Third and final 'Local Water Done Well' Bill introduced

On 17 December 2024 Parliament read the Local Government (Water Services) Bill (Bill 3) for the first time, marking the third instalment of the Coalition Government's 'Local Water Done Well' reforms which will establish a new regulatory framework for water services delivery. It has now been referred to the Finance and Expenditure Select Committee, with submissions likely to be due early in the new year.

The first stage, the Water Services Acts Repeal Act 2024, repealed Labour's previous 'Affordable Water' legislation, while the second stage, the Local Government (Water Services Preliminary Arrangements) Act, established preliminary arrangements for local government water services delivery. The statutory purpose of Bill 3 is to "establish a framework for local government to provide water services in a flexible, cost-effective, financially sustainable, and accountable manner", by providing a range of structural and financing tools, and by implementing a new economic regulation regime for water services providers.

Bill 3 informs the development of water services delivery plans (a one-off requirement to be submitted within 12 months of the enactment of the Preliminary Arrangements Act, i.e. by September 2025), and the regulatory settings in which future water services providers will operate.

Bill 3 provides for, among other things:

• Arrangements for the new water services delivery system
• A new economic regulation and consumer protection regime for water services
• Changes to the water quality regulatory framework and the water services regulator, and
• Singular environmental performance standards and infrastructure design solutions which could substantially streamline consenting processes for wastewater and stormwater infrastructure.

Service delivery options

As previously indicated, territorial authorities will have a number of options to choose from in determining the optimal structure and delivery arrangements for their 'water services' (water supply, stormwater and wastewater). These include one or a combination of the following:

• Providing water services themselves directly (the current status quo, in most cases)
• Transferring responsibility for providing water services to a 'water organisation' (through a transfer agreement, such that the organisation becomes the water service provider in respect of those services - noting that cl 10 prevents the transfer of responsibility for 'transport corridor stormwater infrastructure')
• Contracting with another party to provide water services on their behalf (while remaining responsible for policy matters, and the pricing of water services)
• Entering into a joint water service provider arrangement with other territorial authorities
• Becoming a shareholder in a water organisation established by another territorial authority, or
• Entering another type of arrangement (other than a franchise or concession agreement).

A 'water organisation' is essentially a company owned by one or more territorial authorities, one or more consumer trusts, or a combination. If a water organisation is majority-owned by a local authority, it will be considered a Council-Controlled Organisation (CCO). Existing CCOs delivering water services immediately before the Bill commences will be considered 'water organisations' provided they meet specified requirements within 6 months (with specific differences for Watercare).

Core requirements that apply to water organisations as water service providers

The Bill sets out a number of core requirements that will apply to all 'water service providers' (which include, as applicable, territorial authorities, water organisations, and in some cases regional councils that provide water services).

These requirements include:

• A set of 'objectives' in cl 15, including that each provider must manage and provide water services in a cost-effective and financially sustainable manner
• Compliance with financial principles in cl 16, including a requirement that revenue received from the provision of water services must be spent on those services
• Operating within the planning and reporting framework for water services in the Bill, and
• Restrictions against privatisation.

Additional requirements will apply to water organisations, including that they must be a company, have an independent competency-based board, and limit their activities to the provision of water services.

New powers for 'water organisations' under the Bill

Part 3 of the Bill grants water organisations a range of powers similar to those currently held by local authorities. These include the power to:

• Set and charge customers for water supply services, stormwater services and wastewater (including trade waste) services. Charges can be set and collected for the initial connection, contribution to the capital costs of infrastructure, serviceability, and meeting the costs incurred in exercising the organisation's duties, functions, and powers under the Bill. When setting a charge, the water organisation may determine how the charge is assessed, when its due, how it's to be collected, and how it may be paid. The Bill precludes council rates and water charges being charged for the same water service.
• Require development contributions for growth-related capital costs through a modified version of the development contributions regime in the Local Government Act 2002 (LGA 2002). This would enable water organisations to recover a 'fair and equitable portion of the total cost of capital expenditure necessary to service an additional or increased demand on water services infrastructure over the long term'. If a water organisation requires a development contribution, then a territorial authority cannot require a development contribution or financial contribution (under the RMA) for the same purpose.
• Formally propose that territorial authorities create, amend, or revoke water services bylaws to regulate connections to water services networks. A bylaw would have to provide for a 3-step process: approval of concept plans, approval of engineering plans, and sign-off. Further, a territorial authority would be able to delegate any of its functions or powers that relate to the administration or enforcement of a water services bylaw to a water service provider, but not the function or power to make, amend, or revoke a bylaw. Territorial authorities will also be required to prepare stormwater network risk management plans to identify any hazards and assess risk relating to the network. A water service provider that is responsible for stormwater network management may make stormwater network bylaws to support this plan, including imposing requirements in relation to critical infrastructure and private land.
• Access private land to carry out water services infrastructure work, subject to notice and other requirements (comparable to those which apply to territorial authorities entering land to construct works under section 181 LGA 2002).

