission 2011, page xiv of such guidelines would promote greater confidence in the consistency, reliability and procedural fairness of the price-setting process 149

Icon Water proposed that the guidelines should encompass various aspects, including information templates, regulatory proposal requirements, revenue building block models, rate of return, expenditure forecast assessments, incentive schemes, and consumer engagement arrangements It emphasized that these guidelines must align with legislative objectives and principles, and should be regularly reviewed by the regulator in consultation with stakeholders, excluding the price review process.

The ICRC highlighted a growing trend for regulators to outline specific factors to consider when determining pricing or network charges for water and sewerage services It emphasized that the necessity and cost-effectiveness of these factors should be evaluated, particularly in light of existing considerations mandated by section 20(2) of the ICRC Act Additionally, the ICRC recognized that establishing clear guidelines or pricing principles for assessing economic efficiency could enhance the predictability of the Commission's decisions and streamline the regulatory process.

More specifically, the ICRC suggested that the assessment of economic efficiency should have regard to the following factors:

• the value of past investments in the water and sewerage business which were prudent and efficient;

• the need for future investment in the utility to meet licence obligations, regulatory requirements and ACT water policies;

• debt servicing obligations, interest costs and financing charges; and

• a return on equity appropriate for a government owned entity 153

Consistent with this emphasis on technical efficiency, the ICRC suggested that its future pricing investigations could focus on addressing:

• the efficiency of ACTEW’s operating costs;

• the effectiveness of ACTEW capital planning and delivery practices;

• Icon Water’s financial viability; and

• the ACT’s water security outlook, and the supply side and demand side measures needed to maintain water security while addressing the community’s expectations about water availability and environmental amenity 154

The ICRC emphasized that the outlined factors are fundamental components utilized by the ICRC and Australian regulators to evaluate the efficient costs of network utilities However, a detailed specification of these principles would formalize the obligation to consider these elements in the assessment of a regulated utility’s efficient costs.

The review advises against incorporating detailed or overly prescriptive pricing principles into legislation, as this could diminish regulatory discretion, restrict necessary flexibility, and incur additional costs for future updates It also considers the warnings from Dr David Cousins to the Auditor-General regarding these potential pitfalls.

While Australia, the UK, and the USA have adopted a common model for price regulation, it is important to encourage experimentation with alternative approaches Such experimentation is beneficial and should be embraced Different methodologies should be viewed as tools to guide regulators in their pricing decisions rather than as final solutions Price regulation is as much an art as it is a science; regulators must consider various factors and balance them with informed, wise judgment.

The ICRC's proposal aims to provide Icon Water with a clearer framework for making essential operational, investment, and financing decisions, thereby enhancing the efficiency of its water and sewerage services To support this, the review recommends integrating guidelines based on this approach into the terms of reference for the upcoming pricing investigation, contingent on the continuation of the existing regulatory framework Additionally, it is crucial to clarify the relationship between these guidelines and the factors outlined in section 20(2) of the ICRC Act.

A final comment should also be made on the issue of pricing methodology and regulatory approach The Auditor-General’s performance audit report noted that there had been

156 Quoted by ACT Auditor-General, page 70

“minimal opportunities” during the ICRC’s most recent pricing investigation for external peer review and evaluation of the technical approach that underpinned the price direction 158

The ICRC did not consult or seek help from external experts regarding its proposed technical approach, informing the Audit Office that an external peer review is not mandated by the ICRC Act.

While external peer review is not mandated by the ICRC Act, it is advisable for the ICRC to consider engaging a regulator from another jurisdiction to review its price investigation methodologies and processes, resources permitting This practice, adopted by other regulatory bodies, would enhance confidence in the integrity of the pricing process and potentially reduce the likelihood of appeals against price determinations Currently, the ICRC may struggle to implement such a peer review due to cost constraints that exceed its cost-recovery limits Therefore, there is a compelling case for increasing budget funding for the ICRC, as suggested in Recommendation 4, to enable the Commission and the broader community to benefit from the added assurance provided by a peer review process.

