Public Submission to Water Market Rules Issues Paper
By: Water for Rivers
On: 8 May 2008
Specific Issues Addressed in this Paper: Q4.1, Q4.2, Q4.6, Q5.1,
Q5.4, and Q5.6.
Background
The Joint Government Enterprise Limited, trading as Water for Rivers, was established
by the Commonwealth Government and the State Governments of Victoria and New
South Wales to return 212GL pa (21%) of average natural flows to the Snowy River and
70GL pa of environmental flows to the Murray River by 2012. The recovery of this
water was to be achieved primarily by investment in infrastructure projects and
secondarily by the purchase of water entitlement.
Water for Rivers is an active buyer of permanent entitlement in the water market.
Currently Water for Rivers has purchased in excess of 40GL of water entitlement,
predominately from NSW irrigators. We are increasing our purchasing activity in
Victoria.
Preamble
At this time there is the largest amount of investment being made in Australian irrigation
since the construction of the Snowy Scheme. It is a time that presents a unique
opportunity to re-examine the principles on which the costs of water delivery fees and
charges are based and the ways in which water trade can assist in achieving a sustainable
irrigated agricultural sector within the Murray Darling Basin.
Submission to ACCC
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8 May 2008
It is of concern to Water for Rivers that these fundamental principles may not be
addressed within any contemporary process, including the current review by the ACCC,
and the real potential of this investment may not be realised.
Water for Rivers considers that there are three areas of reform required to reach a true,
free -market in the Basin.
1. The first area relates to the way in which water delivery fees and charges are
calculated. Fees and charges should reflect the true cost of water storage and delivery,
including infrastructure and operational costs, environmental and social costs,
transmission losses within the river and irrigation district systems and the cost of a share
in system delivery capacity. This is currently not the case with some environmental and
social costs of water extraction and delivery borne by the general community, and the
transmission losses generally socialised across all water owners and/or users. The
calculation of costs of water delivery should be transparent, and if deemed appropriate,
government or operator incentives or penalties applied deliberately and openly, sending
clear and unambiguous messages to the market place.
2. The second area relates to availability of information on water products. An efficient
water market requires quality and timely information on the various water entitlement
and delivery products, including features such as measures of reliability and seasonality,
operational or trading constraints, delivery capacities and constraints, exchange rates or
conveyance losses, current fees and charges. This information should be accessible and
continually updated as factors and product characteristics change and new products
emerge.
3. The third area relates to removing inappropriate barriers to trade. While recent
amendments to the Murray Darling Basin Agreement demonstrate intent to phase out
restrictions over time, there remain significant impediments to trade in some irrigation
districts and valleys. The recent imposition of what are effectively compulsory exit
charges within one irrigation district in NSW and access fees in others suggests we have
some way to go to realise a free market in water trade.
This paper deals with all three areas in more detail in the following sections.
Submission to ACCC
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8 May 2008
Specific Responses to Questions in the Issues Paper:
Question 4.1: To what extent, and in what circumstances, is it appropriate for an operator to
be able to impose restrictions on the parties to whom water can be sold?
Water for Rivers considers that there is no case for imposing restrictions on the parties to
whom water can be sold.
More specifically:
(a)
What are the specific forms of these restrictions, and their implications?
The usual restriction imposed by operators is the requirement on the buyer to own land within
the operator’s district. This restriction has been lifted in some of the larger irrigation districts
in NSW but remains in many of the smaller districts.
(b)
To what extent are these restrictions imposed to comply with or reflect
jurisdictional requirements? What is the specific jurisdictional requirement and
what is the specific restriction imposed?
The requirement to own land is not a jurisdictional requirement.
(c)
What are the impacts and significance of these types of restrictions in terms of
achieving the water market and trading objectives and principles?
From the perspective of Water for Rivers it increases the cost of recovery of environmental
water significantly and unnecessarily and has effectively prevented out of district trade in
permanent water entitlement from some irrigation districts.
Question 4.2: To what extent, and in what circumstances, is it appropriate for an operator to
be able to impose restrictions on the export of water?
Water for Rivers considers that there are no circumstances in which it is appropriate for an
operator to impose restrictions on the export of water.
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8 May 2008
More specifically:
(a)
What other restrictions of this type are imposed by operators and what are their
implications?
The typical restriction imposed on the export of water ranges from no export permitted in the
case of some of the smaller private irrigation districts in NSW, to exit and termination fees
and a 4% limit on permanent trade from the larger districts in NSW and Victoria. In relation
to termination fees, some irrigation districts have separated water entitlement and delivery
entitlement and require a compulsory extinguishment of delivery entitlements when water
entitlements are traded off a landholding to an entitlement only holding or permanently out of
the district.
