Public Submission to Charge Rules Issues
Paper for Irrigation Infrastructure Operators
By
Victorian Farmers Federation
Discussion Paper
July 2008
Foreword
The Victorian Farmers Federation is Australia’s largest state farmer organisation, and the
only recognised, consistent voice on issues affecting rural Victoria.
The VFF represents 19,000 farmer members, representing 15,000 farm enterprises. The VFF
consists of an elected Board of Directors, a member representative Policy Council to set
policy and eight commodity groups representing dairy, grains, livestock, horticulture, chicken
meat, pigs, flowers and egg industries.
Farmers are elected by their peers to direct each of the commodity groups and are
supported by Melbourne-based staff.
Each VFF member is represented locally by one of the 230 VFF branches across the state
and through their commodity representatives at local, district, state and national levels. The
VFF also represents farmers’ views on hundreds of industry and government forums.
Simon Ramsay
President
Submission to the Australian Competition and Consumer Commission- Charge Rules Issues Paper for Irrigation Infrastructure
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I. Introduction
The VFF welcomes the opportunity to comment on the Australian Competition and Consumer
Commission (ACCC) issues paper on charge rules for Irrigation Infrastructure Operators
(IIO).
The VFF notes that the ACCC water charges rules issues paper relates to fees and charges in
relation to access to an IIO’s network or the termination of access to an operators’ network.
Issues relating to bulk water charges and charges levied to recover the costs of water
planning and management will be managed through separate consultation processes.
The VFF supports ACCC having an enhanced role in water charges and market rules, to
ensure efficient and transparent water markets and charges in the Murray Darling Basin.
However, the VFF believes that the process of setting water charges at the Victorian State
level through the Essential Services Committee (ESC) should remain, possibly through an
accreditation of ESC by the ACCC.
The VFF maintain that appropriate and consistent water charge regimes, both access and
termination fees, across state boundaries are vital for fair trade in water and to ensure
irrigators do not suffer from rising prices when water is traded out of an area. This approach
is consistent with an equity approach through competitive neutrality; provides a level playing
field; and provides incentives to accelerate progress and achieve shared reform objectives of
the Murray Darling Basin Governments.
Water price is of most importance for rural customers. For many irrigation farmers, water is
a large component of total farm costs. Farmers are unable to pass on to their customers
higher water costs. An increase in water prices can directly affect the viability of farm
businesses.
For this reason, farmers, particularly irrigation farmers, take an active interest in water
issues. The security of their rural water supply can determine the future of their farming
business.
The VFF has a number of specific observations on the issues paper. They relate to areas the
VFF believe need further exploration and attention.
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III. Basin Water Charging Objectives and Principles:
The paper lists five water charging objectives to be achieved through water charges rules,
these include:
(a) to promote the economically efficient and sustainable use of:
(i) water resources; and
(ii) water infrastructure assets; and
(iii) government resources devoted to the management of water resources;
and
(b) to ensure sufficient revenue streams to allow efficient delivery of the required
services; and
(c) to facilitate the efficient functioning of water markets (including interjurisdictional
water markets, and in both rural and urban settings); and
(d) to give effect to the principles of user-pays and achieve pricing transparency in
respect of water storage and delivery in irrigation systems and cost recovery for
water planning and management; and
(e) to avoid perverse or unintended pricing outcomes.
The VFF believes these objectives do not adequately address the concerns of rural water
users. The socio-economic impact of water in production should be recognized and
addressed through water charges rules to achieve the water charging objectives. While the
listed objectives mention the need to to facilitate the efficient functioning of water markets
(including interjurisdictional water markets, and in both rural and urban settings), it does not
seem to adequately reflect the importance of social and economic impacts on the transfer of
water.
The ACCC issues paper notes that “an efficient, well functioning water market can reveal the
value of water to existing and potential users, leading to more productive and efficient use of
water resources over time... (page 14). The VFF believe a water market that is not based on
level playing field will lead to structural adjustments such as contraction in the demand for
complementary agricultural services and output from districts. This may result in significant
and rapid changes to the demographics population and sustainability of communities.
