More details rise to the surface on Local Water Done Well

On 8 August 2024, Local Government Minister Simeon Brown and Commerce and Consumer Affairs Minister Andrew Bayly announced new details on the water service delivery models which will be available under the Government's Local Water Done Well (LWDW) programme.

LWDW is the Coalition Government's answer to Labour's Three Waters reform. The first piece of legislation in the LWDW suite (Water Services Acts Repeal Act 2024) repealed Labour's Three Waters legislation, while the second Bill (due to be passed imminently) establishes the preliminary arrangements for local government water services delivery. You can read about the first instalment and LWDW generally in our Insight here, and the second instalment here.

The third instalment

The legislation to implement the new water service delivery models, the Local Government Water Services Bill, is due to be introduced in December 2024, and will aim to establish 'enduring settings for the new water services system'.

The Bill is intended to provide for the long-term replacement regime, including:

• Setting long-term requirements for financial sustainability;
• Providing for a range of structural and financing tools, including a new class of financially independent council owned organisations;
• Considering the empowering legislation for Taumata Arowai to ensure the regulatory regime is efficient, effective, and fit-for-purpose, and standards are proportionate for different types of drinking water suppliers;
• Providing a new economic regulation regime for water services providers, to be implemented by the Commerce Commission;
• Establishing regulatory backstop powers (i.e. the 'Crown facilitator' and 'Crown water services specialist' discussed in our last update), to be used when required to ensure effective delivery of financially sustainable and safe water services.

Different structure options available

Recently released Cabinet papers provide insight on the different structure options that will be available to councils, giving them a choice as to how they deliver water services. These include:

• Direct delivery by councils - with services provided 'in-house' (the status quo in most places).
• Separate council-owned water organisations, which could include:

• Water council controlled organisations (CCOs) and water council-controlled trading organisations owned by single or multiple councils; and
• Organisations owned by multiple councils, which are intended to be financially independent from a credit rating perspective.
• Separate water organisations owned by consumer trusts or with mixed ownership (by councils and consumer trusts), which are intended to be financially independent from a credit rating perspective.

The different structures available under LWDW are a notable departure from the previous insistence (by the previous Labour Government, and initially the current government as well) on balance sheet separation.

More borrowing power for CCOs

The recent announcement by the Ministers confirmed that water CCOs will be eligible for increased lending from the Local Government Funding Agency (LGFA). CCOs will be able to borrow up to 500% of their operating revenues, provided they are financially supported by parent councils and meet 'prudent credit criteria' (and are able to assess, set, and collect water services charges from consumers).

This is twice the lending currently available to councils themselves, but given it is predicated on financial support from councils, would not be available under all of the structure options outlined above.

The LGFA has said that it will:

• Treat borrowing by qualifying CCOs as separate from borrowing by parent council or councils;
• Lend to multiple-owned water organisations, who are supported by the parent councils;
• Make available to water organisations its existing suite of financial products that are currently made available to councils and CCOs. These include green and sustainable loans and climate action loans, short and long-term loans and standby facilities;
• Still lend to councils to fund water services should they choose to keep those services 'in house' rather than establish a water organisation.

In addition to this increased lending to qualifying CCOs, the Government and the LGFA are also exploring further measures to assist in other circumstances, such as increasing debt limits for 'high-growth' councils (potentially up to 350% of revenue), and also allowing lending to CCOs that are not supported by parent councils.

Increasing CCOs' borrowing ability will allow more investment into water infrastructure, and the borrowed amount will be able to be paid back over the lifetime of that asset. Other stated benefits include:

• Enabling a reduction in operating revenue requirements for a financially sustainable water organisation as compared to the status quo - on the basis that additional debt financing will mean operating revenues will only need to cover the interest costs and debt repayments, as opposed to direct funding investment;
• Councils will not have to borrow against non-water service revenues to fund water services;
• Additional borrowing 'headroom' for parent councils whose current water services borrowings exceed council borrowings for other activities on a debt to revenue basis;
• Parent councils will have the ability to pass on the benefit of any additional debt headroom created to consumers, by utilising this to finance non-water capital expenditure with a corresponding reduction to rates revenue requirements.

Minister Brown indicated the Government's expectation is that "councils will now use this certainty and the additional borrowing capacity to reduce pressure on ratepayers while being able to invest in the critical water infrastructure New Zealand needs".

