An independent report commissioned by Consumer Action Law Centre has recommended the Victorian water regulator lower the rates for equity and debt costs for water authorities. This would have the effect of lowering customers’ bills across the state.
The report by CME Australia examined the regulation of water businesses in Victoria and how both debt levels and allowed returns on equity are calculated. Because water companies in Victoria are government owned entities, the report notes that they are able to borrow at rates more favourable than private businesses. The report recommends that regulated prices should recognise this reality.
The return on equity—the profit a company makes after liabilities and expenses are met—is currently set by the Essential Services Commission (ESC) at between 3.9 per cent and 5.3 per cent. The ESC is currently rating water companies using a new incentive-based framework and deciding the allowed rate of return for each. The report recommends a reduction to the allowed return of 100 basis points. This would set a return on equity between 2.9 per cent and 4.3 per cent. Additionally, the report suggests a reduction in debt costs by 100 basis points—from 6 per cent to around 5 per cent.
CME’s report looked at cost of capital decisions made in other regulated sectors, social and economic policy, and actual Government borrowing costs to draw its conclusions.
If the recommendations in this report were implemented, it would save Victorians $770 million over 5 years. For a typical bill this would mean savings of, on average, roughly $50 each year for Melbourne metro customers. This figure is based on an average annual bill of 200kL per annum.
In Victoria, the Essential Services Commission is tasked with regulating Victoria’s water businesses. It is currently undertaking a price review of all 17 urban water providers which is due to wrap up in mid-2018. More details on the Price Review can be found here: engage.vic.gov.au/water-price-review-2018
Quotes attributable to Consumer Action CEO Gerard Brody:
“It’s important to recognise the important social function that Victorian water companies play in this state. We need to make sure bills are affordable for everyone. This independent study reinforces our view that there is an opportunity for the Essential Services Commission to take further action to hold down bills”
“Many people contacting our financial counselling service are struggling to pay for essential services. Allowing water companies to borrow at rates reflecting the actual rate that it costs the Government will save Victorians $770 million over 5 years.”
180326 Water Price Review submission on cost of equity and debt