Conclusions

In conclusion, there is a consensus on the essential principles guiding regulatory work, which include independence, transparency, accessibility, predictability, cost-effectiveness, adaptability, and procedural fairness However, simply formalizing these attributes may not significantly impact behaviors or outcomes within institutions Instead, it is more effective to focus on specific areas of concern or deficiency and implement targeted measures to address them in a reasonable and cost-effective manner Ultimately, regulators should be held accountable for their performance in these critical areas.

In conclusion, it is essential to find a careful balance between regulatory prescription and discretion in the ICRC's role Overly detailed regulations can compromise the regulator's independence and hinder necessary flexibility, leading to increased costs for updating rules Ultimately, determining the right balance requires careful judgment, especially when the government identifies specific regulatory requirements.

158 ACT Auditor-General, paragraph 4.54, page 77

159 ibid. sufficiently important as to be deemed essential and ongoing, it should aim to reflect that requirement in the legislation governing the operation of the regulatory framework

In conclusion, enhancing planning processes and administrative arrangements is crucial for the future sustainability of the current regulatory framework A primary goal should be to improve clarity early in the pricing investigation, ensuring that all stakeholders are well-informed about the ICRC's plans and their respective responsibilities from the outset.

The ICRC should consider releasing early papers that outline its investigative approach and address specific issues for examination However, mandating this through legislation may reduce necessary flexibility Instead, the responsible Minister could include such a requirement in the terms of reference for pricing investigations if deemed useful Ideally, the ICRC could proactively implement this initiative to enhance its planning procedures.

The ICRC recognized deficiencies in its administrative processes and project management during its recent pricing investigation and has initiated some corrective measures However, it is ultimately the Commission's responsibility to ensure that its administrative procedures, project planning, monitoring, and reporting adhere to high standards The governance and accountability frameworks outlined in Chapter 3 should hold the ICRC accountable in these areas.

Inserting an overarching objects clause into the ICRC Act is essential to clarify that the primary goal of the regulatory framework is to enhance economic efficiency while ensuring the financial viability of the regulated entity This addition would guide the ICRC in balancing various considerations outlined in section 20(2) of the Act and facilitate necessary trade-offs By prioritizing economic efficiency, the overall public interest can be best served, as long as social and equity objectives are managed by governments through alternative means.

Access to high-quality information is essential for regulators, who must be assured of timely access to necessary data for pricing investigations However, the existing ICRC Act lacks provisions to guarantee this assurance To enhance the current regulatory framework, amendments are needed to the ICRC Act, mandating the ICRC to publish an early statement outlining its information requirements and ensuring that regulated entities and relevant parties provide the required data within a reasonable timeframe.

In conclusion, it is essential that any dispute resolution process upholds the statutory independence of the ICRC, recognizing its authority as the final decision-maker in price determinations Consequently, disputes concerning the content of price directions or substantive conclusions from ICRC reports on pricing investigations should be excluded from this process However, disputes related to procedural matters may still be addressed without infringing on the ICRC's independence.

To enhance the current regulatory framework, it is essential to amend the ICRC Act, empowering the Minister to establish a dispute resolution process for procedural matters upon receiving a written request from either party The Minister would have the discretion to choose the most suitable dispute resolution mechanism based on the specific circumstances of the case This process should be considered a last resort, utilized only after all reasonable attempts by the parties to reach an agreement have been exhausted.

Incorporating detailed pricing principles into legislation poses significant risks, including diminished regulatory discretion and reduced flexibility over time This could lead to increased costs for refining or updating these principles as circumstances evolve Price regulation is inherently complex and relies on informed judgment rather than strict formulas Therefore, it is essential to allow for experimentation and adaptability in regulatory strategies and pricing methodologies to effectively respond to changing needs.

To enhance the predictability of the ICRC's price investigation processes and streamline the regulatory framework, it is essential to establish high-level principles for assessing economic efficiency These guidelines would provide Icon Water with a more reliable foundation for making future operating, investment, and financing decisions Therefore, incorporating these principles into the terms of reference for the upcoming pricing investigation for water and sewerage services is recommended, provided the current regulatory framework remains in place.

To enhance the integrity of its pricing processes, the ICRC should consider engaging an external regulator from a different jurisdiction to conduct a peer review of its price investigation methodologies, resources permitting This practice, adopted by other regulatory bodies, would bolster confidence in the pricing process and potentially reduce the likelihood of appeals against price determinations Additionally, if peer review is not covered by existing cost-recovery arrangements, the ICRC's budget should allocate funds for this and other essential functions that may not be suitable for cost recovery.