Economic regulation and changes for Taumata Arowai

Minister Bayly also provided details on the new economic regulation regime under LWDW. The economic regulation regime will initially apply to drinking water and wastewater services and will provide flexibility to include stormwater services at a later date, if necessary. At least initially, current funding arrangements for stormwater services will be retained.

Minister Bayley confirmed that rates or water charges collected by councils or CCOs will need to be 'ring-fenced' for water services. The Commerce Commission will oversee the economic regulation of water services and will have a range of regulatory tools available to it, including mandatory information disclosure to ensure transparency. As part of its role (detailed in this Cabinet paper), the Commerce Commission will be responsible for monitoring and enforcing water service providers' compliance with the financial ringfence provisions, and will be able to require that minimum amounts of water services revenue are ringfenced for water services investment purposes. The Cabinet paper also noted that the Commerce Commission could introduce additional ringfencing requirements if necessary. This could include requiring a portion of water revenues to be invested in a particular asset, expense category, project, programme, or type of regulated water service, or held in reserve.

To ease financial (and regulatory) pressure further, Cabinet agreed to a shift in water quality standards from Taumata Arowai - the water services regulator. Minister Brown noted that the changes to the standards would remove barriers for the regulator. The changes include:

• Ensuring Taumata Arowai considers the cost of compliance on water services suppliers;
• Excluding 'shared domestic supplies' serving 25 consumers or fewer from drinking water regulation;
• Enabling Taumata Arowai to proactively allow exemptions from some regulations if they would be impractical, inefficient, unduly costly or burdensome;
• Having one 'single standard' for national wastewater environmental performance (rather than minimum or maximum standards) and that standard cannot be exceeded in consent conditions apart from on an exceptions basis;
• Introducing a mandatory set of national engineering design standards for water services network infrastructure; and
• Removing the requirement for Taumata Arowai and suppliers to give effect to Te Mana o te Wai.

The Government is also proposing to amend the legislation to refer to the 'Water Services Authority - Taumata Arowai', putting the English name first.

Implications and remaining questions

Not unexpectedly, there have been different views expressed around how effective the measures announced will be at addressing the issues they claim to solve. Labour local government spokesperson Kieran McAnulty criticised the plan, arguing that unless there was balance sheet separation, the required savings would not be found, and rates would increase. McAnulty also raised concerns that the cost required to bring water infrastructure up to standard (reportedly $185 billion) was being understated, and the LGFA was not guaranteeing that it would provide all that funding.

Additionally, global credit rating agency S&P warned that the Government's new water plan could weaken the LGFA's loan asset quality, which new water providers will be relying on for debt. S&P also confirmed that if newly-formed water CCOs are highly leveraged (with the ability to borrow up to 500% of operating revenues) and retain some sort of financial support or backstop from parent councils (which is required to access the funding announced), they could drag down the credit profiles of their parent councils.

Councils will be given considerable choice as to how they would like to provide their water services, meaning we will see a variance in water services delivery from region to region. It remains to be seen how this will play out in different parts of the country, and the extent to which the 'regulatory backstop powers' will ultimately need to be used.

One of the concerns raised is that different councils will have invested in their assets to different degrees, which could result in perceived unfairness to consumers (in terms of if areas with differing levels of required investment being suddenly lumped together). Minister Brown has suggested that councils may wish to explore transitional arrangements whereby consumers in different areas may initially be charged different amounts (with charges to be harmonised over time) in order to address that concern.

Finally, while the increased LGFA funding is significant, it remains to be seen if this will be enough to provide for the multiple and compounding challenges facing councils/water services providers, and how economic regulation will affect the charges that are able to be levied (to either fund improvements directly, or be borrowed against). Some of those future challenges will be:

• Supporting a growing population and/or urban expansion, including as per the Government's "Going for Housing Growth" programme;
• Responding to challenges brought on by climate change (such as increased rain fall and flooding), particularly for stormwater networks;
• Fixing aging water supply infrastructure in order to reduce leaks and avoid water shortages; and
• Complying with environmental regulation set by the Ministry for the Environment, regional councils, and/or Taumata Arowai (particularly in relation to stormwater contaminant loads and wastewater network overflows).

Any of these challenges alone could have a price tag in the billions of dollars, let alone all of them combined. It may take a few years to see how the new model works in practice, but in the short term we can expect further detail on the legislative framework when the Local Government Water Services Bill is introduced at the end of this year (and subsequently enacted in mid-2025).

This article was written with the assistance of Hermione Kemp, a Solicitor in the Wellington Environment and Planning team.

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