Water Market Rules Position Paper
ACN: 067 197 853
PUBLIC SUBMISSION TO
WATER MARKET RULES POSITION PAPER
BY
WESTERN MURRAY IRRIGATION LIMITED (WMI)
PO Box 346,Dareton NSW 2717
AUGUST 2008
Contact: Cheryl Rix – General Manager
Western Murray Irrigation Limited
Water Market Rules Position Paper
Table of Contents
A. Executive Summary 1
· General Issues 1
1. Application of the Rules 1
2. Assessment of Submissions 2
3. Rules have been developed in isolation 2
4. Legal Implications and Challenges 2
5. Costs of Implementation 3
· Specific Issues 3
1. Transformation 3
2. Security Provisions 3
· Ideas for Consideration 4
B. Specific Comments on the Position Paper 6
· Enabling Transformation and/or trade of Water Rights (page xi to xiv) 6
· Obligation to Deliver under Transformation 7
· Terms and Conditions (Box 1 - page xiii) 9
· Application Process (Box 1 - page xiii) 9
· Time limits (Box 1 - page xiv) 9
· Administrative fees and charges (Box 1 – page xiv) 9
· Water Delivery Rights (Box 2 –page xv) 9
· Restrictions on transformation and or/trade (Box 3 – page xvii) 10
· Security ( Box 4 – page xix) 10
· Application and Implementation of Water Market Rules (Box 5 – page xx) 11
Western Murray Irrigation Limited
Water Market Rules Position Paper
Western Murray Irrigation Limited 10
Water Market Rules Position Paper
A. Executive Summary
Western Murray Irrigation Limited (WMI) prepared a detailed submission to the ACCC on the water market rules issues paper. Subsequent to the assessment of numerous submissions, the ACCC released the market rules position paper, which is the specific focus of this submission. Representatives of the ACCC have met with WMI at its office in August to hear verbally the concerns from the Board of Directors of WMI as to the practical implications of the suggested rules. WMI is located, just over the border, in NSW near Mildura. When the ACCC were asked if they meeting with the Victorian operators on the same day, the answer was ‘no the water market rules for the Murray-Darling Basin as outlined in the Federal Water Act do not apply to Victoria or Queensland.’ This represents a critical flaw in the process and will result in inconsistency, water market distortion and inequity. Rules are being imposed on one group, private operators which is clearly biased. One state model, the Victorian example, is being clearly identified as the preferred model with little regard for the history, existing obligations, effectiveness, cost efficiency and recovery of the NSW and SA models. It can be argued the private operators are not the source of all the water market problems. The NSW Irrigators Council Submission to the Position Paper refers to Victorian legislation and rules that currently distorts the water market.
WMI is a private irrigation corporation operating a fully pipelined and pressurised infrastructure system owned by the shareholder irrigators. There is a risk under the market rules of stranding “contemporary water efficient infrastructure.” Water trading into inefficient loss making areas will not be a sound outcome for the Murray Darling Basin. Diminishing the security and prospects of a financially viable operator managed at a local level is a poor strategy.
In terms of consultation, at this stage WMI is unaware of any Commissioners of the ACCC touring the regions to understand the business operations of infrastructure operators and how the water market works. Initial comments by the Chairman of the ACCC in the financial media before submissions were reviewed stated “that clearly the current process is I think on any analysis not satisfactory and big problems with water trading need to be resolved.” This type of comment has not been supported by factual evidence identifying who is the problem and what is the extent of the problem in either of the ACCC papers on the market rules. There is a distinct lack of qualitative and quantitative evidence in the ACCC papers.
There is a perception by NSW infrastructure operators that the market rules outcome is already determined and the Federal Government policy preference for transformed bulk water entitlements will override the need for a commonsense approach to water management and delivery.
General Issues
1. Application of the Rules
The Federal Water Act section relating to market rules is flawed due to the fact it only relates to the infrastructure operators who hold a group water access entitlement on behalf of their member irrigators.
As a result it does not apply to any operator within Victoria and Queensland. NSW and SA infrastructure operators and the model of local and private ownership has been specifically targetted. The ACCC has no jurisdiction over Government and WMI questions the effectiveness of the rules if all infrastructure operators and Government approving authorities cannot be treated equally.
The legislation and rules are so limited and restrictive that a good market outcome for the Murray-Darling Basin cannot be achieved. The rules are at present designed to achieve a political agenda – a water market where a greater amount of water can be released onto the market for the Government environmental buyback without regard to practical implementation, risks to the infrastructure operator or cost. WMI believes the ACCC should identify targets for how much water is expected to be transformed or traded and use this in their assessment process of what the market rules are to achieve.
The rules also ignore that water is already being permanently traded from many operators’ bulk entitlements within NSW and SA without the need for transformation. There is no recognition that not all operators prevent or delay trades.
2. Assessment of Submissions
WMI has challenged the ACCC on the assessment of the submissions. WMI understands a number of “confidential” submissions were received from irrigators, to which infrastructure operators do not have the ability to respond or defend a position as necessary. The weighting of the comments in the position paper are a concern where there are commercial advantages to be gained from the rules or a non-operator with no water delivery, water market or water management experience has received too much emphasis. At times comments from the submissions have been taken out of context. The submission analysis has also confused annual trading with permanent trading particularly in relation to approval timeframes. Annual trading is not relevant to the water market rules. WMI is also concerned at the lack of facts and figures which should have been used to support ACCC statements in the issues and position paper.
3. Rules have been developed in isolation
The rules are being developed in isolation from water charging and water trading rules, where the issues and consequences cannot be separated. The ACCC have noted they have brought forward a paper on termination fees, as they understand the issues are linked. It is difficult for infrastructure operators to comment in an informed way without understanding “the rules” as a whole.
