Water Charge Rules for Irrigation Infrastructure Operators - Issues Paper

Water Branch

Water charge rules for irrigation infrastructure operators - issues paper

Australian Competition and Consumer Commission

GPO Box 520

Melbourne Vic 3001

14th July 2008

Dear Sir/Madam

Water charge rules for irrigation infrastructure operators – submission

Southern Riverina Irrigators and the Ricegrowers Association of Australia welcome the opportunity to provide a submission on issues raised in the ACCC paper Water charge rules for irrigation infrastructure operators.

Please find attached a joint submission prepared by Southern Riverina Irrigators and the Ricegrowers Association of Australia.

Please contact Jennie Hehir, Executive Office, Southern Riverina Irrigators

Phone 0428 832357 if there is a need for clarification of matters addressed within the attached submission.

Yours sincerely

Mr. T HattyMr. L Gordon

Chairman President

Southern Riverina IrrigatorsRicegrowers Association of Australia

“Wondilibi”P O Box 706

TOCUMWAL NSW 2714LEETON NSW 2705

03 5883920602 69530433

0409 8392060427 681504

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SRI/RGA submission page 2

ACCC Submission Water Pricing Rules

1. Background

Southern Riverina Irrigators represents 1600 irrigation farm businesses within the mid MurrayValley in southern NSW. Irrigation water is supplied to these farms by Murray Irrigation Ltd (MIL) and each irrigation business is a member of MIL. Murray Irrigation diverts water from the Murray River under license from the NSW Government. The NSW Government in consultation with the Murray Darling Basin Commission determines the available allocation which is then administered by NSW State Water.

The Ricegrowers Association of Australia Inc (RGA) is the collective voice of rice growers in Australia. RGA represents over 1600 voluntary members in NSW and Victoria on a wide range of issues. As much of the Riverina region has been built upon rice, and rice is still the mainstay of many towns today, it is important that RGA members have strong and effective representation. RGA fulfils this role by representing and leading growers on issues affecting the viability of their businesses and communities.

The rice industry encompasses the Murray Valley of NSW and Victoria and the Murrumbidgee Valley of NSW. Typically, around 150,000 – 160,000 hectares are sown to rice annually producing an average of around 1.2 million tonnes of rice. The industry has a farm gate value of around $350 million and total value (export earnings, value-added) of over $800 million. Including flow-on effects, it is estimated that the industry generates over $4 billion annually to regional communities and the Australian economy.Rice growers have individually invested over $2.5 billion in land, water, plant and equipment and collectively invested around $400 million in mill storage and infrastructure through the Ricegrowers’ Cooperative Limited (SunRice) and the Rice Marketing Board of NSW (RMB).

Southern Riverina irrigators actively trade water on a seasonal (temporary trade) basis. Under normal conditions this region has been a net importer of water with water being purchased from the Victorian Murray system, the NSW Murrumbidgee valley and Lower Murray Darling and South Australia.

The NSW Independent Pricing and Regulatory Tribunal (IPART) recommend to the NSW Government the level of bulk water charges that apply to individual licence holders.Where these charges apply to Irrigation Corporations such as Murray Irrigation Ltd (MIL) in the NSW Murray valley or Coleambally Irrigation (CICL) and Murrumbidgee Irrigation (MI) in the Murrumbidgee valley, these costs are passed directly to irrigators as part of the water account.

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SRI/RGA page 3

2. Key Principles

SRIand RGA consider the following key principles should provide a basis for water charging;

• Water charges should reflect the actual cost of water delivery and the actual cost of using water, where these costs can be clearly demonstrated to occur e.g. offsetting environmental or downstream impacts. Costs of water distribution and management must be justified and be consistent with best practice
• Water pricing should not be used as an additional revenue source for Government or water providers
• Water pricing should not be used as a tool to influence water use
• Water charges should apply to all water users who benefit from river regulation including urban, industry, tourism, recreation and irrigation. These charges should include an allowance for conveyance losses resulting from water management practices such as retaining elevated water levels in lakes for aesthetic or recreational use or providing a surge flow for a special event such as the Southern 80 speed boat race and Easter fishing competitions.
• The basis for water charges at the State water provider level should be consistent between regions and jurisdictions particularly where water trade can occur. An independent review should be undertaken on a three yearly basis to determine that the charging practices result in a level playing field and that the efficiency of the state water providers is consistent with best practice.
• The establishment of water charges at a regional water provider level is the responsibility of the regional water provider. The range of services provided and associated charges need to be established by the provider in consultation with their members.
• Board members of non private water providers must be required to undertake the same level of responsibility for organisational operation and governance as board directors of the NSW Irrigation Corporations. This would ensure that the approach to setting water charges will not result in distorting the annual and permanent water markets
• Water charges should reflect water availability. Fixed costs need to be translated into variable charges wherever possible and financing options need to be used by water providers to accommodate reduced revenue in periods of low water availability.
• Consistent accounting rules must be applied to all capital invested to provide water delivery infrastructure at a regional level regardless of the source of the capital. Depreciation rates and any rate of return on capital must apply equally to irrigator funded capital and capital funded by Government as part of modernisation programs.
• Termination fees are supported to avoid third party impacts of external water trade on remaining members. The requirement for payment of termination fees should relate to the risk of future payment of delivery access charges particularly where there is unlikely to be future use of the delivery infrastructure by the water seller.