Possible alternatives to the current regulatory framework

This chapter responds to the requirement in the Terms of Reference that the review consider

“other possible frameworks for the determination of water and sewerage prices in the Territory”: that is, frameworks other than the regulatory model currently in place

It is important to recognize that no single method of price determination is universally ideal, as each approach has its own advantages, disadvantages, and associated risks The critical decision lies in identifying which option best balances cost-effectiveness and practicality.

Secondly, the arrangements which will best serve a particular jurisdiction may vary over time In supporting a move from price regulation to price monitoring, for example, the Productivity

The Commission contended that the advantages of regulatory price determination in terms of efficiency are expected to be predominantly realized in the initial years of regulation, with minimal benefits in subsequent years Supporting this perspective, Icon Water expressed similar sentiments in its submission.

The policy goal should be to shift from the existing price setting model to a more flexible approach, such as price monitoring or surveillance This transition is typically warranted after 15 to 20 years of consistent incentive-based price regulation While the independent price regulation model has been in effect in the ACT for over 15 years, the effects of the millennium drought and recent regulatory changes suggest that an extended period of regulatory price control may be necessary to ensure a successful move to price monitoring or surveillance.

Recognizing the implications and consequences of available options is crucial, as each alternative to the current regulatory framework requires a well-defined strategy for managing associated risks Conversely, if the decision is made to retain the existing framework, it is essential to promptly address the identified weaknesses and vulnerabilities highlighted in this report.

In evaluating the advantages of different alternatives against the existing regulatory framework, it is essential to compare the assessed costs and cost-effectiveness of these alternatives with the improved current framework.

The review outlines five main alternatives to the current independent price regulation by the ICRC, acknowledging that each alternative could be refined further, although those details are not covered here Additionally, the chapter does not explore other potential long-term options, such as a 'market-based' approach to water pricing, which, despite its theoretical benefits, currently lacks the practical feasibility needed for short-term implementation.

The five possible alternative frameworks examined below are:

• Option 1: The ACT Government to set future prices for water and sewerage services.

• Option 2: The ACT Government to contract a regulator from one of the larger jurisdictions to undertake independent pricing regulation on behalf of the ACT

The ICRC plans to engage a regulator from a major jurisdiction to conduct a comprehensive pricing investigation on its behalf, while maintaining final authority over price determinations.

Option 4 proposes that Icon Water, the regulated utility, be responsible for establishing the prices of water and sewerage services This pricing would be overseen by a 'light-handed' price monitoring regime, as suggested in the Productivity Commission's inquiry report on Australia's Urban Water Sector.

• Option 5: In the context of a possible new national water agreement, the ACT

Government to transfer its powers of determination of water and sewerage prices to a new national regulator, as suggested in the Draft Report of the Competition Policy

Under Options 2, 3, and 5, independent price regulation will persist, albeit with new arrangements compared to the existing framework In contrast, Options 1 and 4 signify a significant departure from the independent price regulation model that has been in effect in the ACT for the last 17 years.

Assessment of the options

Option 1: Government to set the prices of water and sewerage services

While some may view the idea of government-determined prices as a regressive step, it merits serious consideration In various jurisdictions, final prices are set by the government despite national agreements, highlighting the potential implications for the ACT if such a system were implemented The ICRC has recognized this option in its submission, suggesting it should be part of the discussion.

The debate over whether an independent entity should determine the prices for water and sewerage services in the Territory is crucial and cannot be overlooked.

The approach to water and sewerage service pricing in the ACT has been consistent since ACTEW's incorporation in 1995, but it is not the only option available There are scenarios where the government might choose to subsidize these services, adjusting the subsidy amount annually during the budget process Alternatively, the government may consider the profits generated from water and sewerage services as a valid revenue source, determining profit rates alongside other tax rates in the taxation policy framework.

Implementing this option offers significant advantages, including ease and low cost of execution, along with a straightforward design Prices could be adjusted annually during the budget process based on the Consumer Price Index (CPI) or other price indices, eliminating the complexities of the current methodology used by the ICRC This approach would reduce uncertainty and potentially yield short-term cost savings Additionally, the ACT Government would gain better control over the price-setting process, allowing it to align decisions regarding water and sewerage service pricing with its overall budgetary strategy.