The VFF also notes with concern that the ACCC paper refers to “interjurisdictional water
markets, and in both rural and urban settings”...(Page 12). The VFF believes that the impact
on ‘third parties’ in terms of regional effects must be accorded sufficient consideration when
determining water market rules, specifically for urban-rural trading. The VFF has highlighted
that as water is removed from rural communities, jobs and wealth creation will also
disappear and will result in further urban migration.
The VFF welcomes an extensive and wide-spread consultation being undertaken for the
appropriate regulatory measures to implement. This is important in alleviate the level of risk
associated with any regulatory exercise. In this regard, the VFF believes there are a number
of simple things the ACCC and water authorities could do to make the process work better.
Spring and early summer is a very busy time for farmers. It would be much more
appropriate to conduct the consultative process on water plans when farmers are less busy.
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The VFF believes the consultative process should occur between the end of June to end
August. The period mid February to end of March could also be considered although autumn
is a very busy period for horticulturalists.
We also believe the format and presentation of water plans should follow a standard and
consistent format. Water plans should succinctly enable customers to assess the outcomes
that will be delivered, the costs involved and the prices to be charged. Greater attention
should be paid to ensuring the documents are written in plain English with minimal use of
technical terms.
IV. Methodological Issues:
In general the VFF supports the water charging objectives and principles adapted from the
National Water Initiative (NWI) pricing principles in the regulation of natural monopoly
infrastructure, particularly the principles of economic efficiency, the avoidance of
monopoly rents and the sustainability of revenue and natural resources.
However, the VFF supports a cost recovery approach only for costs associated with water
delivery. Water price is of most importance for rural customers. For many irrigation farmers,
water is a large component of total farm costs. Farmers are unable to pass on to their
customers higher water costs. An increase in water prices can directly affect the viability of
farm businesses. The VFF believe that if externalities are to be considered in a water
charging regime, both positive and negative externalities must be accounted for including
discounts for positive elements and costs for negative impacts. As an example, a positive
impact to be considered is the ability of water used in agricultural production to provide high
quality food at affordable prices to the whole community. Failure to consider such an impact
will effectively cut agricultural production and place upward pressures on food prices.
Reclaimed Water Pricing
As a further and specific response to Question 1, the VFF believes that Prices paid for
Reclaimed Water should attract special attention in establishing a methodology for
determining water prices.
In years to come there will be greater use of recycled water in agriculture. Currently there
are a number of inconsistencies in the pricing of recycled water. The VFF believes the ACCC
should establish and publish firm guidelines for pricing recycled water. Recycled water must
be priced consistently and competitively with other supplies. It is unreasonable to expect
farmers using recycled water to pay a higher price than their competitors using traditional
supplies. The principle of ‘polluter pays’ should be applied to pricing of recycled water. This
would mean urban customers should bear the cost of treating and recycling waste water and
providing it to users at prices competitive to alternate supplies. In Victoria, the Government
has a target of recycling 20% of Melbourne’s waste water by 2010. Competitive pricing of
recycled water will be essential if this target is to be achieved.
In the ovens system there is proposed works to upgrade the spillway on Lake William Hovell.
This dam has served the community well and has averaged approximately 60000ML of
spillage per annum, for the benefit of the Basin. Currently G-MW charges Zone 6 and 7
$7.11 /ML headwork’s charge. Ovens Irrigators are being asked to approve a headwork’s
charge that will be approx $30 in 2009 and $60 in 2010. The VFF would suggest that the
60000 ML /annum that the Murray Irrigators and the Environment received, that caused the
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spillway to wear out and require the $7M to repair, may well be moved on the ledger to the
Murray irrigators.