(b)
To what extent are these restrictions imposed to comply with or reflect
jurisdictional requirements? What is the specific jurisdictional requirement and
what is the specific restriction imposed?
Exit fees are not required by any jurisdiction.
(c)
What are the impacts and significance of these types of restrictions in terms of
achieving the water market and trading objectives and principles?
Exit fees or compulsory termination fees unnecessarily increase the transaction cost of water
with no benefit for the purchaser or the seller.
In addition, the requirement in some irrigation districts for compulsory extinguishment of
delivery entitlements for a termination fee, limits the future business choices available to
individual irrigation enterprises within that district. For example, it is legitimate for a
landholder to choose to sell their permanent water entitlement, continue to pay the fixed
charges related to their delivery entitlements and trade in water opportunistically on the
temporary market, however, this is an option no longer available in some irrigation districts.
The irrigation operators who impose these types of restrictions only consider the impacts of
the flow of water entitlements out of their district and fail to consider the barrier they create
to the flow of investment into their district by irrigation enterprises requiring the degree of
flexibility climate change and market variability will demand of their businesses in the future.
(d)
What alternate methods could be used to manage concerns related to water
exports?
With wide experience in the purchase of permanent water entitlement in the Southern Murray
Darling Basin, Water for Rivers considers that there is an effective alternate and readily
applicable solution to the predominant issues used to justify the imposition of trade
restrictions.
Submission to ACCC
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8 May 2008
Currently all irrigation water rating is based on the amount of water entitlement held and
used. This has been the most obvious and simplest method of charging but does not
reflect what infrastructure owners actually provide. In fact they provide physical delivery
capacity for irrigators’ water at a particular time. While not immediately obvious, rating
on a basis of water delivery capacity and time of delivery utilises market forces, rather
than significant public capital investment to overcome the real and potential problems of
inability to deliver water when required and stranded assets.
The result of a set of fees and charges based on the ability and efficiency of delivery will
provide individual irrigation enterprises with the choice of setting up or moving their
business to the valley, river reach or irrigation district that is most capable of delivering
the type of product, in the volumes and at the time when it is required at the most
competitive cost.
Clearly in some cases this will require infrastructure reconfiguration and upgrade, and in
some cases decommissioning, and this is where government based infrastructure
investment can be of greatest value.
Benefits of the Existing System of Water Charges (based on water entitlement and
use):
 Simple;
 Understood.
Shortfalls of the Existing System of Water Charges (based on water entitlement and
use):
 Inequity;
 Doesn’t reflect the true costs of delivery;
 Reinforces the current systems and structures of irrigation delivery;
 Masks true incentives for industry efficiency and reform;
 Leads to less effective investment in delivery infrastructure;
Benefits of a Delivery Capacity rating system
 Sustains the viability of investment in the irrigation asset base;
 Reflects the true costs of water delivery;
 Provides a derivative market for water;
 Adds a real time dimension;
 Encourages diversification of crops and water use;
 Provides a transparent basis for investment decisions at a valley, irrigation district
and farm level;
 Any government decision to subsidise or socialize aspects of delivery costs will
be transparent.
Shortfalls of a Delivery Capacity rating system;
 Quantum change;
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8 May 2008
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More complex to determine true costs of delivery throughout the Basin;
There will be adverse short to medium term community and social impacts as
well as positive longer term outcomes.
Will require structural adjustment support for communities and industry.
Historically such a fundamental overhaul has been considered unwarranted due to the
cost and complexity of moving to the new system, the issues cut across jurisdictions and
the transition process would be difficult to administer.
However, there is now the opportunity to make such a quantum change. It is clear that the
Murray Darling Basin is under considerable environmental strain, competition for water
within and outside of the Basin will continue to increase and the need to produce food
and fibre with less water and energy has never been more important.
There is recognition across all Basin jurisdictions that there is a need to continue to
reform both the physical management of water and the administrative and market systems
that support this, there is available investment and technology, and there is a global
requirement to position Australia’s irrigated agricultural industry on a clean, green and
efficient footing.
Moving to a system where the true costs of delivering water through out the Basin are
identified and understood, well communicated and applied to all sectors of industry and
the community will provide a robust basis for investment to move to the areas where
returns will be maximized, without unexpected environmental and social consequences.
Question 4.6: To what extent, and in what circumstances, should an operator be able to
specify cut-off dates for completing trades or defined trading seasons?