While the option of government involvement in water and sewerage pricing may seem appealing, it presents significant drawbacks, primarily the risk of politicization in pricing decisions Historical instances of high government involvement have often led to inappropriate pricing, either below cost recovery or above efficient levels The establishment of independent price regulation was intended to safeguard against such issues, ensuring that prices reflect the prudent and efficient costs of service delivery Additionally, increased government control over pricing poses risks to the government itself, making the role of an independent regulator beneficial for both consumers and the government.

There are other disadvantages of this option as well An arrangement in which the

The ACT Government's decision to set prices for water and sewerage services raises significant conflict of interest concerns, as it is the sole owner of Icon Water Limited and benefits from its profits Additionally, reverting to government price-setting contradicts the ACT's commitments under various national agreements, particularly the National Water Initiative.

The Parties agree to use independent bodies to set or review prices, or price-setting processes, for water storage and delivery by government water service providers 165

The review concludes that this option is not favorable, as it would represent a backward step The primary issue is that, in the long run, it fails to ensure that government-set prices would accurately reflect the prudent and efficient costs associated with providing water and sewerage services in the ACT.

Option 2: Keep independent price regulation, but contract out the price-setting task

The ACT Government plans to maintain independent price regulation, but instead of the ICRC determining prices, it will contract a regulator from a larger jurisdiction to handle this responsibility on its behalf.

The main justification for considering the option of contracting out lies in cost and cost-effectiveness If regulators in other jurisdictions demonstrate more efficient and effective processes than those of the ICRC, it presents a compelling case for exploring this alternative.

Potential advantages of this option would include:

• the potential for lower net costs and greater efficiency in price determination processes, with ultimate benefits for the customers of water and sewerage services;

• the ability to select a pricing regulator (e.g., via a limited tender process) on the basis of certain specified criteria, including price; and

Leveraging the price determination processes of the ACT through a regulator from a larger jurisdiction could lead to significant economies of scale This approach benefits from established procedures and a proven track record of quality and efficiency, enhancing the overall effectiveness of the regulatory framework.

On the other hand, potential disadvantages and risks associated with this option include:

• a potential loss of ‘sovereignty’ involved in the contracting of price-setting responsibilities to a regulator from another jurisdiction;

Engaging in a contractual arrangement with a regulator from a different jurisdiction may not provide the same level of regulatory independence that is currently ensured by the ICRC, an independent statutory authority.

• a risk that the ACT could attract ‘second-billing’ status in the priorities of a regulator from another jurisdiction;

• the transitional costs involved in making such a change, including the costs of changes to legislation and to current institutional arrangements; and

• uncertainty as to the likely level of interest from suitable regulatory bodies in other jurisdictions.

In relation to the first two entries in the list above, the ICRC’s submission commented in the following terms:

Any contracting out arrangement must be meticulously designed to ensure that the entity operates independently of the ACT government For instance, if IPART in NSW were to be contracted, its perceived independence from the NSW government would not guarantee the same independence when working under a contract with the ACT government This could lead to unintended jurisdictional and territorial power conflicts, effectively ceding authority to a state Creating a contracting arrangement that provides the same level of independence as a well-structured, independent statutory authority in the ACT may prove to be a significant challenge.

The review acknowledges the ICRC's assertion that any proposed arrangement must be meticulously structured to uphold sovereignty and safeguard regulatory independence This implies that the contracted regulator would provide pricing recommendations to the ACT Government rather than making final determinations Consequently, the ultimate decision-making authority would remain with the ACT Government, which would publicly commit to fully implementing the external regulator's recommendations.

The review acknowledges that while the identified risks are significant, they can likely be managed if the proposed option is implemented Effective communication will be essential to convey the rationale behind the changes, highlighting the anticipated benefits for customers of water and sewerage services in the ACT Additionally, it is crucial to clearly outline the ACT Government's key requirements and expectations in the tender documentation and any contracts with successful bidders Furthermore, specific measures must be included to ensure the independence of the contracted regulator is safeguarded.