The VFF has conducted a study on the Issues for Farmers Considering the Use of Reclaimed
Water for Agriculture in 2008. The following are observations extracted from the VFF study1:
1. ESC utilizes the following guidelines for the pricing of reclaimed water:
(a) Prices must be set so as to maximise revenue earned (by water suppliers) from recycled
water services having regard to the price of any alternative substitutes and customers
willingness to pay
(b) Prices must include a usage component in order to provide appropriate signals to
recycled water customers to manage resources
(c) Any revenue shortfall arising from schemes required to meet mandated targets will be
recovered through bulk water charges to the metropolitan retail water businesses2
2. The NSW Government pricing regulator has established more comprehensive guidelines
for the pricing of recycled water, at least for retail customers. In essence these guidelines
suggest that users of recycled water should meet the cost of distribution and the treatment
costs involved additional to that necessary to meet discharge license standards The
exception to this is that other water and sewerage users should meet a component of the
cost of recycling equivalent to the avoided or deferred costs generated by the scheme.
Recycled water schemes may enable a water and sewerage provider to avoid and/or defer
costs. For example, this occurs where capital infrastructure upgrades to service growth or
regulatory requirements are avoided or deferred by building a recycled water scheme.3
3. It is worth stressing that in Victoria the principal objective of monopoly suppliers of
reclaimed water is to maximize their revenue. The regulatory pricing guidelines in NSW are
a slight improvement on the Victorian situation but even here water customers have no way
of knowing the extent to which reclaimed water schemes enable water or sewerage
providers to delay or defer costs.
4. In summary the existing pricing guidelines for reclaimed/recycled water adopted by both
the Victorian and NSW regulators provide little comfort to reclaimed water customers that
the prices charged by monopoly suppliers are fair and reasonable.
5. In practice, prices for recycled water used in agriculture are established through
commercial negotiations between customers and suppliers. The suppliers of reclaimed water
will seek to charge what the market will bear. Customers “willingness to pay” for recycled
water will depend on a range of issues including:
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1
The price and security of alternative water source
Competition for recycled water
Costs of switching to recycled water
Issues for Farmers Considering the Use of Reclaimed Water for Agriculture, VFF Report, 2008.
2Essential
Services Commission, Melbourne Water Determination, 1 July 2005 – 30 June 2008 page 18
http://www.esc.vic.gov.au/NR/rdonlyres/0EC9DC49-A9F6-47DC-B010CF2D31754CCA/0/Determination_MW_20050615.pdf
3 NSW Independent Pricing and Regulatory Tribunal. Review of Prices for Sydney Water Corporation’s water,
sewerage, stormwater and recycled water. Water issues paper August 2007
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
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Profitability of enterprise
Quality, security and reliability of supply of reclaimed water.
Equity with existing customers and nearby recycling schemes.
Perception of risks associated with use of recycled water
Costs involved in complying with regulations associated with use of recycled water.
In negotiating prices for recycled water, customers or potential customers frequently face a
substantial imbalance in negotiating power. This is particularly so if, as has often occurred in
Victoria, negotiations for the supply of recycled water occur when access to alternative
supplies is threatened by seasonal conditions or other factors. Farmers should not assume
water authorities offering reclaimed water are “from the Government and are therefore there
to help them”. In price negotiations water authorities’ principal objective will be to
maximize revenue from reclaimed water sales (just as it is the farmers’ objective to minimize
their costs).
6. In general the ACCC has been accommodating in assisting small business collectively
bargain with larger business, be they private or government businesses. In the
overwhelming majority of cases the ACCC has allowed collective bargaining arrangements to
proceed finding them in the public interest.
V. Service Standards and Obligations:
The VFF believes that the most important task of rural water authorities is cost efficient
delivery of water to customers. Accordingly the most important performance standard
authorities should be expected to achieve relate to the cost of water services. A reasonable
performance standard for Authorities should be that they achieve real reduction in operating
costs. If a reduction in real operating costs does not result in a real reduction in prices an
explanation for the discrepancy must be provided.