A new planning and accountability framework for water services

Part 4 of the Bill introduces a new framework which applies instead of certain provisions in the LGA 2002 (that would otherwise apply to CCOs). The framework includes three core documents:

• Statement of Expectations: Issued by shareholders to a water organisation, this document outlines the strategic and performance expectations for the organisation. Water organisations must incorporate these expectations into their water services strategy.
• Water Services Strategy: Prepared by all water service providers, this is the primary document for strategic, financial, and infrastructure planning and accountability. Shareholders can decide their level of involvement in the preparation process.
• Water Services Annual Report: This report is prepared by water service providers to ensure transparency about their performance over the past financial year. It includes detailed financial statements related to water services.

Ministerial powers

Another notable amendment to the LGA 2002 is that the Bill extends the Ministerial powers to act in relation to local authorities, to apply to all water service providers and shareholders of water organisations. With these increased powers the Minister of Local Government could intervene in the operation of a water service provider, and appoint two new ministerial bodies:

• A Crown facilitator: To assist and advise the body to which it is appointed, to monitor the body, to direct the body to take a particular action, and to make recommendations to the Minister on further action.
• Two or more Crown commissioners: To work with, direct, and oversee the body, and to make recommendations to the Minister on further action. Unlike a Crown facilitator, Crown commissioners have the functions, duties, and powers of the board of a water organisation, the trustees of a consumer trust, or the shareholders of a water organisation (as applicable), to which they have been appointed. Crucially, the water organisation must co-operate with the Crown commissioners and comply with their requests.

In addition, the LGA definition of a 'problem' (the trigger for considering ministerial intervention) will be expanded to include new situations relevant to water services delivery, such as matters or circumstances that could prevent the provision of water services being financially sustainable, or complying with regulatory requirements and standards, and so on.

Economic regulation and consumer protection

The Bill will establish an economic regulation regime for water supply and wastewater services, with the potential to include stormwater services at a later date.

The regime, introduced through amendments to the Commerce Act 1986, includes a range of regulatory tools such as information disclosure requirements, revenue threshold regulation, quality regulation, performance requirement regulation, and price-quality regulation. It will apply to water service suppliers (including councils and water organisations) who are responsible for making core decisions about capital and operating expenditure, revenue recovery, and charging levels. Initially, community suppliers, private schemes, Crown providers, and private third-party contractors will be excluded, but may be included later.

The Bill will amend the Commerce Act to provide a pathway for the Commerce Commission to recommend regulations to the Minister, after considering whether doing so would better promote the long-term benefit of consumers in competitive markets, the nature of the water services delivery structure, and the extent of regulated suppliers' performance against each revenue threshold that applies.

Revenue threshold regulation will enable the Commission to specify the minimum or maximum revenues that should be recovered by a supplier, with the intention that minimum levels of water services revenue will have to be set for water services investment purposes.

The Commission will be required to set initial information disclosure requirements within six months of the Bill's enactment, and apply price-quality regulation to Watercare after the interim regime ends.

Finally, the Bill introduces a consumer protection regime, allowing the Commerce Commission to monitor and enhance consumer protections based on gathered information.

Water Services Authority - Taumata Arowai (née Taumata Arowai - the Water Services Regulator)

Along with a name change for both the Act and the entity (to Water Services Authority - Taumata Arowai) the Bill also amends the operating principles in the Taumata Arowai - the Water Services Regulator Act 2020 in an effort to "reduce regulatory burden" and "improve proportionality".

