Changes To Network Infrastructure Pricing Could Mean Better Use And Investment

A study commissioned by the New Zealand Infrastructure Commission, Te Waihanga, has found that changing the way New Zealand charges for some of its key network infrastructure services could ensure they are used more efficiently, guide better investment, and, in certain cases, avoid costly capital projects.

"We use a number of funding mechanisms to raise most of the money we need to pay for our network infrastructure services - the water we drink, the roads we use to get to work, the electricity to light our homes," says Geoff Cooper, General Manager - Strategy, Te Waihanga.

"Sometimes funding approaches are obvious and connected to how much we use, like monthly electricity bills and mobile phone bills. Other times they are far less visible, like fuel excise that’s included in retail petrol prices or rates and taxes, which pay for many of the infrastructure services that we depend on.

"We commissioned PwC to look at pricing in our four main network infrastructure sectors - land transport, water, energy and telecommunications sectors. We wanted to understand three key things: First, what does good network pricing look like? Second, how do different sectors perform against best-practice principles? Third, because equity and affordability concerns are so important for New Zealanders, we wanted to know how households are affected when we change prices," says Cooper.

A key finding from the study is that the telecommunications and energy sectors perform well against best-practice pricing principles, while the land transport and water sectors perform less well against these principles.

"Energy and telecommunications rely more on direct-user charges and perform far better against best-practice pricing principles as a result. Like shopping in a supermarket, customers can pick and choose how much they consume and pay accordingly. These are also the sectors that have kept project investment levels in check with population growth over the last three decades," says Cooper.

"Sectors with better pricing have an easier time raising the right amount of money for high-quality projects, can better identify the highest-value areas for investment and are strongly incentivised to maintain their assets. These networks also tend to operate more efficiently, as users have good information and incentives to use infrastructure most efficiently.

"While land transport and water currently do not perform as well, we see significant potential for improvement. For example, more councils are introducing volumetric water charges, which are proven to reduce excess water consumption and improve leak detection. Other examples include central and local government working together to progress congestion pricing, which will take the edge off urban traffic congestion and many local authorities are improving the way they price development contributions, which can see us building in areas that have lower infrastructure costs," says Cooper.

Dan Marshall, Partner, PwC, adds "Well-performing sectors, such as energy and telecommunications, have system settings that were designed to promote competition and incentivise efficient investment in services. Pricing is a powerful tool in sending signals to suppliers about where and how they should invest, as well as to users about when, where, and how they can access infrastructure services."

Cooper says the study identifies key opportunities for each sector. "Whether it’s finding ways to improve price signals in land transport, investing in water metering, managing technology risks in telecommunications, or incentivising efficiency in energy, there are lessons that can help strengthen our infrastructure networks. The study makes clear that for many of the problems we face, it is not how much we are paying for infrastructure, but how we are paying for it."

The Network Infrastructure Pricing Study follows Recommendation 56 in the New Zealand Infrastructure Strategy, which identifies a need to improve public understanding of how infrastructure is priced and funded.

Key findings from the study:

The research outlines three best practice goals for how infrastructure networks should be priced:

• Pricing should guide infrastructure investment to ensure that we can provide and maintain the infrastructure we need. This is the most important to get right as network infrastructure is long-lived and can impact our future choices.
• Pricing should send signals to users about when, where, and how they should use infrastructure networks to maximise the overall benefits of those networks. This is the second most important goal as service levels and investment needs are highly influenced by user behaviour.
• Pricing should be used to share benefits of providing networks widely through society. This should be addressed through adjustments to pricing once the first two goals are achieved.

Other findings include:

• The research includes a desktop-based assessment of New Zealand’s four main network infrastructure sectors against best practice goals. This is a broad assessment of overall pricing systems and practices, supported by a set of quantitative case studies, rather than a detailed analysis of prices within each sector.
• The key finding of this assessment is that infrastructure pricing is better aligned with best practice goals in electricity and telecommunications, and less well aligned in land transport and water.
• Sectors with better pricing practices have an easier time raising the right amount of money to maintain and improve their assets and identifying the highest-value areas for investment. These networks also tend to operate more efficiently.
• As a result, improving pricing of network infrastructure can help to improve infrastructure investment. It can do this by increasing the amount of money available for investment, where there is demand for investment, and also by reducing or deferring the need to invest.
• The research identifies opportunities to improve pricing performance in all sectors. For example, transport congestion charging to reduce urban road congestion, implementing water metering to support water conservation and leak detection, managing technology change in telecommunications, and incentivising energy efficiency and decarbonisation.
• The research considers the equity implications of changes to infrastructure prices, which can be a barrier to moving towards better pricing practices. How we charge for infrastructure can affect the distribution of costs between high-income and low-income households. The research quantifies the impacts of increasing different types of charges on different types of households.
• Lastly, the research identifies opportunities to collect and analyse existing data to monitor the effectiveness of network pricing.

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