VI. Expenditure Profile:
The VFF notes that different water authorities have different approaches to fund the renewal
of irrigation infrastructure4. Southern Rural Water and Lower Murray Water have proposed
an annuity approach to fund the renewal of irrigation infrastructure. Goulburn-Murray Water
and GWM Water have proposed a regulatory asset based (RAB) approach.
The VFF does not favour one approach over the other and believes the ACCC should allow
water authorities the flexibility to adopt the approach they and their customers committees
believe best works for them. For this to occur there should be prior discussion with
customer groups as to the relative merits of each method.
The renewals annuity approach has the advantage of being well understood by customers.
The adoption of renewals accounting following the McDonald Review assisted irrigators
understand and accept the importance of making provision for the cost of asset replacement.
On the other hand there are dangers in allowing authorities to accumulate asset replacement
reserves. Furthermore the accuracy of estimates of future renewal expenditure more than
20 years into the future must be questionable.
4
VFF Submission to the Essential Services Commission-Rural Water Price Review, 2006
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However, where an authority moves from renewals annuity to RAB a number of issues need
to be addressed. There should be an obligation on authorities to explain and discuss with
customers the rational and practical effect of the change. Authorities must also address the
transitional issues such as management of existing renewals surpluses.
Southern Rural Water has proposed a different approach to pricing from other authorities
‘indicator prices’. They have also proposed an annual price-review process, which would be
subject to scrutiny by customer committees. The VFF had no objection in principle to the
approach outlined by Southern Rural Water. The annual volume of water available for
delivery cannot be predicted. This is the most important determinant of total revenue and
the more flexible approach to pricing outlined by Southern is understandable.
Furthermore, the VFF is strongly of the view that customer committees should have a
significant influence on pricing decisions. If water prices are set by water plans for several
years in advance the relevance of customer committees is to some extent undermined.
Charging for non-core businesses5
Goulburn-Murray Water and Southern Rural Water have introduced a special charge on
bulk urban supplies to meet the costs of providing public facilities at storages. The
charges called the Regional Urban Storage Ancillary fee by Goulburn Murray and the
Recreational Facilities Charge by Southern. The charge is intended to replace the 4%
rate of return on urban authorities discontinued by the Government.
The VFF notes the proposed charges for public facilities at storages generate significantly
fewer funds than the old 4% rate of return. Furthermore the water plans provide
insufficient information to enable an assessment of the revenue generated from these
charges compared to the actual costs of providing and maintaining public recreational
facilities at storages.
It is worth noting that Goulburn Murray Water has established a Water Storage Amenity
business unit. The Plan discloses the management and administration costs associated
with this unit but there is no information on the revenue generated from these activities
or other costs associated with the provision of public recreational amenities associated
with GMW assets.
The ACCC should closely examine expenditure and revenue related to the provision of
public recreational facilities by water authorities. The VFF’s preference is for these costs
to be met either by user charges or a direct government payment. If neither of these is
possible a charge levied on urban water authorities is a next best alternative.
Governments’ Contributions
The ACCC in its Issues Paper (Page 15) noted that if grants, subsidies or other
contributions are made by government with the intention of benefitting customers, then
charges should not include these contributions as the associated expenditure is not
required to be financed by the operator. The VFF is supportive of this approach,
5
VFF Submission to the Essential Services Commission-Rural Water Price Review, 2006
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Operators
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especially with the current plans to modernize irrigation infrastructure that involve
considerable investments and contributions by the Governments.
However this is only part of the issue. As a result of governments policy initiatives water
authorities are making substantial investments in water saving technology. These
investments are in large part a reflection of a political commitment to invest in ‘the
environment’. These investments are rarely subject to conventional cost benefit analysis.
Water authorities are not environmental benefactors; rather they are water supply
businesses. From a customers’ perspective it is important that there is transparency and
accountability in relation to water savings investments.
The water pricing plans should be explicit in relation to their expectation of government
capital contributions with a sufficient level of transparency and accountability.