Notable changes to the Taumata Arowai-the Water Services Regulator Act 2020 include:

• Removing the requirement to give effect to Te Mana o te Wai from the list of objectives of the Water Services Authority
• Expanding the functions of the Water Services Authority to include developing National Engineering Design Standards (essentially, technical and design standards for water services infrastructure), and supporting education and training for domestic self-suppliers and shared domestic drinking water suppliers, and
• Reducing the number of members of the Māori Advisory Group (from 5-7 down to 3-5) and narrowing the group's role.

Changes to the operating principles will require the Authority to consider the costs of regulatory compliance for drinking water suppliers, in particular mixed-use rural water suppliers, and ensure the regulatory framework is proportionate to the scale, complexity, and risk profile of the relevant water services.

The Authority will also be required to proactively engage with suppliers and network operators to ensure that there is a path to compliance that takes into account the risk profile and capacity of each supply. Finally, the Bill also amends the Water Services Act 2021 to require the Authority to include specific information on mixed-use rural water suppliers in its annual drinking water regulation report and its drinking water compliance, monitoring, and enforcement strategy.

Singular standards for wastewater and stormwater environmental performance and consenting

Currently, the Water Services Act enables Taumata Arowai to develop wastewater and stormwater environmental standards. The RMA then prevents a relevant resource consent from being granted 'contrary' to those standards (if or when developed).

The Bill effectively doubles down on this position. It provides for performance standards to prevail over inconsistent RMA rules, as well RMA policy planning and policy documents (such as national environmental standards, national policy statements, and the NZ Coastal Policy Statement). The Bill also introduces a new instrument called 'infrastructure design solutions' (IDS), to be prepared under the Water Services Act. This instrument can specify design solutions (potentially, 'off the shelf' options) for wastewater and stormwater infrastructure - including consent requirements, activity status, and whether notification is precluded under the RMA.

Associated changes to section 104 of the RMA will mean that resource consent cannot be granted contrary to a wastewater or stormwater environmental performance standard, or an IDS. In addition, when consents are granted, the conditions imposed must be no more or less restrictive than is necessary to give effect to the relevant standard or IDS (as applicable).

The implementation of performance standards through this regime will significantly shake up and streamline consenting for three waters infrastructure. It could also substantially reduce the role or discretion of regional councils in environmental regulation of wastewater and stormwater systems. However, the significance of the changes will ultimately depend on what is included in the performance standards and IDS, and the extent to which they include 'exceptions' or otherwise allow for certain environmental effects to be managed at a local level. In this regard, Taumata Arowai has indicated that the first set of performance standards will be released in draft early next year.

Taumata Arowai will be responsible for developing and administering National Engineering Design Standards, so that the standard of design and construction of water network infrastructure is consistent. Bylaws for connections must also comply with these standards.

Compliance and enforcement regime

The Bill includes a compliance and enforcement regime, including offences and penalties that cover new functions, and graduated enforcement tools for water service providers. Water organisations could propose that territorial authorities make bylaws to specify infringement offences and prescribe fees. A territorial authority may authorise a compliance officer to issue infringement notices to persons alleged to have committed an offence, resulting in fees. The Bill also introduces a range of offences, including in relation to wastewater and stormwater networks (e.g. unauthorised connection or disconnection).

Conclusion

Overall, the Local Water Done Well programme retains council ownership and control of water services, as well as the ultimate responsibility for delivery. In contrast, Labour's 'Affordable Water' plan (originally 'Three Waters') would have passed responsibility to council-owned entities.

The new regime provides councils with no shortage of options in terms of how they structure their water services delivery, which many are currently working through as they run the numbers and explore joint arrangements with neighbouring councils. The Bill usefully puts 'flesh on the bones' of the Preliminary Arrangements Act, and will feed into those deliberations.

In the medium term, the design standards, IDS and environmental performance standards could have a significant impact, and will see the 'Water Services Authority' (currently Taumata Arowai) take on a much greater role in relation to environmental consenting, with regional councils continuing to process consent applications but having less discretion to exercise with regard to the outcome.

It is intended that the Bill will be divided (either at the Select Committee or whole House stage) into two separate Bills - one to set up the substantive requirements and one for repeals and amendments.

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

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