In August 2015 we published an eAlert regarding the proposed rate capping framework and the guidance provided by the Essential Services Commission (ESC) on the process of seeking a variation to the rate cap. To access a copy of this publication, click here.

Since that time, there have been some key developments in this space. These include:

  • the Local Government Amendment (Fair Go Rates) Act 2015 has commenced, effecting key changes to theLocal Government Act 1989 regarding rate capping arrangements
  • the ESC has published the document ‘The Fair Go Rates System: Guidance for Councils (2016-17)‘, as well as other template application forms for seeking a rate cap variation
  • the rate cap for the 2016-17 financial year has been confirmed at 2.5 percent
  • 21 councils have formally expressed interest to the ESC in seeking a rate cap variation.

In this publication we discuss:

  • the time limits for seeking a variation
  • the ESC’s current guidance on the variation requirements
  • the ESC’s process for making determinations
  • our expectations for future rating years.

Deadline fast approaching for variation applications

Councils wishing to apply for a rate cap variation for the 2016-17 financial year have until 31 March 2016 to submit their application to the ESC.

While councils were asked to advise the ESC whether they intended to seek a variation to the 2.5 percent rate cap, whether such an intention was advised does not determine whether a council can, or must, actually seek a variation.

A council which did not express an intention to seek a variation is still entitled to do so. Equally, it is open to any of the 21 councils which indicated an intention to apply for a varied rate cap to determine not to proceed with an application to the ESC.

Guidance on applying for a variation

The ESC’s document ‘The Fair Go Rates System: Guidance for Councils (2016-17)’ comments on each of the six criteria, listed in s 185E(3) of the Local Government Act 1989, required to be addressed in any variation application. These are:

  • the proposed higher rate cap
  • the reasons for which the higher cap is sought
  • how the views of the ratepayers and community have been taken into account
  • how the higher cap is an efficient use of council resources and represents value for money
  • what consideration has been given to reprioritising proposed expenditures and pursuing alternative funding options and why those funding options are not adequate
  • the application’s consistency with the council’s long-term strategy and financial management policies.

The ESC has indicated that it will assess the appropriateness of the amount of the higher cap sought by how well the remaining five criteria have been addressed in the application. Unsurprisingly, the ESC has made it clear that the level of evidence to support a variation should be proportionate to the magnitude of the variation being sought. Accordingly, a council seeking a rate cap of, for example, eight percent would need to provide a far more comprehensive application than a council seeking a rate cap of four percent.

There are no particular circumstances which trigger an automatic qualification for a higher cap. According to the ESC, it is expected that applications will only be made in the context of ‘genuine need’ and will most likely be made on the basis of one of the following categories:

  • a material change to the council’s revenue or costs, due to factors outside of that council’s control that would lead to ongoing operating deficits
  • a new service or higher standard of service which does not have corresponding funding from other sources
  • an increased effort to address asset renewal requirements
  • new infrastructure which has been prioritised on the basis of both the council’s plan, long-term strategy and the outcome of community engagement.

While the ESC has provided some level of guidance on the expectation for applications and how these will be assessed, it is still difficult to anticipate precisely how the ESC will approach variation applications or what the outcome will be.

Even with the guidance provided by the ESC, there appears to be a great deal of flexibility built into the process of determining an application for a higher cap.

ESC determinations

Once an application has been submitted, the ESC has two months in which to determine the application and give notice of its decision.

Given that applications close at the end of this month, all ESC decisions on varied rate caps should be made by the end of May 2016.

Following this process, it is then up to councils to adopt their annual budget and submit annual baseline information to the ESC. The ESC will monitor compliance with the rate capping framework and will publish a compliance report in November 2017.

ESC pricing determinations for other authorities

Guidance about the likely processes that the ESC will adopt for variation applications might be found in the current practice adopted by the ESC with respect to other non-profit agencies, such as water businesses.

The key processes adopted by the ESC in previous pricing determinations are as follows:

  • Step 1 – the ESC consults on, and publishes, guidance on the determination process to be followed
  • Step 2 – the relevant water business delivers a price submission to the ESC
  • Step 3 – the ESC publishes a draft determination in response to the submission
  • Step 4 – the ESC consults on the draft determination
  • Step 5 – a final determination is published by the ESC.

The ESC has in the past reserved the power to itself to publish a determination where a water business has failed to comply with the guidance set by the ESC (or the applicable Water Industry Regulatory Order) or has failed to deliver a price submission within the timeframe set by the ESC.

A key difference between water business price reviews and the review process for council rate cap variations is that all water businesses are required to go through the ESC process in order to have their service charges determined. It remains to be seen what specific processes will be adopted by the ESC to consider variation requests.

The ESC’s final report on the rate capping and variation framework did not recommend that a merits review be available to councils where a variation is rejected by the ESC. Accordingly, it will be very important that councils comply with the relevant processes specified by the ESC.

What is expected for future years

It is likely that many councils will wait until 2017 to apply for a varied rate cap. This is mainly because:

  • applications this year may only be made in respect of the rate cap for the 2016-17 financial year, while next year, councils can seek a higher cap to apply for a period of up to four years
  • councils will have the benefit of seeing the outcome of applications made to the ESC this year and learn from these experiences
  • after assessing the applications this year, the ESC is likely to provide a greater level of guidance to councils around the application process, its expectations for applications and how it is likely to determine applications for variations.