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SRI/RGA page 4

3. Application of Water Charging Rules to State and Regional Water Providers

The application of water charging rules should differ between state water providers such as NSW State Water, an agency of government and regional water authorities, who in many cases are established under government legislation and have specific governance and due diligence responsibilities to meet.

It is considered appropriate that a third party review the water charging arrangements for a state authority to ensure the application of charging principles are appropriate and their operations are being conducted in a cost efficient manner. There is also a need to ensure there is consistency in application across state borders to minimise distortions in trade either by individuals or Government.

Irrigation corporations such as MIL, CICL and MIhave been established under the Corporations Act. These corporations are required to comply with company law and are directly answerable to their shareholders and members. It is inappropriate for a third part to be able to determine a corporations operational arrangements and to impose on its capacity to manage its operations.

4. Response to Issues presented within the ACCC Submission

The issues raised within the Issues Paper Water charge rules for charges payable to irrigation infrastructure operators July 2008 need to be considered both for water operators at a state level (e.g. NSW State Water) who are responsible for providing water to diversion points for licence holders including those individual licence holders who divert water directly from a river and regional water providers who are responsible for providing water to individual properties via channel or pipe systems.

The practices of state water providers reflect state government policy and practice which may or may not be consistent between different states. Where there are differences in water charging approaches and there is capacity for water trade to occur between these states there is potential for distortions to occur within the water trading markets. An example of where there is significant potential for these distortions to occur in the future is the recent announcements in some regions of substantial Government investment in infrastructure modernisation and the manner in which the capital investment is reflected in water charges.

There is also a need to ensure there is sufficient discipline on state water authorities to ensure their management and operation practices are being undertaken in an efficient manner and reflect best practices. The performance of these authorities will influence the competitiveness cost efficiency of water users.

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SRI/RGA page 5

The principles that are established for determining water charges for state water authorities should provide a basis for the process used by regional water providers to establish their watercharges to ensure long term sustainable use of the water resource and consistency between connected river valleys. The actual

Determination of water charges and the services the charges apply to should however remain the responsibility of the regional water provider

4.1 Methodological Issues

Q1

-all water users of the regulated water resources must pay an equitable portion of the costs of resource regulation and the cost of water conveyance. Within the NSW Murray, irrigators pay 70% of the costs of river regulation and bare via the allocation process, the full conveyance losses that result from river management. The reduction in water availability due to increased conveyance losses that result from water management practices such as retaining lake levels at elevated heights and providing surge flows for recreational and tourism use are of equal if not greater (hidden) cost, as the actual costs of operating the river storages and the associated distribution operating costs

-revenue from water charges should not exceed cost requirements or be used to supplement other programs

-water charges passed on to water providers from state water providers and government natural resource management agencies must reflect worlds best practice, be justified and be costs that are incurred within the charging period. Irrigators continue to be frustrated at the apparent inefficiency of the operation of NSW State Water.

-the NSW IPART process is considered a sound model that includes the opportunity for water provider and water user input. It does however, rely on Government accepting its recommendations to drive efficiencies of operation.

4.2 Service Standards and obligations

Q2 Service Standards

-the service standards required by Government regulation should be applied to all water providers in a consistent manner and not just the larger water authorities as has been the case for implementation of standards and obligations to date.

-service standards must have a sound basis and be set at levels that relate to the risks associated with the use of the water resource

-regional water providers should be responsible for determining their own standards of service in consultation with their members, consistent with the principles that apply to the state water providers

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SRI/RGA page 6

-where a range of services are provided, pricing should reflect the level of service both at the state water provider and regional water provider level.

-the level of service should reflect that service appropriate for the use to which the irrigation system is being used.

Q3 Obligations

-obligations should be clearly articulated by Government and regulators and need to be based on a clear purpose

4.3 Expenditure profile

Q4 Capital Financing

-State water regulators and regional water providers should operate as not for profit organisations in their role as providers of an input for food production.

-the setting of water charges must take into account the affordability of the charges on water users.

