Review Of Urban Water Customer Choice Options, Policy Drivers And Regulatory Instruments
A Report Prepared For The National Water Commission
In order to identify opportunities for reform in urban water policy to ensure that the sector was well placed to meet customer and community expectations in the future, in 2011 the Commission launched a project Developing Future Directions for the Australian Urban Water Sector. Reflecting its finding that the water sector is out of step with other sectors in terms of a genuine customer focus, a key recommendation of the report was that governments, regulators and service providers should ensure that the urban water sector gives a greater voice to customers through exploring opportunities for customer choice in pricing and service delivery, improved engagement in objective setting and the determination of trade-offs, improved customer protection frameworks, and competition.
This review seeks to enhance the Commission’s understanding of the progress that is being made implementing these recommendations as a prelude to the development of an enhanced urban water reform agenda in 2014.
Customer choice and its potential role in achieving urban water objectives
For the purposes of this report, we have adopted a fairly broad interpretation of ‘customer choice’ to encompass any arrangement where customers are able to make or influence decisions about the urban water services provided to them. In particular, we have defined customer choice to include both:
- Individual customer choice: situations where individual customers can choose between alternative tariffs, services or providers.
- Collective customer choice: situations where it may not be possible for a provider to offer individual customers choice through a differentiated product, but where customers as a group can have an input into the choice between the costs and benefits of different levels of service (e.g. via surveys, willingness to pay studies, customer panels or other forms of customer engagement).
It is also important to recognise that the urban water sector serves a range of ‘customers’. These include not just the households, commercial and industrial customers to whom water businesses supply water, wastewater and trade waste services, but also extend to developers and local/state governments to whom they can potentially offer a broader range of services, including environmental outcomes and urban amenity values. It is important to recognise that different customers and different types of customers may want different things from their water and sewerage services.
Interest in opportunities for greater customer choice in the urban water industry should not be about greater choice for its own sake. Rather, the issue is whether, and if so, how, greater customer choice could best contribute to improved urban water outcomes that maximise the value of these services to customers and the broader community. By helping to ensure that water users receive the services they want and are prepared to pay for, customer choice can improve efficiency. By facilitating options for alternative products such as recycled water it can also potentially contribute to more environmentally sustainable outcomes. In addition, optimising the trade-offs between cost and service standards to reflect customers’ values is critical to achieving socially beneficial urban water outcomes.
Progress to date
The urban water sector is clearly evolving from one which was dominated by an engineering mindset whereby decisions on virtually all aspects of urban water services have been determined by central planners’ views as to what is best for urban water users. Since microeconomic reforms dating back to the mid 1990s, there has been a gradual widening of the options open to urban water users and moves towards consulting customers to ascertain their views and preferences.
Key drivers of this growing interest in the scope for expanding choice include:
- reforms in other utility sectors generating debate amongst policy makers
- changing culture in the industry
- emerging technological developments allowing alternative sources of water
- growing demand by communities to be consulted on issues affecting the local environment and liveability
- reaction against centrally determined supply augmentations undertaken with little or no public consultation and now impacting on people’s water bills
- land development demands
At the most basic level, customers have some choice over the quantity of services provided by their monopoly water supplier by conserving water, installing water efficient appliances, or installing water tanks, while industrial customers may have some ability to undertake on-site treatment of trade waste. In general, there has been a move toward more cost-reflective tariffs in the water sector across Australia which should help to ensure that the most cost-effective solutions are adopted.
Although there has been considerable discussion of tariff choices for customers in the public debate, there is little evidence that such options have been implemented in practice. To date there is no evidence of an urban water supplier offering a differing level of security product for a different price, although in recent years there does appear to be a greater range of billing and customer service options emerging as some urban water businesses seek to take a greater customer focus. One notable area relates to different billing arrangements and on-line management of customers’ water accounts. The scope for offering differentiated or non-standard services appears to be particularly relevant for larger non-residential customers.
Another form of choice that may be able to be offered to individual customers by the incumbent water supplier is an alternative product or source of supply (e.g. an option to take recycled water as an alternative to or partial substitute for potable water supply). In recent years there has been a significant increase in the supply of recycled water as an alternative to potable water for some customers. There have been a number of examples across several jurisdictions where developers or other parties have sought to have an alternative supply to the traditional centralised solution offered by the incumbent water utility.
Arguably the most direct form of customer choice is where customers can choose to switch from their current supplier to a new supplier. This form of customer choice – known as ‘retail competition’ – has been implemented in a number of utility industries in Australia and elsewhere, most notably in electricity, gas and telecommunications. To date in Australia no jurisdiction has established retail competition for urban water services, although moves towards increasing competition have been initiated in a number of jurisdictions. The most significant reform to allow choice of supplier has occurred in NSW under the Water Industry Competition Act (WICA), although several other States have also flagged similar reforms.
In regard to collective customer choice, approaches to public consultation with customers and other stakeholders on service/price trade-offs by the water industry continue to evolve. Often, however, the most significant cost/service trade-offs relate to matters beyond the purview of the water utilities themselves.
While Australian urban water businesses typically have their own customer committees with which they engage on a range of issues, at present, however, there is no government-funded consumer or advocacy group in the urban water sector.
An overview of customer choice options identified in this report is in the table below.