One of the big announcements in the recent South Australian state election was that the (now re-elected) government would move to de-corporatise the state’s major water utility, SA Water, and establish a new SA Gas and Water Trust. This announcement did not get the attention it deserved, but it could be a significant step away from 30 years of neoliberalism in the governance and regulation of water supply – although whether or not that is a good thing may depend on what replaces this neoliberal corporation.

Background

For much of the last century, water and wastewater in SA was managed by a government department, the Engineering and Water Supply Department. In 1995, the EWS was replaced with a corporatised government business enterprise (SA Water) as neoliberalism swept the world and convinced everybody that government was bad and that a market was the most efficient and beneficial arrangement for the supply of everything, including water.

This corporatised government business was to act like a profit-making corporation in a regulated market where prices are set so the corporation can recover all the costs of service provision. This requires an analysis of the asset base of the corporation and the provision of a guaranteed return on that capital, plus enough revenue to cover operational and other costs. The state government originally set the valuation of the asset base and costs on advice from Treasury, but in 2013 this regulation was taken over by an independent regulator, the Essential Services Commission of SA (ESCOSA).

While neoliberalism sells this model as efficient and the imposition of market discipline, in reality there are inevitable controversies over the subjective pricing of assets and operation costs. As we will see below, these matter to water prices.

This system also puts consumer advocates in an invidious position. Any new consumer protections or environmental initiatives are automatically added to water prices as such operational costs need to be recovered, while consumer advocates need to have a level of technical expertise to assess whether any given capital investment or expenditure is essential or desirable. And if it is, then advocates are trapped into accepting price increases. Alternatively, if limiting price increases is the main goal, they end up having to oppose potentially important capital expenditure or other pro-consumer initiatives.

However, in the context of a proposal to radically change this system, it is worth tracking what happened to water supply and prices under SA Water. This is inevitably a complex and multi-dimensional question, but in this short post I will simply look at what happened to water prices for customers.

Water Prices

Unfortunately, the ABS data for water prices in Adelaide only goes back to 1998, so we don’t have a simple pre-and post- corporatisation comparison. However, as the graph below shows, we can track water and sewerage prices from the infancy of SA Water up to the present, and we can compare this to the general inflation rate. Clearly over the journey, water prices have increased above the general Adelaide CPI, with water price increases 1.3 times higher than the inflation rate.

Of course, correlation is not causation and this the graph says nothing about changes in size of the water and sewerage network, the quality of water or what would have happened if a different regime was in place. More importantly, the graph shows that there were different price trends in different periods, so even the price picture is much more nuanced than the simple 1.3 times inflation rate headline.

In fact, as can be seen, water prices largely tracked with the general inflation rate for the first ten years, and then sharply increased from 2008. A significant part of this was due to major infrastructure investment, including the desalination plant which probably has fewer critics now after years of drought than it had at the time! There was also a major decrease in water prices in 2019, which resulted from a re-valuation of the asset base after a report found that the previous Labor government had over-valued the assets when it handed price control to ESCOSA in 2013. This was obviously a highly politicised process, which could bring in to question the whole “objective” basis of price setting, but either way, the graph shows that it had a significant impact on price trajectories.

Perhaps more interestingly, the graph shows that since 2013 when ESCOSA took over revenue and price regulation, water prices have increased much more slowly – and well under the inflation rate. The one-off adjustment in 2019 skews this data, but even removing that “anomaly” from the data set, water prices have increased by 28.3% since 2013, while the overall CPI has increased by 42.3%. This should be a significant argument for maintaining independent regulation in the new Trust if something like the full revenue-recovery model is to be maintained (i.e. prices set to cover the full cost of service provision).

National Water Price Increases

This conclusion may be reinforced by the national data which shows that since 2013, the rate of Adelaide water and sewerage price increase is one of the lowest of all the Australian capital cities (even without the 2020 revaluation). Indeed, the two cities with the highest rate of price increases (Brisbane and Perth) both have prices set by the state government rather than an independent regulator.

Note though, these comparative figures are only tentative as more research is required on local factors impacting price increases and any changes in the regulatory regimes in what, for other jurisdictions, may be an arbitrary time period. However, the figures certainly make a prima facie case for independent regulation, although again, price in only metric in this issue.

Conclusion

Given all the caveats above, the data and conclusions in this post are not definitive, but the issues raised by the data should be important considerations in structuring water regulation under the proposed new SA Water and Gas Trust. We don’t yet know the details of what is proposed, and given the state government is wanting the Trust to open up development of new housing, we may see a departure from the corporate logic of full cost-recovery. We may also see a limiting of the role of the independent regulator if this regulation is seen as a block to development. However, the price data above suggests some caution would be needed if we have the second without the first.

Personally, given my previous critique of neoliberal essential service models, I am open to alternative structures to deliver water. But in considering this, I would want a much better understanding of where the burden of infrastructure and service costs fall under the various alternatives (e.g. on taxpayers or water customers) and what the equity impacts of that would be. And I would expect that data on the track record of SA Water on price, water quality and network provision would also form part of the consideration.

In that context, this post is just a small, initial contribution to that consideration.