The review recommends that the ACT Government consider maintaining this option alongside the current regulatory framework, assuming that enhancements will be implemented to improve the efficiency and effectiveness of the ICRC’s existing processes.

Option 3: Keep independent price regulation and maintain the ICRC, but contract out the detailed work required for a pricing investigation

Other considerations

The ICRC’s current price direction is set until 30 June 2019, while the Industry Panel's draft report suggests a five-year regulatory period ending on 30 June 2018 Regardless of which period is confirmed, the ACT Government has significant time to evaluate options for a future pricing framework that aligns with the long-term interests of the community To ensure clarity and facilitate planning, the review recommends making an in-principle decision by 30 June 2016, preferably sooner Additionally, it is advisable for the outcomes of this review to be considered in conjunction with Dr Bruce Cohen's report on the institutional and governance arrangements for Icon Water (ACTEW Corporation Limited).

Given the uncertainties associated with alternative arrangements, the review recommends maintaining the current regulatory framework while implementing suggested improvements It also advises the ACT Government to keep a 'contracting out' option available should there be concerns about the adequacy or speed of the changes Additionally, options for a price monitoring regime and transferring price-setting powers to a national regulator should be considered for future evaluation when conditions allow.

The discussion of alternative arrangements raises questions about whether the remaining functions of the ICRC justify its continued existence in its current form If the ICRC is deemed unnecessary, it will be essential to determine how its other responsibilities, such as retail electricity price determinations and managing competitive neutrality complaints, will be addressed moving forward Should the ACT Government lean towards one of these alternatives, this consideration must be integrated into its overall decision-making process.

Conclusions

In conclusion, there is no universally optimal method for price determination, as each approach comes with its unique benefits and drawbacks, along with specific risks and challenges that must be addressed The critical decision lies in identifying which option best balances cost-effectiveness and practicality for the given circumstances.

Reverting to a government-controlled pricing system for water and sewerage services would be a regressive move that should be dismissed This approach could politicize pricing decisions, create serious conflicts of interest, and contradict the ACT's commitments under national agreements Moreover, it would fail to ensure that the prices charged accurately reflect the prudent and efficient costs of providing these essential services in the ACT.

The ACT Government could benefit from contracting a regulator from a larger jurisdiction to conduct independent pricing regulation, potentially enhancing efficiency compared to the current framework However, it is crucial to carefully structure this arrangement to maintain sovereignty and safeguard regulatory independence The ACT Government should consider this option alongside the possibility of continuing with the existing regulatory framework, with the expectation of improvements in the efficiency and effectiveness of the ICRC’s processes.

In conclusion, a viable approach could involve the ICRC continuing its role while the Commission engages a regulator from a larger jurisdiction to perform in-depth pricing investigations Once the regulator completes the analysis, it would provide pricing recommendations to the ICRC, which would ultimately decide on the final pricing.

Revising the current workload structure of the ICRC could alleviate issues of excessive cyclicality, but it may also jeopardize the Commission's sustainability unless additional functions are incorporated The ACT Government should consider this alternative while evaluating the continuation of the existing regulatory framework, with the expectation that enhancements will be implemented to improve the efficiency and effectiveness of the ICRC's processes.

In conclusion, transitioning from regulatory price-setting to a price monitoring regime, as suggested by the Productivity Commission, poses significant risks under the current circumstances and should not be considered at this time.

The government should keep this option available for future consideration after implementing reforms to Icon Water's governance and ensuring greater assurance of ongoing operational efficiency.

The governance structures of government-owned utilities are closely linked to the regulatory system's effectiveness, both crucial for enhancing efficiency, achieving full cost recovery, and safeguarding customer interests Therefore, it is advisable for the ACT Government to take into account the findings and recommendations from this review in conjunction with those presented in Dr Bruce Cohen's report on the institutional and governance arrangements for Icon Water (ACTEW Corporation Limited).

The recent draft report of the Competition Policy Review presents both advantages and disadvantages of establishing a national regulator for the water sector The ACT Government is advised to remain flexible regarding the issues highlighted in the report and to conduct a thorough evaluation of the proposals as more information becomes accessible.

