Queensland Government Submission: ACCC Issues Paper
Submission to Water Charge Rules Issues Paper for Charges Payable to Irrigation Infrastructure Operators
From the Queensland
Department of Natural Resource and Water
July 2008
Part 1: Introduction
This submission sets out the Queensland Government’s response to the issues raised in the Water Charges Rules for Charges Payable to Irrigation Infrastructure Operators, “the Issues Paper”. This Issues Paper refers to fees and charges payable to operators of irrigation infrastructure.
After discussions with the Water Branch of the ACCC, it is the Queensland Government’s understanding that the Issues Paper refers solely to water delivered through an irrigation infrastructure operator’s irrigation distribution network for irrigation purposes. This application of the definition of regulated charges under Section 91 (1) of the Water Act 2007 (C’th) requires clarity given that water storage and delivery of water are both captured as water service infrastructure. A second Issues Paper, Water Charge Rules for Bulk Water, covers water taken from rivers for irrigation purposes. The Queensland Government will also be making a submission on this second Issues Paper. SunWater, the main irrigation provider, provides water to both channel and river irrigation customers from the same storage, they have the same cost base and they also use the same methodology to work out the charges for both irrigation customers. Therefore, the Queensland Government’s submission on the Issues Paper on the Water Charge Rules for Bulk Water will build on what are preliminary comments on issues in the Irrigation Operator’s Issues Paper except on termination fees. It will be important therefore that both Queensland submissions be reviewed in their totality.
Overview of water supply arrangements in Queensland
The Queensland Water Act 2000 (Water Act) establishes a water planning process, under which strategic water resource plans (WRPs) are developed for a catchment and implemented through a resource operations plan ( ROP). The implementation of the ROP creates tradeable water allocations[1], separate from land title, and specifies relevant trading rules amongst other matters, that are designed to protect the environment and third parties.
The supplemented (or regulated) water supply schemes are managed by a headworks infrastructure operator under a resource operations licence (ROL) or an IROL, in areas where a ROP or IROL has been implemented, or under an interim resource operations licence (IROL) in other areas.
In Queensland, delivery of water is supported by a supply contract with the water storage infrastructure operator, that is the holder of the ROL or IROL. The delivery contract with the ROL or IROL holder (for example, SunWater) defines the service standards and delivery conditions as well as the rights and payment obligations of the water allocation holder.
In a supplemented water supply scheme, the ROL may not only distribute water to a customer/water allocation holder on the river but also to a customer/water allocation holder on the off stream channel network. In this case, the ROL holder has a supply contract for the river supply and a separate supply contract for the channel distribution.
Under a WRP or ROP, in the case where the channel distribution network is not the ROL holder, the channel distribution infrastructure operator holds a distribution operations licence (DOL) which authorises the distribution of water. The DOL holder and the water allocation holder have in place separate distribution arrangements to the ROL holder.
Under the Water Act 2000, there is an obligation on the holders of water allocations distributed water by a DOL holder to pay the DOL holder a charge relating to the distributions costs and works. This arrangement is reflected in the DOL holder’s distribution arrangements with the allocation holder. A water allocation managed under the DOL has an administrative advice recorded on its title (in the Water Allocations Register) stating the allocation is one to which a DOL applies. This makes it known that the DOL holder can require a charge from the allocation holder. This charge allows the DOL holder to account for its ongoing fixed costs even if the water allocation is transferred out of the DOL holder’s distribution network. The obligation continues until the DOL holder agrees that the obligation has been satisfied, and if satisfied, the administrative advice is removed from the water allocation title.
Murray Darling Basin Catchments in Queensland
Within the Queensland MDB catchment, the water planning process has been completed for these catchments:
1. Border Rivers March 2008,
2. Warrego, Paroo, Bulloo & Nebine[2] (January 2006)
3. Moonie (January 2006)
The draft Condamine Balonne ROP, released in July 2007 has yet to be finalised.
