Reviewing Sydney Water’s obligations to service wholesale customers

The Issue

The emergence of independent water utilities is a relatively recent development in the NSW water sector. Given that new entrants are potential competitors to Sydney Water, IPART sought to understand whether steps should be taken to ensure that Sydney Water does not impede the entry of competitors, where competition in the market would otherwise be in the long term interest of consumers.

The business model of independent utilities is to acquire wholesale water and sewerage services from an incumbent utility, such as Sydney Water, and on-sell these services to end customers, potentially in competition the incumbent utility.

There are also instances where independent utilities operate recycling plants, and look to discharge wastewater from these plants to Sydney Water’s sewerage network.

The independent utilities are therefore wholesale customers of Sydney Water. Under licensing arrangements in place at the time of writing, Sydney Water was only obliged to service customers that are property owners located within the area of its operations. So technically, Sydney Water is within its rights to refuse service to these customers.

While there is no evidence of Sydney Water refusing to serve wholesale customers, there remains a risk that at some point in the future it could exercise its monopoly power to the detriment of competition.

The Solution

In addressing this brief, Synergies examined four key questions:

• Should Sydney Water be obliged, through its Operating Licence, to serve wholesale customers located within its service area that do not own property?
• If an obligation is deemed necessary, should the Operating Licence also specify minimum standards of service (that is, non-price terms and conditions) for wholesale customers?
• Are any other protection measures for those wholesale customers warranted?; and
• Should Sydney Water be required to publish or otherwise disclose information as a means of promoting competition?

In working through these questions, we examined what actions would represent a ‘reasonable and proportionate’ response given the current state of competition in the water and wastewater market in NSW.

The Results

Synergies evaluated four options for amending Sydney Water’s operating licence to guard against this risk, together with the option of retaining the status quo.

The assessment included a review of approaches used in other jurisdictions (eg. UK’s water industry) and comparable network industries (eg. electricity transmission and telcos)

We concluded that the preferred option would be to obligate Sydney Water to serve wholesale customers (at minimum defined service levels), to obligate it to negotiate with wholesale customers – should the customer seek a higher level of service – and to require that Sydney Water provides sufficient information to the customer to enable the customer to negotiate effectively with Sydney Water.

Conclusion

Our report informed IPART’s Final Report on the Review of Sydney Water’s Operating Licence, which was published In April 2019.