PUBLIC SUBMISSION TO WATER MARKET RULES POSITION PAPER
BY
MACQUARIE RIVER FOOD & FIBRE
ON
15 August 2008
TABLE OF CONTENTS
EXECUTIVE SUMMARY……………………………………………………………………………3
INTRODUCTION……………………………………………………………………………………..4
SOCIAL AND ECONOMIC IMPLICATIONS OF NEW WATER MARKET RULES…………4
SECTION 2: FACILITATING TRANSFORMATION AND/OR TRADE……………………….6
SECTION 3: OPERATORS’ TERMS AND CONDITIONS FOR APPROVING TRANSFORMATION AND/OR TRADE……………………………………………………………7
SECTION 4: TRANSFORMATION AND/OR TRADE ADMINISTRATIVE PROCESS………7
Application Process……………………………………………………………………………………..7
Time Limits……………………………………………………………………………………………...7
Administrative Fees & Charges…………………………….…………………………………………...7
SECTION 5: ENABLING TRANSFORMATION SEPARATE TO TRADE……………………..8
Right to delivery following transformation……………………………………………………………..9
SECTION 6: RESTRICTIVE PROVISIONS………………………………………………………..9
Conveyance losses………………………………………………………………………………………9
The 4% limit on trade out of a district………………………………………………………………....10
SECTION 7: SECURITY FOR FUTURE PAYMENT OF ACCESS FEES……………………..11
The value or quantum of security………………………………………………………………...... 11
SECTION 8: APPLICATION & IMPLEMENTATION OF WATER MARKET RULES...... 12
Monitoring and reporting requirements……………………………………………………………….12
CONCLUDING COMMENTS……………………………………………………………………...13
EXECUTIVE SUMMARY
MRFF wishes to highlight several issues from this submission that are critical elements of future water market rules:
Transformation Separate to Trade
MRFF maintains its position opposing transformation separate to trade, based on it being fraught with risk of unrecoverable costs for the operator and of no practical benefit to the member. However through the process of considering how Operators could possibly manage the risks associated with transformation separate to trade, MRFF has developed the following crucial prerequisites to transformation rules to address the scenarios identified to date, in order to protect remaining scheme members from bearing increased costs or the Operator’s viability being threatened.
1) At the point of transformation, the irrigator is obliged to forego a component of his licence to be set aside in a conveyance loss WAL account;
2) At the point of transformation, the irrigator is obliged to take responsibility for a termination fee liability, payable as a prerequisite condition of any subsequent trade of his WAL (this would require a legal caveat to be placed on the WAL that is listed as a condition of trade);
3) At the point of transformation, there is provision made as part of the individual WAL that the Operator may restrict trade based on the its 4% annual trade limit cap.
4) At the point of transformation, a caveat is placed on the WAL preventing any other works approval enabling the member to take delivery of the water off the Scheme from being attached to the WAL (more detail on this scenario is provided on Page 8).
There are no doubt other unforeseeable scenarios that create loopholes to be exploited and expose Operators to risk in the case of transformation separate to trade even if the above 4 conditions were adopted by ACCC as part of transformation rules. Despite the Federal imperative as stated in the 2007 Schedule E Protocol to unbundled rights, MRFF believes there are many issues that have not been adequately thought through in terms of implications of unbundling for Infrastructure Operators hence MRFF’s continued opposition to transformation separate to trade.
Conveyance Losses: MRFF’s proposed solution to the issue of conveyance losses is that an adequate entitlement to cover future conveyance loss obligations is separated into the Operators’ Conveyance Loss WAL or a separate ‘losses account’ controlled by the Operator at the time of transformation. For example, if a member wished to transform his portion of the Scheme’s WAL into an individual WAL, say 1000 ML, part of his portion, say 20% or 200 ML (based on the Scheme’s conveyance loss as a proportion of its total WAL) would be held by the Operator in the Scheme’s Conveyance Loss WAL.
Additional comments to highlight in the executive summary are as follows:
MRFF reiterates the statements from its earlier submissions in this submission, that in the Macquarie, Operators are simply groups of irrigators operating together. Irrigators and Operators are therefore one in the same and this submission has the endorsement and support of all the Infrastructure Operators in the Macquarie. We note that some Operators may have specific issues they wish to pursue and so will make individual submissions in addition to endorsing the MRFF submission.