Within these water planning areas, the major infrastructure water provider of rural irrigation water is SunWater, a company government owned corporation. SunWater owns and operates a regional network of water supply infrastructure throughout Queensland where it provides water services to about 5500 irrigation, urban and industrial customers. Three other small water irrigation infrastructure operators in the Queensland part of the MDB are Yambocully Water Board, the Callandoon Water Board and the Condamine Plains Water Board.
Supplemented (regulated) water is supplied by SunWater to the St George Water Supply Scheme (WSS), the Macintyre Brook WSS, Maranoa WSS, Chinchilla WSS and the Upper Condamine WSS. The Department of Natural Resources and Water (NRW) administers the Borders Rivers WSS. All of these water supply schemes are supplied from storages with releases of water in rivers except for St George WSS where there is also a channel distribution network.
SunWater’s charging regime
SunWater charges irrigators a two-part tariff. Part A is a fixed charge, covering fixed operating, maintenance and refurbishment costs associated with assets. Part B is a variable charge, based on volume of water supplied.
The Queensland Government determined the pricing policy for SunWater schemes for the five year period from 1 July 2006 to 30 June 2011. Under section 999 of the Water Act 2000, the Queensland Government provides a pricing direction notice to SunWater. The current rural irrigation water pricing policy is set out in the Rural Water Pricing Direction Notice (No. 1) 2006. An extract from the Direction Notice is attached in Attachment 1:
SunWater schemes and movement toward upper bound
SunWater owns and operates 27 water supply schemes, some of which are still transitioning to lower bound prices. Consistent with Queensland’s obligations under the NWI, Queensland Government policy put in place a pricing framework in which SunWater negotiated five year price paths with its irrigation customers in each of its water supply schemes.
The 27 water supply schemes can be divided into 54 scheme segments. Of these 54, 40 scheme segments will reach or have already reached lower bound prices by the end of the current 5 year price path, which is 30 June 2011.
Those schemes that have already reached lower bound prices will increase prices annually by CPI only throughout the price path period.
The remaining 14 scheme segments are small and in areas with low water availability and few customers, and will not reach lower bound by 30 June 2011.
Queensland’s economic regulatory environment for rural irrigation water
Queensland has a different regulatory environment to other Murray Darling Basin (MDB) States. Unlike other Basin States, the economic regulator, the Queensland Competition Authority (QCA), does not have a direct role in determining rural irrigation prices. The issue of economic regulation has been raised is some detail in the Issues Paper: Charge Rules for Bulk Water and the Queensland Government will provide more detail comment on this issue in its Submission on that Issues Paper.
Basin water charging objectives and principles
The water charging objectives are set out in Section 3 of the Issues Paper. However, the water charging principles are only set out in Appendix B with no discussion.
As the principles also govern the water charge rules, it would be useful to have the water charging principles set out in Section 3 of the Issues Paper and a discussion on the ACCC’s interpretation of the principles, similar to what has been done on the objectives.
In terms of basin charging objectives and principles, commercial viability of the water service operator must also be considered. Commercial viability relates to a cost or revenue level which must be covered to ensure that existing and future volumes and levels of services, and all obligations including dividends, are provided in a financially sustainable manner. Both the COAG 1998 pricing principles, and the National Water Initiative (NWI) pricing actions (Section 66) explicitly take account of this objective/principle in that they provide for it in the concept of lower bound pricing. The COAG guidelines state that:
to be viable, a water business should recover, at least, the operational, maintenance and administrative costs, externalities, taxes or TERs (not including income tax), the interest cost on debt, dividends (if any) and make provision for future asset refurbishment/replacement (as per the annuity renewal approach). Dividends should be set at a level that reflects commercial realities and stimulates a competitive market outcome (Lower Bound pricing).
The COAG guidelines state that:
· an annuity approach should be used to determine the medium to long term cash requirements for asset replacement/refurbishment where it is desired that the service delivery capacity be maintained.
· to avoid monopoly rents, a water business should not recover more than the operational, maintenance and administrative costs, externalities, taxes or TERs (tax equivalent regime), provision for the cost of asset consumption and cost of capital, the latter being calculated using a WACC (weighted average cost of capital) (upper bound pricing).