-Government funded infrastructure upgrading at a regional level must be treated the same as irrigation provider funded capital when establishing water pricing models. The substantial Government investment that is likely to occur in some regions e.g. Victorian Food bowl project, but not in other regions will result in distortion in the trade market if the value of this capital is not reflected in water pricing. Private water providers such as Murray Irrigation are required to apply specific accounting standards and are therefore required to include the cost of capital in their water prices.

-Any rate of return on capital included in water charges should only be sufficient to fund the replacement of like capital with like capital.

-It must be recognised that the rate of return paid on capital by water users and the subsequent reinvestment of that revenue in capital works means that the capital assets are in effect funded and ‘owned’ by water users.

-The level of charges applied to regional water providers and passed on to irrigators must take into account the use of the capital resources by all related water users e.g. extraction for urban and industry, tourism and recreational use as well as extraction for irrigation use.

-The water charging principles and water charging arrangements need to be consistent within and between valleys and regions where water trade is undertaken to avoid distortions in water markets. An independent review should be undertaken of water charging at the state water provider level to ensure there is a level playing field across jurisdictional boundaries.

Q5 Financing options - regulatory asset base approach and annuity approach

-The approach used at the regional water provider level should be the responsibility of the water provider.

-Provided the financial management of the water provider complies with acceptable standards and is acceptable to the water provider’s financial auditor, there is no need for an independent audit.

Q6 Asset valuation - no comment

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SRI/RGA page 7

Q7 Taxation - no comment

Q8 Expenditure Efficiency

-At the state water provider level it is important that asset management plans are prepared and reviewed to ensure future prices are prudent and efficient.

-At the regional water provider level the preparation of asset management plans and establishment of prices should be the responsibility of the water provider in consultation with the members and be consistent with the due diligence and governance requirements of the organisation.

4.4 Structure of Charges

Water users and water providers have different requirements regarding the balance of fixed and variable charges. A high proportion of water provider costs are fixed and hence there is a strong preference for a higher proportion of the water charges to be fixed to provide a regular revenue stream. Water user’s capacity to pay costs, relates to water availability and hence has a strong preference for annual water accounts to reflect water availability.

In order to address this difference in requirement, water providers need to investigate water charging arrangements that translate fixed costs into variable charges and to use financing arrangements to cover the reduction in low water availability years. This may involve building reserves or undertaking borrowings and passing the finance costs back to water users.

Q9 Cost allocation between fixed and variable charges

-In recognition of the capacity to pay, the cost of providing services should wherever feasible be allocated as a variable charge linked to water.Allocations. The current drought which has resulted in a zero allocation for the past two years in the mid Murray region of NSW has highlighted the difficulty for members to pay around 60% of the budgeted revenue (in the case of MIL) as fixed charges during a period of no water related income. Options including a rolling average fixed charge which incorporates a level of flexibility in the collection of fixed annual costs and use of alternative financing options including use of borrowings or establishment and draw down of reserves could be used to address the impacts of periods of low water availability.

-Charges should reflect actual costs of water infrastructure management and operation. This will avoid distortions of water trade and asset values.

-Charges should reflect the level of service and the cost of water delivery where it is feasible to differentiate the cost of the service and the geographic area it applies to.

Q10 Deviation of fixed and variable charges

-There should be capacity for the regional water provider to reduce the proportion of costs allocated as fixed charges and translate these into variable charges. A high fixed charge component will encourage entitlement holders to divest and use the annual or temporary market to source water. The likely response by the water provider will be the application of higher variable charges (e.g. a premium charge for water not

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SRI/RGA page 8

linked to a delivery entitlement) to cover the short fall in revenue. It is considered far preferable that a higher proportion of the water use is linked to delivery entitlements and hence the infrastructure that is used to deliver this water.

Q11 Using price as a cash management tool

-Regional water providers are best placedto balance their legal responsibilities with the capacity of their members to pay when managing pricing options to address periods of low and high water availability.

4.4.3 Termination Fees

The purpose of termination fees at a regional water provider level is to offset third party impacts of external water trade on remaining delivery entitlement holders. The requirement for these fees is unquestionable as the costs to remaining delivery entitlement holders will increase, particularly if the external water trade also results in a reduced level of water delivery.

The application of termination fees is strongly influenced by the level of risk associated with recovering delivery access charges (fixed charges) from water users who no longer intend using water from a particular delivery point. For example MIL has assessed the risk to be high and required the termination fee to be paid on all external transfers. Until agreed arrangements can be established by Government and irrigators to minimise the risk of third party impacts andrisks of future payment of delivery access charges, the requirement for payment of the termination fee should remain at the discretion of the regional water authority.