ACCC Water Market Rules
Public Submission to Water Market Rules Position Paper by Mark Cameron on 18/7/08
It is important that any improvement in market efficiency does not come at the expense of delivery efficiency. So when the market has done its job, and all water has been allocated to its most profitable use, delivery efficiency should be able to be maximised.
Market Efficiency
Historically a large proportion of water access rights have been ‘in-house’ water access rights. These water access rights are the result of a contract against an irrigation infrastructure operators own statutory water access entitlement. Members effectively have second tier rights. While rights can be contracted to Members in full, the Operator has a superior title. As a consequence ‘in-house’ water access rights when wishing to be traded by Members can experience a great deal of Operator interference.
Market efficiency would be improved if irrigators directly held a statutory water access licence (WAL).
Delivery Efficiency
Collective Water Ordering
Operators must do the water ordering. Operators understand and need to manage the capacities and lag times within their delivery system. Even a fully automated Operator delivery system would use a collective Operator water order.
A transformation may increase delivery costs if water had to be temporarily traded to an ‘in-house’ water access account to enable delivery. Maybe technology will mean Operators could direct debit from ‘out of house’ water accounts and be just as efficient as debiting from the ‘in-house’ water accounts. Like banks no doubt there will be a fee. Individuals would have to weigh up the market benefits against the extra delivery costs, if any.
Security
Poor security influences delivery efficiency as bad debtors add to Operator’s costs. Having a superior title to the water right greatly reduces any costs in recovering bad debts. So holding enough water access rights in-house as security would seem to improve water delivery efficiency.
An Operator may wish to seek additional security when the value of ‘in-house’ water right is less than 100% of any termination fee. Any registered charge should be limited to the value of the exposed termination fee.
When security is lacking banks have demonstrated that the risk of bad debts are factored into the price of products.
With no market competition there needs to be a limit on the security that an Operator can seek in order to off set its bad debt risk. This limit is necessary when justifying any pricing differentiation.
Any security limit should not be relative to any original ‘in-house’ water right, but relative to the debt exposed. If delivery entitlement was reduced equally with ‘in-house’ water entitlement and termination fees were paid then there is no added risk to the Operator.
Any security limit would not prevent a Member from housing their water right with the Operator if they so choose. Allowable pricing differentiation might warrant such a choice.
Security is no reason to prevent water market participation, only to ensure that the debt position is covered.
Restrictions on Transformation and/or Trade
I agree:
That the only allowable restrictions on transformation and/or trade are:
- legislated restrictions, including but not limited to:
- stock and domestic needs
- environmental needs
- any limitations to a category of entitlement
- trading cap
- being able to meter the remaining water access rights
- a lack of security
This infers that all other restrictions on transformation and/or trade are not allowed. These include but are not limited to:
- any fee or charge greater than the cost of administering the transformation and/or trade
- any discrimination on the basis of the water purchaser
- any discrimination related to a delivery constraint. This constraint would be dealt with through delivery entitlement issued or purchased, or any contractual supply arrangement.
- any time frame (a cut off date)
- any claim to cover conveyance loses. By not allowing a claim for conveyance losses Operators will be forced to create a separate conveyance loss account.
- any operator efficiency measure, such as utilising drainage water to fulfil river water entitlements. That is an operator can not infringe on the rights of a water access right to maintain an operator water saving. If an operator gets a windfall gain then it should be able to offer a commercial incentive to foster its gain.
Conveyance Water
The ACCC through its water charge rules is strong on the need for an operator to be economically responsible, so canals and structures are kept in good working order. Equally important in the delivery of water by an Operator is the conveyance water. With out an adequate base level of conveyance water member irrigators will experience a degree of water right shrinkage and/or service level shrinkage.
Operators may be tempted to sell conveyance water to fund developments. Regulating for conveyance water protection would prevent Operators from getting into trouble of not being able to convey water. Those delivery systems that did not have separated conveyance water would have to negotiate acquiring this with their users. This would provide greater service certainty and protect third parties. With water to ensure conveyance this would no longer be an issue to restrict trade.
An Operator’s water is responsible for the conveying of allocation water not Member’s water.
Categories of Entitlement
Defining categories of water access entitlement should be the domain of the State. Included in this is any zoning restriction that may need to be put on a category because of catchment connectivity or environmental reasons. An Operator should not be able to place restrictions on ‘in-house’ water rights when those restrictions are not placed on the Operator. An example is Murrumbidgee Irrigation’s restriction of Wah Wah irrigator’s water rights. Rights to Murrumbidgee Regulated Water Source Entitlement are being denied.
Even sleeper licences, once issued, were not singled out to be taken away. It is hard to fathom how Wah Wah’s water rights could be taken away with out taking them away from Murrumbidgee Irrigation as well.
For further information on Wah Wah’s issues refer letter attached and correspondence faxed on 7/7/08.
Supplementary Water: Another barrier to trade is a failure to formalise rights. While Murrumbidgee Irrigation holds water access entitlement in supplementary water there is no formal contract with its members who have a history of use of supplementary water. There have been internal trades in supplementary rights. However with no formal contract existing the right to supplementary water is less certain.
Supplementary water should be a right of irrigators like all other water access rights, one that can be traded.
Linking Operator Shares to ‘in-house’ water rights would seem to act against the pursuit of market efficiency. Leverage to hold ‘in-house’ water rights can be placed through dividends on shares. With the ability to extract monopoly rents it is easy to fund a reward to those that hold their water rights ‘in-house’. This effectively blackmails members into holding their water right ‘in-house’.
This coercion could be prevented by ensuring ‘in-house’ water rights are not encumbered. That their existence is not conditional on any other thing and that nothing else is conditional upon ‘in-house’ water rights. Where shares in an Operator are needed to be issued then delivery entitlement would enable this and is better suited. With greater trade in water rights delivery entitlement is the more stable and representative indicator. Currently where delivery entitlement is not split from in-house water rights, then shares issued would equate to water rights as well.
Without a vehicle to arbitrarily reward ‘in-house’ water rights Operators would be less able to discriminate against individuals holding statutory water access entitlements. This would allow irrigators to act in a way that produced better market and delivery efficiencies.
Conclusion
How ACCC advice is presented to the minister will greatly influence the look of the resulting regulations. Regulations need to be relevant over time and are read over time. It seems funny to describe a great deal of the water market rules as rules of transformation. Surely a better way to describe some of these rules would be in terms of anti discrimination.
For freer trade in water there is a need for:
- conveyance water protection
- an unencumbered water right, not linked to Operator shares
- formal translucent in-house water rights, including supplementary water
- a level of security over termination fees
- accounting for water traded, metering
- no discriminating behaviour from Operators other than that directed by legislation
It is important that if people are to hold statutory water access entitlement rather than ‘in-house’ water rights that there is some anti discrimination regulation.
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ACCC Water Market Rules