Last week, in the midst of a Budget day flurry, the Local Government (Water Services Preliminary Arrangements) Bill (the Bill) was quietly introduced to Parliament under urgency. The Bill is the second instalment in the Government’s Local Water Done Well (LWDW) programme. You can read about the first instalment (Water Services Acts Repeal Act 2024) and Local Water Done Well generally, in our Insight here.

The Bill establishes the preliminary arrangements for local government water services delivery under LWDW. Its broad policy (as per the Explanatory Note) is “to lay the foundation for a new framework of water services management and financially sustainable delivery models that meet regulatory standards, including a new water services delivery arrangement for Auckland”. 

Ultimately, the Bill provides: 

• A requirement for councils to develop ‘water services delivery plans’ (WSDPs);
• Additional information disclosure requirements which will ‘lay the groundwork’ for economic regulation; and
• The ability for councils to determine the structure, delivery method, and funding and financing arrangements for their water services (i.e. via council-controlled organisations (CCOs)).

We discuss these elements in turn below.

Water services delivery plans

The Bill requires all district councils (either individually or jointly) to submit a WSDP within 12 months after the Bill is enacted.

The WSDPs are intended to provide detailed information on the current state of councils’ water services arrangements for water supply (including drinking water), wastewater, and stormwater, and set out a strategy for how they will achieve the delivery of financially sustainable water services and meet regulatory quality standards. As set out in clause 11, a WSDP must include:

• A description of the:
  • current state of the council’s water services network;
  • current levels of water services provided;
  • areas that receive water services (and any areas that do not); and
  • water services infrastructure associated with providing for population growth and development capacity.
• The extent to which the water services comply with regulatory requirements;
• Details of required capital and operational expenditure to deliver the services and to ensure regulatory requirements are met;
• Financial projections for delivering water services over the period of the WSDP (which can be no less than 10 financial years, starting 2024-25). More detail is required for the first three financial years;
• An assessment of the current condition, lifespan, and value of the water services network;
• A description of the asset management approach being used;
• Any issues, risks, or constraints that impact on delivering water services;
• The anticipated or proposed model or arrangements for delivering water services;
• An explanation of how revenue from water services will be separated from council's other functions and activities; and
• A proposal to ensure that delivery of water services will be ‘financially sustainable’ by 30 June 2028.  (‘Financially sustainable’ is defined to mean that the revenue applied to the authority’s delivery of water services is sufficient to ensure its long-term investment in delivering water services, and that the authority is financially able to meet the associated ‘regulatory standards’ and requirements – this will require ‘ring-fencing’ of funds, but does not necessarily require new CCOs or balance sheet separation. ‘Regulatory standards’ is not defined, but would presumably include all obligations under the Water Services Act, Resource Management Act, and performance standards for stormwater and wastewater issued by Taumata Arowai).

The Bill enables two or more territorial authorities to enter an ‘arrangement’ to submit a joint plan.  In addition to the matters above, a joint WSDP needs to include information on the likely form of the joint arrangement (e.g. whether the arrangement is a joint services CCO, a ‘joint arrangement under section 137 of the Local Government Act 2002 (LGA), or something else.

Finally, while a WSDP must address all three ‘waters’ (drinking water, wastewater, and stormwater), it can specify that some or all stormwater services for some or all of the member councils will be managed by the relevant council(s) rather than under the joint arrangement.

Once prepared, the WSDP must be provided to the Secretary for Local Government for consideration as to whether it complies with the requirements listed above.

Regulatory guardrails?

Since LWDW’s inception, questions have been raised about the extent to which all councils would be inclined or be able to join with their neighbours to jointly manage water services – and whether they might be required to do so by central government as a last resort. The Explanatory Note to the Bill notes that ‘regulatory backstop powers’ (which may include tools to address this) will be proposed in the third bill later this year.

Notably however, the current Bill does include mechanisms to facilitate or expedite the development of joint arrangements between councils. In particular:

• The Minister can appoint a ‘Crown facilitator’ to assist or advise a council or group of councils on the preparation of their WSDP, either on council request or if the Minister has reason to believe the WSDP otherwise won’t be prepared on time.  The facilitator can also assist two or more councils to agree on the terms of their joint arrangement, but only if the relevant councils agree to this.
• The Minister can appoint a more directive ‘Crown water services specialist’, either on council request or if the council(s) fail(s) to submit a compliant plan on time.  The Specialist can prepare a plan for the councils and direct them to submit it, and can also recommend that the Minister take further action under Part 10 of the LGA (i.e. to intervene or appoint commissioners).