The rules also ignore the practicalities of water delivery. A key example is water needs to be allocated or transferred onto WMI’s licence that is attached to a shared pumping system before it can be used. Transformation requires extra annual water transfers and associated administration costs.
The ACCC developed a detailed report and set of recommendations in November 2006, many of which were included in Schedule E of the Murray-Darling Basin Agreement. The water market rules do not reference the separation of delivery entitlement and water entitlement as facilitating trade. Instead they have created new terminology such as an irrigation right.
WMI believes it is inappropriate to make any changes to its business until all water market, water charging and water trading rules are finalised.
4. Legal Implications and Challenges
WMI has repeatedly asked the ACCC to comment on the implication of the rules on the corporate governance responsibilities of Directors of Private Irrigation Corporations, as outlined under the Corporations Act. No response has been forthcoming. Challenges will be forthcoming on the legal validity of the rules and the motives underlying transformations. These will include centralisation of regulation at the expense of individual operators.
The rules will undermine the continuing capacity of WMI to deliver water, the core purpose of the Company.
5. Costs of Implementation
The cost of implementation of what is currently being suggested is significant at both the operator and State Government level. The ACCC has noted the requirements will prove onerous for small operators. The requirements will prove onerous for all operators and the cost will be ongoing. The logic and benefits of the rules have not been clearly outlined by the ACCC and WMI is not prepared to spend one more cent of irrigators’ money without seeking full monetary compensation for changes that will provide no benefit to either the WMI Company or the individual irrigator members.
Specific Issues
1. Transformation
The ACCC notes there is a strong case for facilitating the transformation process and for giving irrigators the choice to transform. The ACCC notes transformation is not mandatory. Setting up potentially thousands of new water access licences on the NSW State Register that are not attached to water supply works clearly contradicts the NSW Government policy position. The NSW Government does not have the resources to deal with this and it is not clear if the State Authorities would have an obligation to manage these licences.
Valid irrigators would not see transformation as having greater value. There would be confusion around water balances, meter reading, and management of water orders. The irrigator would no longer be a Shareholder of the WMI Company and accordingly would have no voting rights or the ability to receive Shareholder information or the benefit of internal water savings.
WMI has had preliminary advice that the Company could treat transformations as a termination of existing arrangements and there would not be an ongoing obligation to deliver water after a transformation.
If WMI is forced to do all things necessary to allow transformations by the ACCC this means WMI would be required to act without regard to risk, cost or consequence. There will not be a Chief Executive Officer or Board Director who will stay in their role if dealings cannot be reviewed on a case-by-case basis and decisions cannot be made in the best interests of the Company. The ACCC have ignored the fact that WMI irrigators have voluntarily elected to deal with WMI based on known terms that have never envisaged transformations. WMI’s terms enshrine a collective responsibility for infrastructure, costs and expenses within a specified area of operations. The rationale behind the existence of WMI and other entities like it is the risks can be controlled and spread while achieving economies of scale benefits. The view dictated by the ACCC is the interests of each irrigator should be taken in isolation and are paramount, which will significantly disadvantage the WMI Company. The ACCC is asserting that irrigators should be no worse off, without assessing the implications on operators or allowing operators to respond by way of altering terms post transformation.
2. Security Provisions
Rigid security allowances or criteria such as the proposed 20% threshold (irrigator retains less than 20% of the original water entitlement) will result in inflexible and potentially unworkable situations. Fixed criteria also assume that all transfers are comparable and that all transfers require a similar response. The ACCC has not developed data that would support security being limited to 50% of the value of the termination fee. WMI challenged the concept of operators having to bear any lending risks in its original submission and noted infrastructure operators are not banks and do not have the skills or the resources to assess financial risk. It is WMI’s experience Banks take a notice of charge over the entire water entitlement and it will be difficult for an operator to take an effective charge over the same asset. Land is worth nothing without water and the reality is irrigators will not want cash tied up in a bond with an infrastructure operator.
The ACCC have stated security cannot be requested unless there are reasonable grounds to believe there is a risk of debt recovery based on past payment history. Past payment history does not take into account the seasonal impacts of farming and the fact economic circumstances change very quickly. Drought and low water allocations, combined with poor horticultural produce prices, means every WMI shareholder is currently a debt recovery risk.
The time to lodge a charge and complete legal documentation will slow the transformation or trade timeframe and increase the cost to the water entitlement holder.
The ACCC states “that an operator must not require security for the future payment of access fees on delivery entitlements as a condition of the transformation of an irrigator’s irrigation right.” This statement denies the infrastructure operator the ability to manage risk. Once the water is gone, the threat of disconnection is a very hollow one and without the ability to deny a temporary trade of water the operator is left with no ability to recover mounting access charges on delivery entitlements or the termination fee liability. The ACCC by encouraging transformations and setting poor security criteria is providing the perfect escape route for the irrigator who wishes to avoid obligations.
Ideas for Consideration
WMI believes the following should be considered urgently by the ACCC:
· Transformation should be removed from the legislation, or at least limited to operators who are not allowing permanent trades to occur. The rules should focus on permanent water trading and the associated processes without the need for an extra and unnecessary step which adds costs and risks to an operator. Water should be able to be traded directly from a group water access entitlement in compliance with the 4% annual trading cap regardless of the size and type of operator. The smaller operators are the issue at the moment and the ACCC needs to clearly put this into perspective in terms of the number of operators who do not allow trade and the actual water involved. In NSW all of the major operators, including WMI, who manage the bulk of the megalitres under group water entitlements already have processes in place to permit external water trade.