Not Best Practice

Why ARC's Water Charges are not best practice

ARC’s 23 April ’26 press release claims they want to be “implementing best practice water and sewer management …” and “proposing a fairer and more equitable approach to levying water and sewer access charges across residential and business categories. Under the proposal, both water and sewer access charges would be applied based on the size of the meter servicing each property”.

Th mayor says, “For far too long, residential water and sewer customers have been paying the same access charges as larger business users. We are proposing to change these so customers with larger diameter pipes pay more for their service. Customers that use more, pay more.”

The Draft Revenue Policy says on p. 18, “The purpose of the water meter size policy is to ensure that water access charges reflect the demand an individual property places on the water and sewer system”. Council’s mistake here is that pipe diameter governs the peak rate of water supply that can be obtained by a customer, not the total demand the customer makes on Council’s water supply over a year. Council knows what that total demand is (it’s shown by the customer’s meter), so if it’s serious about customers who use more paying more, then it should charge customers primarily on the basis of the total volume of water that they actually use.

Calculating the marginal cost can be a bit complicated. Council could find a reputable consultant to do it for them, but my understanding is that has never been done. Left to their own devices (as rural councils are, unlike urban ones that have IPART looking over their shoulders), some Councils prefer to rely on access charges rather than water-use charges to raise most of the revenue they require to cover their water supply costs. That’s because revenue from water-use charges can vary a lot from year to year depending on seasonal conditions (wet or dry years), whereas revenue from access charges is unaffected by seasonal conditions. Just like any other weather-affected business (e.g., agriculture), Council could set aside in its accounts the extra revenue from water-use charges it receives in some years to compensate for below-average revenue in other years. That’s what best-practice raising of water supply revenue would look like.

Sure, the Council is now charging customers with larger-diameter pipes a higher access charge than other customers. That’s fair enough because it can cost Council more to supply customers with larger pipes the higher rates of water flow for which those larger pipes are designed. But that extra access cost for customers with larger pipes isn’t meant to reflect the costs of supplying them with volumes of water. A fair water pricing policy would set water-use charges at the marginal cost of supplying a given volume of water. Without knowing what that marginal cost is (because it seems no one has calculated it for our Council), I cannot say for sure that the water-use charges are considerably lower than that marginal cost, but that’s very likely to be the case. Which means that customers with larger-diameter pipes are paying more in access fees than other customers, but likely benefitting much more (because generally they use much more water) than other customers from water-use charges being set below the actual cost of supplying them with that water. The water-use charges are in effect kept lower than best practice would advise (i.e., equal to the marginal cost of supply) by charging access fees higher than they should be. And customers benefit from those water-use charges being kept low to the extent that they use more water. Hence, customers with larger-diameter pipes might pay some hundreds of dollars more per year in access fees compared with other customers, but benefit much more than other customers (who generally use much less water) from water-use charges being kept low through cross-subsidisation from access-fee revenues. 

Page 15 of that document says, “The revenue requirement a local water utility uses to set its prices should reflect the efficient costs of supplying its services to appropriate levels”. The appropriate level of water supply should be based on the forecast level of demand for water when water-use charges are set at the marginal cost of supply. As indicated above, the water-use charges proposed to be charged by ARC are likely to be considerably less than the marginal cost of supply. Since demand and price (water-use charge) are negatively related with one another, water-use charges lower than they should be mean that forecast water demand will be higher than it should be (the “appropriate” level of service mentioned above). Hence keeping water-use charges low allows Council to make a more convincing case (although inconsistent with best practice) to increase its level of water-supply service (i.e., by developing the Oaky option).