Additional information disclosure

Foundational information disclosure will be provided through the WSDPs to “lay the groundwork for comprehensive economic regulation”. The Bill provides the ability to require councils and CCOs to make certain information publicly available where such a disclosure promotes the long-term benefit of consumers and supports efficiency, innovation, and investment.

There are no automatic information disclosure requirements on councils or CCOs included in the Bill itself, but the Bill provides for them to be imposed on certain entities via an Order in Council. The Commerce Commission can then make a determination as to the details of the public disclosure. Interestingly, the Government’s Budget announced in May 2024 did not include funding for the Commerce Commission to undertake this work.

Alternative consultation and decision-making process for establishing water services CCOs

Notably, the Bill sets out optional alternative consultation and decision-making requirements for councils to use when establishing, joining, or amending a water services CCO (WSCCO).

Section 56 of the LGA requires councils to consult before they can establish a new CCO. That consultation must be in accordance with the requirements of section 82, which affords Councils discretion to consider what level of consultation is appropriate in the circumstances.

Despite this discretion, establishing a new CCO for water services would generally be considered a relatively substantial undertaking and would require fairly extensive consultation under the LGA (particularly with iwi/Māori). As part of the decision-making process, councils would normally need to identify all reasonably practicable options which could achieve the objective of the decision and assess their advantages and disadvantages. The Community would need to be provided reasonable time to provide their views, and the Council would be required to consider them with an open mind in making its decision.

In addition, the LGA requires councils to use the more enhanced ‘special consultative procedure’ when adopting or amending its long-term plan, which would likely also be required for this type of proposal.

Under the Bill, Councils will have the flexibility to use any or all of the ‘alternative consultation requirements’ contained in the Bill instead of the existing processes in the LGA (but if the alternative requirements are not used, then relevant requirements in the LGA will continue to apply). 

Under the alternative arrangements, councils may:

• Identify two options for delivering water services (the status quo and the proposed new arrangement), in place of the normal requirement to identify all reasonably practicable options under section 77 LGA;
• Consult only once and are not required to consult additionally on an amendment to the long-term plan resulting from a decision relating to WSCCO, in place of the normal consultation requirements (under sections 56 and 82 of the LGA) ;
• Not need to consult on consequential changes to its long-term plan if it has already consulted on the proposal to establish, join, or amend a WSCCO;
• Conditionally approve a long-term plan amendment subject to corresponding agreement from the other councils that are parties to a joint WSCCO; and/or
• Consider in their decision making the impact of a joint WSCCO on communities in the area covered, as well as in the council’s district.

Further, councils will be temporarily exempted from the cost-effectiveness review in section 17A LGA that relates to a decision to establish, join, or amend a WSCCO.

Overall, these changes are likely to materially streamline and de-risk the process. It may nonetheless be prudent for councils to consult more widely than they are strictly required to, given the significance of these issues from a social license and iwi/Māori relationships perspective.

New financially sustainable model for Watercare

Finally, the Bill carves out a special solution for Auckland Council, allowing it to implement its preferred model for water services delivery. Watercare Services Limited already provides water supply and wastewater services in Auckland, and the Bill acknowledges this by moving the obligation to provide water services (in relation to wastewater and water supply, Auckland Council will still be responsible for stormwater) from Auckland Council to Watercare. The Bill also makes other changes to achieve “balance sheet separation” between the two (by removing Auckland Council’s interests in the assets, security, debts, and liabilities of Watercare, and prohibiting Auckland Council from providing Watercare with any sort of financial support).

Where to from here?

The Bill passed its first reading, and submissions are open until 13 June 2024. The Select Committee is due to report back on 18 July 2024.

The Government has also indicated that the third Bill in its Local Water Done Well programme will be introduced in December 2024. The third instalment will provide for the long-term replacement regime, including:

• long-term requirements for financial sustainability;
• establishing new classes of CCOs and service delivery models (earlier announcements have signalled that this third Bill will allow the creation of a new type of financially independent council-controlled organisation”);
• accountability, planning, and reporting regimes for water services;
• providing for comprehensive economic regulation;
• amendments to the regulatory settings for Taumata Arowai–the Water Services Regulator:
• establishing further ‘regulatory backstop powers’;
• refinements to water services delivery system settings; and
• detailed changes to the Local Government Act 2002 and other legislation to strengthen the delivery of water services.

If everything goes to plan, all the legislation required for LWDW should be passed by mid-2025.