The cut off dates for all trades should be consistent across the Basin, unless there is a strong
operational reason to vary them. Individual operators should not be able to specify earlier cut
off dates than those existing within their valley. There are inconsistencies that exist between
Valleys (eg. the Murrumbidgee and Murray Valleys) and within Valleys (eg. the
Murrumbidgee Valley) which should be assessed as potential barriers to trade.
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8 May 2008
Question 5.1.1: To what extent are operators’ terms and conditions for transformation
and/or trade presently:
a) Clearly Specified?
b) Comprehensive?
c) Readily available?
This varies considerably, with the larger operators in NSW and Victoria generally
providing detailed information on their websites relating to temporary and permanent
trading rules, fees and charges and administrative processes. Most of the smaller
operators do not provide any information, with many not allowing permanent trade of
entitlement at all.
Question 5.1.2: Should operators’ terms and conditions for transformation and/or trade
be comprehensive and clearly specified as part of the supply agreement?
Yes – or at least readily available at the time an investor is considering purchasing either
a water entitlement or a delivery or access entitlement or right.
a) What are the implications of not having comprehensive, clearly specified terms and
conditions?
An investor needs to be able to assess the flexibility they have to trade when deciding to
buy into a valley or irrigation district, the costs of trade and any constraints that may
apply to trade in and out of the system. These factors should inform and influence the
price that the investor is prepared to pay for water or access entitlements.
b) What specific terms and conditions should be clearly specified?
Any restrictions that relate to permanent or temporary trade or water entitlements or
delivery and access rights, any fees and charges, any cut off times for trade, an
explanation of the transformation or trade process with expected turn around times,
c) Should these terms and conditions be open to unilateral variation by the operator? If,
so, how often and according to what process?
Many operators are privately owned companies and cooperatives and should therefore, be
able to make unilateral decisions that affect their business. However, there should be a
simple and accessible process of review set up by the ACCC, where any party can bring
forward an operator rule deemed to be non-competitive or against open and free trade for
determination and appropriate and swift action.
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d) Should operators be required to identify where terms and conditions have been
adopted to comply with government legislation and policies?
Yes, this would assist with informing the market and assist with any assessment of the
rule by the ACCC.
Question 5.4.1: Are the transformation and/or trading approval processes of operators
undertaken in a reasonable timeframe?
This varies greatly from operator to operator, and can take from several weeks to three or
four months. In some districts, a permanent trade of water entitlement requires Board
approval and therefore will depend on the timing of the Board meeting cycle. In others,
the creation of a new entitlement only contract or holding can take considerable time.
Generally once the purchaser holds a contract or entitlement only holding on the
operators licence, the administrative process related to subsequent trades is significantly
quicker to complete.
The trade of water entitlement off an operators licence can take considerable time – in
one instance in NSW, up to six months, due to the need to obtain the approval of the
majority of shareholders in the joint supply authority.
Question 5.6: In relation to water market information (ie volumes and or/prices of
irrigation rights and/or water access entitlements traded within, into and out of their
area of operations):
a) Is adequate market currently available from operators?
This varies significantly from operator to operator and state to state. Some operators such
as Murray Irrigation Ltd provide quality information on volumes and prices of temporary
and permanent trade within their district. The NSW government also provides a register
of permanent trades, although there is a time lag between when trades are completed and
listings on the register are posted.
There is generally not sufficient information on either volumes or prices of permanent
trade. Nor is there sufficient information on the characteristics of each available water
product and access or delivery entitlements. This information should be made available
for both river based water products and those available in irrigation districts. It would be
ideal to have this accessible to prospective purchases and sellers in one central location,
however, as the information will need to be sourced from a combination of state agencies
and private operators it is difficult to see how this can be achieved. As a minimum this
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8 May 2008
information should be available on the websites of key state agencies and the larger
private operators
b) What information do operators collect or could they collect?
c) Should operators be required to provide market information and what should this
include? Is this information available from other sources? Should this information be
publicly available or provided on some other basis?
Ideally, the characteristics of each water product should be listed, in terms of security (for
example average long term at January and June, percentage of years 100% allocation is
reached, percentage of 80% allocation) and conversion factors. This information should
be made available by the state agencies.
State agencies and private operators should also make available volumes of each product
traded and prices paid.
d) Is there any market information that operators should not be required to provide?
The names of sellers and buyers should not need to be released, only the licence or
contract numbers.
For further information on this submission, please contact:
Neville Smith, CEO, Water for Rivers, 02 6041 5467, 0418 633288
Kaye Dalton, Project Director, Water for Rivers, 02 6964 7990, 0407 222599
Submission to ACCC
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8 May 2008