In conclusion, the alternative arrangements discussed raise questions about the necessity of maintaining the ICRC in its current form, particularly regarding its residual functions beyond price determinations for water and sewerage services If the ACT Government leans towards one of these alternatives, it should incorporate this evaluation into its broader decision-making process.

In response to the ACT Auditor-General’s Performance Audit Report on the water and sewerage pricing process, the Government has pledged to enhance the independent pricing framework for regulated water and sewerage services in the Territory.

The Government is initiating a review of the ACT's price regulation framework for water and sewerage services to explore options for enhancing this framework.

The review will examine the current framework for water and sewerage pricing in the ACT and within this context, provide comments and recommendations on:

The governance and administrative framework for setting independent pricing for regulated water and sewerage services in the Territory is under review, focusing on the effectiveness of the current model while exploring alternative options for improvement.

• all relevant legislation related to the pricing framework for regulated water and sewerage services, in particular the Independent Competition and Regulatory Commission Act 1997 (ICRC Act);

• whether the ACT would benefit from a set of principles for conducting pricing investigations for regulated water and sewerage services, and outline the principles to be included; and

• any other matters considered relevant to improving the pricing framework

The review will also consider other possible frameworks for the determination of water and sewerage prices in the Territory

To ensure a comprehensive review, it is essential to gather insights from key stakeholders and community members This can be achieved through a public call for submissions and continuous engagement with relevant parties.

Appendix B: Consultations held and submissions received

Independent Competition and Regulatory Commission

Ranjini Nayager Chief Executive Officer

Ian Phillips Legal, Regulatory and Consumer Affairs Adviser

Sam Sachse General Manager, Finance

David Graham Director, Regulatory Affairs and Pricing

Alison Pratt Manager, Legal Services

Chief Minister, Treasury and Economic Development Directorate

Karen Doran Executive Director, Economic and Financial Group

Tony Hays Senior Manager, Government Business Enterprise Unit,

Phil Liddicoat Manager, Government Business Enterprise Unit,

Stewart Chapman Senior Manager, Water Policy

Brett Stanton Director, Performance Audits

David Metcalf Deputy Parliamentary Counsel

Paul Baxter Former Senior Commissioner, Independent Competition and Regulatory Commission

David Cousins AM Adjunct Professor, Centre for Regulatory Studies,

Ted Matthews PSM Chair, Audit and Risk Management Committee,

Independent Competition and Regulatory Commission

(a) Submissions can be accessed on the website www.act.gov.au/frameworkreview

ACT Auditor-General, The Water and Sewerage Pricing Process, Report No 2/2014, April 2014

- 2014a, Release of the Auditor-General’s Performance Audit: The Water and Sewerage Pricing

- 2014b, Review of Water and Sewerage Pricing Framework, media release, 25 November 2014

Cohen, B, Review of Institutional Arrangements for ACTEW Corporation Limited (ACTEW),

Competition Policy Review, Draft Report, Australian Government, September 2014

Council of Australian Governments (COAG)

- 1994, Water Reform Framework, Communiqué from Hobart COAG meeting, 25 February 1994 - 1995, Competition Principles Agreement, 11 April 1995

- 2004, Intergovernmental Agreement on a National Water Initiative, 25 June 2004

- 2014a, Comparison of water regulatory approaches – Final report, Report prepared for the Essential Services Commission, Victoria, April 2014

- 2014b, Regulatory pricing models for the Victorian Water sector – Final report, Report prepared for the Essential Services Commission, Victoria, April 2014

Frontier Economics, Improving economic regulation of urban water, Report prepared for the Water

Services Association of Australia, August 2014

- 2014a, Modified Statement of Corporate Intent 2014-15 to 2017-18, November 2014

- 2014b, Response to Issues Paper: Submission to the ACT Government review of the ACT’s water and sewerage pricing framework, 12 December 2014

Independent Competition and Regulatory Commission (ICRC)

- 2013a, Draft Report: Regulated Water and Sewerage Services, Report No 1 of 2013, February 2013

- 2013b, Final Report: Regulated Water and Sewerage Services, 1 July 2013 to 30 June 2019, Report No 5 of 2013, June 2013

- 2013c, Price Direction: Regulated Water and Sewerage Services, 1 July 2013 to 30 June 2019, Report No 6 of 2013, June 2013