Finally MRFF notes the current failings of a lack of integrated approach by ACCC to dealing with the related issues of Water Market Rules and Water Charge Rules. It is imperative that ACCC changes its approach to developing separate positions on these issues, in order to avail itself of all relevant information being provided in the separate submissions and in order for ACCC staff working on position papers to be building a combined knowledge base in formulating positions on each issue.
INTRODUCTION
Macquarie River Food & Fibre (MRFF) appreciates the demonstration by ACCC in developing its Water Market Rules Position Paper, that it has read and considered submissions made on its Water Market Rules Issues Paper. However MRFF is disappointed at not being properly informed of ACCC’s planned consultation process for both water market rules and water charge rules and how these two consultation processes would or would not be linked at the commencement of the submission process. It appears ACCC’s timelines and approach to sharing knowledge between the two issues have not allowed the consideration of submissions on water charge rules prior to publishing its Position Paper on Water Market Rules. There are clearly issues of commonality and relevance across the two subjects and MRFF asks that ACCC reviews our Water Charge rules submission in addition to this submission responding to Water Market Rules.
MRFF has emphasised concerns in this submission related to the impact of new rules on Infrastructure Operator’s viability and related socioeconomic impacts, externality impacts and issues related to stranded assets. These critical issues appear not to have been identified or addressed by ACCC through its Issues and Positions paper process.
SOCIAL AND ECONOMIC IMPLICATIONS OF NEW WATER MARKET RULES
MRFF is concerned following the ACCC’s Issues Paper and subsequent Position Paper on Water Market Rules, that it has not addressed or even contemplated one of the key principles of future water trading markets that is a requirement of reforms – tests of the rules to ensure avoidance of stranded assets of Infrastructure Operators. MRFF believes the simplest translation of this issue is to test whether the proposed market rules have any impact on the viability of an Infrastructure Operator, as it is declining viability which will ultimately lead to the most extreme scenario with respect to stranded assets. The flip side to this test is to ensure that rules surrounding transformation and trade adequately address and provide for ongoing business risk and cost management requirements of Operators.
Aside from no reference by ACCC to the ‘other side to freeing up trade’ being the sustainability of rules for Infrastructure Operators & consequent flow on effects for local communities, MRFF’s concerns that viability of Macquarie schemes is under serious threat are based on ACCC’s current position on issues such as:
· enabling transformation separate to trade, and progressing towards the development of sub-standard and complicated security measures rather than enabling an adequate termination fee liability to become part of the transformed WAL conditions;
· restricting the ability of the Operator to address conveyance losses as part of its termination fee or at the time of transformation; and
· lack of mention of issues such as how the 4% annual cap on trade will be managed once licences are transformed into individual WALs.
MRFF understands from discussion with ACCC that socioeconomic considerations are not part of ACCC’s charter in developing its advice. This simply means there is a flaw in ACCC’s charter, given the relevance of socioeconomics to water market rules policy and MRFF requests that at the very least ACCC acknowledges the need to consider socioeconomic issues as part of its advice. MRFF assumes it is in the interests of the Australian Government and the population, to know that changes in Government policy have given consideration to the Public Benefit test. In the case of new water market rules, this would have to include consideration of the social and economic impacts of rules on the local communities dependent on Infrastructure Operators, rather than simply making transformation and/or trade as free as possible for the individual irrigator, with no regard to the cost and subsequent ramifications to others.
ACCC may not be aware of just how significant the business activity generated by Macquarie Infrastructure Operators is in the scheme of total irrigation in the Macquarie. Therefore it makes the safeguard measures MRFF raises in terms of the criteria required on transformation and or trade in order to protect Operators’ businesses crucial not only to them, but to the local communities that absolutely rely on the business activity generated by Macquarie Operators.
At the end of 2007, the Macquarie valley’s General Security entitlements totaled 632,428 megalitres and high security entitlements were 19,419 megalitres. Schemes represented a substantial 43% of the total General Security licences and 22% of high security licences in the valley.
As depicted in the map below, there are several smaller towns in the valley where the Infrastructure Operators are based; Narromine, Trangie, Nevertire and Warren. The irrigation industry generates by far the most significant contribution to these communities of all existing industries. Therefore without Infrastructure Operators, it is clear that there would be a massive and irreversible decline in these local communities, especially given the current stressed financial climate for many businesses and the sensitivity of key thresholds to even small reductions in economic activity.
