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Lytton Advisory

Stress Testing Infastructure Pricing During Coronavirus

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Coronavirus is forcing utilities to rapidly reappraise their pricing, to assist communities. I have been looking how to stress test utilities in response to Coronavirus. This follows observing the deferral of a recent regulatory pricing review and extension of the regulatory pricing period by a year for a water utility here in Australia. That action in and of itself will not address the impacts of Coronavirus.

I had some thoughts about a possible review approach. Specifically:

i) the financial capacity of the water and waste units to respond to requests by the governments to support their communities; and

ii) the ability of water and waste activities to defer some capital expenditures beyond the governments’ current budget horizons.

My initial thoughts are that this might be in the form of a series of financial stress tests that consider:

i) the implications of extending the current path for rates based on governments’ current asset management approaches;

ii) reducing charges by dropping any surplus generated to assist households over a period nominated by governments;

iii) deeper reductions in charges based on deferring capital and operating expenditures through the current period of budgets and perhaps beyond;

iv) implications for the path for charges beyond the current budget outlook, including taking into account the impact of deferring of capital expenditures designed to drive greater efficiency of service delivery; and

v) commercial implications of significantly lower volumes of services to businesses on utilities’ operations and margins, which might be significant in terms of trade waste issues.

A high-level review of engineering costs, capex and opex, could feed this financial analysis based on available information. Although not a full cost pricing determination, the review would help a government and utility business managers quickly figure out what level of relief can be given by the water and waste activities to households and businesses while minimising future rises in charges.

From an economic perspective, it may be simpler for governments to subsidise water and waste activities through temporary community service obligations (CSOs) directly. If that were a viable policy option, this could be a key piece of analysis to help set the level of the CSO, lay out KPIs for that CSO and establish the criteria for unwinding the CSO when measurable impacts from Coronavirus have passed.