Specifically the plans should specify:
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The total amount and timing of anticipated government capital contributions.
The total cost of projects and thus the share of costs borne by government and
customers.
The sharing of benefits of the project, for example the water savings expected
and how these will be split between the Government (as environmental flows)
and the authority.
Environmental Headwork’s Charges
Environmental water must pay its share of systems, headworks and distribution charges.
The VFF strongly opposes farmers having to store environmental water as water savings are
returned to the environment as part of a modernisation program. Improved environmental
water flows benefit the whole community; it is inequitable to expect farmers to meet these
costs.
Government must also fund the storage and delivery costs of any “new” water gained from
infrastructure works that is then used to increase environmental flows. The VFF strongly
supports that the environmental share of water savings must pay its headwork’s charges. As
environmental water flows benefit the whole community, it is inequitable that storage costs
for environmental water be borne by irrigators. The VFF also strongly support an approach
where Governments pay the standard charges for water entitlements that they hold.
Externalities
The ACCC paper recognizes the issues associated with externalities as one of the “cost
blocks” to estimate the expenditure profile and revenue requirement.. (page 20); however
the VFF believe that if externalities are to be considered in a water pricing regime, both
positive and negative externalities must be accounted for including discounts for positive
elements and costs for negative impacts. As an example, a positive impact to be considered
is the ability of water used in agricultural production to provide high quality food at
affordable prices to the whole community. Failure to consider such an impact will effectively
cut agricultural production and drive up the price of food for consumers.
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VII. Structure of Charges:
Termination Fees
The VFF maintain that appropriate and consistent termination fees across state boundaries
are vital for fair trade in water and to ensure irrigators do not suffer from rising prices when
water is traded out of an area.
The VFF strongly recommends that collected termination fees within a district should be
quarantined within that district, accounted for separately and should be used to cover any
increase in charges to irrigators remaining on the system.
The VFF supported the agreement between Victoria and New South Wales to accept the
Australian Competition and Consumer Commission (ACCC) recommendation that exit and
termination fees which apply when water permanently leaves a district should be separate
from the sale of water. The factor used for the calculation of termination fees was set at a
maximum multiplier of 15 times the access fee. This ensures sufficient funds to maintain
water supply infrastructure over a suitable period and for structural readjustment so that
remaining users are not required to absorb these costs. A review of termination fees will be
completed by 1 January 2009. The review will include an assessment of the multiplier used
in calculating termination fees.
The ACCC had recommended that the fees should be no greater than 12 times the
infrastructure access fee, reducing to 8 times the access fee after eight years. The VFF is
concerned that fees at this level would not ensure a level trading field across state
boundaries.
Exit fees are defined in the Schedule E protocol as a fee levied by an infrastructure operator
on the transfer of a water entitlement out of the infrastructure operator’s network or
irrigation district (excluding any fee associated with the costs of processing that transfer).
Exit fees remain as barrier to trade, and are still in use by some corporations and trusts, that
will prevent water moving to its higher value use. It is against the principle of level playing
field to impose such restrictions to protect one area from structural adjustment, since this
will increase structural adjustment pressures for other areas. The water market rules should
prohibit exit fees and exclude them from being part of terms and conditions for
transformation and/or trade.
The VFF supports the Murray Darling Basin Agreement (MDBA) Schedule E protocol on
access, exit and termination fees that provides for some circumstances when an operator
can seek security over the future payment of access fees. Specifically:
Before approving the transfer of any water entitlement, an infrastructure operator should not
require security for the payment of future continuing access fees unless:
(a) the current market value of any water entitlements retained by the transferor to water
within the relevant irrigation district is less than 50 per cent of any termination fee which
would be payable upon the surrender of all of the delivery entitlements retained; and
(b) the infrastructure operator considers, on reasonable grounds, that there is a significant
risk that the transferor may be unable to pay future access fees in relation to those delivery
entitlements, when they fall due.
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