In addition to the need to acknowledge the relevance of socioeconomic considerations to water market rules, MRFF poses a related question to ACCC on behalf of at least one of the Macquarie Infrastructure Operators, regarding threshold viability levels. ACCC has referred to the 4 to 6% cap of trade as a means of enabling Operators time to adjust and find new efficiencies to cope with reductions in scheme water. At least one Macquarie Infrastructure Operator believes it is already approaching viability threshold levels in terms of water volumes held by the Scheme. Therefore MRFF sees it as crucial that ACCC gives due regard to the issues created by freeing up trade in these instances, (such as stranded assets and broader socioeconomic implications) prior to finalizing its advice on water market and charge rules.
SECTION 2: FACILITATING TRANSFORMATION AND/OR TRADE:
ACCC (p7) proposes establishing an obligation on operators to assist individual irrigators transforming and/or trading their transformed entitlements in the water market rules.
MRFF stated its position in its earlier submission against allowing transformation separate to trade. In order for Operators to remain sustainable under new rules enabling transformation and/or trade, several security risk and cost recovery measures need to be adopted upfront, as conditions of transformation and there may be other unforeseen issues created by transformation yet to be identified or factored into transformation rules. It is critical that ACCC acknowledges and incorporates into its advice that if new water market and charge rules do not incorporate the conditions required by Operators, or if there are other unintended exposures created, that there is adequate compensation made available to Operators to enable them to restructure and continue, or opportunity to modify rules to address exposure to Operators..
These conditions are noted again below and have been added to in order to address the issue of capping trade as per the policy of the 4% limit that currently applies in some valleys.
Conditions Macquarie Infrastructure Operators require in facilitating transformation and/or trade are as follows:
1) At the point of transformation, the irrigator is obliged to forego a component of his licence to be set aside in a conveyance loss account (more detail is provided under Section 6);
2) At the point of transformation, the irrigator is obliged to take responsibility for a termination fee liability payable as a prerequisite condition of any subsequent trade of his WAL via a legal caveat placed on the WAL;
3) At the point of transformation, there is provision made as part of the individual WAL that trade may be restricted, based on the Operator’s 4% annual trade limit cap.
4) At the point of transformation, a caveat is placed on the WAL preventing any other works approval enabling the member to take delivery of the water off the Scheme from being attached to the WAL.
Obviously in addition to the above, it is noted as per earlier submissions, that the composition of the termination fee is also critical to all parties.
SECTION 3: OPERATORS’ TERMS AND CONDITIONS FOR APPROVING TRANSFORMATION AND/OR TRADE:
In its preliminary position, ACCC (p11) notes that ‘operators face resource constraints’ in referring to the process of establishing and implementing policies to support transformation and/or trade. ACCC does not estimate the likely cost of this reform for operators or suggest any mitigation of the cost, noting that ‘any imposed administrative burden will not be ongoing’.
MRFF strongly contests ACCC’s assumption that there will not be ongoing costs of administering new transformation and/or trade policies and believes that ACCC should be recommending some form of financial assistance or cost mitigation from the Federal Government in assisting businesses to make the necessary changes.
SECTION 4: TRANSFORMATION AND/OR TRADE ADMINISTRATIVE PROCESS:
MRFF supports ACCC’s preliminary position (p16) in reference to benefits of standardization of a base set of application forms as a guideline for Operators. However ACCC places the onus for developing these forms on operators (p17) “Operators must develop a base set of forms for both transformation applications and transformation and trade applications”. MRFF asks ACCC how the development of a base set of forms will be able to be standardized for each legislative jurisdiction if they are developed by individual Operators. Again there is a cost and resourcing consideration as well as a consistency issue that mean standardized base set of application forms should be developed by ACCC or the appropriate Government department.
Application Process:
MRFF seeks clarification from ACCC regarding who is responsible for preparing a base set of standard forms. ACCC (pxx) states that ‘the ACCC will assist irrigation operators by developing standard forms and documents.’ However further on in ACCC’s position paper (p17) ACCC’s preliminary position on the application process states “Operators must develop a base set of forms for both transformation applications and transformation and trade applications…”