In general, it is important to acknowledge that the concept of lower bound pricing as set out in the COAG Principles and within the NWI (Section 66) has played a role in the development of Queensland rural irrigation water pricing policy. It is noted by Queensland that the Basin Water Charging Objectives and Principles as set out under Schedule 2 in the Water Act 2007 do not directly reflect either the COAG Principles and the NWI with respect to commercial viability for water service providers and lower bound pricing, however, Queensland notes that this may be implicit in the Water Charging Principle (Water Act 2007, Schedule 2, Part 3 (4)) as follows:
Water charges in the rural water sector are to continue to move towards upper bound pricing where practicable.
Termination fees
A number of questions raised in the Issues Paper relate to Schedule E of the Murray Darling Basin Agreement (MDBA). Schedule D to the MDBA sets out that Queensland is a contracting party to the agreement, under the terms set out in the Schedule. Schedule D specifies those parts of the MDBA that do not apply to Queensland. However, given that Schedule E is concerned primarily with the southern position of the Murray-Darling Basin, Schedule E does not currently apply to Queensland.
Part 2: Responses to Questions
Question 1
Are there any matters not mentioned above that are relevant in establishing a methodology for determining prices consistent with the objectives and principles of the Act?
The Section 4.1 of the Issues Paper addresses in broad terms all the necessary methodological issues satisfactorily.
Question 2
Are there any issues the ACCC should be aware of in relation to service standards? Provide details including:
a) to what extent the proposed level of service is or should be communicated to customers during the price-setting process.
b) the role of customers when establishing service standards;
c) the role of customers in determining the balance between the level of prices and the standard of service;
d) the extent to which service standards are, or should be, reported publicly; and
e) the extent to which service standards form, or should form, part of a customer service contract.
Given that the price setting process in Queensland is through negotiations between SunWater and its customers within the Queensland Government’s price direction notice, it is essential that customers are aware of the proposed service standards. Without clear and ongoing communication of service standards it will be difficult for stakeholders to engage in the price setting process from an informed position.
The Queensland Government endorsed a joint industry and SunWater process for setting prices for a five year period from 1 July 2006 to 30 June 2011. This process involved significant customer representation including on the proposed level of service standards.
For example, the first stage (over 10 months and 15 meetigns) involved a Statewide Irrigation Pricing Working Group (Tier 1), a group of fifteen people consisting of SunWater senior management and a cross section of SunWater’s customer base and peak industry, considering issues including service standards that needed to be consistently applied to set prices in a fair and efficient way.
The second stage of the price setting process involved the formation of working groups for each scheme, known as Tier 2 or Scheme Irrigation Pricing Working Groups, to resolve scheme specific issues. The Tier 2 discussions focused on: customer service standards as well as a number of other issues such as irrigation water usage forecasts, tariff structure, and form of price control – revenue cap or price cap and ‘drought’ tariff.
In relation to service standards, Tier 1 considered customer service standards and resolved that each Tier 2 group could decide on how other scheme customers are consulted on the more significant issues, but any changes to customer service standards would need to be supported by a majority of the customers in the scheme.
The Tier 2 groups considered changes in customer service standards or targets during the five year price path. All schemes opted to maintain the existing customer service standards/targets although one scheme (not in the MDB) did identify a number of customer service standards/targets that would be discussed on an ongoing basis at future meetings of the scheme’s Irrigator Committee.
Customers agreed to SunWater’s proposed customer service standards for the current price path period. Tier 1 had already agreed that if a Tier 2 group requested a significant change to customer service standards, this could not be implemented until the subsequent price path (commencing 1 July 2011).
During the negotiations for the 2006/07 to 2010/11 price paths, customers at the Tier 2 level did not have an opportunity to negotiate a different set of service standards. Customers were informed that they could seek a change in service standards beyond 2011. This was because there was insufficient time within the price negotiations to plan and implement changes to service standards. There was also an understanding between SunWater and customers that significant changes to service standards could result in a change in prices